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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
10-K
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(Mark
One)
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2005
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OR
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[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 1-9916
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Freeport-McMoRan
Copper & Gold Inc.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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74-2480931
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification No.)
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1615
Poydras Street
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New
Orleans, Louisiana
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70112
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(Address
of principal executive offices)
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(Zip
Code)
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(504)
582-4000
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(Registrant's
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class
B Common Stock, par value $0.10 per share
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New
York Stock Exchange
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Depositary
Shares representing 0.003125 shares of Silver-
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Denominated
Preferred Stock, par value $0.10 per share
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New
York Stock Exchange
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10⅛%
Senior Notes due 2010 of the registrant
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New
York Stock Exchange
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7%
Convertible Senior Notes due 2011 of the registrant
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act S
Yes
0
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. 0
Yes
S
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. S
Yes
0
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
0
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Act. (Check
one):
S
Large
accelerated filer 0
Accelerated filer 0
Non-accelerated filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). 0
Yes
S
No
The
aggregate market value of common stock held by non-affiliates of the registrant
was approximately $8.7 billion on March 1, 2006, and approximately $5.0 billion
on June 30, 2005.
On
March
1, 2006, there were issued and outstanding 188,428,983 shares of Class B
Common Stock and on June 30, 2005, there were issued and outstanding 177,342,552
shares.
DOCUMENTS
INCORPORATED BY REFERENCE
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Portions
of our Proxy Statement for our 2006 Annual Meeting to be held on
May 4,
2006 are incorporated by reference into Part III
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(Items
10, 11, 12, 13 and 14) of this
report.
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FREEPORT-McMoRan
COPPER & GOLD INC.
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i
All
of our periodic report filings with the Securities and Exchange Commission
(SEC)
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as
amended, are available, free of charge, through our web site, www.fcx.com,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports. These reports
and amendments are available through our web site as soon as reasonably
practicable after we electronically file or furnish such material to the SEC.
References to “Notes” are Notes in our “Notes to Consolidated Financial
Statements” included in our 2005 Annual Report incorporated herein by reference
(see “Item 8. Financial Statements and Supplementary Data”).
General
Through
our majority-owned subsidiary, PT Freeport Indonesia, we have one of the world’s
largest copper and gold mining and production operations in terms of reserves
and production. We are also one of the lowest-cost copper producers in the
world, after taking into account credits for related gold and silver production.
Our principal asset is the Grasberg minerals district. We discovered the largest
ore body in the district, Grasberg, in 1988. Based on available year-end 2004
reserve data, the Grasberg minerals district contains the largest single copper
reserve and the largest single gold reserve of any mine in the
world.
Our
principal operating subsidiary is PT Freeport Indonesia, a limited liability
company organized under the laws of the Republic of Indonesia and incorporated
in Delaware. We own approximately 90.64 percent of PT Freeport Indonesia, and
the Government of Indonesia owns the remaining approximate 9.36 percent. PT
Freeport Indonesia mines, processes and explores for ore containing copper,
gold
and silver. It operates in the remote highlands of the Sudirman Mountain Range
in the province of Papua, Indonesia, which is on the western half of the island
of New Guinea. PT Freeport Indonesia markets its concentrates containing copper,
gold and silver worldwide.
PT
Freeport Indonesia conducts its operations pursuant to an agreement, called
a
Contract of Work, with the Government of Indonesia (see “Contracts of Work”).
The Contract of Work allows us to conduct extensive mining, production and
exploration activities in a 24,700-acre area that we call Block A, which
contains the Grasberg minerals district, and governs our rights and obligations
relating to taxes, exchange controls, royalties, repatriation and other matters.
The Contract of Work also allows us to explore for minerals in an approximately
500,000-acre area that we call Block B. Exploration activities in Block B have
been suspended in recent years, but we continue to assess the possible timing
for the resumption of those activities. The term of our Contract of Work expires
in 2021, but we can extend it for two 10-year periods subject to Indonesian
government approval, which cannot be withheld or delayed
unreasonably.
Another
of our operating subsidiaries, PT Irja Eastern Minerals, which we refer to
as
Eastern Minerals, holds an additional Contract of Work in Papua covering
approximately 1.2 million acres. Eastern Minerals conducts exploration
activities, which have been suspended in recent years, under this Contract
of
Work (see “Contracts of Work”). We continue to assess the possible timing for
the resumption of exploration activities in Eastern Minerals’ exploration area.
We have a 100 percent ownership interest in Eastern Minerals.
In
1996,
we established joint ventures with Rio Tinto plc, which is an international
mining company with headquarters in London, England. Rio Tinto conducts mining
operations in North America, South America, Asia, Australia, Europe and southern
Africa. One of our joint ventures with Rio Tinto covers PT Freeport
Indonesia’s
mining
operations in Block A. This joint venture gives Rio Tinto, through 2021, a
40
percent interest in certain assets and in production above specified levels
from
operations in Block A and, after 2021, a 40 percent interest in all production
in Block A. Under our joint venture arrangements, Rio Tinto also has a 40
percent interest in PT Freeport Indonesia’s
Contract
of Work and Eastern Minerals’
Contract
of Work. In addition, Rio Tinto has the option to participate in 40 percent
of
any of our other future exploration projects in Papua. To date, Rio Tinto has
elected to participate in all exploration projects, including PT Nabire Bakti
Mining.
Under
a
joint venture agreement through PT Nabire Bakti Mining, we conduct exploration
activities, which have been suspended in recent years (see “Contracts of Work”),
in an area covering approximately 500,000 acres in five parcels contiguous
to PT
Freeport Indonesia’s
Block B
and one of Eastern Minerals’
blocks.
We continue to assess the possible timing for the resumption of exploration
activities in PT Nabire Bakti Mining’s
exploration area.
1
Table
of Contents
At December 31, 2005, PT Freeport Indonesia’s share of proven and probable recoverable reserves totaled 40.3 billion pounds of copper and 43.9 million ounces of gold, all of which are located in Block A. Our approximate 90.64 percent equity share of these proven and probable recoverable reserves totaled 36.5 billion pounds of copper and 39.8 million ounces of gold (see “Ore Reserves”). In this annual report, we refer to (1) aggregate reserves, which means all reserves for the operations we manage, (2) PT Freeport Indonesia’s share of reserves, which means the reserves net of Rio Tinto’s interest under our joint venture arrangements and which are the reserves reported as those of our operations in our consolidated financial statements and (3) our equity share of reserves, which is net of the 9.36 percent of PT Freeport Indoneisa owned by the Government of Indonesia.
At December 31, 2005, PT Freeport Indonesia’s share of proven and probable recoverable reserves totaled 40.3 billion pounds of copper and 43.9 million ounces of gold, all of which are located in Block A. Our approximate 90.64 percent equity share of these proven and probable recoverable reserves totaled 36.5 billion pounds of copper and 39.8 million ounces of gold (see “Ore Reserves”). In this annual report, we refer to (1) aggregate reserves, which means all reserves for the operations we manage, (2) PT Freeport Indonesia’s share of reserves, which means the reserves net of Rio Tinto’s interest under our joint venture arrangements and which are the reserves reported as those of our operations in our consolidated financial statements and (3) our equity share of reserves, which is net of the 9.36 percent of PT Freeport Indoneisa owned by the Government of Indonesia.
In
July
2003, we acquired the 85.7 percent ownership interest in PT Puncakjaya Power
owned by affiliates of Duke Energy Corporation. Puncakjaya Power is the owner
of
assets supplying power to PT Freeport Indonesia’s operations, including the 3x65
megawatt coal-fired power facilities (see “Infrastructure”).
We
also
smelt and refine copper concentrates in Spain and market the refined copper
products through our wholly owned subsidiary, Atlantic Copper, S.A. In addition,
PT Freeport Indonesia has a 25 percent interest in PT Smelting, an Indonesian
company that operates a copper smelter and refinery in Gresik, Indonesia. These
smelters play an important role in our concentrate marketing strategy, as
approximately one-half of PT Freeport Indonesia’s
concentrate production has been sold to Atlantic Copper and PT Smelting over
the
last several years (see “Investment in Smelters”).
The
diagram below shows our corporate structure.
_______________
(a)
FM
Services Company, a Delaware corporation, provides us and two other
publicly-traded companies with executive, administrative, financial, accounting,
legal, tax and similar services.
The
following four maps indicate
- the
distance from the Grasberg minerals district in Papua to Bali (approximately
1,500 miles) and to Jakarta (approximately 2,000 miles);
- the
location of the Papua province in which we operate;
- the
location of our Contracts of Work areas within the Papua province;
and
- the
infrastructure of our Contract of Work project area.
2
3
[
4
5
Contracts
of Work
Through Contracts
of Work with the Government of Indonesia, PT Freeport Indonesia and Eastern
Minerals conduct their current exploration operations and PT Freeport Indonesia
conducts its mining operations in Indonesia. Both Contracts of Work govern
our
rights and obligations relating to taxes, exchange controls, royalties,
repatriation and other matters. Both Contracts of Work were concluded pursuant
to the 1967 Foreign Capital Investment Law, which expresses
Indonesia’s
foreign
investment policy and provides basic guarantees of remittance rights and
protection against nationalization, a framework for economic incentives and
basic rules regarding other rights and obligations of foreign investors.
Specifically, the Contracts of Work provide that the Government of Indonesia
will not nationalize or expropriate PT Freeport Indonesia’s
or
Eastern Minerals’ mining operations. Any disputes regarding the provisions of
the Contracts of Work are subject to international arbitration. We have
experienced no disputes requiring arbitration during the 38 years we have
operated in Indonesia.
PT
Freeport Indonesia’s
Contract
of Work covers both Block A, which was first included in a 1967 Contract of
Work
that was replaced by a new Contract of Work in 1991, and Block B, to which
we
gained rights in 1991. The initial term of our Contract of Work expires in
December 2021, but we can extend it for two 10-year periods subject to
Indonesian government approval, which cannot be withheld or delayed
unreasonably. We originally had the rights to explore 6.5 million acres in
Block
B, but pursuant to the Contract of Work we have only retained the rights to
approximately 500,000 acres following significant geological
assessment.
Eastern
Minerals signed its Contract of Work in August 1994. The Contract of Work
originally covered approximately 2.5 million acres. Eastern Minerals' Contract
of Work provides for a four-to-seven year exploratory term and a 30-year term
for mining operations. Subject to Indonesian government approval, which cannot
be withheld or delayed unreasonably, we can extend this period for two 10-year
periods. Eastern Minerals’ Contract of Work requires us to relinquish our rights
to 25 percent of the original 2.5-million-acre Contract of Work area at the
end
of each of three specified periods. As of December 31, 2005, we had relinquished
approximately 1.3 million acres and must relinquish an additional 0.6 million
acres at the end of the three-year exploration period (currently in suspension),
which can be extended by the Government of Indonesia for as many as two
additional years.
We
suspended our exploration activities outside of Block A in recent years because
of safety and security issues and regulatory uncertainty relating to a possible
conflict between our mining and exploration rights in certain forest areas
and
an Indonesian Forestry law enacted in 1999 prohibiting open-pit mining in forest
preservation areas. In 2001, we requested and received from the Government
of
Indonesia formal temporary suspensions of our obligations under the Contracts
of
Work in all areas outside Block A. The current suspensions were granted for
one-year periods ending February 26, 2006, for Block B; March 31, 2006, for
PT
Nabire Bakti Mining; and November 15, 2006, for Eastern Minerals. We have
requested additional one-year suspensions for Block B and PT Nabire Bakti
Mining. Recent Indonesian legislation permits open-pit mining in PT
Freeport Indonesia’s
Block B
area, subject to certain requirements. We continue to assess these requirements
and security issues. The timing for our resumption of exploration activities
in
our Contract of Work areas outside Block A depends on the resolution of
these matters.
PT
Freeport Indonesia pays a copper royalty under its Contact of Work that varies
from 1.5 percent of copper net revenue at a copper price of $0.90 or less per
pound to 3.5 percent at a copper price of $1.10 or more per pound. The Contract
of Work royalty rate for gold and silver sales is 1.0 percent.
A
large
part of the mineral royalties under Government of Indonesia regulations are
designated to the provinces from which the minerals are extracted. In connection
with our “fourth concentrator mill expansion,” PT Freeport Indonesia agreed to
pay the Government of Indonesia additional royalties (royalties not required
by
our Contract of Work) to provide further support to the local governments and
the people of Papua. PT Freeport Indonesia pays the additional royalties on
metal from production above 200,000 metric tons of ore per day. The additional
royalty for copper equals the Contract of Work royalty rate and for gold and
silver equals twice the Contract of Work royalty rates. Therefore, our royalty
rate on copper net revenues from production above 200,000 metric tons of ore
per
day is double the Contract of Work royalty rate, and our royalty rates on gold
and silver sales from production above 200,000 metric tons of ore per day are
triple the Contract of Work royalty rates.
PT
Freeport Indonesia’s
share of
the combined royalties, including the additional royalties which became
effective January 1, 1999, totaled $103.7 million in 2005, $43.5 million in
2004
and $26.5 million in 2003.
6
Republic
of Indonesia
General.
The
Republic of Indonesia consists of more than 17,000 islands stretching 3,000
miles along the equator from Malaysia to Australia and is the fourth most
populous nation in the world with over 240 million people. Following many years
of Dutch colonial rule, Indonesia gained independence in 1945 and now has a
presidential republic system of government.
Our
mining complex was Indonesia’s
first
copper mining project and was the first major foreign investment in Indonesia
following the economic development program instituted by the Indonesian
government in 1967. We work closely with the central, provincial and local
governments in development efforts in the area surrounding our operations.
We
have had positive relations with the Indonesian government since we commenced
business activities in Indonesia in 1967, and we intend to continue to maintain
positive working relationships with the central, provincial and local branches
of the Indonesian government.
Political
Developments.
In May
1998, President Suharto, Indonesia’s
political leader for more than 30 years, resigned in the wake of an economic
crisis in Indonesia and other parts of Southeast Asia and in the face of growing
social unrest. Vice President B.J. Habibie succeeded Suharto. In June 1999,
Indonesia held a new parliamentary election on a generally peaceful basis as
the
first step in the process of electing a new president. In October 1999, in
accordance with the Indonesian constitution, the country’s
highest
political institution (the People’s
Consultative Assembly), composed of the newly elected national parliament along
with additional provincial and other representatives, elected Abdurrahman Wahid
as president and Megawati Sukarnoputri as vice president in the national's
first
direct persidential election.
There
were repeated challenges to the political leadership of President Wahid after
his election in October 1999. In July 2001, the People’s
Consultative Assembly voted to remove President Wahid, and elected Vice
President Megawati Sukarnoputri as president. In October 2004, Susilo Bambang
Yudhoyono was elected as president in the nation's first direct persidential
election.
Other
Developments.
In
February 2006, a group of illegal gold panners engaged in conflict with
Indonesian police and PT Freeport Indonesia security personnel when they were
requested to leave an area near our milling facilities. Following the incident,
the illegal panners blocked the road leading to the Grasberg mine and mill
in
protest and we temporarily suspended mining and milling operations as a
precautionary measure. The panners also vandalized some of our light vehicles
and offices near this area, causing approximately $4 million in damages. Our
port facilities continued to operate during the disruption and concentrate
shipments were not affected. The panners, mostly Papuans from outside our area
of operations, presented a list of aspirations, primarily relating to their
desire to share in the benefits of our existing initiatives and programs
provided for the Papuans who are the traditional residents of our operations
area. Mining and milling operations resumed after an approximate four-day
outage. During the incident at our mine and mill, protestors in Jakarta
vandalized the entrance floor of the office building housing our Indonesian
headquarters and staged a three-day rally outside the building. The Indonesian
police handled this matter, which did not disrupt our administrative functions
or damage any of our facilities.
On
August
31, 2002, three people were killed and 11 others were wounded in an ambush
by a
group of unidentified assailants. The assailants shot at several vehicles
transporting international contract teachers from PT Freeport
Indonesia’s
school
in Tembagapura, their family members, and other contractors to PT Freeport
Indonesia on the road near Tembagapura, the mining town where the majority
of PT
Freeport Indonesia’s
personnel reside. Indonesian authorities and the United States Federal Bureau
of
Investigation (FBI) investigated the incident, which resulted in the U.S.
indictment of an alleged operational commander in the Free Papua
Movement/National Freedom Force. In January 2006, Indonesian Police arrested
this individual and 11 other Papuans.
On
October 12, 2002, a bombing killed 202 people in the Indonesian province of
Bali, which is 1,500 miles west of our mining and milling operations. Indonesian
authorities arrested 35 people in connection with this bombing and 29 of those
arrested have been tried and convicted. On August 5, 2003, 12 people were killed
and over 100 others were injured by a car bomb detonated outside of the JW
Marriott Hotel in Jakarta, Indonesia. On September 9, 2004, 11 people were
killed and over 200 others injured by a car bomb detonated in front of the
Australian embassy. On October 1, 2005, three suicide bombers killed 19 people
and wounded over 100 others in Bali. International terrorist organizations
are suspected in each of these incidents. In November 2005, Indonesian Police
raided a house in East Java that resulted in the death of other accused
terrorists linked to these bombings. Our mining and milling operations were
not
interrupted by these incidents, but our corporate offices in Jakarta sustained
damages and relocated for several months as a result of the September 2004
bombing.
7
The Government of Indonesia, which provides security for PT Freeport Indonesia’s personnel and operations (see “Security Matters”), has expressed a strong commitment to protect natural resources businesses operating in Indonesia, including PT Freeport Indonesia, with heightened security following the incidents discussed above.
Economic
and Social Conditions.
The
Indonesian economy grew by an estimated 6 percent in 2005 and 5 percent in
2004.
The Indonesian currency, the rupiah, averaged approximately 9,700 rupiah to
one
United States (U.S.) dollar during 2005 and closed at 9,825 rupiah to one U.S.
dollar on December 30, 2005, compared with 9,270 rupiah to one U.S. dollar
on
December 31, 2004.
Despite
gradual improvements on the economic front, Indonesia’s
recovery
remains vulnerable to ongoing political and social tensions. Incidents of
violence and separatist pressures continue to occur. Pro-independence
movements have been prominent in certain areas, especially in the province
of
Aceh, and to a lesser extent in Papua. In 2005, the Government of Indonesia
and
the Free Aceh Movement reached a peace agreement which included the withdrawal
of 24,000 military troops from Aceh. Subsequently, the U.S. restored full
relations with the Indonesian military after a 14-year moratorium, partly
because of the successes by the Government of Indonesia in fighting terrorism
and in reaching a peaceful agreement in Aceh.
The
area
surrounding our mining development is sparsely populated by indigenous
people and former residents of other areas of Indonesia, some of whom have
resettled in Papua under the Government of Indonesia’s
transmigration program. A segment of the local population is opposing Indonesian
rule over Papua, and several separatist groups have sought political
independence for the province. In addition to the August 31, 2002, shooting
incident, there have been sporadic attacks on civilians by separatists and
sporadic but highly publicized conflicts between separatists and the Indonesian
military in Papua.
In
2001,
new autonomy laws became effective in Indonesia. The laws were intended to
shift
a greater share of revenues and greater control of economic, regulatory and
social affairs to Indonesia’s 31 provinces and over 300 regencies. The
central government and the provinces continue to consider
the implementation and administration of these new
responsibilities.
Our
Contracts of Work and the Government of Indonesia.
The
Indonesian government has repeatedly assured investors that existing contracts
would be honored. In our 38 years of operating in Indonesia, the Indonesian
government has always honored its commitments to us. Our belief that our
Contracts of Work will continue to be honored is further supported by U.S.
laws,
which prohibit U.S. aid to countries that nationalize property owned by, or
take
steps to nullify a contract with, a U.S. citizen or company at least 50 percent
owned by U.S. citizens if the foreign country does not within a reasonable
time
take appropriate steps to provide full value compensation or other relief under
international law.
In
July
2004, we received a request from the Indonesian Department of Energy and Mineral
Resources that we offer to sell shares in PT Indocopper Investama to Indonesian
nationals at fair market value. PT Indocopper Investama, which we wholly own,
has an approximate 9.36 percent ownership interest in PT Freeport Indonesia.
In
response to this request and in view of the potential benefits of having
additional Indonesian ownership in our operations, we have agreed to consider
a
potential sale of an interest in PT Indocopper Investama at fair market value.
Neither our Contract of Work nor Indonesian law requires us to divest any
portion of our ownership interest in PT Freeport Indonesia or PT Indocopper
Investama. We have received no offers for our ownership interest.
Our
Investment in Indonesia and Papua.
We have
a board-approved policy on social, employment and human rights, and have
comprehensive and extensive social, cultural and community development programs,
to which we have committed significant financial and managerial resources.
See
“Social Development, Employment and Human Rights.” These policies and programs
are designed to address the impact of our operations on the local villages
and
people and to provide assistance for the development of the local people. While
we believe these efforts serve to avoid damage to and disruptions of
our operations, our operations could be adversely affected by social,
economic and political forces beyond our control.
PT
Freeport Indonesia contributes to the economies of Papua and the Republic of
Indonesia through the payment of taxes, dividends and royalties; economic
development programs; infrastructure development; employment and the purchase
of
local and national goods. PT Freeport Indonesia has frequently been one of
the largest taxpayers in the Republic of Indonesia. In addition, it pays
royalties on all minerals removed from the ground. Royalty payments are based
on
the volumes and prices of minerals sold in accordance with the terms of PT
Freeport Indonesia’s Contract of Work, as discussed above.
8
Since it began development activities more than 35 years ago, PT Freeport Indonesia has made significant investments in infrastructure both for its use and for use by the Papuan public. These infrastructure improvements include medical facilities, roads, an airport and heliports, schools, housing, community buildings and places of worship.
PT
Freeport Indonesia is also one of the largest private employers in Indonesia
and
by far the largest in Papua. As of December 31, 2005, PT Freeport Indonesia
directly employed 8,044 people; and 6,225 contract workers provided services
to
PT Freeport Indonesia. In addition, 4,475 persons worked for privatized
companies providing services within PT Freeport Indonesia’s
operations area.
Besides
the estimated $3.9 billion in direct benefits from taxes, royalties, dividends
and fees payable to the Indonesian government under the Contract of Work from
1992 through 2005, PT Freeport Indonesia’s operations have provided another
$10.0 billion during this period in indirect benefits to Papua and the Republic
of Indonesia in the form of wages and benefits paid to workers, purchases of
goods and services, charitable contributions and reinvestments in operations.
For 2005, direct benefits totaled approximately $1.2 million and indirect
benefits totaled approximately $736 million.
Ore
Reserves
During
2005, net additions and revisions to the aggregate proven and probable reserves
of the Grasberg and other Block A ore bodies in the Grasberg minerals district
totaled approximately 132 million metric tons of ore representing increases
of
2.1 billion recoverable pounds of copper, 0.4 million recoverable ounces of
gold
and 12.1 million recoverable ounces of silver. The additions were primarily
the
result of positive drilling results at the Mill Level Zone and Deep Mill Level
Zone deposits, a 345-million-metric-ton complex with average ore grades of
1.06
percent copper and 0.83 grams per metric ton (g/t) of gold, and at the Grasberg
underground extension to the Kucing Liar deposit, a 579-million-metric-ton
complex with average ore grades of 1.20 percent copper and 1.06 g/t of gold.
Completion of a successful feasibility study at Big Gossan also contributed
to
these gains. Year-end aggregate proven and probable recoverable reserves, net
of
2005 production, were 2.8 billion metric tons of ore averaging 1.07 percent
copper, 0.92 g/t of gold and 4.02 g/t of silver representing 56.6 billion pounds
of copper, 58.0 million ounces of gold and 180.8 million ounces of silver.
Our
aggregate exploration budget for 2006, including Rio Tinto’s
share,
is expected to total approximately $15 million ($10 million for our share)
with
most of the efforts focused on potential extensions of the Grasberg underground
and Kucing Liar mine complex, and testing downward extensions of the previously
mined Ertsberg deposit. We continue to assess the timing of resumption of
suspended exploration activities in areas outside the existing producing area
of
the Grasberg minerals district.
Pursuant
to joint venture arrangements between PT Freeport Indonesia and Rio Tinto,
Rio
Tinto has a 40 percent interest in production from reserves above those reported
at December 31, 1994. Net of Rio Tinto’s
share,
PT Freeport Indonesia’s
share of
proven and probable recoverable reserves as of December 31, 2005, was 40.3
billion pounds of copper, 43.9 million ounces of gold and 127.0 million ounces
of silver. FCX’s
equity
interest in proven and probable recoverable reserves as of December 31, 2005,
was 36.5 billion pounds of copper, 39.8 million ounces of gold and 115.1 million
ounces of silver. We estimated recoverable reserves using a copper price of
$0.90 per pound and a gold price of $350 per ounce. If metal prices were
adjusted to the approximate average London spot prices for the past three years,
i.e., copper prices adjusted from $0.90 per pound to $1.26 per pound and gold
prices adjusted from $350 per ounce to $406 per ounce, the resulting additional
proven and probable reserves would not be material to our reported
reserves.
All
of
our proven and probable recoverable reserves lie within Block A. Aggregate
Grasberg open pit and underground proven and probable recoverable ore reserves
as of December 31, 2005, are shown below along with those of our other deposits.
Reserve calculations were prepared by our employees under the supervision of
George D. MacDonald, our Vice President of Exploration, and were reviewed and
verified by Independent Mining Consultants, Inc., experts in mining, geology
and
reserve determination. See “Risk Factors.” We developed our current mine plan
based on completing the mining of all of our currently designated recoverable
reserves before the end of 2041, which would be the expiration of our Contract
of Work including the two 10-year extensions discussed above. Prior to the
expiration of the initial term of our Contract of Work in December 2021, under
our current mine plan we expect to mine approximately 44 percent of aggregate
proven and probable ore, representing approximately 52 percent of PT Freeport
Indonesia’s
share of
recoverable copper reserves and approximately 65 percent of PT Freeport
Indonesia’s
share of
recoverable gold reserves.
9
|
Proven
|
Probable
|
Total
|
|||||||
|
Metric
Tons of Ore (000s)a
|
Average
Ore Grade
|
Metric
Tons of Ore (000s)a
|
Average
Ore Grade
|
Metric
Tons
|
|||||
|
Copper
|
Gold
|
Silver
|
Copper
|
Gold
|
Silver
|
of
Ore (000s)a
|
|||
|
(%)
|
(g/t)
|
(g/t)
|
(%)
|
(g/t)
|
(g/t)
|
||||
|
Developed
and producing:
|
|||||||||
|
Grasberg
open pit
|
193,245
|
1.08
|
1.31
|
2.47
|
444,839
|
1.08
|
1.18
|
2.59
|
638,084
|
|
Deep
Ore Zone
|
82,202
|
0.92
|
0.62
|
4.91
|
80,697
|
0.83
|
0.59
|
4.92
|
162,899
|
|
Undeveloped:
|
|||||||||
|
Grasberg
block cave
|
164,904
|
1.08
|
0.96
|
2.86
|
686,968
|
0.95
|
0.69
|
2.96
|
851,872
|
|
Kucing
Liar
|
183,545
|
1.35
|
1.05
|
4.75
|
395,579
|
1.12
|
1.07
|
5.70
|
579,124
|
|
Deep
Mill Level Zone
|
52,759
|
1.28
|
0.99
|
6.48
|
196,535
|
1.11
|
0.85
|
5.42
|
249,294
|
|
Ertsberg
Stockwork Zone
|
36,656
|
0.50
|
0.85
|
1.78
|
110,112
|
0.50
|
0.86
|
1.74
|
146,768
|
|
Mill
Level Zone
|
47,398
|
0.99
|
0.75
|
4.20
|
48,643
|
0.70
|
0.66
|
3.01
|
96,041
|
|
Big
Gossan
|
9,040
|
2.48
|
1.14
|
13.40
|
43,696
|
2.28
|
1.09
|
15.03
|
52,736
|
|
Dom
open pit
|
5,753
|
2.07
|
0.43
|
12.78
|
17,897
|
2.01
|
0.43
|
11.93
|
23,650
|
|
Dom
block cave
|
7,201
|
1.43
|
0.36
|
9.31
|
14,820
|
1.34
|
0.36
|
8.58
|
22,021
|
|
Total
|
782,703
|
1.13
|
1.01
|
3.95
|
2,039,786
|
1.03
|
0.89
|
4.04
|
2,822,489
|
|
Mill
Recoveries (%)
|
Proven
and Probable
Recoverable
Reservesb
|
|||||||
|
Copper
|
Gold
|
Silver
|
Copper
|
Gold
|
Silver
|
|||
|
(Billions
of Lbs.)
|
(Millions
of Ozs.)
|
(Millions
of Ozs.)
|
||||||
|
Developed
and producing:
|
||||||||
|
Grasberg
open pit
|
89.6
|
86.5
|
58.6
|
|
13.3
|
20.8
|
23.7
|
|
|
Deep
Ore Zone
|
86.2
|
76.5
|
66.2
|
|
2.6
|
2.3
|
13.1
|
|
|
Undeveloped:
|
||||||||
|
Grasberg
block cave
|
87.8
|
68.5
|
69.4
|
|
15.6
|
13.5
|
43.0
|
|
|
Kucing
Liar
|
89.0
|
49.5
|
49.7
|
|
13.2
|
9.5
|
38.4
|
|
|
Deep
Mill Level Zone
|
89.8
|
80.7
|
82.2
|
|
5.4
|
5.5
|
28.6
|
|
|
Ertsberg
Stockwork Zone
|
88.3
|
78.7
|
86.1
|
|
1.4
|
3.1
|
5.5
|
|
|
Mill
Level Zone
|
88.0
|
79.1
|
82.4
|
|
1.5
|
1.7
|
7.0
|
|
|
Big
Gossan
|
94.7
|
69.4
|
82.8
|
|
2.5
|
1.2
|
15.9
|
|
|
Dom
open pit
|
|
62.3
|
63.8
|
46.6
|
|
0.6
|
0.2
|
3.3
|
|
Dom
block cave
|
84.1
|
63.9
|
46.9
|
|
0.5
|
0.2
|
2.3
|
|
|
Total
|
88.5
|
71.4
|
64.5
|
|
56.6
|
58.0
|
180.8
|
|
|
PT
Freeport Indonesia’s
share
|
40.3
|
43.9
|
127.0
|
|||||
|
FCX’s
equity share
|
36.5
|
39.8
|
115.1
|
|||||
| a. |
Ore reserve tonnage estimates are after application of applicable
mining
recovery factors.
|
|
b.
|
Proven
and probable recoverable reserves represent estimated metal quantities
from which we expect to be paid after application of estimated mill
recovery rates and smelter recovery rates of 96.5 percent for copper,
97.0
percent for gold and 76.9 percent for silver. The term “recoverable
reserve” means that part of a mineral deposit which we estimate can be
economically and legally extracted or produced at the time of the
reserve
determination.
|
In
defining its open-pit reserves, PT Freeport Indonesia applies an “economic
cutoff grade” strategy. The objective of this strategy is to maximize the net
present value of its operations. PT Freeport Indonesia uses a break-even cutoff
grade to define the insitu reserves for its underground ore bodies. The
break-even cutoff grade is defined for a metric ton of ore as that equivalent
copper grade, once produced and sold, that generates sufficient revenue to
cover
all operating and administrative costs associated with its
production.
Our
reserve estimates are based on the latest available geological and geotechnical
studies. We conduct ongoing studies of our ore bodies to optimize economic
values and to manage risk. We revise our mine plans and estimates of proven
and
probable mineral reserves as required in accordance with the
latest available studies.
PT
Freeport Indonesia’s ores contain three commercially recoverable metals; copper,
gold and silver. We value all three metals in terms of a copper equivalent
percentage to determine a single break-even cutoff grade. Copper equivalent
percentage is used to express the relative value of multi-metal ores in terms
of
one metal. The calculation expresses the relative value of the ore using
estimates of contained metal quantities, metals prices as used for reserve
10
determination,
recovery rates, treatment charges and royalties. The table below shows the
break-even cutoff grade, expressed as a copper equivalent percentage, for each
of our existing ore bodies as of December 31, 2005.
|
Ore
Body
|
Copper
Equivalent
Cutoff
Grade
|
|
Grasberg
open pit
|
0.65%
|
|
Deep
Ore Zone
|
0.73%
|
|
Grasberg
block cave
|
0.70%
|
|
Kucing
Liar
|
0.88%
|
|
Mill
Level Zone
|
0.80%
|
|
Deep
Mill Level Zone
|
0.83%
|
|
Ertsberg
Stockwork Zone
|
0.78%
|
|
Dom
block cave
|
1.00%
|
|
Big
Gossan
|
1.63%
|
|
Dom
open pit
|
1.14%
|
|
Average
|
0.77%
|
The
following table sets forth the average drill hole spacing for each of our ore
bodies. Drill hole spacing data are used by mining professionals, such as
mining engineers, in determining the suitability of data coverage (on a relative
basis) in a given deposit type and mining method scenario so as to achieve
a
given level of confidence in the resource estimate. Drill hole spacing is only
one of several criteria necessary to establish resource classification.
Drilling programs are typically designed to achieve an optimum sample spacing
to
support the level of confidence in results that apply to a particular
stage of development of a mineral deposit. We calculate the average drill hole
spacing within each ore body using the distance from the center of each block
in
the resource model to the nearest drill hole composite. We then calculate the
averages of these values within the volume of each ore body and reported them
under the column entitled “Average Distance: To Nearest Sample.” This value
represents at least one-half of the average drill hole spacing within each
deposit. We calculate the value under the column entitled “Average Distance:
Between Drill Holes” by multiplying the average minimum distance value by two,
and this value represents the maximum average drill hole spacing.
|
Spacing
(in
meters)
|
Average
Distance
(in
meters)
|
|||||
|
Deposit
|
Mining
Unit
|
Surface
Drilling
Grids
|
Underground
(&
Surface)
Drill
Fans
|
Drilling
Method
|
To
Nearest
Sample
|
Between
Drill
Holes
(less
than)
|
|
Grasberg
|
Open
Pit
|
83
|
73
|
Core
|
39
|
79
|
|
Deep
Ore Zone
|
Block
Cave
|
-
|
50
|
Core
|
27
|
54
|
|
Grasberg
|
Block
Cave
|
-
|
94
|
Core
|
44
|
89
|
|
Kucing
Liar
|
Block
Cave
|
-
|
81
|
Core
|
39
|
78
|
|
Mill
Level Zone
|
Block
Cave
|
-
|
50
|
Core
|
28
|
56
|
|
Deep
Mill Level Zone
|
Block
Cave
|
-
|
91
|
Core
|
44
|
88
|
|
Ertsberg
Stockwork Zone
|
Block
Cave
|
100
|
55
|
Core
|
29
|
58
|
|
Dom
|
Block
Cave
|
-
|
50
|
Core
|
43
|
86
|
|
Big
Gossan
|
Open
Stope
|
100
|
62
|
Core
|
20
|
39
|
|
Dom
|
Open
Pit
|
-
|
50
|
Core
|
35
|
71
|
Mining
Operations - Mines in Production
We
and
our predecessors have conducted exploration and mining operations in Block
A
since 1967 and have been the only operator of these operations. We currently
have two mines in operation: the Grasberg open pit and the Deep Ore
Zone.
Grasberg
Open Pit. We
began
open-pit mining of the Grasberg ore body in 1990. Open-pit operations are
expected to continue until 2015 at which time the Grasberg underground mining
operations are scheduled to begin.
11
Production is currently at the 3,385- to 4,060-meter elevation level and totaled 60.3 million metric tons of ore in 2005 and 48.9 million metric tons of ore in 2004, which provided 81 percent of our 2005 mill feed and 76 percent of our 2004 mill feed. Our open-pit mining rate, including ore and overburden, totaled 691,600 metric tons per day in 2005 and 592,700 metric tons per day in 2004. Annual production rates are expected to range between 650,000 metric tons per day and 750,000 metric tons per day through 2010 and then decline through 2015. The Grasberg open pit is fully developed and we expect to incur only maintenance capital costs with respect to the Grasberg open pit during its remaining life.
The
current Grasberg equipment fleet consists of over 800 pieces of equipment.
As of
December 31, 2005, the larger mining equipment directly associated with
production of the Grasberg open pit includes 164 haul trucks with payloads
ranging from approximately 70 metric tons to 330 metric tons, 18 shovels with
bucket sizes ranging from 15 cubic meters to 42 cubic meters and 62
bulldozers and graders. We believe our current equipment level is adequate
to
meet our projected production levels over the remaining life of the
pit.
Grasberg
crushing and conveying systems are integral to the mine and provide the capacity
to transport up to 225,000 metric tons per day of Grasberg ore to the mill
and
135,000 metric tons per day of overburden to the overburden
stockpiles.
Mining
costs are charged to operations as incurred. However, because of the
configuration and location of the Grasberg open-pit ore body and the location
and extent of the related surrounding overburden, the ratio of overburden to
ore
is much higher in the initial mining of the open pit than in later years. In
2005 and years prior, surface mining costs associated with overburden removal
at
PT Freeport Indonesia’s Grasberg open-pit mine that were estimated to relate to
future production were initially deferred when the ratio of actual overburden
removed to ore mined exceeded the estimated average ratio of overburden removed
to ore mined over the life of the Grasberg open-pit mine, as projected in our
most recent mine plan. Those deferred costs were to be charged
subsequently to operating costs when the ratio of actual overburden removed
to
ore mined fell below the estimated average ratio of overburden to ore over
the life of the Grasberg open-pit mine. The reserve quantities used to develop
the life of mine ratio are the proven and probable ore quantities for the
Grasberg open pit shown above.
In
the
mining industry, the costs of removing overburden and waste material to access
mineral deposits are referred to as “stripping costs.” Through 2005, we applied
the deferred mining cost method in accounting for our post-production stripping
costs. The deferred mining cost method has been used by some companies
in the metals mining industry; however, industry practice has varied. The
deferred mining cost method matches the cost of production with the sale of
the
related metal from the open pit by assigning each metric ton of ore removed
an
equivalent amount of overburden tonnage, thereby averaging overburden removal
costs over the life of the mine. The mining cost capitalized in inventory and
the amounts charged to cost of goods sold do not represent the actual costs
incurred to mine the ore in any given period. The application of the deferred
mining cost method resulted in an asset on our balance sheets (“Deferred
Mining Costs”) totaling $285.4 million at December 31, 2005 and $220.4 million
at December 31, 2004 (see Note 1).
In
March
2005, the Financial Accounting Standards Board (FASB) ratified Emerging Issues
Task Force (EITF) Issue No. 04-6, “Accounting for Stripping Costs Incurred
during Production in the Mining Industry,” (EITF 04-6) (see Note 1) which
requires that stripping costs incurred during production be considered costs
of
the extracted minerals and recognized as a component of inventory to be
recognized in cost of sales in the same period as the revenue from the sale
of
inventory. As a result, capitalization of stripping costs incurred during
production is appropriate only to the extent product inventory exists at the
end
of a reporting period. The guidance in EITF 04-6 is effective for financial
statements issued for fiscal years beginning after December 15, 2005. Companies
may apply this guidance either by recognition of a cumulative effect adjustment
to beginning retained earnings in the period of adoption or by restating prior
period financial statements. We adopted the guidance on January 1, 2006, with
the most significant impacts of adoption being the deferred mining costs asset
on our balance sheet on that date ($285.4 million) was recorded, net of taxes,
minority interest share and inventory effects ($135.9 million), as a cumulative
effect adjustment to reduce our retained earnings. Stripping costs incurred
in
2006 and later periods will now effectively be charged to cost of sales as
incurred. Adoption of the new guidance has no impact on our cash flows. The
pro
forma impact of applying EITF 04-6 would be to reduce net income by $35.3
million or $0.16 per diluted share for the year ended December 31, 2005, $39.4
million or $0.21 per share for the year ended December 31, 2004 and $33.8
million or $0.21 per diluted share for the year ended December 31, 2003. These
pro forma amounts are not necessarily indicative of what charges may be for
future periods.
12
Deep
Ore Zone. The
Deep
Ore Zone ore body lies vertically below the now depleted Intermediate Ore Zone
ore body. We began production from the Deep Ore Zone ore body in 1989, but
we
suspended production in 1991 in favor of production from the Grasberg deposit.
Production using the block-cave method resumed in September 2000.
Production is at the 3,110-meter elevation level and totaled 15.3 million metric
tons of ore in 2005 and 15.9 million metric tons of ore in 2004. The Deep Ore
Zone has performed above design capacity of 35,000 metric tons of ore per
day. We are expanding the Deep Ore Zone operation to a sustained rate of
50,000 metric tons of ore per day with the installation of a second crusher
and
additional ventilation. Production from the Deep Ore Zone averaged 42,000 metric
tons of ore per day in 2005 and 43,600 metric tons of ore per day in
2004.
The
Deep
Ore Zone mine fleet consists of over 140 pieces of mobile heavy equipment.
The
primary mining equipment directly associated with production and development
includes 41 load-haul-dump (LHD) units and 14 haul trucks. Our LHD units
typically carry approximately 11 metric tons of ore. Using orepasses and chutes,
the LHD units transfer ore into 55-ton capacity haul trucks. The trucks dump
into a gyratory crusher and ore is then conveyed to the surface stockpiles.
During
2005 at the Deep Ore Zone mine, we completed over 10,000 meters of development
drifting in support of the block-cave mining method and the ongoing expansion
to
50,000 metric tons of ore per day. The expansion to a sustained rate of 50,000
metric tons of ore per day with the installation of a second crusher and
additional ventilation is expected to be completed in 2007. The aggregate
development costs for the Deep Ore Zone expansion is expected to approximate
$62
million (approximately $37 million for PT Freeport Indonesia’s share) through
the projected 2007 ramp-up. The Deep Ore Zone mine, a block cave operation,
is
one of the world’s largest underground mines.
Our
development costs include costs incurred resulting from mine pre-production
activities undertaken to gain access to proven and probable reserves including
adits, drifts, ramps, permanent excavations, infrastructure and removal of
overburden. Depreciation for mining and milling life-of-mine assets is
determined using the unit-of-production method based on estimated recoverable
proven and probable copper reserves. Development costs that relate to a specific
ore body are depreciated using the unit-of-production method based on estimated
recoverable proven and probable copper reserves for the ore body benefited.
PT
Freeport Indonesia’s total development costs at December 31, 2005 for the Deep
Ore Zone mine, currently our only operating underground mine, totaled
approximately $220 million, which are being depreciated on a unit-of-production
basis over the life of the Deep Ore Zone proven and probable reserves (see
Note
1).
The
majority of maintenance activities are performed on site by a combination of
PT
Freeport Indonesia employees and contract workers. As of December 31, 2005,
we
had approximately 7,500 employees and contract workers directly involved in
Grasberg open-pit and Deep Ore Zone underground mining, milling and ore flow
operations.
The
Intermediate Ore Zone was an underground block-cave operation that began
production in 1994. The Intermediate Ore Zone was depleted in 2003.
Production totaled 2.5 million metric tons of ore in 2003. During its 10-year
life, the Intermediate Ore Zone operation produced almost 30 percent more copper
and gold than the initial reserve estimates.
Our
principal source of power for all our operations is a coal-fired power plant
that we built in conjunction with our fourth concentrator expansion (see
“Infrastructure”). Diesel generators supply peaking and backup electrical
power generating capacity. A combination of naturally occurring mountain streams
and water derived from our underground operations provides water for our
operations. The average annual rainfall in the project area is 180
inches.
Mining
Operations - Mines in Development
Seven
other ore bodies (the underground Grasberg, Kucing Liar, Mill Level Zone, Deep
Mill Level Zone, Ertsberg Stockwork Zone, Big Gossan and the Dom) are located
in
Block A. These ore bodies are at various stages of development, and are included
in our proven and probable recoverable reserves. We continually review our
operations development opportunities to maximize the value of the reserves.
We incurred $12.6 million for mine development, expansion and infrastructure
capital expenditures related to these ore bodies and $45.2 million for common
underground infrastructure development during the three years ended December
31,
2005. See “Risk Factors.”
The
underground Grasberg reserves will be mined using the block-cave method at
the
end of open-pit mining, which
13
is
expected to continue until approximately 2015. The Kucing Liar ore body lies
on
the southern flank of and underneath the southern portion of the Grasberg open
pit at the 2,605- to 3,115-meter elevation level. We expect to mine the Kucing
Liar ore body using the block-cave method.
The
Mill
Level Zone ore body lies directly below the Deep Ore Zone mine at the
2,890-meter elevation. The Deep Mill Level Zone ore body lies beneath the Mill
Level Zone ore body at the 2,590-meter elevation. This ore represents the
downward continuation of mineralization in the Ertsberg East Skarn system and
neighboring Ertsberg porphyry. Drilling efforts continue to determine the extent
of these ore bodies. We expect to mine the Mill Level Zone ore body using a
block-cave method near completion of mining at the Deep Ore Zone ore body.
Near
the end of mining the Mill Level Zone ore body, we expect to mine the Deep
Mill
Level Zone ore body also using a block-cave method.
The
Ertsberg Stockwork Zone ore body extends off the southwest side of the Deep
Ore
Zone ore body at the 3,126- to 3,626-meter elevation level. Drilling efforts
continue to determine the extent of this ore body, which we expect to mine
using
a block-cave method starting in about 2009.
The
Big
Gossan ore body is located approximately 1,000 meters southwest of the original
Ertsberg open-pit deposit. We began the initial underground development of
the
ore body in 1993 when we drove tunnels from the mill area into the ore zone
at
the 3,000-meter elevation level. A stope and fill mining method will be used
on
the Big Gossan deposit. In 2005, we completed a feasibility study and an update
to the site-wide development plan to determine the timing of initial production,
currently projected to be 2008.
The
Dom
ore body lies approximately 1,500 meters southeast of the depleted Ertsberg
open-pit deposit. Production at the open-pit and underground portions of the
ore
body will begin after completion of open-pit mining at Grasberg.
The
projected aggregate capital expenditures required to reach full production
capacity for each of our undeveloped ore bodies based on our latest mine plans
and our proven and probable recoverable reserves as of December 31, 2005, are
shown below in millions of U.S. dollars. Actual costs could differ materially
from these estimates as we will not incur most of the expenditures for several
years and we will incur them over a period of several years. In addition to
the
mine development costs below, our current mine development plans include
approximately $1 billion of capital expenditures at our processing facilities
to
optimize the handling of underground ore types once Grasberg open-pit operations
cease. We continue to review our processing plans to maximize the value of
our
reserves. Based on our current estimates, we expect aggregate expenditures
will
range between $40 million and $330 million annually, during the next 15 years.
In addition, these costs will be shared with Rio Tinto in accordance with our
joint venture agreement.
|
Grasberg
block cave
|
$
|
1,120
|
|
Kucing
Liar block cave
|
690
|
|
|
Mill
Level Zone block cave
|
310
|
|
|
Deep
Mill Level Zone block cave
|
280
|
|
|
Big
Gossan open stope
|
225
|
|
|
Ertsberg
Stockwork Zone block cave
|
170
|
|
|
Dom
block cave
|
130
|
|
|
Dom
open pit
|
70
|
|
|
Total
|
$
|
2,995
|
Description
of Ore Bodies. Our
ore
bodies are located within and around two main igneous intrusions, the Grasberg
monzodiorite and the Ertsberg diorite. The host rocks of these ore bodies
include both carbonate and clastic rocks that form the ridge crests and upper
flanks of the Sudirman Range, and the igneous rocks of monzonitic to dioritic
composition that intrude them. The igneous-hosted ore bodies (the Grasberg
open
pit and block cave, and the Ertsberg Stockwork Zone block cave) occur as vein
stockworks and disseminations of copper sulphides, dominated by chalcopyrite
and, to a much lesser extent, bornite. The sedimentary-rock hosted ore bodies
occur as “magnetite-rich, calcium/magnesian skarn” replacements, whose location
and orientation are strongly influenced by major faults and by the chemistry
of
the carbonate rocks along the margins of the intrusions.
The
copper mineralization in these skarn deposits is also dominated by chalcopyrite,
but higher bornite concentrations are common. Moreover, gold occurs in
significant concentrations in all of the district’s
ore
bodies, though rarely visible to the naked eye. These gold concentrations
usually occur as inclusions within the copper sulphide minerals, though, in
some
deposits, these concentrations can also be strongly associated with
pyrite.
14
The
following diagram indicates the relative elevations (in meters) of our reported
reserve ore bodies.
15
The
following map, which encompasses an area of approximately 42 square kilometers
(approximately 16 square miles), indicates the relative positions and sizes
of
our reported reserve ore bodies and their locations.
16
The
following chart illustrates our current plans for sequencing and producing
each
of our ore bodies and the years in which we currently expect that production
of
each ore body will begin and end. Production volumes are typically lower in
the
first few years of each ore body as development activities are ongoing and
as
the mine ramps up to full production. Currently, the Grasberg open pit and
Deep
Ore Zone are our only producing mines. The ultimate timing of the start of
production from our undeveloped mines is dependent upon a number of factors,
including the results of our exploration efforts, and may vary from the dates
shown below. In addition, we develop our mine plans for the Grasberg open pit
and underground mines based on maximizing the net present value from the ore
bodies.
During
2005, we mined an average of 733,600 metric tons of material per day, including
ore and overburden. We do not require any additional approvals for higher
mining rates. During 2004, we mined an average of 636,200 metric tons of
material per day. The following chart illustrates our current aggregate mill
capacity; our aggregate permitted mill capacity and our projected milling rates.
Mill capacity will vary with the ore type being processed. The decline in
milling rates in 2016 reflects the expected completion date of open-pit mining
at the Grasberg ore body. We are continuing to develop mine plans to optimize
production levels.
17
Milling
and Production
The
ore
from our mines moves by a conveyor system to a series of shafts through which
it
drops to our milling and concentrating complex located approximately 2,900
meters above sea level. At the mill, the ore is crushed and ground and mixed
in
tanks with water and small amounts of flotation reagents where it is
continuously agitated with air. During this physical separation process,
copper-, gold- and silver-bearing particles rise to the top of the tanks and
are
collected and thickened into a concentrate. The concentrate leaves the mill
complex as a slurry, consisting of approximately 65 percent solids by weight,
and is pumped through three parallel 115-kilometer pipelines to our coastal
port
site facility at Amamapare where it is filtered, dried and stored for shipping.
Ships are loaded at dock facilities at the port until they draw their maximum
dock-side water, and they then move to deeper water, where loading is completed
from shuttling barges.
Our
production results for the last three years are as follows:
|
Years
Ended December 31,
|
Percentage
Change
|
||||
|
2005
|
2004
|
2003
|
2004
to 2005
|
2003
to 2004
|
|
|
Mill
throughput (metric tons of ore
|
|||||
|
per
day)
|
216,200
|
185,100
|
203,000
|
17%
|
(9)%
|
|
Copper
production, net to PT
|
|||||
|
Freeport
Indonesia (000 pounds)
|
1,455,900
|
996,500
|
1,291,600
|
46%
|
(23)%
|
|
Gold
production, net to PT Freeport
|
|||||
|
Indonesia
(ounces)
|
2,789,400
|
1,456,200
|
2,463,300
|
92%
|
(41)%
|
|
Average
unit net cash costs
|
|||||
|
(credits)
per pound of coppera
|
$0.07
|
$0.40
|
$(0.02)
|
(83)%
|
N.M.
|
N.M.
Not
Meaningful
|
a.
|
Includes
site production and delivery costs, smelting and refining costs,
and
royalties, less credits for gold and silver sales. See our 2005 Annual
Report incorporated herein by reference for a reconciliation of average
unit net cash costs per pound to production and delivery costs applicable
to sales reported in our consolidated financial
statements.
|
18
Mill
throughput and production improved significantly in 2005 compared to 2004,
which
was negatively affected by PT Freeport Indonesia’s
efforts
to accelerate removal of overburden material and restore safe access to
higher-grade areas in the pit (see below). Mill throughput averaged 216,200
metric tons of ore per day in 2005, a 17 percent increase from the 185,100
metric tons average in 2005. Copper and gold production was higher in 2005
compared with 2004 reflecting the higher mill throughput and higher average
ore
grades. Copper production for 2005 totaled 1.46 billion pounds, 459.4 million
pounds higher than 2004 production. Gold production for 2005 totaled 2.79
million ounces, 1.3 million ounces higher than 2004 production. The higher
sales
volumes and the primarily fixed nature of a large portion of PT Freeport
Indonesia’s
cost
structure resulted in average unit net cash costs for 2005 decreasing to $0.07
per pound compared with $0.40 per pound for 2004.
In
October 2003, a slippage of material occurred in a section of the Grasberg
open
pit and in December 2003, a smaller debris flow occurred in the same section.
The area affected by the slippage events included two active mining areas which
were scheduled to be mined in the fourth quarter of 2003 (see “Grasberg Open-Pit
Slippage”). Mill throughput and production in 2003 and 2004 were negatively
affected by PT Freeport Indonesia’s
efforts
to accelerate removal of overburden material and restore safe access to
higher-grade areas in the pit. Mill throughput averaged 185,100 metric tons
of
ore per day in 2004, a nine percent decrease from the 203,000 metric tons
average in 2003. Copper and gold production was lower in 2004 compared with
2003
reflecting the lower mill throughput and lower average ore grades. Copper
production for 2004 totaled 1.0 billion pounds, 295 million pounds lower than
2003 production. Gold production for 2004 totaled 1.46 million ounces, 1.0
million ounces lower than 2003 production. The lower sales volumes and the
primarily fixed nature of a large portion of PT Freeport Indonesia’s
cost
structure resulted in average unit net cash costs for 2004 increasing to $0.40
per pound compared with a net credit of $(0.02) per pound for 2003. Average
unit
net cash costs per pound of copper totaled a net credit of $(0.02) per pound
for
2003, which was an annual record low.
Because
of the fixed nature of a large portion of our costs, unit costs vary
significantly from period to period depending on volumes of copper and gold
sold
during the period. In addition, we have experienced significant increases in
our
production costs in recent years primarily as a result of higher energy costs
and costs of other consumables, higher mining costs and milling rates, labor
costs and other factors. Once we complete our open-pit mining operations at
the
Grasberg mine in approximately 2015 and transition to underground, we expect
our
share of annual copper and gold production to be lower than current levels,
and
all other factors being equal, our average unit net cash costs to increase.
For
more information regarding our operating and financial results, see our 2005
Annual Report incorporated herein by reference.
We
estimate our share of sales for 2006 to approximate 1.3 billion pounds of copper
and 1.7 million ounces of gold. Average annual sales volumes over the five-year
period from 2006 through 2010 are expected to approximate 1.3 billion pounds
of
copper and 1.9 million ounces of gold. As a result of lower than targeted mining
rates, ore from a high-grade section in the primary ore area (“6 North”) of the
Grasberg open pit, previously expected to be mined in late 2006 has been
deferred to early 2007. Accordingly, our current mine plans alter the timing
of
subsequent years’ ore production compared with previous plans. These revised
production estimates do not have a significant economic effect since the
deferrals occur within months of overlapping annual periods. Efforts are under
way to improve productivity of mining activities which would increase mining
rates and advance the timing of metal production. See “Risk
Factors.”
Geotechnical
Programs
Our
geotechnical programs support several phases of the operations, including our
open-pit mine (pit slope and overburden stockpile stability), our underground
mine, our infrastructure and our tailings management program. For information
regarding our tailings management program, see “Environmental
Matters.”
A
group
of our senior level employees has the responsibility, authority and oversight
for our overall geotechnical programs. Our multi-disciplinary approach combines
in-house personnel with backgrounds in civil, geotechnical, mining engineering,
geology and hydrology to form a technical services group that reports to our
senior managers. Our technical services group develops information that our
mine
engineering group uses to develop mine and stockpile designs, production
schedules and related plans. Our technical services group also monitors slope
stability and other geotechnical and hydrological developments.
Our
technical services group is composed of expatriates and Indonesian nationals,
who are university educated. International consulting experts in each of the
applicable technical fields support this group. In-house training provided
by
consultants as well as off-site seminars and industry conferences supports
the
training of our staff. Our
19
joint
venture partner has also provided geotechnical and engineering support to our
operations. Consultants and our joint venture partner provide input into program
development and assess performance of these critical roles.
Our
technical services group uses information from geological drilling for the
development and updating of our geological, geotechnical and hydrologic models.
We develop computer-based geologic models for mine design and dewatering
programs. We provide continuous ground and slope monitoring in our mines and
on
overburden stockpiles using various computerized and automated systems. We
also
daily inspect all open-pit working areas, with any items of concern being
reported to our senior managers. Our hydrology function measures and tracks
water flow patterns to determine the effectiveness and need for de-watering
and
depressurization programs. We drain all surface flows away from the open pit
and
pump any in-pit surface water to dedicated drain holes connected to our
underground de-watering drift system. We also continuously monitor rainfall
at
our operations so that we may adjust for operational impacts and safety
considerations.
Grasberg
Open-Pit Slippage
On
October 9, 2003, a slippage of material occurred in a section of the Grasberg
open pit. Eight workers perished and five workers were injured in the incident.
The area affected by the slippage, comprising approximately five percent of
the
surface area of the massive Grasberg pit, included two active mining areas
that
were scheduled to be mined in 2003 and 2004. On December 12, 2003, a debris
flow
involving a relatively small amount of loose material occurred in the same
area
of the Grasberg open pit resulting in only minor property damage. Following
these two events, PT Freeport Indonesia redirected its open-pit operations
to
accelerate removal of waste material from the south wall to restore safe access
to the higher-grade ore areas in the pit. These activities resulted in reduced
production levels. In April 2004, PT Freeport Indonesia established safe access
and initiated mining in higher-grade ore areas while continuing waste removal
activities. PT Freeport Indonesia resumed normal milling rates in June
2004.
As
a
result of the fourth-quarter 2003 slippage and debris flow events, PT Freeport
Indonesia notified its copper concentrate customers that it was declaring force
majeure under the terms of its contracts as it would be unable to satisfy its
annual sales and delivery commitments. In December 2004, PT Freeport Indonesia
terminated the force majeure that had been in effect since December 2003 under
its concentrate sales contracts.
PT
Freeport Indonesia maintains property damage and business interruption insurance
related to its operations. In December 2004, we entered into an insurance
settlement agreement and settled all claims that arose from the fourth-quarter
2003 slippage and debris flow events in the Grasberg open-pit mine. PT Freeport
Indonesia’s
insurers
agreed to pay an aggregate of $125.0 million in connection with its claims.
After considering our joint venture partner’s
interest
in the proceeds, PT Freeport Indonesia’s
share of
proceeds totaled $95.0 million.
Exploration
As
a
result of our joint venture arrangements, Rio Tinto generally pays for 40
percent of our joint venture exploration and exploratory drilling costs in
Papua. The joint ventures incurred total exploration costs of $13.3 million
in
2005 and $13.6 million in 2004. The joint ventures’ exploration budget for 2006,
including Rio Tinto’s share, is expected to total approximately $15 million ($10
million for our share) with most of the effort focused on potential extensions
of the Grasberg underground and Kucing Liar mine complex, and testing downward
extensions of the previously mined Ertsberg deposit. We continue to assess
the
timing of resumption of suspended exploration activities in areas outside the
existing producing area of the Grasberg minerals district.
In
June
1998, we entered into a joint venture agreement to conduct exploration
activities in PT Nabire Bakti Mining’s
Contract
of Work area, which currently covers approximately 500,000 acres in several
blocks contiguous to PT Freeport Indonesia’s
Block B
and one of Eastern Minerals’ blocks in Papua. Rio Tinto shares in 40 percent of
our interest and costs in this exploration joint venture. We and Rio Tinto
can
earn up to a 62 percent interest in the PT Nabire Bakti Mining Contract of
Work
by spending up to $21 million on exploration and other activities in the joint
venture areas. We have spent $17.3 million through December 31,
2005.
With
the
subsequent approval of the Indonesian government, in 2000 we suspended our
field
exploration activities in Block B, which includes the Wabu Ridge gold prospect,
as well as in the other Contract of Work areas of Eastern Minerals and PT Nabire
Bakti Mining. The suspensions are due to safety and security issues and
regulatory uncertainty relating to a possible conflict between our mining and
exploration rights in certain forest areas and an Indonesian Forestry law
enacted in 1999 prohibiting open-pit mining in forest preservation areas. All
of
the
20
suspended
areas are outside of our current mining operations area. We continue to assess
the possible timing for resumption of our exploration activities.
Infrastructure
The
location of our mining operations in a remote area requires that our operations
be virtually self-sufficient. In addition to the mining facilities described
above, in the course of the development of our project we have constructed
ourselves or participated with others in the construction of an airport, a
port,
a 119 kilometer road, an aerial tramway, two hospitals and related medical
facilities, and two town sites with housing, schools and other facilities
sufficient to support more than 17,000 persons.
In
1996,
we completed a significant infrastructure program, which includes various
residential, community and commercial facilities. We designed the program to
provide the infrastructure needed for our operations, to enhance the living
conditions of our employees, and to develop and promote the growth of local
and
other third party activities and enterprises in Papua. We have developed the
facilities through joint ventures or direct ownership involving local Indonesian
interests and other investors.
In
July
2003, we acquired the 85.7 percent ownership interest in Puncakjaya Power owned
by affiliates of Duke Energy Corporation for $68.1 million cash, net of $9.9
million of cash acquired. Puncakjaya Power is the owner of assets supplying
power to PT Freeport Indonesia’s operations, including the 3x65 megawatt
coal-fired power facilities. PT Freeport Indonesia purchases power from
Puncakjaya Power under infrastructure asset financing arrangements. In March
2005, we prepaid $187.0 million of bank debt associated with Puncakjaya Power’s
operations; and as a result of this prepayment of debt, at December 31, 2005,
we
had a $135.4 million intercompany loan outstanding to Puncakjaya Power. At
December 31, 2005, PT Freeport Indonesia had infrastructure asset financing
obligations to Puncakjaya Power totaling $218.1 million and Puncakjaya Power
had
a receivable from PT Freeport Indonesia for $280.0 million, including Rio
Tinto’s share. We consolidate PT Freeport Indonesia and Puncakjaya Power and our
consolidated balance sheet only reflects a $61.9 million receivable ($8.8
million in other accounts receivable and $53.1 million in long-term assets)
for
Rio Tinto’s share of Puncakjaya Power’s receivable as provided for in our joint
venture agreement with Rio Tinto.
Marketing
PT
Freeport Indonesia sells its copper concentrates, which contain significant
quantities of gold and silver, under U.S. dollar-denominated sales agreements,
mostly to companies in Asia and Europe and to international trading companies.
We sell substantially all of our budgeted production of copper concentrates
under long-term contracts with selling prices based on world metals prices
(generally the London Metal Exchange settlement prices for Grade A copper).
Under these contracts, initial billing occurs at the time of shipment and final
settlement on the copper portion is generally based on average prices for a
specified future period. Gold generally is sold at the average London Bullion
Market Association price for a specified month near the month of
shipment.
Revenues
from concentrate sales are recorded net of royalties (see “Contracts of Work”),
treatment and refining charges (including participation charges, if applicable,
based on the market prices of metals), and the impact of derivative financial
instruments, if any, used to hedge against risks from metals price fluctuations.
Moreover, because a portion of the metals contained in copper concentrates
is
unrecoverable as a result of the smelting process, our revenues from concentrate
sales are also recorded net of allowances based on the quantity and value of
these unrecoverable metals. These allowances are a negotiated term of our
contracts and vary by customer. Treatment and refining charges represent
payments to smelters and refiners and are either fixed or in certain cases
vary
with the price of copper. We sell a small amount of copper concentrates in
the
spot market. See “Risk Factors.”
We
have
commitments, including commitments from Atlantic Copper and PT Smelting, for
essentially all of PT Freeport Indonesia’s estimated 2006 production. PT
Freeport Indonesia has a long-term contract through 2007 to provide Atlantic
Copper with a quantity of copper concentrates at market prices which currently
approximates 60 percent of Atlantic Copper’s
annual
copper concentrate requirements. PT Freeport Indonesia’s
agreement with PT Smelting provides, for the life of PT Freeport
Indonesia’s
mines,
for the supply of 100 percent of the copper concentrate requirements necessary
to produce 205,000 metric tons of copper (essentially the Gresik
smelter’s
original
design capacity) on a priority basis. In 2004, PT Smelting increased its stated
production capacity to 250,000 metric tons of copper per year. PT Smelting
plans
to expand its production capacity to approximately 270,000 metric tons of copper
metal per year by the middle of 2006. For the first 15 years of PT
Smelting’s
commercial operations beginning December 1998, PT Freeport Indonesia agreed
that
the treatment and refining
21
charges
on specified quantities of the concentrate PT Freeport Indonesia supplies will
not fall below specified minimum rates, subject to renegotiation in 2008. The
rate was $0.23 per pound, during the period from the commencement of PT
Smelting’s
operations in 1998 until April 3, 2004 when it declined to a minimum of $0.21
per pound. We anticipate that PT Freeport Indonesia will sell approximately
50
to 60 percent of its annual concentrate production to Atlantic Copper and PT
Smelting. A summary of PT Freeport Indonesia’s
aggregate percentage concentrate sales to its affiliates and to other parties
for the last three years follows:
|
2005
|
2004
|
2003
|
||||
|
PT
Smelting
|
29%
|
40%
|
30%
|
|||
|
Atlantic
Copper
|
25%
|
19%
|
25%
|
|||
|
Other
parties
|
46%
|
41%
|
45%
|
|||
|
100%
|
100%
|
100%
|
||||
Investment
in Smelters
Our
investment in smelters (Atlantic Copper and PT Smelting) serves an important
role in our concentrate marketing strategy. As discussed above, PT Freeport
Indonesia generally sells approximately one-half of its concentrate production
to its affiliated smelters, Atlantic Copper and PT Smelting, and the remainder
to other customers. Treatment charges for smelting and refining copper
concentrates represent a cost to PT Freeport Indonesia and income to Atlantic
Copper and PT Smelting. Through downstream integration, we are assured placement
of a significant portion of our concentrate production. While low smelting
and
refining charges in recent years adversely affected the operating results of
Atlantic Copper, they benefited the operating results of PT Freeport
Indonesia’s
mining
operations, effectively achieving a hedge for these charges. Market rates for
treatment and refining charges have increased significantly since late 2004.
Higher treatment and refining charges benefit the operating results of Atlantic
Copper and adversely affect the operating results of PT Freeport Indonesia.
However, the net effect of changes in treatment and refining rates on our
consolidated results is not material.
Atlantic
Copper, S.A.
We own
100 percent of Atlantic Copper. Atlantic Copper completed the last expansion
of
its production capacity in 1997 and its smelter currently has a
nominal capacity of 290,000 metric tons of copper per year and its refinery
currently has a design capacity of 260,000 metric tons of copper per year.
We
have no present plans to expand Atlantic Copper’s
production capacity. During 2005, Atlantic Copper treated 975,400 metric tons
of
concentrate and scrap and produced 284,200 metric tons of new copper anodes.
During 2004, Atlantic Copper treated 768,100 metric tons of concentrate and
scrap and produced 224,300 metric tons of new copper anodes. Atlantic Copper’s
positive results in 2005 compared with 2004 primarily reflect higher treatment
charge rates and realized benefits from a recent cost reduction and operational
enhancement effort, partially offset by higher energy costs. Atlantic Copper
completed a 51-day scheduled major maintenance turnaround in May 2004, adversely
affecting 2004 results. Major maintenance turnarounds of this duration typically
occur approximately every nine years for Atlantic Copper, with significantly
shorter-term maintenance turnarounds occurring in the interim. Atlantic Copper
has a 22-day maintenance turnaround currently scheduled for 2007. Atlantic
Copper purchased approximately 55 percent of its 2005 concentrate requirements
from PT Freeport Indonesia at market prices. Atlantic Copper has experienced
no
material operating problems, and we are not aware of any potential material
environmental liabilities at Atlantic Copper.
We
made
no capital contributions to Atlantic Copper in 2005; however, we contributed
$202.0 million to Atlantic Copper in 2004 and $10.0 million in 2003. In
addition, we loaned $189.5 million to Atlantic Copper in 2004. The funds were
used to improve Atlantic Copper’s
financial structure during its major maintenance turnaround and during a period
of extremely low treatment and refining charge rates, which negatively affected
Atlantic Copper’s
results.
Our net investment in Atlantic Copper through December 31, 2005, was $115.0
million.
PT
Smelting.
PT
Freeport Indonesia’s
Contract
of Work required us to construct or cause to be constructed a smelter in
Indonesia if we and the Indonesian government determined that such a project
would be economically viable. In 1995, following the completion of a feasibility
study, we entered into agreements relating to the formation of PT Smelting
and
the construction of the copper smelter in Gresik, Indonesia.
PT
Smelting is a joint venture among PT Freeport Indonesia, Mitsubishi Materials
Corporation, Mitsubishi Corporation and Nippon Mining & Metals Co., Ltd.,
which own 25 percent, 60.5 percent, 9.5 percent and 5 percent, respectively,
of
the outstanding PT Smelting common stock. In accordance with the joint venture
agreements, PT Freeport Indonesia provides the majority of PT
Smelting’s
copper
concentrate requirements. In December 2003, PT Smelting’s
shareholder agreement was amended to eliminate PT Freeport Indonesia’s
assignment of its earnings in
22
PT
Smelting to support a 13 percent cumulative annual return to the other owners
for the first 20 years of operations. No amounts were paid under this
assignment. PT Freeport Indonesia’s
total
investment in PT Smelting through December 31, 2005, was $98.7
million.
During
2005, PT Smelting treated 908,900 metric tons of concentrate and produced
275,000 metric tons of new copper anodes. During 2004, PT Smelting treated
758,100 metric tons of concentrate and produced 211,600 metric tons of new
copper anodes. PT Smelting completed a 31-day major maintenance turnaround
in
the second quarter of 2004. Major maintenance turnarounds of this duration
typically occur approximately every four years for PT Smelting, with
significantly shorter term maintenance turnarounds in the interim. PT Smelting
has an 18-day maintenance turnaround scheduled for mid-2006 and its next major
maintenance turnaround is scheduled for 2008. PT Smelting also completed a
refinery expansion during the maintenance turnaround, increasing its production
capacity to approximately 250,000 metric tons of copper metal per year. PT
Smelting plans to further expand its production capacity to approximately
270,000 metric tons of copper metal per year by the middle of 2006. PT Smelting
has experienced no material operating problems and we are not aware of any
potential material environmental liabilities at PT Smelting.
Competition
We
compete with other mining companies in the sale of our mineral concentrates
and
the recruitment and retention of qualified personnel. Some competing companies
possess financial resources greater than ours and possess multiple mining assets
less geographically concentrated in a single area than ours. We believe,
however, that we are one of the lowest-cost copper producers in the world,
after
taking into account credits for related gold and silver production, which gives
us a significant competitive advantage.
Social
Development, Employment and Human Rights
We
have a
social, employment and human rights policy designed to result in our operating
in compliance with the laws in the areas of our operations, and in a manner
that
respects basic human rights and the culture of the people who are indigenous
to
the area. We continue to make significant expenditures on social and cultural
activities, primarily in Papua. These activities include:
| · |
comprehensive
job training programs;
|
| · |
basic
education programs;
|
| · |
several
public health programs, including extensive malaria
control;
|
| · |
agricultural
assistance programs;
|
| · |
a
business incubator program to encourage the local people to establish
their own small scale businesses;
|
| · |
cultural
preservation programs; and
|
| · |
charitable
donations.
|
In
1996,
PT Freeport Indonesia agreed to commit at least one percent of its revenues
to
the Freeport Partnership Fund for Community Development (formerly the Freeport
Fund for Irian Jaya Development) to support village-based health, education,
economic and social development programs in its area of operations. This
commitment replaced our community development programs in which we spent a
similar amount of money each year. Our share of contributions to the Freeport
Partnership Fund for Community Development totaled $35.7 million in 2005, $17.5
million in 2004 and $17.4 million in 2003. Our joint venture partner, Rio
Tinto, also contributes to this fund and including their share the contributions
totaled $42.3 million in 2005, $19.0 million in 2004 and $21.5 million in
2003.
Lembaga
Pembangunan Masyarakat Amungme Kamoro (LPMAK) oversees disbursement of the
amounts we contribute to the fund. LPMAK’s
board of
commissioners is made up of a leader of the Amungme people, a leader of the
Kamoro people, leaders of the three local churches, a representative of the
local government and a representative of PT Freeport Indonesia.
We
believe that our social and economic development programs are responsive to
the
issues raised by the local villages and people and should help us to avoid
disruptions of mining operations. Nevertheless, social and political instability
in the area may adversely impact our mining operations. See “Risk
Factors.”
In
December 2000, we endorsed the joint U.S. State Department-British Foreign
Office Voluntary Principles on Human Rights and Security. Several major natural
resources companies and international human rights
23
organizations participated
in developing the Voluntary Principles and have endorsed them. We participated
in developing these principles and incorporated them into our social
and human rights policy.
Security
Matters
Consistent
with our Contract of Work and the requirement to protect our employees
and property, we have taken appropriate steps to provide a safe and secure
working environment. As part of its security program, PT Freeport Indonesia
maintains its own internal security department, which performs functions such
as
protecting company facilities, monitoring the shipment of company goods through
the airport and terminal, assisting in traffic control and aiding rescue
operations. PT Freeport Indonesia’s
civilian
security employees (numbering about 680) are unarmed and perform duties
consistent with their internal security role. PT Freeport Indonesia’s
share of
costs for its internal civilian security department totaled $11.3 million for
2005, $12.3 million for 2004 and $11.2 million for 2003. The security department
has received human rights training and each member is required to certify his
or
her compliance with our human rights policy.
PT
Freeport Indonesia, and all businesses and residents of Indonesia, relies on
the
Government of Indonesia for the provision of public order, upholding the rule
of
law and the protection of personnel and property. The Grasberg mine has been
designated by the Government of Indonesia as one of Indonesia’s
vital
national assets. This designation results in the military’s
playing
a significant role in protecting the area of our operations. The Government
of
Indonesia is responsible for employing police and military personnel and
directing their operations.
From
the
outset of PT Freeport Indonesia’s
operations, the government has looked to PT Freeport Indonesia to provide
logistical and infrastructure support and assistance for these necessary
services because of the limited resources of the Indonesian government and
the
remote location of and lack of development in Papua. PT Freeport
Indonesia’s
financial support for the Indonesian government security institutions assigned
to the operations area represents a prudent response to its requirements to
protect its workforce and property, better ensuring that personnel are properly
fed and lodged, and have the logistical resources to patrol PT Freeport
Indonesia’s
roads
and secure its operating area. In addition, provision of such support and
oversight is consistent with PT Freeport Indonesia’s
obligations under the Contract of Work, reflects our philosophy of responsible
corporate citizenship, and is in keeping with our commitment to pursue practices
that will promote human rights, which include our endorsement of the joint
U.S.
State Department-British Foreign Office Voluntary Principles on Human Rights
and
Security.
PT
Freeport Indonesia’s
share of
support costs for the government-provided security, involving over 2,400
Indonesian government security personnel currently located in the general area
of our operations, was $6.2 million for 2005, $6.9 million for 2004 and $5.9
million for 2003. This supplemental support consists of various infrastructure
and other costs, such as food, housing, fuel, travel, vehicle repairs,
allowances to cover incidental and administrative costs, and community
assistance programs conducted by the military/police. PT Freeport
Indonesia’s
capital
costs for associated infrastructure was $0.1 million for 2005, $0.2 million
for
2004 and $0.6 million for 2003.
As
reported in January 2006, we are responding to requests from governmental
authorities in the United States and Indonesia for information about PT
Freeport Indonesia primarily relating to PT Freeport Indonesia's support of
Indonesian security institutions. As discussed above, we provide support to
assist security institutions deployed and directed by the Government of
Indonesia with infrastructure, logistics and the hardship elements of posting
in
Papua and our practices adhere to the joint U.S. State Department-British
Foreign Office Voluntary Principles on Security and Human Rights.
We intend to cooperate in responding to these
requests.
Environmental
Matters
We
have a
board-approved environmental policy that commits us not only to compliance
with
applicable federal, state and local environmental statutes and regulations,
but
also to continuous improvement of our environmental performance at every
operational site. We believe that we conduct our Indonesian operations pursuant
to all necessary permits and are in compliance in all material respects with
applicable Indonesian environmental laws, rules and regulations. Additionally,
the environmental management systems for our PT Freeport Indonesia mining and
milling operations and our Atlantic Copper smelting operations are ISO
(International Standardization Organization) 14001 certified.
Mining
operations on the scale of our operations in Papua involve significant
environmental challenges, primarily related to the disposition of tailings,
which are the crushed and ground rock material resulting from the physical
separation of commercially valuable minerals from the ore. We have
comprehensive, ongoing environmental
24
management
and monitoring plans for the disposal of tailings resulting from our milling
operations, which the Government of Indonesia has approved. Pursuant to these
plans, we manage and monitor the impact of our tailings disposal on the
surrounding area of the Ajkwa River and adjoining water bodies and the
surrounding coastal areas. In 1997, we completed an engineered levee system
to
minimize the impact of the tailings through a controlled deposition area located
on a portion of the flood plain on the Ajkwa River.
In
furtherance of our commitments to the Indonesian government pursuant to our
tailings management plan, we monitor the acid-neutralizing capacity of tailings
on a daily basis to ensure the discharge of non-acid generating tailings into
our tailings deposition area. The net acid-neutralizing capacity of our tailings
discharge is maintained through a managed program of blending underground ore
with ore from the open pit, the addition of supplemental limestone (or lime)
to
the ore blend, and the addition of lime for control of the pH levels in the
flotation system. Daily samples are collected and tested and this data is
communicated to our mill operations so that adjustments in ore blending and
lime/limestone addition can be made as appropriate.
With
respect to overburden, control and treatment of acid rock drainage is our
primary environmental issue. Our approaches to this issue include the prevention
of acid rock drainage generation, the control of acid rock drainage migration,
and the capture and treatment of acid rock drainage emanating from the
overburden stockpile. In addition, tests have shown the feasibility of
revegetating the overburden stockpile and, as a result, we have engaged in
stockpile reclamation as an additional means of mitigating acid rock
drainage.
We
have
made significant capital expenditures with respect to the capture and treatment
of acid rock drainage. We continue to evaluate various technologies for the
treatment of captured acid rock drainage. Currently, acid rock drainage
collected by boreholes at the base of the overburden stockpile is treated using
conventional lime neutralization.
We
have
also committed to the Indonesian government to have independent external
environmental audits of our Papuan operations performed by qualified experts
every three years, with results available for public review. We have had four
independent environmental audits conducted by internationally recognized
consulting and auditing firms. Montgomery Watson Harza has completed the
fieldwork for the 2005 external environmental audit and we expect the audit
report to be completed by early in the second quarter of 2006.
We conduct annual internal audits to ensure that our environmental
management and monitoring programs remain sound and our
operations will continue to comply in all material respects with
applicable regulations.
In
connection with obtaining our environmental approvals from the Indonesian
government, we committed to performing a one-time environmental risk assessment
on the impacts of our tailings management plan. We completed this extensive
environmental risk assessment with more than 90 scientific studies conducted
over four years and submitted it to the Indonesian government in December 2002.
We developed the risk assessment exercise with input from an independent review
panel, which included representatives from the Indonesian government, academia,
and non-governmental organizations. The risks that we identified during this
process were in line with our impact projections of the tailings management
program contained in our environmental approval documents.
We
have
environmental approvals from the Government of Indonesia to expand our milling
rate up to a maximum of 300,000 metric tons of ore per day. In 2005, we averaged
216,200 metric tons of ore per day and in 2004 we averaged 185,100 metric tons
of ore per day.
The
cost
of complying with environmental laws is a fundamental cost of our business.
We
incurred aggregate environmental capital expenditures and other environmental
costs totaling $44.0 million in 2005, $65.1 million in 2004 and $72.1 million
in
2003, including tailings management levee maintenance and mine reclamation.
In
2006, we expect to incur approximately $28 million of aggregate environmental
capital expenditures and $37 million of other environmental
costs.
We
are
currently revegetating portions of the tailings deposition area. Upon the
completion of our mining operations, we will fulfill
the commitments included in our approved
environmental management plans. Our plans for revegetation of affected
areas of the deposition area include natural revegetation, forage crops and
grasses, fruits, grains and vegetables, and other traditional food and medicinal
crops. Decisions on these plans are made in consultation with local and
regional government, local residents and other stakeholders. In addition to
the
revegetation and reclamation of the deposition area, we will continue to operate
treatment systems as long as necessary. We also monitor and test the water
discharged from our mine and the pH, sulfate and electrical conductivity levels
of ground water in the deposition area. The stability of our levees will be
ensured through
25
comprehensive
visual inspection, maintenance and improvement programs directed by an
experienced engineering group dedicated to levee management and revegetation
of
the levee embankments. Moreover, we will submit an annual written report to
the
Indonesian government regarding our reclamation activities.
Our
ultimate reclamation and closure activities will be determined after
consultation with the Indonesian government, local residents and other parties.
Our estimate as of December 31, 2005 of PT Freeport
Indonesia’s
total
aggregate reclamation and closure obligations total approximately $156 million.
Estimates of reclamation and closure costs involve complex issues requiring
integrated assessments over a period of many years, and we may revise them
as we
perform more complete studies. Some reclamation costs will be incurred during
mining activities, while most closure costs and the remaining reclamation costs
will be incurred at the end of mining activities, which are currently estimated
to continue for more than 35 years.
Moreover,
we cannot predict with any certainty the ultimate future uses of the tailings
deposition area once our mining operations are completed. In addition to forage
crop and grass planting and food and medicinal crop production, possible future
uses of the tailings deposition area include rainforest regrowth, production
of
timber, fuel woods, fruits and nuts and other economic forestry, and the
cultivation of fish, shellfish and other aquaculture. The ultimate future uses
will be determined in consultation with local and regional government, local
residents and other stakeholders.
In
1996,
we began contributing to a cash fund ($7.2 million balance at December 31,
2005)
designed to accumulate at least $100 million by the end of our Indonesian mining
activities. We plan to use this fund, including accrued interest, to pay for
mine closure and reclamation costs. Any incremental costs in excess of this
$100
million fund are expected to be incurred throughout the life of the mine and
would be funded by operational cash flow or other sources. Future
environmental considerations and future changes in regulations could
require us to incur additional costs that would be charged against future
operations. Estimates involving environmental matters are by their nature
imprecise and changes in government regulations, operations, technology and
inflation can be expected to require us to revise them over
time.
We
believe that Atlantic Copper’s
facilities and operations are in compliance in all material respects with all
currently applicable Spanish environmental laws, rules and regulations. In
July 2002, the Integrated Pollution Prevention and Control guidelines were
adopted under Spanish law with a phase in for compliance by 2009. Atlantic
Copper, working with local environmental authorities, is continually assessing
the impact of these new guidelines on its operations, and has budgeted
approximately $20 million as its estimate of the remaining required capital
expenditures from 2006 through 2009 to comply. In April 2005, the Environmental
Management Systems at Atlantic Copper’s operations in Huelva were audited by the
Spanish Association for Standardization and Certification (AENOR), in accordance
with the ISO 14001:96 international certification standards and the European
Union Environmental, Eco-Management and Eco-Auditing (EMAS) Regulation No.
761/2001. AENOR is a Spanish not-for-profit entity that has been accredited
by
the Spanish government to inspect, audit and certify environmental management
systems. Atlantic Copper received positive results from the audits, which are
required annually to retain the ISO 14001 certification that Atlantic Copper
achieved in prior years.
The
Indonesian and Spanish governments may periodically revise their environmental
laws and regulations or adopt new ones, and we cannot predict the effects on
our
operations of new or revised regulations. We have expended significant
resources, both financial and managerial, to comply with environmental
regulations and permitting and approval requirements, and we anticipate that
we
will continue to do so in the future. There can be no assurance that we will
not
incur additional significant costs and liabilities to comply with such current
and future regulations or that such regulations will not materially affect
our
operations (see “Risk Factors”).
Employees
and Relationship with FM Services Company
As
of
December 31, 2005, PT Freeport Indonesia had 8,044 employees (approximately
98
percent Indonesian) and 6,225 contract workers, the vast majority of whom were
Indonesian. Approximately 75 percent of PT Freeport Indonesia’s
employees are represented by the All Indonesia Workers’ Union, which operates
under Government of Indonesia supervision. PT Freeport Indonesia has a labor
agreement covering its hourly paid Indonesian employees, the key provisions
of
which are renegotiated biannually. In June 2005, PT Freeport Indonesia and
its
workers agreed to terms for a new labor agreement that expires in September
2007. PT Freeport Indonesia’s relations with the workers’ union have generally
been satisfactory. In addition, 4,475 persons worked for privatized companies
providing services within PT Freeport Indonesia’s
operations area.
26
As of December 31, 2005, Atlantic Copper had 544 employees, of which approximately 72 percent are represented by union contracts. Atlantic Copper’s labor contract covering its smelter/refinery workforce in Huelva, Spain expired on December 31, 2005 and was renewed for a three-year period with no material changes in terms. Atlantic Copper experienced a four-day labor strike in October 2004 at its smelter facility in Huelva because of a workforce reduction plan. The union’s issues with the workforce reduction plan were resolved and the plan was approved by Spanish authorities and implemented in December 2004.
FM
Services Company (FM Services) furnishes executive, administrative, financial,
accounting, legal, tax and similar services to us. FM Services became our wholly
owned subsidiary in October 2002, when we purchased the remaining 50 percent
ownership in FM Services from McMoRan Exploration Co. (McMoRan) for $1.3
million. As of December 31, 2005, FCX had 10 employees and FM Services had
140
employees. FM Services employees continue to also provide services to McMoRan,
a
publicly traded company engaged in the exploration, development and production
of oil and gas, and Stratus Properties Inc., a publicly traded company engaged
in the development of real estate.
This
report contains “forward-looking statements” within the meaning of the federal
securities laws. Forward-looking statements are all statements other than
statements of historical facts, such as statements regarding anticipated
production volumes, unit net cash costs, sales volumes, ore grades, commodity
prices, development and capital expenditures, mine production and development
plans, environmental reclamation and closure cost and plans, reserve estimates,
political, economic and social conditions in our areas of operations, and
exploration efforts and results. Except for our ongoing obligations under the
federal securities laws, we do not intend, and we undertake no obligation,
to
update or revise any forward-looking statements. Readers are cautioned that
forward-looking statements are not guarantees of future performance and actual
results may differ materially from those projected, anticipated or assumed
in
the forward-looking statements. Important factors that could cause our actual
results to differ materially from those anticipated in the forward-looking
statements include the following:
Because
our primary operating assets are located in the Republic of Indonesia, our
business may be adversely affected by Indonesian political, economic and social
uncertainties, in addition to the usual risks associated with conducting
business in a foreign country.
Indonesia
has faced political, economic and social uncertainties, including separatist
movements and civil and religious strife in a number of provinces. In
particular, several separatist groups are opposing Indonesian rule over the
province of Papua, where our mining operations are located, and have sought
political independence for the province. In response to demands for political
independence, new Indonesian regional autonomy laws became effective January
1,
2001. However, the manner in which the new laws are being implemented and the
degree of political and economic autonomy that they may bring to individual
provinces, including Papua, is uncertain and is an ongoing issue in Indonesian
politics. Moreover, in Papua there have been sporadic attacks on civilians
by
separatists and sporadic but highly publicized conflicts between separatists
and
the Indonesian military. Social, economic and political instability in Papua
could materially and adversely affect us if this instability results in damage
to our property or interruption of our activities.
Maintaining
a good working relationship with the Indonesian government is important to
us
because all of our mining operations are located in Indonesia and are conducted
pursuant to Contracts of Work with the Indonesian government. Accordingly,
we
are also subject to the usual risks associated with conducting business in
and
with a foreign country, including the risk of forced modification of existing
contracts, changes in the country’s
laws and
policies, including those relating to taxation, royalties, divestment, imports,
exports and currency, and the risk of having to submit to the jurisdiction
of a
foreign court or arbitration panel or having to enforce the judgment of a
foreign court or arbitration panel against a sovereign nation within its own
territory. In addition, we are subject to the risk of expropriation, and our
insurance does not cover losses caused by expropriation.
In February 2006, a group of illegal gold panners engaged in conflict with Indonesian police and PT Freeport Indonesia security personnel when they were requested to leave an area near our milling facilities. Following the incident, the illegal panners blocked the road leading to the Grasberg mine and mill in protest and we temporarily suspended mining and milling operations as a precautionary measure. The panners also vandalized some of our light vehicles and offices near this area, causing approximately $4 million in damages. Our port facilities continued to operate during the disruption and concentrate shipments were not affected. The panners, mostly Papuans from outside our area of operations, presented a list of aspirations, primarily relating to their desire to share in the benefits
27
of
our
existing initiatives and programs provided for the Papuans who are the
traditional residents of our operations area. Mining and milling operations
resumed after an approximate four-day outage. During the incident at our mine
and mill, protestors in Jakarta vandalized the entrance floor of the office
building housing our Indonesian headquarters and staged a three-day rally
outside the building. The Indonesian police handled this matter, which did
not
disrupt our administrative functions or damage any of our
facilities.
We
cannot
predict if there will be additional incidents similar to the February 2006
protests. If there were additional protests at our mine and mill facilities,
it
could materially and adversely affect our business and profitability in ways
that we cannot predict at this time.
In
addition to the usual risks encountered in the mining industry, we face
additional risks because our operations are located on difficult terrain in
a
very remote area.
Our
mining operations are located in steeply mountainous terrain in a very remote
area in Indonesia. Because of these conditions, we have had to overcome special
engineering difficulties and develop extensive infrastructure facilities. In
addition, the area receives considerable rainfall, which has led to periodic
floods and mudslides. The mine site is also in an active seismic area and has
experienced earth tremors from time to time. In addition to these special risks,
we are also subject to the usual risks associated with the mining industry,
such
as the risk of encountering unexpected geological conditions that may result
in
cave-ins and flooding of mine areas. Our insurance may not sufficiently cover
an
unexpected natural or operating disaster.
On
October 9, 2003, a slippage of material occurred in a section of the Grasberg
open pit, resulting in eight fatalities. On December 12, 2003, a debris flow
involving a relatively small amount of loose material occurred in the same
section of the open pit resulting in only minor property damage. All material
involved in the affected mining areas was removed. The events caused us to
alter
our short-term mine sequencing plans, which adversely affected our 2003 and
2004
production. While we resumed normal production activities in the second quarter
of 2004, no assurance can be given that similar events will not occur in the
future.
The
terrorist attacks in the United States on September 11, 2001, subsequent attacks
in Indonesia and the potential for additional future terrorist acts and other
recent events have created economic and political uncertainties that could
materially and adversely affect our business and the prices of our
securities.
On
August
31, 2002, three people were killed and 11 others were wounded in an ambush
by a
group of unidentified assailants. The assailants shot at several vehicles
transporting international contract teachers from our school in Tembagapura,
their family members, and other contractors to PT Freeport Indonesia on the
road
near Tembagapura, the mining town where the majority of PT Freeport
Indonesia’s
personnel reside. We, along with the U.S. government, the central Indonesian
government, the Papuan provincial and local governments, and leaders of the
local people residing in the area of our operations condemned the attack.
Indonesian authorities and the U.S. FBI investigated the incident, which
resulted in the U.S. indictment of an alleged operational commander of the
Free
Papua Movement/National Freedom Force. In January 2006, Indonesian Police,
accompanied by FBI agents, arrested the alleged operational commander in the
Free Papua Movement/National Freedom Force and 11 other Papuans.
On
October 12, 2002, a bombing killed 202 people in the Indonesian province of
Bali, which is 1,500 miles west of our mining and milling operations. Indonesian
authorities arrested 35 people in connection with this bombing and 29 of those
arrested have been tried and convicted. On August 5, 2003, 12 people were killed
and over 100 others were injured by a car bomb detonated outside of the JW
Marriott Hotel in Jakarta, Indonesia. On September 9, 2004, 11 people were
killed and over 200 others injured by a car bomb detonated in front of the
Australian embassy in Jakarta. On October 1, 2005, three suicide bombers killed
19 people and wounded over 100 others in Bali. The same international terrorist
organizations are suspected in each of these incidents. In November 2005,
Indonesian Police raided a house in East Java that resulted in the death of
other accused terrorists linked to the bombings discussed above. Our mining
and
milling operations were not interrupted by these incidents but our corporate
office in Jakarta had to relocate for several months following the bombing
in
front of the Australian embassy.
We
cannot
predict whether there will be additional incidents similar to the recent
shooting or bombings. If there were to be additional separatist, terrorist
or
other violence in Indonesia, it could materially and adversely affect our
business and profitability in ways that we cannot predict at this
time.
28
Terrorist
attacks and other recent events have caused uncertainty in the world’s
financial and insurance markets and may significantly increase global political,
economic and social instability, including in Indonesia. In addition to the
Bali, JW Marriott Hotel and Australian embassy bombings, there have been
anti-American demonstrations in certain sections of Indonesia reportedly led
by
radical Islamic activists. Radical activists have also threatened to attack
foreign interests and have called for the expulsion of U.S. and British citizens
and companies from Indonesia.
It
is
possible that further acts of terrorism may be directed against the U.S.
domestically or abroad, and such acts could be directed against properties
and
personnel of companies such as ours. The attacks and the resulting economic
and
political uncertainties, including the potential for further terrorist acts,
have negatively impacted insurance markets. Moreover, while our property and
business interruption insurance covers damages to insured property directly
caused by terrorism, this insurance does not cover damages and losses caused
by
war. Terrorism and war developments may materially and adversely affect our
business and profitability and the prices of our securities in ways that we
cannot predict at this time.
Our
profitability can vary significantly with fluctuations in the market prices
of
copper and gold.
Our
revenues are derived primarily from the sale of copper concentrates, which
also
contain significant quantities of gold and silver, and from the sale of copper
cathodes and anodes. Although we sell most of our copper concentrates under
long-term contracts, the selling price is based on world metal prices at or
near
the time of shipment and delivery.
During
2005, the daily closing prices on the London spot market ranged from $1.39
to
$2.11 per pound for copper and $411 to $538 per ounce for gold. During 2004,
the
daily closing prices on the London spot market ranged from $1.06 to $1.49 per
pound for copper and $374 to $456 per ounce for gold.
World
copper prices have historically fluctuated widely and are affected by numerous
factors beyond our control, including:
| · |
the
strength of the U.S. economy and the economies of other industrialized
and
developing nations, including
China;
|
| · |
available
supplies of copper from mine production and
inventories;
|
| · |
sales
by holders and producers of copper;
|
| · |
demand
for industrial products containing copper;
and
|
| · |
investment
activity, including speculation, in copper as a
commodity.
|
World
gold prices also have historically fluctuated widely and are affected by
numerous factors beyond our control, including:
| · |
the
strength of the U.S. economy and the economies of other industrialized
and
developing nations, including
China;
|
| · |
global
or regional political or economic
crises;
|
| · |
the
relative strength of the U.S. dollar and other
currencies;
|
| · |
expectations
with respect to the rate of
inflation;
|
| · |
interest
rates;
|
| · |
purchases
and sales of gold by central banks and other
holders;
|
| · |
demand
for jewelry containing gold; and
|
| · |
investment
activity, including speculation, in gold as a
commodity.
|
29
Any
material decrease in market prices of copper or gold would materially and
adversely affect our results of operations and financial condition. See our
2005
Annual Report incorporated herein by reference for an analysis of the effect
on
our revenues and net income of changes in copper and gold prices.
Our
Contracts of Work are subject to termination if we do not comply with our
contractual obligations, and if a dispute arises, we may have to submit to
the
jurisdiction of a foreign court or arbitration panel.
PT
Freeport Indonesia’s
Contracts of Work and other Contracts of Work in which we have an interest
were
entered into under Indonesia’s
1967
Foreign Capital Investment Law, which provides guarantees of remittance rights
and protection against nationalization. Our Contracts of Work can be terminated
by the Government of Indonesia if we do not satisfy our contractual obligations,
which include the payment of royalties and taxes to the government and the
satisfaction of certain mining, environmental, safety and health requirements.
Indonesian government officials have periodically raised questions regarding
our
compliance with Indonesian environmental laws and regulations and the terms
of
the Contracts of Work. In order to address these questions, the Indonesian
government formed a fact-finding team in 2000 that reviewed our compliance
with
all aspects of PT Freeport Indonesia’s
Contract
of Work. We cannot assure you that, if and when the Indonesian
government’s
report is released, the report will conclude that we are complying with all
of the provisions of PT Freeport Indonesia’s
Contract
of Work.
Moreover, at
times, certain government officials and others in Indonesia have questioned
the
validity of contracts entered into by the Government of Indonesia prior
to May 1998 (i.e.,
during
the Suharto regime), including PT Freeport Indonesia’s
Contract
of Work, which was signed in December 1991. We cannot assure you that the
validity of, or our compliance with the Contracts of Work will not be challenged
for political or other reasons. PT Freeport Indonesia’s
Contracts of Work and our other Contracts of Work require that disputes with
the
Indonesian government be submitted to international arbitration. Notwithstanding
that provision, if a dispute arises under the Contracts of Work, we face the
risk of having to submit to the jurisdiction of a foreign court or arbitration
panel, and if we prevail in such a dispute, we will face the additional risk
of
having to enforce the judgment of a foreign court or arbitration panel against
Indonesia within its own territory.
Any
suspension of required activities under our Contracts of Work requires the
consent of the Indonesian government.
Our
Contracts of Work permit us to suspend certain contractually required
activities, including exploration, for a period of one year by making a written
request to the Indonesian government. These requests are subject to the approval
of the Indonesian government and are renewable annually. If we do not request
a
suspension or are denied a suspension, then we are required to continue our
activities under the Contract of Work or potentially be declared in default.
Moreover, if a suspension continues for more than one year for reasons other
than force majeure and the Indonesian government has not approved such
continuation, then the government would be entitled to declare a default under
the Contract of Work.
We
suspended our field exploration activities outside of Block A in recent years
due to safety and security issues and regulatory uncertainty relating to a
possible conflict between our mining and exploration rights in certain forest
areas and an Indonesian Forestry law enacted in 1999 prohibiting open-pit mining
in forest preservation areas. In 2001, we requested and received from the
Government of Indonesia, formal temporary suspensions of our obligations under
the Contracts of Work in all areas outside of Block A. Recent Indonesian
legislation permits open-pit mining in PT Freeport Indonesia’s
Block B
area, subject to certain requirements. We continue to assess these requirements
and security issues. The timing for the resumption of exploration activities
in
our Contract of Work areas outside of Block A depends on the resolution of
these
matters.
Our
mining operations create difficult and costly environmental challenges, and
future changes in environmental laws, or unanticipated environmental impacts
from our operations, could require us to incur increased
costs.
Mining
operations on the scale of our operations in Papua involve significant
environmental risks and challenges. Our primary challenge is to dispose of
the
large amount of crushed and ground rock material, called tailings, that results
from the process by which we physically separate the copper-, gold- and
silver-bearing materials from the ore that we mine. Our tailings management
plan
uses the river system near our mine to transport the tailings to the lowlands
where the tailings and natural sediments are deposited in a controlled area
contained within a levee system
30
that
will
be revegetated. We incurred aggregate costs relating to tailings management
of
$8.7 million in 2005, $11.8 million in 2004 and $8.3 million in
2003.
Another
major environmental challenge is managing overburden, which is the rock that
must be moved aside in the mining process in order to reach the ore. In the
presence of air, water and naturally occurring bacteria, some overburden can
cause acid rock drainage, or acidic water containing dissolved metals which,
if
not properly managed, can have a negative impact on the
environment.
Certain Indonesian governmental officials have from time to time raised issues with respect to our tailings and overburden management plans, including a suggestion that we implement a pipeline system rather than our river deposition system for tailings disposal. Because our mining operations are remotely located in steep mountainous terrain and in an active seismic area, a pipeline system would be costly, difficult to construct and maintain, more prone to catastrophic failure and involve environmental issues. An external panel of qualified experts, as directed in our 300K ANDAL (the Environmental Impact Assessment document submitted to the Indonesian government), conducted detailed reviews and analyses of a number of technical studies. They concluded that all significant impacts identified were in line with the 300K ANDAL predictions, and that the current system of riverine tailings management was appropriate considering all site-specific factors. For these reasons, we do not believe that a pipeline system is necessary or practical.
We
anticipate that we will continue to spend significant financial and managerial
resources on environmental compliance. In addition, changes in Indonesian
environmental laws or unanticipated environmental impacts from our operations
could require us to incur significant unanticipated costs.
The
volume and grade of the reserves we recover and our rates of production may
be
more or less than we anticipate.
Our
reserve amounts are determined in accordance with established mining industry
practices and standards, but are estimates of the mineral deposits that can
be recovered economically and legally based on currently available
data. Our ore bodies may not conform to standard geological expectations,
and estimates may change as new data become available. Because ore bodies do
not
contain uniform grades of minerals, our metal recovery rates will vary from
time
to time, which will result in variations in the volumes of minerals that we
can
sell from period to period. Some of our reserves may become unprofitable to
develop if there are unfavorable long-term market price fluctuations in copper
and gold, or if there are significant increases in our operating or capital
costs. In addition, our exploration programs may not result in the discovery
of
additional mineral deposits that we can mine profitably.
We
do not expect to mine all of our reserves before the initial term of our
Contract of Work expires.
All
of
our current proven and probable reserves, including the Grasberg deposit, are
located in Block A. The initial term of our Contract of Work covering these
reserves expires at the end of 2021. We can extend this term for two successive
10-year periods, subject to the approval of the Indonesian government, which
under our Contract of Work cannot be withheld or delayed unreasonably. Our
reserves reflect estimates of minerals that can be recovered through the end
of
2041 (i.e.,
through the expiration of the two 10-year extensions) and our current mine
plan
has been developed, and our operations are based on the assumption that we
will
receive the two 10-year extensions. As a result, we will not mine all of our
reserves during the current term of our Contract of Work, and there can be
no
assurance that the Indonesian government will approve the extensions. Prior
to
the end of 2021, we expect to mine approximately 44 percent of aggregate proven
and probable recoverable ore at December 31, 2005, representing approximately
52
percent of PT Freeport Indonesia’s
share of
recoverable copper reserves and approximately 65 percent of its share of
recoverable gold reserves.
Servicing
our debt will require a significant amount of cash, and our ability to generate
sufficient cash depends on many factors, some of which are beyond our
control.
Our
ability to make payments on and to refinance our maturing debt depends on our
ability to generate sufficient cash flow. This ability, to a significant extent,
is subject to commodity prices and general economic, financial, regulatory,
political and other factors that are beyond our control. In addition, our
ability to borrow funds in the future to service our debt will depend on meeting
the financial covenants in our 10⅛% senior notes due 2010, our 6⅞% senior notes
due 2014, our bank credit facilities and other debt agreements we may have
in
the future. Future borrowings may not be available to us under our bank credit
facilities or from the capital markets in amounts sufficient to enable us to
pay
our obligations as they mature or to fund other liquidity needs. As a result,
we
may
31
need
to
refinance all or a portion of our debt on or before maturity. Any inability
to
generate sufficient cash flow or refinance our debt on favorable terms could
materially and adversely affect our financial condition.
Covenants
in our bank credit facilities impose restrictions on us.
Although
we currently have no amounts outstanding under our bank credit facilities,
our
bank credit facilities:
| · |
restrict
the repurchase of, and payment of dividends on, our common stock
under
certain circumstances;
|
| · |
limit,
among other things, our ability to:
|
· incur
additional indebtedness;
· make
investments;
· engage
in
transactions with affiliates;
· create
liens on our assets; and
| · |
require
us to maintain specified financial ratios and satisfy financial condition
tests.
|
Events
beyond our control, including changes in general economic and business
conditions, may affect our ability to satisfy these covenants, which could
result in a default. If an event of default occurs, the banks could declare
any
amounts outstanding together with accrued interest, to be immediately due and
payable. An event of default under our bank credit facilities may also give
rise
to an event of default under our other existing and future debt
agreements.
Covenants
in our 10⅛% senior notes due 2010 and 6⅞% senior notes due 2014 also impose
restrictions on us.
Our
10⅛%
senior notes and our 6⅞% senior notes limit, among other things, our ability
to:
| · |
pay
dividends on our common stock and repurchase and redeem certain classes
of
our capital stock;
|
| · |
incur
additional indebtedness;
|
| · |
make
investments;
|
| · |
engage
in transactions with affiliates;
and
|
| · |
create
liens on our assets.
|
Movements
in foreign currency exchange rates or interest rates could negatively affect
our
operating results.
All
of
our revenues and a significant portion of our costs are denominated in U.S.
dollars; however, some costs, and certain asset and liability accounts are
denominated in Indonesian rupiah, Australian dollars or euros. As a result,
we
are generally less profitable when the U.S. dollar weakens in relation to these
foreign currencies.
The
rupiah/U.S. dollar daily closing exchange rate ranged from 9,142 to 10,753
rupiah per U.S. dollar during 2005, and on December 30, 2005, the closing
exchange rate was 9,825 rupiah per U.S. dollar compared with 9,270 rupiah per
U.S. dollar on December 31, 2004. During 2005, the Australian dollar/U.S. dollar
daily closing exchange rate ranged from $0.72 to $0.80 per Australian dollar
and
the euro/U.S. dollar daily closing exchange rate ranged from $1.16 to $1.36
per
euro. On December 30, 2005, the closing exchange rates were $0.73 per Australian
dollar and $1.18 per euro, compared with the December 31, 2004 closing exchange
rates of $0.78 per Australian dollar and $1.36 per euro.
From
time
to time, we have in the past and may in the future implement currency hedges
intended to reduce our exposure to changes in foreign currency exchange rates.
However, our hedging strategies may not be successful, and any of our unhedged
foreign exchange payment requirements will continue to be subject to market
fluctuations.
32
In
addition, our bank credit facilities are based on fluctuating interest rates.
Accordingly, an increase in interest rates could adversely affect our results
of
operations and financial condition.
Because
we are a holding company, our ability to pay our debts depends upon the ability
of our subsidiaries to pay us dividends and to advance us funds. In addition,
our ability to participate in any distribution of our subsidiaries’ assets is
generally subject to the prior claims of the subsidiaries’
creditors.
Because
we conduct business primarily through PT Freeport Indonesia, our major
subsidiary, and other subsidiaries, our ability to pay our debts depends upon
the earnings and cash flow of PT Freeport Indonesia and our other subsidiaries
and their ability to pay us dividends and to advance us funds. Contractual
and
legal restrictions applicable to our subsidiaries could also limit our ability
to obtain cash from them. Our rights to participate in any distribution of
our
subsidiaries’ assets upon their liquidation, reorganization or insolvency would
generally be subject to the prior claims of the subsidiaries’ creditors,
including any trade creditors and preferred shareholders.
Not
applicable.
We
are
involved from time to time in various legal proceedings of a character normally
incident to the ordinary course of our business. We believe that potential
liability in such proceedings would not have a material adverse effect on our
financial condition or results of operations. We maintain liability insurance
to
cover some, but not all, potential liabilities normally incident to the ordinary
course of our business as well as other insurance coverage customary in our
business, with coverage limits that we deem prudent.
Not
applicable.
Certain
information as of March 1, 2006 about our executive officers, including their
position or office with FCX, PT Freeport Indonesia and Atlantic Copper, is
set
forth in the following table and accompanying text:
|
Name
|
Age
|
Position
or Office
|
||
|
James
R. Moffett
|
67
|
Chairman
of the Board of FCX. President Commissioner of
|
||
|
PT
Freeport Indonesia.
|
||||
|
Richard
C. Adkerson
|
59
|
President
and Chief Executive Officer of FCX. Director and
|
||
|
Executive
Vice President of PT Freeport Indonesia.
|
||||
|
Chairman
of the Board of Directors of Atlantic Copper.
|
||||
|
Michael
J. Arnold
|
53
|
Chief
Administrative Officer of FCX. Director,
|
||
|
Executive
Vice President and Chief Financial Officer of
|
||||
|
PT
Freeport Indonesia.
|
||||
|
Mark
J. Johnson
|
46
|
Senior
Vice President and Chief Operating Officer of FCX.
|
||
|
Adrianto
Machribie
|
64
|
President
Director of PT Freeport Indonesia.
|
||
|
Kathleen
L. Quirk
|
42
|
Senior
Vice President, Chief Financial Officer and
|
||
|
Treasurer
of FCX. Commissioner of PT Freeport Indonesia.
|
||||
|
Director
of Atlantic Copper.
|
James
R. Moffett
has
served as Chairman of the Board of FCX since 1992. Mr. Moffett previously served
as the Chief Executive Officer of FCX from July 1995 until December 2003. He
is
also President Commissioner of PT Freeport Indonesia and Co-Chairman of the
Board of McMoRan Exploration Co. (McMoRan).
33
Richard
C. Adkerson
has
served as FCX’s
President since April 1997 and Chief Executive Officer since December 2003.
Mr.
Adkerson previously served as FCX’s
Chief
Financial Officer from October 2000 to December 2003. Mr. Adkerson is also
a
director and Executive Vice President of PT Freeport Indonesia, Chairman of
the
Board of Directors of Atlantic Copper, and Co-Chairman of the Board of McMoRan.
From November 1998 to February 2004, he also served as President and Chief
Executive Officer of McMoRan.
Michael
J. Arnold has
served as the Chief
Administrative Officer of FCX since December 2003. He also served as a director
and Executive Vice President of PT Freeport Indonesia since May
1998.
Mark
J. Johnson
has
served as the Senior Vice President and Chief Operating Officer of FCX since
December 2003 and as Vice President of PT Freeport Indonesia since February
2002. He previously served as
Vice
President of FCX from July 2001 to December 2003.
Adrianto
Machribie
has
served as President Director of PT Freeport Indonesia since March
1996.
Kathleen
L. Quirk
has
served as FCX’s Senior Vice President, Chief Financial Officer and Treasurer
since December 2003. She previously served as the Vice President and Treasurer
of FCX from February 2000 to December 2003, and as Vice President from February
1999 to February 2000. Ms. Quirk has also served as a Commissioner of PT
Freeport Indonesia since April 2000, as the Senior Vice President and Treasurer
of McMoRan since April 2002 and as Vice President and Treasurer of McMoRan
from
January 2000 to April 2002.
Unregistered
Sales of Equity Securities
In
January 2006, we privately negotiated a transaction with holders representing
$11.0 million of our 7% Convertible Senior Notes due 2011 to induce conversions
into 0.4 million shares of FCX common stock. This transaction is in reliance
on
the exemption from registration provided under Section 3(a)(9) of the Securities
Act of 1933.
Class
B Common Shares
Our
Class
B common shares trade on the New York Stock Exchange (NYSE) under the symbol
“FCX.” The FCX share price is reported daily in the financial press under “FMCG”
in most listings of NYSE securities. At year-end 2005, the number of holders
of
record of our Class B common shares was 8,649. NYSE composite tape Class B
common share price ranges during 2005 and 2004 follow:
|
2005
|
2004
|
|||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||
|
First
Quarter
|
$
|
43.90
|
$
|
35.12
|
$
|
44.90
|
$
|
35.09
|
||||
|
Second
Quarter
|
40.31
|
31.52
|
39.85
|
27.76
|
||||||||
|
Third
Quarter
|
49.48
|
37.12
|
42.13
|
31.54
|
||||||||
|
Fourth
Quarter
|
56.35
|
43.41
|
42.55
|
33.98
|
||||||||
As
of
March 1, 2006, there were approximately 8,571 holders of record of our
Class B common stock.
Common
Share Dividends
In
February 2003, the Board of Directors initiated a cash dividend for FCX’s common
stock of $0.09 per share quarterly beginning May 1, 2003. In October 2003,
the
Board authorized an increase in the cash dividend to an annual rate of $0.80
per
share and increased the dividend again in October 2004 to an annual rate of
$1.00 per share. In December 2004, the Board authorized a supplemental common
stock dividend of $0.25 per share, and during 2005 the Board authorized three
supplemental dividends of $0.50 per share paid on March 31, 2005, September
30,
2005 and December 30, 2005. In November 2005, the Board authorized an increase
in our annual common stock dividend to $1.25 per share (from $1.00 per share)
payable quarterly ($0.3125 per share) beginning with the
34
February
1, 2006 dividend payment. In addition, on January 31, 2006, the Board authorized
a supplemental dividend of $0.50 per share payable on March 31, 2006 to
shareholders of record as of March 15, 2006.
Below
is
a summary of the common stock cash dividends declared and paid for the quarterly
periods of 2005 and 2004, and the 2005 and 2004 supplemental
dividends:
|
2005
|
2004
|
||||||||||
|
Amount
Per Share
|
Record
Date
|
Payment
Date
|
Amount
Per Share
|
Record
Date
|
Payment
Date
|
||||||
|
First
Quarter
|
$0.25
|
Jan.
14, 2005
|
Feb.
1, 2005
|
$0.20
|
Jan.
15, 2004
|
Feb.
1, 2004
|
|||||
|
Supplemental
dividend
|
0.50
|
Mar.
15, 2005
|
Mar.
31, 2005
|
N/A
|
N/A
|
N/A
|
|||||
|
Second
Quarter
|
0.25
|
Apr.
15, 2005
|
May
1, 2005
|
0.20
|
Apr.
15, 2004
|
May
1, 2004
|
|||||
|
Third
Quarter
|
0.25
|
July
15, 2005
|
Aug.
1, 2005
|
0.20
|
July
15, 2004
|
Aug.
1, 2004
|
|||||
|
Supplemental
dividend
|
0.50
|
Sept.
15, 2005
|
Sept.
30, 2005
|
N/A
|
N/A
|
N/A
|
|||||
|
Fourth
Quarter
|
0.25
|
Oct.
14, 2005
|
Nov.
1, 2005
|
0.25
|
Oct.
15, 2004
|
Nov.
1, 2004
|
|||||
|
Supplemental
dividend
|
0.50
|
Dec.
15, 2005
|
Dec.
30, 2005
|
0.25
|
Dec.
20, 2004
|
Dec.
29, 2004
|
|||||
The
declaration and payment of dividends is at the discretion of our Board and
will
depend on our financial results, cash requirements, future prospects and other
factors deemed relevant by the Board. In addition, payment of dividends on
our
common stock and purchases of common stock are subject to limitations under
our
10⅛% Senior Notes and 6⅞% Senior Notes and, in certain circumstances, our credit
facility.
Issuer
Purchases of Equity Securities
In
October 2003, our Board of Directors approved a new open market share purchase
program for up to 20 million shares, which replaced our previous program. The
program does not have an expiration date. No shares were purchased during the
three-month period ended December 31, 2005, and 14.2 million shares remain
available for purchase.
The
information set forth under the caption “Selected Financial and Operating Data”
of our 2005 Annual Report is incorporated herein by reference.
Our
ratio
of earnings to fixed charges was as follows for the years
presented.
|
Years
Ended December 31,
|
|||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
|
|
Ratio
of earnings to fixed charges
|
15.7x
|
4.7x
|
3.9x
|
3.4x
|
2.9x
|
|
Ratio
of earnings to fixed charges
|
|||||
|
and
preferred stock dividends
|
8.1x
|
2.8x
|
3.0x
|
2.5x
|
2.1x
|
For
the
ratio of earnings to fixed charges calculation, earnings consist of pre-tax
income from continuing operations before minority interests in consolidated
subsidiaries, income or loss from equity investees and fixed charges. Fixed
charges include interest and that portion of rent deemed representative of
interest. For the ratio of earnings to fixed charges and preferred stock
dividends calculation, we assumed that our preferred stock dividend requirements
were equal to the pre-tax earnings that would be required to cover those
dividend requirements. We computed those pre-tax earnings using actual tax
rates
for each year.
The
information set fourth under the caption “Management’s Discussion and Analysis”
of our 2005 Annual Report is incorporated herein by reference.
Our
financial statements and the notes thereto, the report thereon of Ernst &
Young LLP, each as set forth in our 2005 Annual Report, are incorporated
herein by reference.
35
Not
applicable.
(a) Evaluation
of disclosure controls and procedures.
Our
chief executive officer and chief financial officer, with the participation
of
management, have evaluated the effectiveness of our “disclosure controls and
procedures” (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of the end of the period covered by this annual report
on Form 10-K. Based on their evaluation, they have concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to FCX (including our consolidated subsidiaries) required
to be disclosed in our periodic SEC filings.
(b) Changes
in internal controls.
There
has been no change in our internal control over financial reporting that
occurred during the fourth quarter that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
(c) Management’s
annual
report on internal control over financial reporting and the report thereon
of
Ernst & Young LLP are incorporated herein by reference to our 2005 Annual
Report.
Not
applicable.
The
information set forth under the captions “Information About Director Nominees”
and “Section 16(a) Beneficial Ownership Reporting Compliance” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2006 Annual Meeting
to
be held on May 4, 2006, is incorporated herein by reference. The information
required by Item 10 regarding our executive officers appears in a separately
captioned heading after Item 4 in Part I of this report.
The
information set forth under the captions “Director Compensation” and “Executive
Officer Compensation” of our definitive Proxy Statement to be filed with the
SEC, relating to our 2006 Annual Meeting to be held on May 4, 2006, is
incorporated herein by reference.
The
information set forth under the captions “Stock Ownership of Directors and
Executive Officers,” “Stock Ownership of Certain Beneficial Owners” and
“Proposal to Adopt the 2006 Stock Incentive Plan” of our definitive Proxy
Statement to be filed with the SEC, relating to our 2006 Annual Meeting to
be
held on May 4, 2006, is incorporated herein by reference.
The
information set forth under the caption “Certain Transactions” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2006 Annual Meeting
to
be held on May 4, 2006, is incorporated herein by reference.
The
information set forth under the caption “Independent Auditors” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2006 Annual Meeting
to
be held on May 4, 2006, is incorporated herein by reference.
36
(a)(1). Financial
Statements.
Reference
is made to Item 8 and the Index to Financial Statements appearing on page F-1
hereof.
(a)(2). Financial
Statement Schedules.
Reference
is made to the Index to Financial Statements appearing on page F-1
hereof.
(a)(3). Exhibits.
Reference
is made to the Exhibit Index beginning on page E-1 hereof.
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 14, 2006.
Freeport-McMoRan
Copper & Gold Inc.
By:
/s/
Richard C. Adkerson
Richard
C. Adkerson
President
and
Chief
Executive Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed by the following persons on behalf of the registrant in the capacities
indicated on March 14, 2006.
|
*
|
Chairman
of the Board
|
|
James
R. Moffett
|
|
|
*
|
Vice
Chairman of the Board
|
|
B.
M. Rankin, Jr.
|
|
|
/s/
Richard C. Adkerson
|
President
and Chief Executive Officer
|
|
Richard
C. Adkerson
|
(Principal
Executive Officer)
|
|
/s/
Kathleen L. Quirk
|
Senior
Vice President, Chief Financial Officer and
|
|
Kathleen
L. Quirk
|
Treasurer
|
|
(Principal
Financial Officer)
|
|
|
*
|
Vice
President and Controller - Financial Reporting
|
|
C.
Donald Whitmire, Jr.
|
(Principal
Accounting Officer)
|
|
*
|
Director
|
|
Robert
J. Allison, Jr.
|
|
|
*
|
Director
|
|
Robert
A. Day
|
|
|
*
|
Director
|
|
Gerald
J. Ford
|
|
|
*
|
Director
|
|
H.
Devon Graham, Jr.
|
|
|
*
|
Director
|
|
J.
Bennett Johnston
|
|
S-1
|
*
|
Director
|
|
Bobby
Lee Lackey
|
|
|
*
|
Director
|
|
J.
Taylor Wharton
|
|
|
By:
/s/ Richard C. Adkerson
|
|
|
Richard
C. Adkerson
|
|
|
Attorney-in-Fact
|
S-2
FREEPORT-McMoRan COPPER & GOLD INC.
INDEX
TO FINANCIAL STATEMENTS
Our
financial statements and the notes thereto, and the report of Ernst & Young
LLP included in our 2005 Annual Report are incorporated herein by reference.
The
financial statements in schedule I listed below should be read in conjunction
with our financial statements included in our 2005 Annual Report incorporated
herein by reference.
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Schedule
I-Condensed Financial Information of Registrant
|
F-2
|
|
Schedule
II-Valuation and Qualifying Accounts
|
F-5
|
Schedules
other than the ones listed above have been omitted since they are either not
required, not applicable or the required information is included in the
financial statements or notes thereto.
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan
COPPER & GOLD INC.
We
have
audited the consolidated financial statements of Freeport-McMoRan Copper &
Gold Inc. (the Company) as of December 31, 2005 and 2004 and for each of the
three years in the period ended December 31, 2005, and have issued our report
thereon dated February 24, 2006. Our audits also included the schedules
listed in the index above for this Form 10-K. The schedules listed in the index
above are the responsibility of the Company’s
management. Our responsibility is to express an opinion based on our
audits.
In
our
opinion, the schedules referred to above, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in
all
material respects the information set forth therein.
Ernst
& Young LLP
New
Orleans, Louisiana
February
24, 2006
F-1
FREEPORT-McMoRan
COPPER & GOLD INC.
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE
SHEETS
|
December
31,
|
||||||
|
2005
|
2004
|
|||||
|
Assets:
|
(In
Thousands)
|
|||||
|
Cash
|
$
|
145,215
|
$
|
98,125
|
||
|
Restricted
cash and investments
|
-
|
500
|
||||
|
Interest
receivable
|
1,344
|
1,296
|
||||
|
Due
from affiliates
|
37,099
|
31,973
|
||||
|
Notes
receivable from PT Freeport Indonesia
|
179,880
|
192,381
|
||||
|
Notes
receivable from Atlantic Copper
|
189,500
|
189,500
|
||||
|
Notes
receivable from PT Puncakjaya Power
|
135,426
|
-
|
||||
|
Investments
in PT Freeport Indonesia and PT Indocopper Investama
|
2,355,273
|
2,326,089
|
||||
|
Investment
in Atlantic Copper
|
122,908
|
104,971
|
||||
|
Investment
in PT Puncakjaya Power
|
82,537
|
83,824
|
||||
|
Other
assets
|
94,622
|
100,999
|
||||
|
Total
assets
|
$
|
3,343,804
|
$
|
3,129,658
|
||
|
Liabilities
and Stockholders’ Equity:
|
||||||
|
Accounts
payable and accrued liabilities
|
$
|
40,693
|
$
|
18,852
|
||
|
Accrued
interest payable
|
31,112
|
46,199
|
||||
|
Long-term
debt, including current portion
|
1,188,391
|
1,683,699
|
||||
|
Other
long-term liabilities
|
51,595
|
44,636
|
||||
|
Deferred
income taxes
|
189,019
|
172,623
|
||||
|
Stockholders'
equity
|
1,842,994
|
1,163,649
|
||||
|
Total
liabilities and stockholders’ equity
|
$
|
3,343,804
|
$
|
3,129,658
|
||
The
footnotes to the consolidated financial statements of FCX contained in
FCX’s
2005
Annual Report to stockholders incorporated by reference are an integral part
of
these statements.
F-2
FREEPORT-McMoRan COPPER & GOLD INC.
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS
OF INCOME
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Income
from investments in PT Freeport Indonesia and
|
|||||||||
|
PT
Indocopper Investama, net of tax provisions
|
$
|
1,270,269
|
$
|
380,418
|
$
|
421,493
|
|||
|
Net
income (loss) from investment in Atlantic Copper
|
17,842
|
(103,388
|
)
|
(58,538
|
)
|
||||
|
Income
from investment in PT Puncakjaya Power
|
15,642
|
15,712
|
6,521
|
||||||
|
Intercompany
charges and eliminationsa
|
8,368
|
88,678
|
72,588
|
||||||
|
General
and administrative expenses
|
(19,431
|
)
|
(18,059
|
)
|
(14,937
|
)
|
|||
|
Depreciation
and amortization
|
(14,693
|
)
|
(11,324
|
)
|
(13,557
|
)
|
|||
|
Interest
expense, net
|
(115,641
|
)
|
(125,674
|
)
|
(151,453
|
)
|
|||
|
Interest
income on PT Freeport Indonesia and Atlantic Copper
|
|||||||||
|
notes
receivable:
|
|||||||||
|
Gold
and silver production payment loans
|
9,054
|
9,037
|
13,683
|
||||||
|
Promissory
notes
|
17,570
|
5,246
|
-
|
||||||
|
Other
income, net
|
5,392
|
2,897
|
4,715
|
||||||
|
Gains
on sales of assets
|
6,631
|
21,281
|
-
|
||||||
|
Losses
on early extinguishment and conversion of debt
|
(30,778
|
)
|
(10,176
|
)
|
(30,268
|
)
|
|||
|
Provision
for income taxes
|
(175,098
|
)
|
(52,381
|
)
|
(43,912
|
)
|
|||
|
Cumulative
effect of change in accounting principle, net
|
-
|
-
|
(24,675
|
)b
|
|||||
|
Net
income
|
995,127
|
202,267
|
181,660
|
||||||
|
Preferred
dividends
|
(60,500
|
)
|
(45,491
|
)
|
(27,441
|
)
|
|||
|
Net
income applicable to common stock
|
$
|
934,627
|
$
|
156,776
|
$
|
154,219
|
|||
|
a.
|
Includes
reimbursements from PT Freeport Indonesia and Rio Tinto, FCX’s
joint venture partner, totaling $73.7 million in 2005, $94.3 million
in
2004 and $69.1 million in 2003 for certain FCX stock option
exercises.
|
|
b.
|
Effective
July 1, 2003, FCX adopted SFAS No. 150 and reclassified its mandatorily
redeemable preferred stock as debt and recorded a cumulative effect
charge
to accelerate amortization of deferred financing costs. SFAS No.
150 does
not allow restatement of prior
periods.
|
The
footnotes to the consolidated financial statements of FCX contained in
FCX’s
2005
Annual Report to stockholders incorporated by reference are an integral part
of
these statements.
F-3
FREEPORT-McMoRan
COPPER & GOLD INC.
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS
OF CASH FLOWS
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Cash
flow from operating activities:
|
|||||||||
|
Net
income
|
$
|
995,127
|
$
|
202,267
|
$
|
181,660
|
|||
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|||||||||
|
Income
from investments in PT Freeport Indonesia and
|
|||||||||
|
PT
Indocopper Investama
|
(1,270,269
|
)
|
(380,418
|
)
|
(421,493
|
)
|
|||
|
Deferred
income taxes
|
20,852
|
37,277
|
41,669
|
||||||
|
Net
(income) loss from investment in Atlantic Copper
|
(17,842
|
)
|
103,388
|
58,538
|
|||||
|
Income
from investment in PT Puncakjaya Power
|
(15,642
|
)
|
(15,712
|
)
|
(6,521
|
)
|
|||
|
Elimination
of intercompany profit
|
65,335
|
5,594
|
(3,500
|
)
|
|||||
|
Dividends
received from PT Freeport Indonesia and
|
|||||||||
|
PT
Indocopper Investama
|
1,179,201
|
96,981
|
-
|
||||||
|
Dividends
received from PT Puncakjaya Power
|
16,928
|
8,571
|
9,736
|
||||||
|
Depreciation
and amortization
|
14,693
|
11,324
|
13,557
|
||||||
|
Amortization
of deferred financing costs
|
4,528
|
4,818
|
6,157
|
||||||
|
Gains
on sales of assets
|
(6,631
|
)
|
(21,281
|
)
|
-
|
||||
|
Losses
on early extinguishment and conversion of debt
|
30,778
|
10,176
|
30,268
|
||||||
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
24,675
|
||||||
|
(Increase)
decrease in interest receivable and due from affiliates
|
(1,374
|
)
|
9,435
|
(13,437
|
)
|
||||
|
(Decrease)
increase in accounts payable and accrued liabilities
|
(10,109
|
)
|
(1,571
|
)
|
21,833
|
||||
|
Increase
(decrease) in accrued income taxes
|
16,973
|
2,467
|
(314
|
)
|
|||||
|
Increase
in long-term compensation benefits
|
10,079
|
13,000
|
5,716
|
||||||
|
Other
|
2,234
|
2,178
|
922
|
||||||
|
Net
cash provided by (used in) operating activities
|
1,034,861
|
88,494
|
(50,534
|
)
|
|||||
|
Cash
flow from investing activities:
|
|||||||||
|
Sale
of assets
|
6,631
|
21,634
|
-
|
||||||
|
Capital
expenditures and other
|
(9,090
|
)
|
(3,446
|
)
|
(2,083
|
)
|
|||
|
Sale
of restricted investments
|
-
|
21,804
|
73,629
|
||||||
|
Investment
in Atlantic Copper
|
-
|
(202,000
|
)
|
(10,000
|
)
|
||||
|
Investment
in PT Puncakjaya Power
|
-
|
-
|
(78,367
|
)
|
|||||
|
Net
cash used in investing activities
|
(2,459
|
)
|
(162,008
|
)
|
(16,821
|
)
|
|||
|
Cash
flow from financing activities:
|
|||||||||
|
Cash
dividends paid:
|
|||||||||
|
Common
stock
|
(452,510
|
)
|
(198,782
|
)
|
(41,682
|
)
|
|||
|
Convertible
perpetual preferred stock
|
(60,500
|
)
|
(35,460
|
)
|
-
|
||||
|
Step-up
convertible preferred stock
|
(1
|
)
|
(10
|
)
|
(24,552
|
)
|
|||
|
Mandatory
redeemable preferred stock
|
-
|
-
|
(9,181
|
)
|
|||||
|
Net
proceeds from sale of senior notes
|
-
|
344,354
|
1,046,437
|
||||||
|
Net
proceeds from sale of convertible perpetual preferred
stock
|
-
|
1,067,000
|
-
|
||||||
|
Repayment
of debt
|
(396,918
|
)
|
(260,299
|
)
|
(931,136
|
)
|
|||
|
Redemption
of step-up convertible preferred stock
|
(215
|
)
|
(1,172
|
)
|
(5,792
|
)
|
|||
|
Repayment
from PT Freeport Indonesia
|
-
|
30,000
|
245,121
|
||||||
|
Repayments
to PT Freeport Indonesia
|
-
|
-
|
(81,500
|
)
|
|||||
|
Purchase
of FCX common shares from Rio Tinto
|
-
|
(881,868
|
)
|
-
|
|||||
|
Purchases
of other FCX common shares
|
(80,227
|
)
|
(99,477
|
)
|
-
|
||||
|
Net
proceeds from exercised stock options
|
5,081
|
3,196
|
68,776
|
||||||
|
Other
|
(22
|
)
|
(1,547
|
)
|
6,258
|
||||
|
Net
cash provided by (used in) financing activities
|
(985,312
|
)
|
(34,065
|
)
|
272,749
|
||||
|
Net
increase (decrease) in cash and cash equivalents
|
47,090
|
(107,579
|
)
|
205,394
|
|||||
|
Cash
at beginning of year
|
98,125
|
205,704
|
310
|
||||||
|
Cash
at end of year
|
$
|
145,215
|
$
|
98,125
|
$
|
205,704
|
|||
|
Interest
paid
|
$
|
126,945
|
$
|
124,903
|
$
|
126,875
|
|||
|
Taxes
paid
|
$
|
117,044
|
$
|
12,681
|
$
|
1,026
|
|||
The
footnotes to the consolidated financial statements of FCX contained in
FCX’s
2005
Annual Report to stockholders incorporated by reference are an integral part
of
these statements.
F-4
FREEPORT-McMoRan
COPPER & GOLD INC.
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
|
Col.
A
|
Col
B
|
Col.
C
|
Col.
D
|
Col.
E
|
||||||||||||
|
Additions
|
||||||||||||||||
|
Balance
at
Beginning
of
Period
|
Charged
to Costs and Expense
|
Charged
to Other Accounts
|
Other
Add
(Deduct)
|
Balance
at End of Period
|
||||||||||||
|
Reserves
and allowances deducted
|
||||||||||||||||
|
from
asset accounts:
|
||||||||||||||||
|
2005
|
||||||||||||||||
|
Materials
and supplies reserves:
|
||||||||||||||||
|
PT
Freeport Indonesia
|
$
|
16,994
|
$
|
6,000
|
$
|
-
|
$
|
(6,416
|
)a
|
$
|
16,578
|
|||||
|
Atlantic
Copper
|
139
|
-
|
-
|
(139
|
)a
|
-
|
||||||||||
|
2004
|
||||||||||||||||
|
Materials
and supplies reserves:
|
||||||||||||||||
|
PT
Freeport Indonesia
|
16,110
|
3,525
|
-
|
(2,641
|
)a
|
16,994
|
||||||||||
|
Atlantic
Copper
|
1,498
|
1,391
|
-
|
(2,750
|
)a
|
139
|
||||||||||
|
2003
|
||||||||||||||||
|
Materials
and supplies reserves:
|
||||||||||||||||
|
PT
Freeport Indonesia
|
15,303
|
6,000
|
-
|
(5,193
|
)a
|
16,110
|
||||||||||
|
Atlantic
Copper
|
520
|
978
|
-
|
-
|
1,498
|
|||||||||||
|
Reclamation
and mine
|
||||||||||||||||
|
shutdown
reserves:
|
||||||||||||||||
|
2005
|
||||||||||||||||
|
PT
Freeport Indonesia
|
22,010
|
2,709
|
1,744
|
-
|
26,463
|
|||||||||||
|
Atlantic
Copper
|
838
|
113
|
(798
|
)
|
153
|
|||||||||||
|
2004
|
||||||||||||||||
|
PT
Freeport Indonesia
|
25,696
|
2,848
|
-
|
(6,534
|
)b
|
22,010
|
||||||||||
|
Atlantic
Copper
|
790
|
212
|
-
|
(164
|
)
|
838
|
||||||||||
|
2003
|
||||||||||||||||
|
PT
Freeport Indonesia
|
29,175
|
2,781
|
605
|
(6,865
|
)c
|
25,696
|
||||||||||
|
Atlantic
Copper
|
-
|
170
|
-
|
620
|
790
|
|||||||||||
|
Reserves
for non-income taxes:
|
||||||||||||||||
|
2005
|
||||||||||||||||
|
PT
Freeport Indonesia
|
17,815
|
4,500
|
-
|
(4,161
|
)d
|
18,154
|
||||||||||
|
Atlantic
Copper
|
1,095
|
-
|
-
|
(146
|
)
|
949
|
||||||||||
|
2004
|
||||||||||||||||
|
PT
Freeport Indonesia
|
17,978
|
3,856
|
-
|
(4,019
|
)d
|
17,815
|
||||||||||
|
Atlantic
Copper
|
1,022
|
-
|
-
|
73
|
1,095
|
|||||||||||
|
2003
|
||||||||||||||||
|
PT
Freeport Indonesia
|
15,306
|
3,286
|
-
|
(614
|
)d
|
17,978
|
||||||||||
|
Atlantic
Copper
|
848
|
-
|
-
|
174
|
1,022
|
|||||||||||
| a. |
Primarily
represents write-offs of obsolete materials and supplies
inventories.
|
| b. |
Represents
impact of changes in reclamation and closure
estimates.
|
| c. |
Includes
$(1.2) million for liabilities settled in 2003, $(4.3) million for
changes
in reclamation and closure estimates and $(1.4) million for cumulative
effect adjustment for adoption of SFAS No. 143, “Accounting for Asset
Retirement Obligations.”
|
| d. |
Represents
amounts paid or adjustments to reserves based on revised
estimates.
|
F-5
|
3.1
|
Amended
and Restated Certificate of Incorporation of Freeport-McMoRan Copper
&
Gold Inc. (FCX). Incorporated by reference to Exhibit 3.1 to the
Quarterly
Report on Form 10-Q of FCX for the quarter ended March 31, 2002 (the
FCX
2002 First Quarter Form 10-Q).
|
|
|
3.2
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation
of FCX.
Incorporated by reference to Exhibit 3.1 to the Quarterly Report
on Form
10-Q of FCX for the quarter ended March 31, 2003 (the FCX 2003 First
Quarter Form 10-Q).
|
|
|
3.3
|
Amended
and Restated By-Laws of FCX as amended, effective January 31, 2006.
Incorporated by reference to Exhibit 3.3 to the Current Report on
Form 8-K
of FCX dated January 31, 2006.
|
|
|
4.1
|
Deposit
Agreement dated as of July 25, 1994, among FCX, Mellon, as Depositary,
and
holders of depositary receipts (Silver-Denominated Depositary Receipts)
evidencing certain Depositary Shares, each of which, in turn, initially
represented 0.025 shares of Silver-Denominated Preferred Stock.
Incorporated by reference to Exhibit 4.7 to the Quarterly Report
on Form
10-Q of FCX for the quarter ended June 30, 2002 (the FCX 2002 Second
Quarter Form 10-Q).
|
|
|
4.2
|
Form
of Silver-Denominated Depositary Receipt. Incorporated by reference
to
Exhibit 4.8 to the FCX 2002 Second Quarter Form 10-Q.
|
|
|
4.3
|
Certificate
of Designations of 5½% Convertible Perpetual Preferred Stock of FCX.
Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K
of FCX dated March 30, 2004 and filed March 31, 2004.
|
|
|
4.4
|
Amended
and Restated Credit Agreement dated as of September 30, 2003, but
effective as of October 2, 2003, among FCX, PT Freeport Indonesia,
the
several financial institutions that are parties thereto, U.S. Bank
Trust
National Association, as PT Freeport Indonesia Trustee, J.P. Morgan
Securities Inc., as Arranger, and JPMorgan Chase Manhattan Bank as
Administrative Agent, Issuing Bank, Security Agent, JAA Security
Agent and
Documentation Agent. Incorporated by reference to Exhibit 4.7 to
the
Quarterly Report on Form 10-Q of FCX for the quarter ended September
30,
2003.
|
|
|
4.5
|
Senior
Indenture dated as of November 15, 1996, from FCX to The Chase Manhattan
Bank, as Trustee. Incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-3 of FCX filed November 5, 2001
(the FCX
November 5, 2001 Form S-3).
|
|
4.6
|
First
Supplemental Indenture dated as of November 18, 1996, from FCX to
The
Chase Manhattan Bank, as Trustee, providing for the issuance of the
Senior
Notes and supplementing the Senior Indenture dated November 15, 1996,
from
FCX to such Trustee, providing for the issuance of the 7.50% Senior
Notes
due 2006 and the 7.20% Senior Notes due 2026. Incorporated by reference
to
Exhibit 4.5 to the FCX November 5, 2001 Form S-3.
|
|
|
4.7
|
Indenture
dated as of January 29, 2003, from FCX to The Bank of New York, as
Trustee, with respect to the 10⅛%
Senior Notes due 2010. Incorporated by reference to Exhibit 4.1 to
the
Current Report on Form 8-K of FCX dated February 6,
2003.
|
|
|
4.8
|
Indenture
dated as of February 11, 2003, from FCX to The Bank of New York,
as
Trustee, with respect to the 7% Convertible Senior Notes due 2011.
Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K
of FCX dated February 11, 2003 and filed February 25,
2003.
|
|
|
4.9
|
Indenture
dated as of February 3, 2004, from FCX to The Bank of New York, as
Trustee, with respect to the 6⅞% Senior Notes due 2014. Incorporated by
reference to Exhibit 4.12 to the Annual Report on Form 10-K of FCX
for the
fiscal year ended December 31, 2003 (the FCX 2003 Form
10-K).
|
E-1
|
|
||
|
4.10
|
Rights
Agreement dated as of May 3, 2000, between FCX and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent. Incorporated by reference to Exhibit
4.26 to the Quarterly Report on Form 10-Q of FCX for the quarter
ended
March 31, 2000.
|
|
|
4.11
|
Amendment
No. 1 to Rights Agreement dated as of February 26, 2002, between
FCX and
Mellon Investor Services. Incorporated by reference to Exhibit 4.16
to the
FCX 2002 First Quarter Form 10-Q.
|
|
|
10.1
|
Contract
of Work dated December 30, 1991, between the Government of the Republic
of
Indonesia and PT Freeport Indonesia. Incorporated by reference to
Exhibit
10.1 to the FCX November 5, 2001 Form S-3.
|
|
|
10.2
|
Contract
of Work dated August 15, 1994, between the Government of the Republic
of
Indonesia and PT Irja Eastern Minerals Corporation. Incorporated
by
reference to Exhibit 10.2 to the FCX November 5, 2001 Form
S-3.
|
|
|
10.3
|
Participation
Agreement dated as of October 11, 1996, between PT Freeport Indonesia
and
P.T. RTZ-CRA Indonesia with respect to a certain contract of work.
Incorporated by reference to Exhibit 10.4 to the FCX November 5,
2001 Form
S-3.
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10.4
|
Agreement
dated as of October 11, 1996, to Amend and Restate Trust Agreement
among
PT Freeport Indonesia, FCX, the RTZ Corporation PLC, P.T. RTZ-CRA
Indonesia, RTZ Indonesian Finance Limited and First Trust of New
York,
National Association, and The Chase Manhattan Bank, as Administrative
Agent, JAA Security Agent and Security Agent. Incorporated by reference
to
Exhibit 10.3 to the Current Report on Form 8-K of FCX dated November
13,
1996 and filed November 15, 1996.
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10.5
|
Concentrate
Purchase and Sales Agreement dated effective December 11, 1996, between
PT
Freeport Indonesia and PT Smelting. Incorporated by reference to
Exhibit
10.3 to the FCX November 5, 2001 Form S-3.
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10.6
|
Second
Amended and Restated Joint Venture and Shareholders’ Agreement dated as of
December 11, 1996, among Mitsubishi Materials Corporation, Nippon
Mining
and Metals Company, Limited and PT Freeport Indonesia. Incorporated
by
reference to Exhibit 10.5 to the FCX November 5, 2001 Form
S-3.
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10.7
|
Settlement
Agreement dated December 17, 2004, between Underwriters Subscribing
to
Certain Policies Reinsuring the Original Policy, Freeport-McMoRan
Insurance Company Limited, FM Services Company (FMS) and FCX. Incorporated
by reference to Exhibit 10.7 to the Annual Report on Form 10-K of
FCX for
the fiscal year ended December 31, 2004 (the FCX 2004 Form
10-K).
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Executive
Compensation Plans and Arrangements (Exhibits 10.8 through
10.55)
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10.8
|
Annual
Incentive Plan of FCX as amended effective February 2, 1999. Incorporated
by reference to Exhibit 10.11 to the Annual Report on Form 10-K of
FCX for
the fiscal year ended December 31, 1998 (the FCX 1998 Form
10-K).
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10.9
|
FCX
Performance Incentive Awards Program as amended effective February
2,
1999. Incorporated by reference to Exhibit 10.13 to the FCX 1998
Form
10-K.
|
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10.10
|
FCX
President’s
Award Program. Incorporated by reference to Exhibit 10.7 to the FCX
November 5, 2001 Form S-3.
|
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10.11
|
FCX
Adjusted Stock Award Plan. Incorporated by reference to Exhibit 10.12
to
the FCX 2003 Form 10-K.
|
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10.12
|
FCX
1995 Stock Option Plan. Incorporated by reference to Exhibit 10.13
to the
FCX 2003 Form 10-K.
|
E-2
|
10.13
|
FCX
1999 Stock Incentive Plan. Incorporated by reference to Exhibit 10.13
to
the Quarterly Report on Form 10-Q of FCX for the quarter ended June
30,
2005 (the FCX 2005 Second Quarter Form 10-Q).
|
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10.14
|
Form
of Notice of Grant of Nonqualified Stock Options under the 1999 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.14 to the
FCX 2005
Second Quarter Form 10-Q.
|
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10.15
|
Form
of Restricted Stock Unit Agreement under the 1999 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.15 to the FCX 2005 Second
Quarter
Form 10-Q.
|
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10.16
|
Form
of Performance-Based Restricted Stock Unit Agreement under the 1999
Stock
Incentive Plan. Incorporated by reference to Exhibit 10.16 to the
FCX 2005
Second Quarter Form 10-Q.
|
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10.17
|
FCX
1999 Long-Term Performance Incentive Plan. Incorporated by reference
to
Exhibit 10.19 to the Annual Report of FCX on Form 10-K for the year
ended
December 31, 1999 (the FCX 1999 Form 10-K).
|
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10.18
|
FCX
Stock Appreciation Rights Plan dated May 2, 2000. Incorporated by
reference to Exhibit 10.20 to the Quarterly Report on Form 10-Q of
FCX for
the quarter ended June 30, 2001 (the FCX 2001 Second Quarter Form
10-Q).
|
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10.19
|
FCX
2003 Stock Incentive Plan. Incorporated by reference to Exhibit 10.19
to
the FCX 2005 Second Quarter Form 10-Q.
|
|
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10.20
|
Form
of Notice of Grant of Nonqualified Stock Options under the 2003 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.20 to the
FCX 2005
Second Quarter Form 10-Q.
|
|
|
10.21
|
Form
of Restricted Stock Unit Agreement under the 2003 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.21 to the FCX 2005 Second
Quarter
Form 10-Q.
|
|
|
10.22
|
Form
of Performance-Based Restricted Stock Unit Agreement under the 2003
Stock
Incentive Plan. Incorporated by reference to Exhibit 10.22 to the
FCX 2005
Second Quarter Form 10-Q.
|
|
|
10.23
|
FCX
1995 Stock Option Plan for Non-Employee Directors. Incorporated by
reference to Exhibit 10.23 to the FCX 2005 Second Quarter Form
10-Q.
|
|
|
10.24
|
FCX
2004 Director Compensation Plan. Incorporated by reference to Exhibit
10.24 to the FCX 2005 Second Quarter Form 10-Q.
|
|
|
10.25
|
FCX
Director Compensation. Incorporated by reference to Exhibit 10.25
to the
FCX 2004 Form 10-K.
|
|
|
10.26
|
FCX
Supplemental Executive Retirement Plan dated February 26, 2004.
Incorporated by reference to Exhibit 10.26 to the FCX 2004 Form
10-K.
|
|
|
10.27
|
Amendment
No. 1 to FCX Supplemental Executive Retirement Plan. Incorporated
by
reference to Exhibit 10.1 to the Current Report on Form 8-K of FCX
dated
May 3, 2005.
|
|
|
10.28
|
FCX
2005 Annual Incentive Plan. Incorporated by reference to Exhibit
10.1 to
the Current Report on Form 8-K of FCX dated May 5,
2005.
|
|
|
10.29
|
Amended
Financial Counseling and Tax Return Preparation and Certification
Program
of FCX. Incorporated by reference to Exhibit 10.18 to the FCX 2003
First
Quarter Form 10-Q.
|
E-3
|
10.30
|
FM
Services Company Performance Incentive Awards Program as amended
effective
February 2, 1999. Incorporated by reference to Exhibit 10.19 to the
FCX
1998 Form 10-K.
|
|
|
10.31
|
Amended
FM Services Company Financial Counseling and Tax Return Preparation
and
Certification Program. Incorporated by reference to Exhibit 10.20
to the
FCX 2003 First Quarter Form 10-Q.
|
|
|
10.32
|
Consulting
Agreement dated as of December 22, 1988, with Kissinger Associates,
Inc.
(Kissinger Associates). Incorporated by reference to Exhibit 10.21
to the
Annual Report on Form 10-K of FCX for the fiscal year ended December
31,
1997 (the FCX 1997 Form 10-K).
|
|
|
10.33
|
Letter
Agreement dated May 1, 1989, with Kent Associates, Inc. (Kent Associates,
predecessor in interest to Kissinger Associates). Incorporated by
reference to Exhibit 10.22 to the FCX 1997 Form 10-K.
|
|
|
10.34
|
Letter
Agreement dated January 27, 1997, among Kissinger Associates, Kent
Associates, FCX, Freeport-McMoRan Inc., and FMS. Incorporated by
reference
to Exhibit 10.26 to the Annual Report on Form 10-K of FCX for the
fiscal
year ended December 31, 2001 (the FCX 2001 Form 10-K).
|
|
|
Supplemental
Consulting Agreement with Kissinger Associates and Kent Associates,
effective as of January 1, 2006.
|
||
|
10.36
|
Agreement
for Consulting Services between FTX and B. M. Rankin, Jr. effective
as of
January 1, 1990 (assigned to FMS as of January 1, 1996). Incorporated
by
reference to Exhibit 10.24 to the FCX 1997 Form 10-K.
|
|
|
10.37
|
Supplemental
Agreement between FMS and B. M. Rankin, Jr. dated December 15, 1997.
Incorporated by reference to Exhibit 10.25 to the FCX 1997 Form
10-K.
|
|
|
Supplemental
Letter Agreement between FMS and B. M. Rankin, Jr., effective as
of
January 1, 2006.
|
||
|
10.39
|
Letter
Agreement effective as of January 7, 1997, between Senator J. Bennett
Johnston, Jr. and FMS. Incorporated by reference to Exhibit 10.31
to the
FCX 2001 Form 10-K.
|
|
|
10.40
|
Supplemental
Letter Agreement dated July 14, 2003, between J. Bennett Johnston,
Jr. and
FMS. Incorporated by reference to Exhibit 10.28 to the Quarterly
Report on
Form 10-Q of FCX for the quarter ended June 30, 2003.
|
|
|
10.41
|
Supplemental
Letter Agreement between FMS and J. Bennett Johnston, Jr., dated
January
18, 2005. Incorporated by reference to Exhibit 10.40 to the FCX 2004
Form
10-K.
|
|
|
Supplemental
Consulting Agreement between FMS and J. Bennett Johnston, Jr., effective
as of January 1, 2006.
|
||
|
10.43
|
Letter
Agreement dated November 1, 1999, between FMS and Gabrielle K. McDonald.
Incorporated by reference to Exhibit 10.33 to the FCX 1999 Form
10-K.
|
|
|
Supplemental
Letter Agreement, between FMS and Gabrielle K. McDonald, effective
as of
January 1, 2006.
|
||
|
10.45
|
Executive
Employment Agreement dated April 30, 2001, between FCX and James
R.
Moffett. Incorporated by reference to Exhibit 10.35 to the FCX 2001
Second
Quarter Form 10-Q.
|
|
|
10.46
|
Executive
Employment Agreement dated April 30, 2001, between FCX and Richard
C.
Adkerson. Incorporated by reference to Exhibit 10.36 to the FCX 2001
Second Quarter Form 10-Q.
|
E-4
|
10.47
|
Change
of Control Agreement dated April 30, 2001, between FCX and James
R.
Moffett. Incorporated by reference to Exhibit 10.37 to the FCX 2001
Second
Quarter Form 10-Q.
|
|
|
10.48
|
Change
of Control Agreement dated April 30, 2001, between FCX and Richard
C.
Adkerson. Incorporated by reference to Exhibit 10.38 to the FCX 2001
Second Quarter Form 10-Q.
|
|
|
10.49
|
First
Amendment to Executive Employment Agreement dated December 10, 2003,
between FCX and James R. Moffett. Incorporated by reference to Exhibit
10.36 to the FCX 2003 Form 10-K.
|
|
|
10.50
|
First
Amendment to Executive Employment Agreement dated December 10, 2003,
between FCX and Richard C. Adkerson. Incorporated by reference to
Exhibit
10.37 to the FCX 2003 Form 10-K.
|
|
|
10.51
|
First
Amendment to Change of Control Agreement dated December 10, 2003,
between
FCX and James R. Moffett. Incorporated by reference to Exhibit 10.38
to
the FCX 2003 Form 10-K.
|
|
|
10.52
|
First
Amendment to Change of Control Agreement dated December 10, 2003,
between
FCX and Richard C. Adkerson. Incorporated by reference to Exhibit
10.39 to
the FCX 2003 Form 10-K.
|
|
|
10.53
|
Change
of Control Agreement dated February 3, 2004, between FCX and Michael
J.
Arnold. Incorporated by reference to Exhibit 10.40 to the FCX 2003
Form
10-K.
|
|
|
10.54
|
Change
of Control Agreement dated February 3, 2004, between FCX and Mark
J.
Johnson. Incorporated by reference to Exhibit 10.41 to the FCX 2003
Form
10-K.
|
|
|
10.55
|
Change
of Control Agreement dated February 3, 2004, between FCX and Kathleen
L.
Quirk. Incorporated by reference to Exhibit 10.42 to the FCX 2003
Form
10-K.
|
|
FCX
Computation of Ratio of Earnings to Fixed Charges.
|
||
|
Those
portions of the 2005 Annual Report to stockholders of FCX that are
incorporated herein by reference.
|
||
|
14.1
|
Ethics
and Business Conduct Policy. Incorporated by reference to Exhibit
14.1 to
the FCX 2003 Form 10-K.
|
|
|
Subsidiaries
of FCX.
|
||
|
Consent
of Ernst & Young LLP.
|
||
|
Consent
of Independent Mining Consultants, Inc.
|
||
|
Certified
resolution of the Board of Directors of FCX authorizing this report
to be
signed on behalf of any officer or director pursuant to a Power of
Attorney.
|
||
|
Powers
of Attorney pursuant to which this report has been signed on behalf
of
certain officers and directors of FCX.
|
||
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d -
14(a).
|
||
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d -
14(a).
|
||
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.
|
||
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C Section
1350.
|
E-5