Freeport-McMoRan (FCX) is a copper giant, a company whose fortunes rise and fall with the red metal's price. Their Q1 2024 earnings call [link to transcript] was a masterclass in bullish copper sentiment, with executives highlighting the metal's essential role in electrification and the growing supply deficit. But amidst the talk of leach initiatives and brownfield expansions, a subtle detail hints at a potentially massive, untapped value driver for Freeport: the impending completion of their Indonesian smelter.

While analysts focused on the smelter's impact on export duties and long-term operating rights, something far more significant might be hiding in plain sight. The transcript reveals a fascinating dynamic: the potential for the smelter to significantly boost PT-FI's gold production, leading to a surge in gold byproduct credits that could add billions to Freeport's bottom line.

Let's rewind to understand the context. Freeport's Indonesian subsidiary, PT-FI operates Grasberg, one of the world's largest copper and gold mines. While copper is the primary product, Grasberg produces a substantial amount of gold as a byproduct. These gold byproducts generate credits that offset copper production costs, a factor readily apparent in Q1 2024, where PT-FI's unit net cash cost was a remarkable negative $0.12 per pound.

Now, enter the smelter. Smelters are typically associated with copper production, but they also play a crucial role in gold recovery. The anode slimes generated during copper smelting are rich in precious metals, including gold. Currently, PT-FI exports these slimes for processing, incurring transportation costs and relying on external refineries.

The transcript, however, reveals that once the smelter and precious metals refinery are fully operational (expected by year-end), PT-FI will become a fully integrated metals producer. This implies that they will process anode slimes in-house, capturing additional gold that was previously lost in external refining processes.

While the transcript doesn't quantify this potential gold upside, the implications are significant. Consider that in Q1 2024, gold byproduct credits were sufficient to entirely offset PT-FI's copper production costs, pushing unit net cash costs into negative territory. If the smelter enables even a modest increase in gold recovery, the resulting byproduct credits could dramatically amplify this effect, further slashing copper costs and boosting profitability.

Hypothetical Scenario: Impact of Increased Gold Recovery

Let's assume the smelter allows PT-FI to capture an additional 5% of gold currently lost in external refining. If PT-FI produced, say, 300,000 ounces of gold in Q1 2024, this translates to an additional 15,000 ounces of recovered gold. At a gold price of $2,000 per ounce, this represents an additional $30 million in revenue – a seemingly modest figure.

However, remember that gold byproduct credits directly offset copper costs. Assuming PT-FI produced 300 million pounds of copper in the same quarter, this $30 million in additional gold revenue translates to a further $0.10 per pound reduction in copper costs, on top of the already negative $0.12 per pound.

This pushes PT-FI's unit net cash costs to an astonishing negative $0.22 per pound – essentially, they would be paid to produce copper. Extrapolate this across Freeport's annual production and the financial impact becomes staggering, potentially adding billions to their bottom line.

Of course, this is a hypothetical scenario based on assumptions about gold recovery rates. The actual impact of the smelter on gold production remains to be seen. However, the transcript's subtle hints, combined with the existing dynamics of gold byproduct credits, suggest that Freeport might be sitting on a gold mine (literally) within their copper operations, a value driver that could dwarf even the most ambitious leach initiatives and propel the company to unprecedented profitability.

"Fun Fact: Freeport-McMoRan was founded in 1912, the same year the Titanic sank, but unlike the ill-fated ocean liner, Freeport has weathered countless storms to become a global mining powerhouse."