Oct 28, 2014
Executives
Kathleen Quirk - Executive Vice President and CFO Richard Adkerson - President and CEO Jim Bob Moffett - Chairman Jim Flores - President and CEO, Freeport-McMoRan Oil & Gas
Analysts
Curt Woodworth - Nomura Oscar Cabrera - Bank of America Merill Lynch Ash Lazenby - HSBC John Tumazos - John Tumazos Very Independent Research Joan Lappin - Gramercy Capital Steve Bristo - RBC Capital Markets Wilfredo Ortiz - Deutsche Bank
Operator
Welcome to the Freeport-McMoRan Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session. (Operator Instructions).
I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer.
Please go ahead, ma’am.
Kathleen Quirk
Thank you and good morning. Welcome to the Freeport-McMoRan third quarter 2014 earnings conference call.
Our results were released earlier this morning and a copy of the press release and slides for today’s call are available on our website at fcx.com. Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call.
In addition to analysts and investors, the financial press has been invited to listen to today’s call and a replay of the webcast will be available on our website later today. Before we begin our comments, we’d like to remind everyone that today’s press release and certain of our comments on the call include forward-looking statements and actual results may differ materially.
I’d like to refer to the cautionary language included in our press release and in the presentation materials and to the risk factors described in our 2013 Form 10-K and subsequent SEC filings. On the call today are, Jim Bob Moffett, our Chairman of the Board, Richard Adkerson, our President and Chief Executive Officer, Jim Flores, President and Chief Executive Officer of Freeport-McMoRan Oil & Gas and we’ve got several others from our senior management team here in the room.
We’ll start by briefly summarizing the financial results and then I’ll turn the call over to Richard who will be reviewing our recent performance and outlook. As usual, we’ll open the call after our remarks for questions.
Today, FCX reported net income attributable to common stock of $552 million, $0.53 per share for third quarter of 2014, compared with $821 million or $0.79 per share for the third quarter of 2013. There are several special items as you'll note in the press release included in this quarter's result which reduced net income by $115 million or $0.11 per share.
These items included a ceiling test write-down on our oil and gas properties which impacted net income by $192 million, a charge of $47 million for an increase in deferred tax accruals associated with recent tax law changes in Chile. These were offset partially by mark-to-market gains on oil and gas derivatives totaling $76 million and $48 million in gains on asset sales and debt redemption transaction.
The operating results, as you'll see reflect strong operating performance throughout the organization. Copper sales totaled 1.08 billion pounds and gold sales totaled 525,000 ounces; those exceeded the year ago quarter.
Our oil and gas sales of 12.5 million barrels of oil equivalents exceeded the recent forecast but were below the year ago quarter, reflecting the sale of the Eagle Ford shale properties in June of 2014. Our results also benefited from the resumption of Grasberg concentrate exports in August following regulatory approvals from the Indonesian government late July.
Our third quarter average realized copper price was $3.12 per pound that was below the year ago quarter of $3.28 per pound. Gold prices were also below the year ago at $1,220 per ounce versus $1,329 per ounce in the third quarter of 2013.
And Brent crude prices average a $103.50 per barrel compared with the $110 per barrel in the year ago quarter. Our operating cash flows generated during the quarter totaled $1.9 billion and our capital expenditures approximated $1.9 billion as well.
As we previously announced and we’ve got additional information in the press release, we entered into an agreement in October to sell our 80% interest in the Candelaria and Ojos copper mining operations and supporting infrastructure to Lundin Mining Corporation for $1.8 billion in cash and contingent consideration of up to $200 million. We expect this transaction to close in the fourth quarter.
During the quarter we redeemed $1.7 billion of Senior Notes with an average interest rate of 6.6% and additionally on October 15th, we redeemed $400 million of aggregate principal amount of our 8.625% Senior Notes. We ended the quarter with $19.7 billion of total debt and the consolidated cash was $658 million.
I’ll now turn the call over to Richard who will be referring to materials, the slide presentation materials on our website.
Richard Adkerson
Hey, good morning everyone. And we’ve got a lot to talk about today.
And I know this complicated geopolitical world we live in with the market conditions we face, we’ve got some issues to talk about in Indonesia; and we’re going to talk about the things that affect our business like in those areas and answer your questions. But I also want to put the situation in context for our company.
Kathleen just talked about a quarter despite all these things where we had solid performance from our global operations, both in mining and oil and gas. In Indonesia, we resumed concentrate exports in all of this following the export ban that came into play in January and we are working to -- working with the government on our long-term contract situation.
Then when we look at our strategy of growing the volumes of our business, and to do that, we obviously have to focus on making long-term decisions and making long-term investments and being consistent about it. You’re seeing progress made of efforts that began back at the time when the Phelps Dodge Freeport merger in 2007.
And the Morenci expansion is expected to reach full rates by the end of this year, the project is essentially complete and it's a major step for us. The Cerro Verde expansion, which is tripling of our output there, project that cost is estimated to be an excessive $4.5 billion is on progress, construction is underway heading for a start up in 2016.
And our oil and gas business, Jim will be talking about the commissioning of Lucius this year and the Hollander project where we're completing the well for testing and production as part of our Inboard Lower Tertiary program, important project in that area. Beyond that our exploration activities and our planning activities for future expansions in our mining business, our oil and gas business continue to look at our large resource base and position ourselves for future growth over long periods of time.
Kathleen talked about the sales of Candelaria that was a good asset. We found a bar willing to pay reasonable price.
And we executed it, should be a good deal for both companies. For us, it’s a step towards meeting our objective of generating cash to reduce our debt.
And all of that has gone smoothly and we’ll work in (inaudible) on all the efforts to close the transactions and have an effective transition. Speaking about copper markets, global macroeconomic situations have been overhanging the market, raising questions about demand.
Europe has become a recent matter of global concern about its financial and geopolitical situation. People are concerned about growth rates slowing in China.
But when we look at our business and the outlook and then talking with our customers, I mean we -- in our copper business, we sell directly to users of copper, we’re not traders. We have a limited amount of activity with trading companies.
And so we have direct cost to copper consumers globally. Here in the U.S., we’re almost just a little less than 50% of the total marketplace for copper we sell around the world.
And copper consumption continues to remain strong. Copper is affected by the economic situations in any particular country, but as we talk with our customers and we were with many of them during LME week, the outlook of the current uncertainty is bolstered by more positive outlook going forward.
U.S. continues to grow at a moderate rate.
Then when you step back from the demand side which is going to be affected by what goes on in China and the global economy, the supply side change challenge is which is the underpinning for the current copper price and for our optimistic view about copper going forward is really driven by the supply side issues. The number of projects were started, some of them delayed.
The surpluses that were projected are not yet being realized and appeared perhaps the overstated inventories and customers of exchanges remain low and we see examples of new projects being delayed target forward and so the supply side picture remains the same and the positive long-term fundamentals for the copper market which drives our business are intact. On slide 7, you can see that we managed our business in an efficient way during the quarter and achieved good unit cost results.
And you can see that for the quarter, our consolidated unit costs were $1.34 and the improvement in Indonesia with the resumption of exports during the quarter. We have a set of assets that allows us to be responsive to market changes.
We showed that clearly in 2008, 2009 and then with assets that can generate profits at today's copper price levels and with the outlook being positive for the longer term improved profits as we go forward. Production volumes in North America reflect the Morenci ramp up and improvements at our mine in South America we were in lower rate sections of our mine.
And you can see that Africa performed well as did Indonesia during the quarter. The strength of our company in the minerals business is our resource base.
At $2 copper plans, we have over 100 billion pounds of proved and probable reserves reported under SEC standards. Beyond that, we have identified mineral resources associated with our existing properties of an incremental contained over 100 billion pounds.
And we are working to take this mineral resource base to develop long-term investments. Finding projects to invest in requires time.
And after we complete the current round of investments, there is going to be an active period of doing all the work that’s necessary before we begin making significant capital commitments to new projects. But we have to be focused on doing that with the sense of urgency in order to be able to take advantage of these opportunities.
Then beyond this big resource base, there is significant additional potential that’s not included in our mineral resources and much of this has to do with sulfide deposits lying in North America associated with the oxide production that we have but Morenci and Safford with the Lone Star deposit in other properties in North America. At Tenke, we still are doing drilling activities, metallurgical analyses to identify the mixed or sulfide based beyond our existing production that we have there.
El Abra has continued opportunities for our resource additions and we’re working with partners in the area to determine the best way to deal with that and we have attractive rebuild project in Serbia. So that is a real strength of our company.
Now where do we stand in this process? Well, this first round of projects that we are now completing, the Morenci project; the Cerro Verde project; we previously completed the Tenke project; we’re designed to add about 20% to our production volumes.
We started on these projects in 2010; by 2016 we'll be moving from a sale, annual sales level of roughly 4 billion pounds to 5 billion pounds. I recall with that we completed the initial development of Tenke, we completed a start up of the Climax mine, we had enhanced production from our existing operations.
Now, we're seeing where we go from there. Grasberg through all the issues related to the export ban, the other issues we faced in recent times, we have progressed the development of the underground resource.
This is a big project; very attractive long-term economics, because of the high grades of both copper and gold that are available to us. And we're working to establish Grasberg as a long-term asset with high production volumes, low cost.
You can see that the schedule we're own, we provide for the commencement of mining from the extension of our existing DOZ mine, The Deep MLZ mine with this high grades that will begin by the end of 2015. And then once we complete mining the Grasberg pit, which will be 2016-2017 timeframe, we will commence mining from the Grasberg Block Cave underlying the pit and that’s what we've been working on for several years and continue to invest in.
All of that is part of our long-term plan. Now to just where we stand in Indonesia, we entered this Memorandum of Understanding in July to allow us resume exports.
Export sales have been prohibited since mid-January as a result of a government policy, government laws and regulations designed to encourage in-country investment and downstream processing. We executed MoU; we agree to pay higher royalties, pay an export duty; we posted a bond to support a commitment to -- for a smelter development; and then we are continuing to operate under our existing cap.
Our agreement with the government is that we will work to amend the contract of work provided we’re provided assurances for our ability to operate beyond 2021 through the extension provisions of the cap to 2041 with assurances about our fiscal terms, operating rights and legal rights. We’ve done work with the government own that; work remains to be done.
Last week, there was inauguration of the new government; the President came into office; he is now announced his cabinet; and we’re again working in a transition mode from the prior government officials with these new government officials. Our goal is to maintain a positive long-term partnership with the Government of Indonesia.
We’re confident we can achieve that because it’s one of these things where it’s everyone’s best interest to do it. It’s been a complicated political environment with the elections and we’ve had to work in that environment.
But we are confident; we’re going to be able to achieve this because we've done such good things for the country, our employees and the reason and it's important to do country it's the right thing to do and we're going to work to do. Labor, we have had issues with labors that started two years ago when we had a strike; [rumors] drew a CLA agreement following the strike three years ago with the strike.
Last year, we signed a new CLA agreement. We've had safety issues that have been reported.
We had a collapse of the underground classroom area last year and then recently we've had two accidents. Union has been -- we're approaching these with a great deal of focus to ensure that our procedures are right and we’ll handle the safety right.
Safety programs are strong by international standards. Operations in Indonesia have had very low incident rates.
Our standards are very high, but it's because of the tyrant weather and the workforce, when someone makes a mistake, unfortunately the consequences can be tough. So we're dealing with all of that.
It's been -- let me just say an emotional time in Indonesia with the elections not only nationally, but in the region. And as a result of that, that's led to a current issue with parts of our workforce.
75% to 80% of our workforce is in place. But some workers are engaging in protest and demands relating to these recent safety issues where we’re attempting to work with them.
Some workers are currently not reporting to work and that’s having some constraints on our mining activities in the pit. We’ve been continuing to operate our mineral, our underground operations and our concentrate delivery systems, but it’s having a current impact.
And those discussions are going on right now. We’re getting support from the local government, the local community and the central government.
And we’re in the process of working to resolve this. We’re reaching out with the union leadership to have discussions with them as well.
Again this is thing, sorts of things that we’ve worked through in the past and we’ll work through these issues, but that is a situation we’re dealing with currently. Now stepping back, after we complete these projects where do we go next?
We’ve been engaged in Brownfield development studies. We have significant long-term opportunities for growth projects in Chile at our El Abra mine where we have a partnership with Codelco.
We’re talking with our partners about how to proceed with a major development project there that requires development of water sources desalinization pipeline project to power and so forth, but the great thing is we’ve got a huge resource. And so those are issues we’re working on.
At our Bagdad mine near Prescott here in Arizona we have a very significant large sulfide resource that has the capacity more than double our mill rates. We’re working on developing the necessary steps with water land to develop pro-tailings areas and so forth to move forward with that.
In Tenke, we have the resource that allows for growth. To take the next step we require development of power resources for the area.
And we are working with the government and other companies in Katanga to deal with that. That's a necessary step to allow us for the long-term development at Tenke.
And at the Safford mine in Eastern Arizona with the adjacent Lone Star resource, we have about five years left on our oxide, current oxide production. We're looking at a stepped opportunity there to supplement that oxide ore with ore from the Lone Star deposit.
And then at Lone Star and at Safford, we have a significant sulfide resource that will allow for us to deal with that. So that is kind of a line up before we're going and we'll continue to report for.
We have from last ‘13 and ‘14 these, we have these 3D models, models that allow us to say grow hole results and project the geometry of resources and we thought we’d share a couple of those with you at Morenci where we’ve just completed an expansion of our mill. But the opportunity there because of this huge potential resource that’s shown on this slide for a very large scale milling expansion in the future is something that is become increasingly more attractive.
At Lone Star, adjacent to Safford, a deposit that’s been known about for decade now is because of the ability to take advantage of resources and the drilling and exploration analysis we’ve done is showing a huge resource potential. These are in the U.S., today in the U.S., because of the improved energy situation coming from the shale oil and gas; development with attractive energy costs; because of the flexibility of U.S.
labor; the support we have near in Arizona from the local government for Brownfield development expansions makes these things very attractive. Jim Bob, would you want to say a couple of words about the potential projects?
Jim Bob Moffett
(Inaudible) average day two good examples Morenci and Lone Star that shows it is Brownfield and related the property that we acquired from (inaudible) iceberg is in there stat oil is there, tip of the iceberg with a big value of the iceberg down their own surface. Remember, the only different oxide ore (inaudible).
So, if you look at this and see the growth have you build and (inaudible) need this (inaudible) a non-potential this would be daily (inaudible) in the year and rest of the world. So if you realize the most stable sign we have find into your projects, we shouldn’t have with the infrastructure and on a year or so potentially Africa, as mentioned earlier 60 kilometer (inaudible).
Richard Adkerson
Great. Thanks Jim Bob.
Now, just closing we're really excited about the business. It's tough business.
There are challenges we have to face. And over the years, we're confident about our ability to do that and we've got a track record of doing it.
Great set of assets, great people, great technology; and then on page 15, you can see where we have right now with insight five mines to be world class mines and those are very, very difficult to find with 400,000 to 500,000 tons of annual production. That's again the world and then all these resources that while we won't be spending capital on, in the near term we'll be very disciplined about that.
We're going to be focused on the shareholder returns. It gives us a great deal of excitement about this part of our business.
And now Jim shares that excitement about oil and gas business and I’ll let him takeover.
Jim Flores
Thank you Richard and good morning everyone. As Kathleen articulated in our opening comments, oil and gas business is doing well.
Our sales of 12.5 million barrels of oil equivalent in the third quarter were slightly above the July estimate but it was impacted by our earlier $3.1 billion rationalization of the Eagle Ford Shale assets in the second quarter. We continue to have good steady production performance in California and our Deepwater Gulf of Mexico while higher margin barrel of oil come from.
The cash operating margin was $600 million for the quarter and with the $48 barrel margin, it was impacted by the decent price activity and the Brent pricing, 68% of Gulf of Mexico with the $65 margin and we’ve done a good job over the summer to position the company for future growth out of our key area, which is the Deepwater Gulf of Mexico. Also our oil hedges that were carried over from the plains days come in handy with this current oil price where we have put to this rocket 90 bucks, they cost us $3 or $4 a barrel and so forth and when you start talking about $80, $85 oil in this type of market, volatility imbalance that there is a fire protection you need to make sure you continue to protect your capital budget, your shareholder returns that we’re all pledged to protect.
On page 17, the reserves and resource potential, we’re trying to articulate here but what the rotation of our business has been from purely production assets that are flat to declining to something that’s going to be impactful for the company with large growth. As you can see California and Deepwater Gulf of Mexico is a great comparison, two excellent oil assets.
The cash margin obviously in the Gulf of Mexico much higher because the efficiency of production versus California with 79 versus 53. And the reserve bases are basically about the same 200 million barrels each but the growth potential and the reserve potential in both areas is dramatically different, from 400 million barrels in California to 4.4 billion in the Gulf of Mexico.
Still with the same operating leverage, still with the same Brownfield complexion of reserve adds and also the facility and technical leverage that observes your individual project economics was like in the mining business, that's where our strong foot is. So, we're putting a tremendous amount of effort as everyone does in the deepwater Gulf of Mexico, positioning our business, we'll talk about that portfolio rotation here in a second.
In the meantime, we do have on the right hand side of the page a very large opportunity in Morocco to drill some (inaudible) plays and some deep structures there offshore that we're excited about. We’ll start drilling those, the first one next year and the second in ‘16.
I have passed over, but not left out our gas business. Our gas business highlight about the Haynesville and Inboard Lower Tertiary with 23 Tcf of gas potential there versus our 8 billion barrels of oil upside.
With gas prices where they are, we still continue to put the harness on this. We're drilling a few exploratory wells in Inboard Lower Tertiary on the backs of the Highlander apparent success, even though we haven't put it on production yet.
And as far as trying to delineate where the play goes to and try to make sure that we protect our resources there without going into full development just because of the gas price margin, obviously 285 Mcf or 18 bucks a barrel doesn't compete as well for capital as in deepwater Gulf of Mexico or California International does. So that gives a look at the 8 billion barrels of potential resource potential we have in the company versus our 430 million barrel reserve base in the additional 23 Tcf.
We have a very deep portfolio of opportunities that we point out taking advantage of for many years and decades to come. Specifically to the third quarter business on page 18, the portfolio optimization comes on the back of the Eagle Ford shale interest sale for $3.1 billion at June of 14th.
We reinvested $1.4 billion of deepwater Gulf of Mexico interest on a tax rate exchange for interest and picked up another 5% plus of our Lucius oil development and then Heidelberg oil development we’re watching is just to the west of our Holstein facility in Green Canyon, pick up 12.5% both of those are operated by Anadarko. And then a new -- our Vito oil discovery that shale in Anadarko and Statoil had drilled a few years ago, it’s a delineated structure that has a lot of development of leases and exploitation and leases around the mini basin that we have a significant interest in.
And this will give us an infrastructure hub coming in the basin that will make our offset drilling exploratory and exploitation leases have the Brownfield economics that we enjoy in the rest of our portfolio. And a super high quality projects and high quality operators that we’ll be doing business with either as a [non-IV] partner operating for them as well.
So, this rotation into the Gulf of Mexico projects replaces the Eagle Ford production with extended growth profile starting at 2017, very value created, it was an ongoing -- it was an important ongoing step in our debt reduction plan with $1.2 billion of debt reduction in that after-tax proceeds. The graphs of the deepwater production reflects on 18 incorporates these assets, as well as in that resource potential comparison.
You can see how more important these assets were compared to our outside the Eagle Ford, so about 10 times more potential from the 1.3 billion barrels of oil. And just to remind everybody about our strategic position in the Gulf of Mexico, the size of our assets, the assets are coming.
This is our Holstein facility here, reflecting we have Marlin and Horn Mountain as far as these big production facilities are running at about 25% of capacity. And we plan to get into 100% capacity by the end of this decade.
The major development projects that are coming on is Lucius, Heidelberg and Vito. Lucius is scheduled to come on here in the fourth quarter of 2014; probably first production that will impact us over the line field would be early ‘15 and our new guidance reflects those small delays at Lucius.
Heidelberg is scheduled to come on third quarter of ‘16 and detailed schedule will come on sometime in 2019 right now even though it's unsanctioned. And then of course our exploration and exploitation opportunities, we're focused primarily with 85% of our dollars on exploitation the next several years and staying with our disciplined operating strategy of filling those existing facilities with high revenue barrels out of Gulf of Mexico.
Kind of a global picture of our Gulf of Mexico here and starting from right to left; as I'm a left hander I like going backwards. We have a Marlin area Horn Mountain area and Mississippi Canyon area.
And you see our Vito fits in very well between Mississippi Canyon and our Holstein Green Canyon area, the Vito in the lower Mississippi Canyon, Atwater Valley area and we’re again able to keep the Canyon and Lucius. And it also reflects by asset areas where the 4.4 billion barrels of resource potential lie and it's a well balanced area, about 0.5 billion to 1 billion barrels per area and we continue to explore it as we get all of our seismic data in and our geosciences.
And we think we have a long, long way to of developing Brownfield and tie back opportunities in these areas. One we really want to highlight this morning is our Holstein Deep play that we’re drilling on right now which is on page 25.
This is a discovery that we drilled a few years ago and after the Holstein purchase, we’re able to pick the leases back up and develop it. And this is the log from our initial well in Green Canyon 643 discovery well and we’re currently drilling well about 1 mile south of it or 1 mile and 1.5 mile south of it, southeast of it.
And we’re in the M13 sand right now core and we’ve done M13 A and B sands as well as the D sands and we’re looking at the M13 E sand and coring it and then we’re going to drill down the M18. We think this is a significant discovery at this point in time with the confirmation well and we’re learning a lot about our seismic as we drill more wells here and how much comp as we have gone all the way around the salt feature.
It’s a very large resource potential multi-pay in the Miocene and we haven’t got into the lower territory of the Cretaceous at this point in time. So, this is going to be a dominant production event for us in 2016.
At Holstein we have where we have about 100,000 barrels of capacity there, that will be able to bring on a significant portion of that 50,000 or 60,000 barrels a day in 2016 out of this the Holstein Deep drilling as we continue to drill around it that will complement with our Heidelberg and also Lucius ramp ups this year and the 2016 with Heidelberg. So we’ve got a lot of production events coming forward that are already in the pipeline, some aggregate and the work done.
And we're going to continue to drill the well and report on M18 sands and further the coring activity in our next call. Lucius and Heidelberg development projects, I gave you the update on those just refresh it by memory.
We have 25% work interest there, so it's a very significant; we talk about 80,000 barrels a day and half a million cubic feet of 450 million cubic feet of gas and most of that is third party. And then we have a 12.5% interest right now on Heidelberg going forward.
And that as you can see the spot already had the sale away and it's progressing on structure. And page 23 our Inboard Lower Tertiary/Cretaceous activities, we've been very active here.
The Highlander project which is our top project at this point in time, we've had ongoing completion operations there. We've had some mechanical or equipment failure; we’ve had to replace equipment that's put us about 30 days to 45 days behind.
So we expect the flow test here in the fourth quarter, more oilfield stuff that we manage through. So, we're on track; we're just delayed.
The Davy Jones 2, we're conducting flow test with Wilcox sands. At this point of time, most of the test at this in point has not yielded commercial results of hydrocarbons, but it's given us comp and it's in our flow rates from the deeper sands that we can overflow on lot of water and not much gas, but at least the permeability and pyrolysis there if not the productivity.
Same thing on Blackbeard West No. 2, and then on Blackbeard East, we're going to be including a rig later this year to do a Miocene completion there and there is some stands there and we're drilling our Farthest Gate West exploratory well and spud it here in October and it's drilling towards 29,000 feet in South West of Louisiana and we also have our Lineham Creek project that we’ll review and completion operations with the operator Chevron.
So that’s how together in oil and gas side had been active, we’re rotating toward a very busy Gulf of Mexico season and for the next several years with our growth shift and driving production volumes and moving to cash flow production higher. Richard?
Richard Adkerson
Okay. Thanks Jim.
Let’s look at the outlook slide, our update to our outlook for the year 2014. Current copper is projected to be 3.9 billion pounds that reflects the sale of Candelaria and some timing issues at Grasberg gold molybdenum and oil this also reflects the most recent information we have from the operative Lucius about the start-up from it, it’s going fine, but it’s starting just a bit later in the fourth quarter and some maintenance that we’re having in our modern platform, some unscheduled maintenance, but that gives our current outlook for our oil production.
You can see our unit costs outlook is consistent in a $1.50 range. Operating cash flows at $3 copper would be $5.8 billion for the year and our capital expenditures are consistent with our previous estimates.
On a quarter-by-quarter basis, we have the projected sales volumes on page -- for the annual -- this is the annual, I’m sorry on the slide here to myself. This is the annual sales volumes going from 2013 to 2016.
Again copper reflects the adjustment for Candelaria and our most recent outlook for plans at Grasberg. You can see 2016 as we approach the completion of mining from the pit continues to be a big year.
Some of that may go into 2017 based on the work that's been done there. And you can see the ramp up in our growth in oil and gas business as well.
Now we get to the quarterly slide that I was talking about earlier, but it shows again the adjustments for the year and gives our quarter-by-quarter projection of our volumes. The site operating cost, union operating cost that we have by region is shown on page 27.
It shows good performance at each one of our operating sites, as well as our sales by region. That's information for your reference and doing your models.
And then on page 28, we have the fiction that we traditionally show, showing the cash earning capability of our business. At variant copper prices we now go from $3 to $4 and show operating cash flows ranging from $9 billion a year to $12.5 billion a year.
Based on previous estimates, we've lowered the byproduct prices to $1,200 for gold and $10 for moly and $100 for oil and also reflect the sale of Candelaria and the adjustments of Grasberg volumes. The capital expenditures and how they break out between oil and gas, major mining projects and sustaining capital for mining shows the completion of the Cerro Verde project in 2015 and the drop of -- as a result of that.
We remain committed to balance sheet management. We recognized that our long-term plans for developing our resource base can best be accomplished if we have a strong balance sheet.
We’re currently financially strong with an investment grade rating and our recent meetings with the credit rating agencies have been positive. We have acted in response to lower commodity prices to sell assets.
We had a positive transaction with our Eagle Ford sale and now we’ve sold Candelaria and we’re continuing to look at other types of transactions to generate cash for balance sheet management. With lower commodity prices and with the situation in the non-investment grade credit markets is kind of the transactions are currently more challenging.
But we’re going to be creative, we’re going to find ways of looking at the timing of our spending, we’re going to -- we are looking at partnership arrangements that may give us the chance to share cost with others on attractive basis and we’re looking at the potential for selling assets in a creative way. We’ve got a long history of adjusting our business to varying markets and we’re prepared to do this now.
We’re looking at our balance sheet and how best structure is for the long-term. So this is still work in progress.
What we want to communicate today to our shareholders is that as a management team and as a Board, we remain committed to this process of reaching a strong balance sheet to support the long-term development of our resource base and the attractive businesses that we’re in. So, that is our update of where we stand right now.
We know you have a lot of questions; and Jim Bob, Jim and I, Kathleen and her team is here prepared to respond.
Kathleen Quirk
Operator, we'll take questions now.
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions).
Our first question will come from the line of Curt Woodworth with Nomura. Please go ahead.
Curt Woodworth - Nomura
Hi, good morning.
Richard Adkerson
Hey Curt.
Curt Woodworth - Nomura
I just wanted to drill down more into this capital allocation for the company going forward; obviously this year there has been pretty significant shifts both in terms of monetizing some of oil assets and then reinvestment in the deepwater. So, could you just comment on, do you continue to expect to pursue more bolt-on acquisitions in the deepwater and does the recent decline in the oil price change any thinking regarding exploration spending and/or potential to what you would want to do with California?
Jim Flores
Okay. Curt, this is Jim.
The aspect of spending, we’re spending a minimal amount of exploration spending in the Gulf of Mexico, most of this development and exploitation spending around our facilities. So, as far as exploration and we'll be willing to change, there has not much of it been done.
We are obligated to drill one well in Morocco on the exploration front, that's on the international side to go and call that the deepwater aspect. The bolt-on acquisitions and so forth, the market -- I think it's going to continue to be there from the seller’s perspective.
Our needs, when you look at our portfolio on page 20; we have a tremendous portfolio; sure we’ll buy a few leases when the [March] lease sale coming up. I don’t forecast as active a year as we had this year.
Even though there will be opportunity, we just don’t -- we don’t have the need. As far as California and thinking about that, it’s a monetization asset because of the flat production curve and growth.
I think it kind of falls in the area where Richard talked about with the creativity and so forth; we still have partnership concepts and ways to do that. It’s a tremendous asset to finance.
And we’re working on something as a project like that with partners to see obviously the market volatility. We’re not rushing out to price something in this type of market; we want to see what things stabilize.
And we have probably a little more constructive outlook on commodity prices than the banks at this point in time. They’ve been calling for $80 oil for three years and so they finally got it; now they call it for $70 oil.
So, we see demand around the world, we have a pretty good look at it is continuing to be healthy. There is a lot of financial noise in the markets right now and all this will calm down and we’ll get back to business usual, maybe early as first half of next year and maybe take a little longer, but we don’t think so.
So we continue to have that I guess error and aquiver and we’re talking about something that works that’s very smart and value creative for the FCX stakeholders. And so that’s more of a dry powder, but as far as rotating more Gulf of Mexico assets, we’re probably developing those with the drill bit on our properties versus third-parties at this point in time.
Curt Woodworth - Nomura
Okay. That's great.
And then just a follow-up on the sulfide projects, Richard, can you give a sense for how the capital costs curve for say pounded capacity would look compared to some of the recent Brownfield expansions that you've been doing?
Richard Adkerson
You know, Curt that I'm always reluctant to use averages because we are assessing these projects based on the individual economics of each property. The nature of the properties are similar though.
And that the available sulfide projects that we have to work with are these large low grade deposits. And we are looking at the individual aspects of what it takes to develop them.
In other words, if we compare an El Abra with our Bagdad mine and when we look longer range at Morenci and Lone Star, all of those things have attributes for development, permitting water access, power that vary significantly. So, if we match those up, we eliminate projects that don't fit in the portfolio, don't have good rates of return or ones that are not impactful or ones that we consider in a way we manage variations and prices overtime.
So, with the real detail dynamic study of what to do and then we look at execution risk, which ones can be approached and achieved with the least amount of risk in terms of engineering design, tailings management it’s a very dynamic kind of project. So, we can give you averages, but that’s not really the way we look at.
You look at the Morenci project that we just completed that we’re ramping up now. Here we added our modern hot pressure grinding roll mill, goes along a 1940s area mill.
We’re taking material that we were wasting and now we’re finding a way to economically process it. It’s a lot different situation than at Cerro Verde where we’re basically tripling where we had an existing site.
We developed an innovative approach with a waste water system for the (inaudible) water. We had about a straight forward of building size you can have in this industry in terms -- and we have technology that we’ve just put in place when we started the project and so we’re tripling that and that gave us the opportunity to go for that.
So, as I said, what I’m looking forward to is having a day where we can bring a group of investors here in and go into some detail, this is the process we go through in analyzing this thing. The issue is -- and this is the reason that the outlook for copper price is so good in situations that we have where we have the resource we have the ability to do it, we want to do it as fast as we can, we’re talking 10 years plus or minus.
And that’s what’s so supportive of prices. Now if you’re talking about a Greenfield project, you can just see -- might watch those that are going on around the world.
And that’s why I say when we’re looking at market, that’s really supportive of copper price. And grades are falling; mines are having to go underground to help those having to deal with these social issues.
So, we think it's great business.
Curt Woodworth - Nomura
No question. Thank you.
Operator
Your next question will come from the line of Oscar Cabrera with Bank of America Merrill Lynch. Please go ahead.
Oscar Cabrera - Bank of America Merill Lynch
Thank you operator. Good morning everyone.
Richard Adkerson
Hi Oscar.
Oscar Cabrera - Bank of America Merill Lynch
Hi guys. I’d like to get started with the $12 billion in net debt target that you had set for 2016, would the presumption that the California sale at current oil prices doesn't make sense.
Would you be willing to be flexible with that, because 2016 appears to be a pretty good year for production from your projects? And in addition to that, I noticed that you have been continuing to buy back high cost debt which makes absolute sense to me.
So, could you just provide more color around that?
Richard Adkerson
Well, when we set the $12 billion target, it was just following the announcement of the acquisition of the oil and gas business. And we have faced some headwinds since that initial analysis with lower commodity prices, with the interruption of production in Indonesia and that's led us to find ways of selling assets and establishing our business.
We're going to continue to do that. We are looking at capital spending, one of the attractive things in the oil and gas business it is; it is a business that has great more financial flexibilities than the mining business.
Once we start spending on a mine like Cerro Verde, it’s very difficult to pull the plug. So it gives opportunity for partner arrangements that could help us for timing and spending for selling partial interest.
And so we’re going through all of our business, looking at all of our capital spending seeing what we can differ, how we can deal with it, how we can generate cash. And we are going to be committed to reaching the strong balance sheet target.
All of you run your models and many of you said Richard my model shows it’s going to be tough for you to get 12 billion by 2016, you’re right by the way. Does that mean, we’re going to change our focus from getting to a strong balance sheet, none of us know what commodity prices are going to be in 2015, 2016.
We have a great set of flexible assets, we’re all very confident, we’re going to reach the goal of having the kind of balance sheet that you -- most of you as investors are encouraging us to get to and we’re going to work diligently to try to get there. While, we work to keep our production volumes up, execute deal with our issues in Indonesia, deal with our long-term growth plans to be disciplined about how we spend capital over the long range, we’re going to deal with it.
Jim Flores
And Richard, just to add one thing; Oscar this is Jim. You mentioned only California sale.
Remember, we have a very strong hedge book on the oil from the standpoint; I’m looking from where commodity prices are now and what the current financial community’s outlook for it is through ‘15. So that gives us a bridge to still be strongly considering a transaction evolved in California that has -- that is like I said accretive to the stakeholder report.
So we’re in a unique position there to carry over some of those hedges on floors. So, I would not take that off the table at this point in time as part of our flexibility and bullets toward getting to the goals that Richard outlined because we're all committed across the board to making sure because we're talking about a business that lasts as Richard said for decades and 100 years, stock reserves.
So the quicker we get to a balance sheet that we're proud of that we feel like it's going to give us the flexibility to accelerate the growth, the faster we'll all be happy right here. So if that helps you?
Oscar Cabrera - Bank of America Merill Lynch
No, that's great. From my perspective, you already have a strong balance sheet.
Then if I may, second question with regards to Grasberg. COW would notice the agreement that Vale reach in their Indonesian nickel operations ahead of the President taking office.
And I understand it's a difficult situation but I was just wondering if you could just compare and contrast your situation with that of Vale because it seemed that they've got an extension to the contract of work that they've been happy for and in addition to that, it seems just based on the press released that they can go directly to the Indonesian Stock Exchange to this dispose off 20% of the stake they need to do.
Richard Adkerson
All right. Well Oscar, let me say first of all, it's going to be a limit amount that I want to say about another company.
You need to -- Vale will explain their situation but a key thing to remember for all of you looking at our situation in Indonesia, is that all of these contracts are different. They were signed at different times.
Vale’s operations like three forth go back; ours go back to the 70s, theirs go back at least to the 80s. And so where they ended up where we ended up with was contracts that have historical legacy and that have significantly different terms going into this process.
For whatever reason, for some reason the Indonesian government has elected to treat nickel and copper differently. Valley produces an intermediate project called nickel matte, which represents 80% of the value of refined nickel.
That product is allowed to be exported under Indonesian regulations without any restrictions without any duty. We produce a product called copper concentrate that is worth 90% plus 90% to 95% of value of refined copper and yet it’s treated essentially as an ore and we’re subject to these restrictions.
I don’t have any answer for that. But Valley’s contract according to their press reports did not have legally the same degree of assurance in the contract authorized to extend.
Legally our contract work has very strong provision that gives us the right for extensions from 2021 to 2041. Valley’s contract extended to 2025 and did not have the same kinds of legal provisions.
They’ve breached some agreement with Indonesian government, we’re not sure the details, but allows them to continue operate under a business license approach. And typically under a business license you have the right to operate, but you’re subject to prevailing laws and regulations that can be changed.
We’re working with the government and it was acknowledged in our MoU with the need for us to have assurance about the terms of our operations beyond 2021 about our rise to operate physical terms legal enforceability because we're spending so much capital now between now and 2021 that won't be produced until after 2021. 75% of our reserves are produced after 2021.
So, we have to be in a position of saying we'll spend this money, we've agreed to work with them on our smelter, but provided we have assurance of terms beyond 2021. Valley’s situation is different and I don't know enough about it really to give you a detailed comparison in any event I don't want to talk about another company.
But our situation is just what I described.
Oscar Cabrera - Bank of America Merill Lynch
No that was great Richard. That’s the sentiment I was looking for.
Thank you very much.
Richard Adkerson
Thank you, Oscar.
Operator
Your next question will come from the line of Ash Lazenby with HSBC. Please go ahead.
Ash Lazenby - HSBC
Yes. Good morning all, just a couple of questions.
Just if you could possibly expand a bit more you commented about the hedge book on to next year. If you do give us an idea of how significant the volumes are and sort of prices and to the extent that you can disclose that?
And then secondly, just a point of clarification in terms of the CapEx and on oil, the $3.5 billion to $4 billion, how can we think about that in terms of flexibility? For example, if the oil price wasn't recover from these sorts of level, how much sort of flexibility do you have within those CapEx figures where you could potentially bring in some of that and free up some more and then boost the free cash flow generation.
And what would that be In terms of the reduction of any of sort of production that you've currently got in the profile? Thank you.
Jim Flores
Ash, it’s a two part. On page 35 in our presentation and I need Kathleen to take it a later bit.
35 has got a detail on all our volumes. And we have 83 million barrels a day that’s a hedge profile talked about in 2014 or 107 in 2015.
So significant portion, all of our California volumes decided to do a transaction, so page 35 will help you there. As far as flexibility in CapEx, there is couple of different ways to do it, right, there is -- you can just reduce activity, but in spite of flexibility that oil and gas business has, we do have significant relationships in contracts with drill ships and the Gulf of Mexico, you have to plan your business much further ahead due to the regulations today and go through all that regulatory process and permitting that causes a little lengthier situation.
I think the easiest or the best way to do it, start looking at the longer dated projects and develop joint venture relationships and basically bring in partners to share the spending. And that’s something we’ve been active in doing for the past several months and going to be continue to have those discussions, mainly out of solicitations from investors to us versus us really reaching out to other investors.
So we’re ramping up those activities to make sure that we continue to maintain that. Our front end loaded development activity versus doing too much drilling for the future while, even though it’s development, during any kind of period of constraint commodity prices.
So we’re looking at building that flexibility. And I think you’ll see the realization of it in the second half of 2015, if we’re able to be successful there.
I think in the first half of 2015, you would look at rationalization of assets like California; in the second half, you look at the realization of joint ventures reducing CapEx and we're going to proceed to have a flexibility in our program irrespective of where our prices are if it makes sense.
Ash Lazenby - HSBC
Okay, thanks.
Operator
Your next question will come from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead.
John Tumazos - John Tumazos Very Independent Research
Good morning. Thank you for taking my call.
I was taking a look at the commodity prices on December 5, 2012 when you announced the oil and gas acquisitions versus yesterday. It implies about 2.8 billion a year less after-tax cash flow.
It would seem as though some of the CapEx is more, things like smelter in Indonesia came up small. And some of the CapEx that's a large project in midstream is hard to change like the Cerro Verde Mill ones you've started.
Given the decline in cash flow, what are the levers of spending that you can turn off? And would it be less damaging to just omit the dividend as opposed to cutting off these oil and gas projects when they're permitted or the Peruvian CapEx in midstream and you've got probably some regulatory CapEx for [provision] control?
And I know it's very complicated, it’s a terrible question but the realities of markets in the markets.
Richard Adkerson
Right. Well John, you’re exactly right and that’s what we’ve been dealing with.
I mean we have as this situation has unfolded with the lowering of commodity prices, with the interruption we had in Indonesia, we’ve been taking steps all along. In our mining business we scrutinized spending to differ delay spending all along and we’ve done that in oil and gas and we’re going to continue to do it.
We are not in a 2008 crisis mode. Oscar made the point, thank you Oscar for saying that at the end of his -- as we answered his questions; we’ve got a strong balance sheet.
I mean we’re an investment grade rated company right now. We’ve had very positive discussions with the agencies.
And so the issue of having to take the draconian steps that we took in the fall of 2008 where I came back from LME; we called our team together and said we’re stopping spending right then. I mean we stopped Climax; we stopped the spending on Cerro Verde which was an earlier stage on Morenci.
We just stopped all the projects; we cut the dividend; we even raised a little capital if you recall. We’re not like that now.
We don’t have to go through that kind of analysis. But what we want our shareholders to understand is we’ve got this commitment to work to strengthen our balance sheet in a rational way.
We’re not going to fire sale assets, we don’t have to. We’re going to find ways; we’re going to look at all of our capital spending, see if things can be deferred with that of where we’re honoring our contracts to spend where we’re doing what we need to do.
This is not something we're bringing our hands about here. We can manage our way through this and preserve our long-term growth.
We're not having any discussions about cutting the dividend. We are just talking about managing our business.
And we got the assets, the balance sheet and the way to do it. And we're going to do it in a way that John you're going to be happy with and we're going to be happy with.
Jim Flores
Yes. John this is Jim.
There is no well that support enough to drill before paying the dividend on the oil and gas side. They can be drilled later or that type of things just because of structure of our business as Richard talked about on the mining aspect.
They are very co-relative of both sides. And I think what's impacted is trying to impress everybody about this company is that we're not only trying to put our business in great shape for the future, now we're in great shape for the present.
At the same point in time, increase our flexibility about paying that debt all at the same time. That it is that hard to do, yes, we’ve all acknowledge that.
But that's the kind of goals and realizations that our Board expects and we're proud of the flexibility of our business to be able to even -- to discuss a proposal. And we've made some progress this year with Candelaria and the Eagle Ford sale and we've got more progress to do.
So, we're all in the same boat and I think it will be beneficial for the shares irrespective where commodity prices go and that's what our job is.
John Tumazos - John Tumazos Very Independent Research
Thank you, I'm a shareholder.
Jim Flores
Thanks John. So are we, John.
Operator
Your next question will come from the line of Lee Gorin with (inaudible). Please go ahead.
Unidentified Analyst
Hi. Yes Richard, just two questions.
First is that a lot of chatter regarding the copper tied up in financial deals, China has tied down. And I was wondering if you had any comment on that?
And second, this is the first time I’ve heard you talk of Serbia. And I’m very curious about where that project lies as far as in your priority of your capital investments and new projects going forward between now and 2020?
And a bit to that property, so it’s very interesting.
Richard Adkerson
Yes. I knew you’ve been there, Lee.
Great hearing from you, it’s been a long time since we’ve seen each other. This financing deal in China has always been murky as to what it meant; they had this fraudulent situation developed, but of course that for a period of time really raised everybody’s concern.
We’ve talked about over the years at any point in time in China there is always some story about things that could be happening. And I got to tell you, I don’t know all the details of the financing scheme, but when I look at the size of the Chinese economy and the amount of money that’s being spent on development even in this lower gross situation and thinking about all they have to do to meet their development goals for the interior and what’s they grid is pacing this year, next year with over 20 year period in terms of development, how much copper that involves.
So, I got to tell you, I think a lot of these stories about inventories at any point in time, financing deals or slide shows that are probably really meaningful for companies that are traders, companies that have to make short-term statements about what to do with copper stocks and buying and selling. For company like ours, we’re again focused on the longer term situation.
Just like you as investors often have to be more concerned about short-term movement as to how you realign your portfolios, we understand that. But if we ever were to let short-term deals affect the way we run this business, then we're going to miss out on some huge opportunities because of the time it takes to get projects ready to go.
Now Serbia: There is nothing in the natural resource business like Greenfield exploration, I mean nothing. It is idea of making some investments in exploration and finding a new asset and creating huge value.
That's the happiest day you can have in a company like ours. And in oil and gas business it happens a lot more frequently than it does in the mining business; and that's again what’s supportive about prices.
You go back and you think what are the big success stories during my long career in the mining business from Greenfield exploration, they are few and far between. We have an active program, Rich [Lovell] and Jim Bob worked with and we fund junior mining companies around the world, own exploration concepts that have the potential to be big.
We don't look at anything unless it has a potential to be big. So that's why you haven't heard much from us about this program.
This does, this has a potential. You've been there.
There have been some real exciting core holes that have been drilled. A lot of work needs to be done.
It's in an area that's a traditional mining area. The government of Serbia is very anxious to see come in and invest.
The current status is we're not actively drilling now. We're working on partnership arrangements with our partner there.
I saw them briefly in London when I was there last week. And we're excited about it but it’s longer term; a lot of work to be done but it is a Greenfield project that if it is successful could add a lot of value to our company.
Unidentified Analyst
Thank you Richard very much.
Richard Adkerson
Okay.
Operator
Your next question will come from the line of Joan Lappin with Gramercy Capital. Please go ahead.
Joan Lappin - Gramercy Capital
Good morning. I have a question about the water bates flowing through on this recent test.
I would presume that what you haven’t said straight out is you have solved the problem of how to perforate these wells now and whether we’re getting out hydrocarbons in commercial quantities is less significant in a way then all the problems that we had at Davy 1. So, my question is, am I correct in surmising that that the guns are now working and the ability to perforate at these steps is now perfected?
And would that mean that would you ever go back to Davy 1; what this implies for Davy 2 and for -- and can you elaborate a little on whatever the problems were you had at Highlander?
Jim Flores
Joan this is Jim Bob. That’s a possibility, the other possibility is the reservoirs are different and the porosities and permeabilities were better at Davy Jones 2 versus Davy Jones 1.
When we’re in the business of producing salt water versus oil and gas, it’s scientific but as far as economic and financial, all eyes are on Highlander, that’s where we have even better porosity and permeability and core evidence and log evidence of having accumulations so that’s where we’re focused. The delays in Highlander were strictly oil field related equipment that failed that we had we retrieved out of the whole and just put us behind schedule.
But we think we're getting closer and closer to the development test and we've got a little more work to do out there. And feel like here in the fourth quarter, we'll deal with kind of test of Highlander and put it in the sales very quickly, once it happens.
So, that's what we're focused on; we're really just updating everybody over the operational results of those existing wellbores from McMoRan.
Joan Lappin - Gramercy Capital
Well, I know you are not in a business of producing water. But I'm asking it's more specific question which is…
Jim Flores
And Joan, I'd say that is a possibility but there is also another possibility.
Joan Lappin - Gramercy Capital
What's the possibility?
Jim Flores
The possibility is that it was -- it's purely mechanical with the perforating guns. But the other possibility, more likely possibility is just different, reservoir characteristics.
So, I know I'm answering your question with two answers and either one a possibility that could be the reservoir characteristics has changed or the mechanical aspects of the guns, I happen to think and I have think it has to be reservoir characteristics, but that guns are an issue. But at the end of day, we're focused on Highlander and perfecting the flow rates of gas and oil there and that's what we're are concentrating.
Joan Lappin - Gramercy Capital
Okay. So, you will not say that the guns are now working?
Jim Flores
They've always worked.
Joan Lappin - Gramercy Capital
Well, there is some question about that. But okay, thank you.
Jim Flores
There you go.
Operator
Your next question will come from the line of Steve Bristo with RBC Capital Markets. Please go ahead.
Steve Bristo - RBC Capital Markets
Yes, thanks. I just had a question on your hedging portfolio in oil and gas.
And I know you commented on that being an asset possibly in the divestiture of California. Are there any plans to add to that portfolio because it was acquired with the plant’s exploration and since announcing you guys have added to it at all?
Kathleen Quirk
Steve, this is Kathleen. We’ve not added to the positions, PXP had positions going into the deal, which will benefit us during this period of time.
We continue to monitor markets and look at how a hedging program might fit in with our overall plans and capital spending. But at this point in time with these markets we’re not looking to add to positions, but it’s something that will continue to evaluate overtime in the future.
Steve Bristo - RBC Capital Markets
All right. And then…
Richard Adkerson
Steve I just might note too, company situation is different than [plains] and FCX. I mean we have a broader set of assets, stronger balance sheet.
We’re also short oil in a lot of our businesses. It’s kind of different to match it all up piece-by-piece, but we’re a big energy user, energy is 20% to 25% of our costs.
It’s from a variety of sources in our mining business natural gas, hydro, but all other component of it. So, when we step back and look at the overall business in terms of what our financing strategy should be, it’s a different circumstance than having an independent oil and gas I think my point was.
Jim Flores
Steve, this is Jim. I will just highlight and it gives us a lot of flexibility during the comparative time that other people do not have when it comes to valuations and financial flexibility of financing deals with California.
So that was -- that’s unique to us and unique to our situation.
Steve Bristo - RBC Capital Markets
Okay, thanks. And then just on the debt target, it came up early about the $12 billion net debt target by 2016, but it sounds like you're sort of shying away from that and then you targeted just a strong balance sheet without a certain number around that.
Is that correct in assuming that's where you're sort of leading into?
Richard Adkerson
Look, all I'm acknowledging; let me just say I'm acknowledging is we have a target and we're working to get that, never anything magic about that target. We want it just to be as clear as we could to the marketplace at the time about trying to make it.
It would be unrealistic of me to sit here and look at these circumstances and what we're dealing with and say if I got $12 billion, it’s $12 billion. We're going to continue to work towards it.
We're going to work to have a strong balance sheet. We're going to look at the time of when we can get there and I'm just being realistic than not being realistic.
Jim Flores
And Steve, that is really the discipline that brings into all the spending, all our business, it sure keeps everybody focused on creating value. So it's been a beak and it’s been endorsed by the board.
So we’ll continue to focus on it.
Steve Bristo - RBC Capital Markets
Perfect. That's it for me.
Thanks a lot.
Operator
Our last question comes from the line of with Wilfredo Ortiz with Deutsche Bank. Please go ahead.
Wilfredo Ortiz - Deutsche Bank
Yes, good morning everyone. Just a quick question on your volume guidance for copper for the fourth quarter, does this include any type of impact if like at Grasberg were to take place?
And if it does take place, would it impact the whole operation or just partially a portion of the operation? Just wanted to get a sense as to what we're seeing as far as the guidance versus what could potentially happen if the strike doesn’t sue post November 6.
Richard Adkerson
The answer is it does not include any impacts of any kind of potential work disruption strikes or otherwise. And there is no real clear answer to your question.
As I said, as we speak now there is a group of workers primarily in the Grasberg open pit who are not reporting to work that’s in violation of our collective labor agreement. The work continues in our DOZ mine, in our underground development, in the mill operations and so forth.
So, we’re just going to have to work through this. It’s unclear even if the union were to declare a strike; to what extent will the workforce respond to that.
There is a -- it’s a dynamic situation with a lot of interest represented even within the union. And so we’re going to deal with it, could have an impact.
That impact is not reflected in any of our numbers and there is one thing you can be sure of Indonesia, you’ve got a real time news flow coming your way because whatever the union does is in the paper every day. And we’re going to be active in our communications efforts to make sure the market is aware of what the circumstance is.
Wilfredo Ortiz - Deutsche Bank
Understood. Thank you.
Richard Adkerson
Okay. Thank you, Wilfredo.
Operator
Now we will turn the call over to management for any closing remarks.
Richard Adkerson
We appreciate everybody’s interest and your good questions. We’re going to work hard to achieve all these goals that we have.
And we’re very confident we’re going to be successful. So, thanks for your interest in following our company.
Operator
Ladies and gentlemen, that concludes our call for today. Thank you for your participation.
You may now disconnect.