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Richard Adkerson 'We were being told we could do the largest merger ever done in the mining business'

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Richard Adkerson, chief executive officer of the world’s largest listed copper producer, Freeport-McMoRan, was going to be an engineer until a bad experience changed his mind. He had a summer job at a school bus assembly plant following high
school in Kosciusko, Mississippi. It was good work, but the working conditions then were poor – clay floors, no air conditioning and
inadequate safety procedures. “I saw two people get pieces of their hands cut off. One day I came to work and there was a thumb on
my machine!” Adkerson recalls.

It pushed a math-minded student towards business and made a lasting impression about the importance of workforce safety that Adkerson took with him when he joined the mining industry 25 years later.

As a child, Adkerson grew up in small towns in the US Deep South. Born as one of the first ‘Baby Boomers’ after World War II, his parents came from small farm families in West Tennessee, not far from Memphis. His father managed department stores and
bought a small retail business just before Adkerson started his final year of high school. When his father died at just 54, Richard helped his mother take over the business.

For his part, Adkerson was more interested in playing football and baseball than anything else until he aced his college entrance test and became a National Merit Scholar, something Adkerson says “surprised everybody.” He ended up going to Mississippi State University, where, after the experience at the bus factory, he asked the Associate Dean at the College of Business for academic advice.

“He told me that accounting is the language of business, so I majored in accounting,” Adkerson tells Metal Market Magazine.
“Accounting is one of those light-switch deals – you either get it or you don’t. I got it, and I also liked it,” he says.

Adkerson applied his competitive spirit from sports into his studies, taking every accounting class he could, graduating with highest honors and then earning an MBA. One of his accounting professors told him about the national Certified Public Accounting exam. “She told me there were awards for people who score highly on the exam. Recent awards in Mississippi had been won by students at Ole Miss, our bitter rival. She said if I were to study hard, I might win the state award,” Adkerson says.

He took on the challenge, earning the second highest grade in the nation out of around 80,000 students, thus putting a star over
his head in the accounting profession. At a young age, he joined Arthur Andersen in New Orleans. In December 1970, he was assigned his first principal client: McMoRan Exploration Co.

Working with McMoRan
 
The path to create Freeport- McMoRan was complex, but Adkerson was there from almost the start. McMoRan had just been founded when Adkerson walked into its offices. There were 16 people with the company at that time, including the three founders, Ken McWilliams (the ‘Mc’ of McMoRan), Jim Bob Moffett (‘Mo’), both geologists, and Mack Rankin (‘Ran’), a petroleum land man and business executive.

Adkerson spent the next five years working closely with McMoRan in New Orleans as the company grew until another opportunity came his way: an accounting fellowship with the Securities & Exchange Commission (SEC) in Washington, DC. It was 1976, and oil and gas had become a hot political topic following the Arab oil embargo. The high industry profile gave Adkerson an element of notoriety.

In the next two years, he gave over 100 speeches to groups of all sizes. During this period, he led the development of new accounting and disclosure rules for the petroleum industry, including the present value disclosures for oil and gas reserves. He selected the 10% discount rate at age 30, which continues to be used for financial reporting forty years later.

He also helped draft the then new US Foreign Corrupt Practices Act. “I drafted it and now I live with it every day!” he jokes.

When his term at the SEC ended in 1978, Adkerson moved to the heart of the oil and gas industry in Houston and became one of Arthur Andersen’s youngest ever partners, age 31. An expert in SEC matters, within a year he became head of Arthur Andersen’s worldwide oil and gas practice during the tumultuous 1980s and he resumed his working relationship with McMoRan.

While all this was happening, a mining company with its roots in the sulphur business was quietly developing what – unbeknown to
it – would become one of the industry’s greatest mines. Established in 1912, Freeport Sulphur became Freeport Minerals, having added other resources to its portfolio. In 1981, Freeport merged with McMoRan.

Adkerson became an adviser on the newly merged company’s transactions. The company moved its headquarters to New
Orleans from New York in the mid-1980s and in 1988 completed an initial public offering for its Indonesian subsidiary. The year prior,
40-year old Adkerson moved to Chicago to become head of Arthur Andersen’s global public company audit practice. It was then that his devotion to the firm started to wane.

“I moved to Chicago thinking I would stay with Arthur Andersen forever – I loved the firm and was two steps down from the managing partner level at a very young age. But I became dissatisfied with the internal bickering between the firm’s consulting arm (which later
became Accenture) and the traditional accounting/audit firm. I was close to both sides, stuck in the middle, and just wasn’t happy,” he says.

Adkerson made the decision to move back to Houston after completing the Advance Management Program at the Harvard Business School. Word got out that he was not entirely happy, leading to an offer for him to become CFO of a large oil and gas company. “When Jim Bob [Moffett] heard I might leave Arthur Andersen, which he thought I’d never do, he called me to say ‘if you’re going to leave, then you need to join Freeport.’ So that’s how I ended up at Freeport in 1989,” Adkerson adds.

Adkerson’s new role was not as an accountant, but more as a financial dealmaker. He joined Freeport at the same time as Chip Goodyear, the future head of BHP Billiton, who left Wall Street’s Kidder Peabody. “After I accepted the Freeport offer, Jim Bob called me to say that a young guy in banking was leaving New York, and the two of us would make a great team. And we did,” Adkerson tells Metal Market Magazine.

“We formed an exceptional partnership from a work standpoint and established an enduring close personal friendship,” he says. The pair – who now own a ranch in Montana together with Bobby Patrick, another friend from New Orleans – were not given specific
management roles within the group – “Jim Bob said we would be in-house investment bankers,” Adkerson notes.

Mining the moon

At that time, Freeport quickly determined that its Grasberg discovery was a game-changer. It had originally been discovered in 1936 during an expedition by Shell geologists to the highest mountain on the Island of New Guinea. A member of the group, Jean Jacques Dozy, observed an outcropping of copper ore that a glacier had exposed. Dozy wrote a paper on his findings, noting that the mineralization might as well be on the moon because of its inaccessibility.

The report was lost for 20 years, until Freeport’s geologist Forbes Wilson came across it, which led to a trip to the site in 1960.
“Freeport had a hard rock mining group that was looking for a new project after Castro nationalized its nickel mine in Cuba in the
1950s. Wilson’s group cut its way through the jungle, climbed up to the side of the Ertsberg, Dutch for ‘ore mountain,’ and drilled it,”
Adkerson adds.

Freeport began the process of securing mining rights from the government of Indonesia, which was going through the presidential ousting of Sukarno and transitioning to Suharto, who ruled for the next three decades. Freeport signed its first Indonesian contract in 1966, developed the small high-grade deposit and started production in 1972.

It was not until 1988 that Freeport decided to drill a grassy ridge, named ‘Grasberg’ by Dozy in 1936, located three kilometres
from the original Ertsberg mine. “The accepted wisdom was that it was probably a low-grade copper porphyry and never drilled
because it was expected to be uneconomic,” he notes. Adkerson credits Moffett for bringing a geologist explorer’s outlook to
Freeport that led to the discovery of Grasberg.

Adkerson made his first trip to Freeport’s operations in Indonesia in early 1988, the year before he joined Freeport, as the second
hole was being drilled at the future Grasberg – he snapped a Polaroid photo of the Grasberg exploration shack that is framed on the wall of his office today.

The rest is history. After a series of assets sales and innovative financings, in 1992 Adkerson was made CFO and Goodyear was Chief Development Officer of Freeport. In the mid-1990s, Freeport spun-off its copper business as well as its oil and gas unit, leaving the agricultural minerals business with the parent. Adkerson moved with the former, and Goodyear became CFO of the latter, which was ultimately merged into what is now Mosaic.

During this time, Grasberg was being developed “in an extraordinarily rapid fashion,” says Adkerson, who was traveling to the jobsite every quarter.

The company faced liquidity issues during the mid-1990s, in part because of the parent’s “overly aggressive dividend policy,” Adkerson acknowledges. Rio Tinto made an investment to help finance Grasberg and became a partner in the project in 1995.

Within a couple of years, the major development of Grasberg was completed. Freeport was widely viewed as a relatively small
but interesting company, and things were going well. Adkerson was now Freeport’s president, with Moffett the chairman and CEO.

But in May 1998, Suharto stepped down. It was in the midst of the Asian financial crisis, and the contagion spread globally.
“Grasberg took all our focus: everybody rolled up their sleeves and thought about how to develop it for the long-haul,” Adkerson says.

Although Freeport was not a major diversified miner, it earned the respect of its peers by developing the asset in the right way, and in particular during a turbulent era in Indonesia. Yet times were difficult: copper and share prices slumped, and the company repurchased a third of its stock when its value fell in anticipation of a revival that was not quickly forthcoming, creating another liquidity crisis.

Adkerson, who was at this time not on the Freeport board, started working closely with company treasurer Kathleen Quirk. She
had joined Freeport at the same time as he and Chip, working initially in Freeport’s ag-minerals business. The pair set about
working towards restructuring the company’s balance sheet.

“We had quite a task in working through that issue. We had developed Grasberg and then, just as it was beginning to generate significant cash flows, the Asian financial crisis happened, the company was over-levered, and Freeport was painted with the brush of Indonesian political risk,” he says.

“It was boot-camp training for what we had to deal with just a few years later,” he adds. Freeport’s challenges from excessive debt
left a lasting impression on the Adkerson/Quirk team.

Then 2003 came, China emerged as a major developing economy, and the world came out of recession. “Grasberg was fully developed and we started making money hand over fist. We paid off all of our debt and were distributing large amounts to shareholders,” Adkerson says.

Phelps Dodge deal

At the end of 2003, Adkerson became CEO and Quirk became CFO; Moffett was chairman, largely focused on the separate oil
and gas business. Adkerson’s attention turned to the future of the copper company.

“Freeport was performing well after commodity prices rose beginning in 2003 but it was a single asset company. We recognized that wasn’t sustainable. We talked with a number of bankers and companies about strategic ideas – in the back of our minds, we always thought someone would come in and buy us,” Adkerson admits.

But they could not find the right deal. Grasberg was an unusual orebody – roughly two-thirds of the value was copper and the rest
was gold, so it didn’t naturally fit with other mining or pure gold companies, plus it was in Indonesia, which had lingering political risk implications.

One company that Adkerson had his eye on starting in the 1990s was Phelps Dodge, a major copper producer with large low-grade deposits. He developed a friendship with its CEO, Steve Whisler. The pair had talked about a combination – including the sale of Freeport to Phelps Dodge – for over a decade, but nothing materialized. Adkerson remained convinced that an amalgamation of their assets would be a winning combination.

By 2006, Phelps Dodge was under pressure by activist hedge fund investor Atticus Capital, and responded by attempting a
complicated three-way transaction in which it would acquire Inco and Falconbridge. It failed, losing out to Vale and Xstrata respectively.
 
“While we were watching this, our bankers – JP Morgan and Merrill Lynch – came to us separately and each informed us they could finance an acquisition of Phelps Dodge. I remember how amazed I was when they walked in and told us this,” Adkerson says.

“I recall thinking, a short-time earlier we’d been really financially stretched, and now we were being told we could do the largest
merger ever done in the mining business,” he adds.

Adkerson was given the green light by the Freeport board, and in August called Whisler. Adkerson was aware the deal would be
viewed as “the minnow swallowing the whale, the upstart miner buying the industrial giant.”
 
“I called Steve and said we’d long talked about how putting our assets together would create a really great company and that
Freeport was now in a position of negotiating an acquisition of Phelps Dodge. We agreed to pay a market premium, so that kicked
off discussions,” he says.

Due diligence was conducted in secret over a few days in the fall in a basement room at Dallas Fort Worth airport, with surprising
results; Adkerson says he grew increasingly excited as he saw previously unreported information about the company’s
deposits and realized the opportunities for future growth.

“We’d done all our initial analysis based on Phelps Dodge’s public disclosures of its existing operations. I got on the phone to Jim Bob and said, ‘this is unbelievable! There’s so much more here that hasn’t been publicly reported.’ That was the excitement that carried forward after combining the companies,” he tells Metal Market Magazine.

Talks extended to the end of November, when the deal was announced. How was it received? “Shock,” laughs Adkerson. “Nobody
thought Freeport could do it.”

Copper prices were volatile: they had moved from 70 cents a pound in 2003 to $4/lb by mid-2006, easing back to $2.50/ lb in the second half of the year, a factor that “probably deterred others from coming into the deal,” Adkerson says. “We had run our economics on lower prices anyway so we stuck with it,” he adds.

Freeport did its financing in advance of closing the deal, with a $6 billion high-yield bond offering and a $10 billion bank term loan,
both of which were record setting. It paid Phelps Dodge a 30% premium to its all-time high stock price and negotiated a 70% cash, 30% stock deal, followed by a large equity offering to raise roughly $5.5 billion in common stock and mandatory converged stock to bring the deal back to Freeport’s originally desired 50% cash, 50% stock. The company’s credit rating was upgraded despite the debt.

Adkerson carefully planned integrating the two companies. Phelps Dodge’s corporate culture was traditional and structured; Freeport’s culture was centered on teamwork, accessibility, and lack of bureaucracy, Adkerson recalls. “We completely changed
the way that business was conducted at the corporate level,” he says.

At an operating level, there was more common culture, which focused on safety and operational excellence. Freeport took advantage of not disrupting operations because copper prices were high and it needed to pay off its now-significant debt. It did not just operate; it set about planning expansions at Morenci, Cerro Verde and Tenke Fungurume. Having initially planned to pay off $10 billion of debt in four years, it did so in nine months.

“It’s a good thing we did. When the 2008 financial crisis first emerged, we immediately shut down our expansion projects and
reduced costs,” Adkerson says.
 
As the global financial crisis continued to bite, the price of copper collapsed, dropping from $4 to $1.20/lb by the end of 2008
with expectations of further declines. Freeport developed plans to operate its mines in the USA and South America at break-even, and to use the cash flows from Indonesia to fund debt servicing and G&A. It cut costs, improved productivity and reduced output. “That was the real test – the companies had just come together the prior year. It’s one thing to operate well in good times but we really were tested. That’s when our organization really came together,” Adkerson says.

The macroeconomic backdrop turned positive much more quickly than expected, and, aided by the company’s actions, by 2011
the company was debt free, its share price was at record highs, and Adkerson thought the company was set up for large cash returns of shareholders and long-term success.
 
Unfortunately that situation didn’t last for long. The company got hit by a double whammy of Indonesian contract renegotiations
and an ill-advised investment in oil and gas, which Adkerson says he adamantly opposed.

Oil & gas

The oil and gas investment was first proposed in early 2012, by Moffett and some Freeport board members. The idea was to
diversify the company into an area in which its management had experience at a time when its mining expansion projects were
coming together and the company was generating strong cash flow from then-high copper prices.

Adkerson was not supportive, aware that Freeport shareholders wanted exposure to copper and China, not oil and gas. “Our
shareholders’ view was, and I knew in advance it was going to be, that if they wanted exposure to the oil and gas industry they
could do that individually on their own – they didn’t want us to make that choice for them,” he recounts.

But the notion carried the day at the Freeport board level, with Freeport going on to acquire Houston-based Plains Exploration & Production Company, as well as McMoRan Exploration Company, of which Adkerson was co-chairman, a situation that meant he was conflicted and precluded from voting on the deal. He says that he almost quit over it. “It was a tough decision for me – I came close to leaving,” he admits.

So why did he stay? “First of all, I had a lot invested in the company – financially and emotionally. I felt responsibility to its employees, its shareholders and to the communities where we operated. If I’d left, I think I felt I’d have trouble just living with myself, thinking about all these people whose livelihoods depended on the company,” he reflects. “It was a very poor personal financial
decision but I have absolutely no regrets,” he adds.

By mid-2014 oil prices started collapsing, followed by copper prices later that year. By the fall of 2015, things had really deteriorated and the severity of the situation had become very clear. The board started the process of restructuring, a situation hastened when activist shareholder Carl Icahn took an 8.5% stake in Freeport. Moffett left at year-end, replaced by current chairman Gerald Ford.

The year ahead was a “tough, tough, tough time,” Adkerson says, noting that the company had gone from being cash rich to having $20 billion of debt.

“Commodity prices were terrible. There was a lot of speculation that we just weren’t going to make it. We started trying to sell oil and
gas assets in the fourth quarter of 2015 and there were no buyers.”

Freeport changed the oil and gas management in early 2016 and then set about trying to unwind its related capital expenditure commitments, including restructuring drill contracts. Sumitomo, a long-time joint venture partner of Freeport’s copper business, stepped up and bought an additional stake in Morenci; the company was forced to sell its Tenke Fungurume asset in the Democratic Republic of Congo to China Molybdenum, something that Adkerson says he would not have done under different circumstances.

“The sad thing is we had to sell good assets, we had to sell stock in our company at very low prices, and we had oil and gas contracts that we had to restructure. It was really tough,” Adkerson says, noting the invaluable role that Quirk and the company’s financial and legal team played in this process.

Their efforts paid off. In early 2016, the company set a goal of cutting its debt by $5-10 billion within two years; by the end of that year it had already cut it by $10 billion, and continued reducing it in 2017 and 2018.

Indonesia

While all this was taking place, Freeport was fighting a battle on another front – over the fate of its Indonesian investment. Things had
been running relatively smoothly there until the country passed a new mining law in 2009. Early indications were that it would not
apply to Freeport because of its established contract. It was not until 2011, when the new regulations were adopted, that Freeport’s contract started to be undermined.

Adkerson had to juggle contractual negotiations with the government alongside efforts to improve labour relations and site security while, at the same time, dealing with the consequences of the oil and gas investment. By 2013, Freeport thought its contractual issues were resolved, but a last minute decision in January 2014 effectively banned the company’s exports – “a total surprise” to Adkerson and his team.

Efforts continued over the next couple of years, with various twists and turns, until new regulations were announced at the end of 2016 that the government believed resolved the situation. They did not. “It was very difficult. I remember landing in Jakarta as these regulations came out and my email was lighting up with people congratulating me for having solved the problem. I hadn’t even seen the regulations,” Adkerson says. “When I read them, I called the government and said, ‘This just doesn’t work, we can’t accept this.’”

Negotiations hit an impasse, and Freeport filed a notice of arbitration in February 2017, with Adkerson conducting a press conference in Jakarta to highlight the company’s stance. The approach worked: talks resumed, a temporary extension for exports was provided, and extended again to allow for discussions, leading to a broadterms framework for an agreement later that year.

Freeport agreed to meet the government’s aspirations to own a 51% stake in Grasberg and said that it would build a smelter the government wanted; in return the company would be granted an extension of its operations through 2041 with legal and fiscal certainty, with any divestments to be at fair market value and Freeport continuing to manage the operations.
 
“When I proposed that, the government responded very positively. That set off the process for the negotiations and, for the first
time, we were working together. We didn’t agree on everything, but we had a common goal we were working towards,” Adkerson
says. The atmosphere changed – relationships improved, he adds.

In the midst of this, Rio Tinto made it clear that it was interested in selling its 40% stake in Grasberg, something Adkerson describes as creating an opportunity for “an elegant solution” in which everyone would win. Rio Tinto would get to exit Grasberg at an acceptable
valuation; the government would get its desired stake and a commitment to a new smelter; Freeport would sell a far smaller stake than initially envisaged and receive an extension of its rights to operate Grasberg with legal and fiscal certainty. Adkerson and Quirk thrashed out the details in a cooperative undertaking with Indonesian government officials. A definitive agreement was signed in
September 2018.

“It’ll allow us to put our total focus on creating value for shareholders from our strong base of assets. We’re in a much, much better situation now,” Adkerson says.

Might there be a merger or acquisition in the company’s future, as reports have recently speculated? Adkerson says there are no plans to sell the company, and that it has a consistent policy of looking for actions that create shareholder value. “I do not believe
the current environment is one in which large M&A transactions are likely given the uncertainties in today’s world on the broader
economic questions. We’re certainly not actively pursuing any efforts to try to sell the company,” he notes.

“We are confident in our efforts to create value for our shareholders through investing in our assets and growing our business. But if other alternatives arise in the future, we’re going to be open to considering whatever makes sense for our shareholders,” he adds.

Written by Andrea Hotter

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