FCX 2Q06 Form 10Q
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|
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
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|
FORM
10-Q
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|
(Mark
One)
|
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended June 30, 2006
|
OR
|
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from
|
|
To
|
Commission
File Number: 1-9916
|
|
|
|
Freeport-McMoRan
Copper & Gold Inc.
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
74-2480931
|
(State
or other jurisdiction of
|
(IRS
Employer Identification No.)
|
incorporation
or organization)
|
|
|
|
1615
Poydras Street
|
|
New
Orleans, Louisiana
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70112
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
(504)
582-4000
|
(Registrant's
telephone number, including area code)
|
|
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. R
Yes
ÿ
No
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 Exchange Act (Check
one): Large accelerated filer R Accelerated
filer ÿ Non-accelerated
filer ÿ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ÿ
Yes
R
No
On
June
30, 2006, there were issued and outstanding 187,159,910 shares of the
registrant’s Class B Common Stock, par value $0.10 per share.
FREEPORT-McMoRan
COPPER & GOLD INC.
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Page
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3
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48
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48
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E-1
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FREEPORT-McMoRan
COPPER & GOLD INC.
FREEPORT-McMoRan
COPPER & GOLD INC.
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June
30,
|
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December
31,
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|
|
|
2006
|
|
|
2005
|
|
|
|
(In
Thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
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Cash
and cash equivalents
|
|
$
|
357,751
|
|
|
$
|
763,599
|
|
Accounts
receivable
|
|
|
685,275
|
|
|
|
687,969
|
|
Inventories
|
|
|
790,942
|
|
|
|
565,019
|
|
Prepaid
expenses and other
|
|
|
18,534
|
|
|
|
5,795
|
|
Total
current assets
|
|
|
1,852,502
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|
|
|
2,022,382
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Property,
plant, equipment and development costs, net
|
|
|
3,104,806
|
|
|
|
3,088,931
|
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Deferred
mining costs
|
|
|
-
|
|
|
|
285,355
|
|
Other
assets
|
|
|
111,661
|
|
|
|
119,999
|
|
Investment
in PT Smelting
|
|
|
40,570
|
|
|
|
33,539
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|
Total
assets
|
|
$
|
5,109,539
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|
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$
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5,550,206
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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|
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Current
liabilities:
|
|
|
|
|
|
|
|
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Accounts
payable and accrued liabilities
|
|
$
|
581,022
|
|
|
$
|
573,560
|
|
Accrued
income taxes
|
|
|
94,563
|
|
|
|
327,041
|
|
Current
portion of long-term debt and short-term borrowings
|
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89,683
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253,350
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Unearned
customer receipts
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56,900
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|
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57,184
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Accrued
interest payable
|
|
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29,828
|
|
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32,034
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Rio
Tinto share of joint venture cash flows
|
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26,251
|
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125,809
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Total
current liabilities
|
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878,247
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1,368,978
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Long-term
debt, less current portion:
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|
|
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Senior
notes
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612,900
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624,365
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Convertible
senior notes
|
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307,663
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|
|
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323,667
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Equipment
and other loans
|
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47,764
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|
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54,529
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Atlantic
Copper debt
|
|
|
13,841
|
|
|
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37
|
|
Total
long-term debt, less current portion
|
|
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982,168
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1,002,598
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Accrued
postretirement benefits and other liabilities
|
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236,710
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|
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210,259
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Deferred
income taxes
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|
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852,209
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|
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902,386
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Minority
interests
|
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218,849
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222,991
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Stockholders'
equity:
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|
|
|
|
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|
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Convertible
perpetual preferred stock
|
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|
1,100,000
|
|
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|
1,100,000
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Class
B common stock
|
|
|
30,011
|
|
|
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29,696
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Capital
in excess of par value of common stock
|
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2,357,782
|
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2,212,246
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Retained
earnings
|
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1,202,295
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|
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1,086,191
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Accumulated
other comprehensive income
|
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|
199
|
|
|
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10,749
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Common
stock held in treasury
|
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|
(2,748,931
|
)
|
|
|
(2,595,888
|
)
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Total
stockholders’ equity
|
|
|
1,941,356
|
|
|
|
1,842,994
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
5,109,539
|
|
|
$
|
5,550,206
|
|
|
|
|
|
|
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The
accompanying notes are an integral part of these financial
statements.
FREEPORT-McMoRan
COPPER & GOLD INC.
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|
Three
Months Ended
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Six
Months Ended
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|
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|
June
30,
|
|
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June
30,
|
|
|
|
2006
|
|
|
2005
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|
|
2006
|
|
|
2005
|
|
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(In
Thousands, Except Per Share Amounts)
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Revenues
|
$
|
1,426,202
|
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$
|
902,909
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$
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2,512,324
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$
|
1,705,974
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|
Cost
of sales:
|
|
|
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Production
and delivery
|
|
605,607
|
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390,586
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1,083,522
|
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755,592
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Depreciation
and amortization
|
|
43,355
|
|
|
54,159
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|
86,605
|
|
|
111,085
|
|
Total
cost of sales
|
|
648,962
|
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|
444,745
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1,170,127
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866,677
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Exploration
expenses
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2,778
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2,342
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5,354
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4,262
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General
and administrative expenses
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35,135
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25,379
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65,766
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46,993
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Total
costs and expenses
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|
686,875
|
|
|
472,466
|
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1,241,247
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917,932
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|
Operating
income
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|
739,327
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|
430,443
|
|
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1,271,077
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|
788,042
|
|
Equity
in PT Smelting earnings
|
|
2,006
|
|
|
2,562
|
|
|
5,565
|
|
|
5,158
|
|
Interest
expense, net
|
|
(21,024
|
)
|
|
(35,292
|
)
|
|
(43,695
|
)
|
|
(72,840
|
)
|
(Losses)
gains on early extinguishment and
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
of debt
|
|
(267
|
)
|
|
-
|
|
|
(2,240
|
)
|
|
37
|
|
Other
income, net
|
|
14,616
|
|
|
8,143
|
|
|
19,574
|
|
|
16,095
|
|
Income
before income taxes and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
interests
|
|
734,658
|
|
|
405,856
|
|
|
1,250,281
|
|
|
736,492
|
|
Provision
for income taxes
|
|
(310,244
|
)
|
|
(188,684
|
)
|
|
(531,966
|
)
|
|
(352,712
|
)
|
Minority
interests in net income of
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated
subsidiaries
|
|
(42,034
|
)
|
|
(26,800
|
)
|
|
(69,160
|
)
|
|
(47,888
|
)
|
Net
income
|
|
382,380
|
|
|
190,372
|
|
|
649,155
|
|
|
335,892
|
|
Preferred
dividends
|
|
(15,125
|
)
|
|
(15,125
|
)
|
|
(30,250
|
)
|
|
(30,250
|
)
|
Net
income applicable to common stock
|
$
|
367,255
|
|
$
|
175,247
|
|
$
|
618,905
|
|
$
|
305,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$1.95
|
|
|
$0.98
|
|
|
$3.29
|
|
|
$1.71
|
|
Diluted
|
|
$1.74
|
|
|
$0.91
|
|
|
$2.97
|
|
|
$1.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
188,506
|
|
|
178,324
|
|
|
188,211
|
|
|
178,822
|
|
Diluted
|
|
222,111
|
|
|
219,990
|
|
|
221,794
|
|
|
220,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid per share of common stock
|
|
$1.0625
|
|
|
$0.25
|
|
|
$1.875
|
|
|
$1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
FREEPORT-McMoRan
COPPER & GOLD INC.
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
Thousands)
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
649,155
|
|
|
$
|
335,892
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
86,605
|
|
|
|
111,085
|
|
Minority
interests' share of net income
|
|
|
69,160
|
|
|
|
47,888
|
|
Deferred
income taxes
|
|
|
63,295
|
|
|
|
5,327
|
|
Stock-based
compensation
|
|
|
24,824
|
|
|
|
1,826
|
|
Long-term
compensation and postretirement benefits
|
|
|
10,590
|
|
|
|
9,802
|
|
Losses
(gains) on early extinguishment and conversion of debt
|
|
|
2,240
|
|
|
|
(37
|
)
|
Equity
in PT Smelting earnings
|
|
|
(5,565
|
)
|
|
|
(5,158
|
)
|
Increase
in deferred mining costs
|
|
|
-
|
|
|
|
(52,810
|
)
|
(Recognition)
elimination of profit on PT Freeport Indonesia
|
|
|
|
|
|
|
|
|
sales
to PT Smelting
|
|
|
(12,979
|
)
|
|
|
25
|
|
Provision
for inventory obsolescence
|
|
|
3,000
|
|
|
|
3,000
|
|
Other
|
|
|
4,806
|
|
|
|
1,067
|
|
(Increases)
decreases in working capital:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,790
|
)
|
|
|
123,278
|
|
Inventories
|
|
|
(218,373
|
)
|
|
|
25,155
|
|
Prepaid
expenses and other
|
|
|
(2,845
|
)
|
|
|
(2,406
|
)
|
Accounts
payable and accrued liabilities
|
|
|
29,655
|
|
|
|
(8,100
|
)
|
Rio
Tinto share of joint venture cash flows
|
|
|
(99,558
|
)
|
|
|
(334
|
)
|
Accrued
income taxes
|
|
|
(226,292
|
)
|
|
|
25,011
|
|
(Increase)
decrease in working capital
|
|
|
(519,203
|
)
|
|
|
162,604
|
|
Net
cash provided by operating activities
|
|
|
375,928
|
|
|
|
620,511
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
PT
Freeport Indonesia capital expenditures
|
|
|
(104,163
|
)
|
|
|
(53,428
|
)
|
Atlantic
Copper and other capital expenditures
|
|
|
(6,182
|
)
|
|
|
(5,863
|
)
|
Sale
of assets
|
|
|
2,887
|
|
|
|
-
|
|
Investment
in PT Smelting and other
|
|
|
(1,152
|
)
|
|
|
131
|
|
Proceeds
from insurance settlement
|
|
|
-
|
|
|
|
2,016
|
|
Net
cash used in investing activities
|
|
|
(108,610
|
)
|
|
|
(57,144
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
|
53,135
|
|
|
|
65,647
|
|
Repayments
of debt
|
|
|
(223,303
|
)
|
|
|
(235,249
|
)
|
Redemption
of step-up preferred stock
|
|
|
-
|
|
|
|
(215
|
)
|
Purchases
of FCX common shares
|
|
|
(99,783
|
)
|
|
|
(80,227
|
)
|
Cash
dividends paid:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
(352,493
|
)
|
|
|
(179,658
|
)
|
Preferred
stock
|
|
|
(30,250
|
)
|
|
|
(30,251
|
)
|
Minority
interests
|
|
|
(56,802
|
)
|
|
|
(71,425
|
)
|
Net
proceeds from exercised stock options
|
|
|
13,830
|
|
|
|
2,016
|
|
Excess
tax benefit from exercised stock options
|
|
|
22,522
|
|
|
|
-
|
|
Other
|
|
|
(22
|
)
|
|
|
(21
|
)
|
Net
cash used in financing activities
|
|
|
(673,166
|
)
|
|
|
(529,383
|
)
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(405,848
|
)
|
|
|
33,984
|
|
Cash
and cash equivalents at beginning of year
|
|
|
763,599
|
|
|
|
551,450
|
|
Cash
and cash equivalents at end of period
|
|
$
|
357,751
|
|
|
$
|
585,434
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
FREEPORT-McMoRan
COPPER & GOLD INC.
The
accompanying unaudited consolidated financial statements should be read in
conjunction with Freeport-McMoRan Copper & Gold Inc.’s (FCX) consolidated
financial statements and notes contained in its 2005 Annual Report on Form
10-K.
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
periods. All such adjustments are, in the opinion of management, of a normal
recurring nature. Operating results for the six-month period ended June 30,
2006, are not necessarily indicative of the results that may be expected for
the
year ending December 31, 2006. All significant intercompany transactions have
been eliminated. Certain prior year amounts have been reclassified to conform
to
the 2006 presentation. Changes in the accounting principles applied during
2006
are discussed below in Notes 2 and 3.
2.
|
STOCK-BASED
COMPENSATION
|
Accounting
for Stock-Based Compensation.
As of
June 30, 2006, FCX has four stock-based employee compensation plans and two
stock-based director compensation plans. Prior to January 1, 2006, FCX accounted
for options granted under all of its plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations, as permitted by
Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for
Stock-Based Compensation.” APB Opinion No. 25 required compensation cost for
stock options to be recognized based on the difference on the date of grant,
if
any, between the quoted market price of the stock and the amount an employee
must pay to acquire the stock (i.e., the intrinsic value). Because all the
plans
require that the option exercise price be at least the market price on the
date
of grant, FCX recognized no compensation cost on the grant or exercise of its
employees’ options through December 31, 2005. Other awards under the plans did
result in compensation costs being recognized in earnings based on the intrinsic
value on the date of grant for restricted stock units and the intrinsic value
on
the reporting or exercise date for cash-settled stock appreciation rights
(SARs).
Effective
January 1, 2006, FCX adopted the fair value recognition provisions of SFAS
No.
123 (revised 2004), “Share-Based Payment” or “SFAS No. 123R,” using the modified
prospective transition method. Under that transition method, compensation cost
recognized in 2006 includes: (a) compensation costs for all stock option awards
granted to employees prior to, but not yet vested as of January 1, 2006, based
on the grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, and (b) compensation cost for all stock option
awards granted subsequent to January 1, 2006, based on the grant-date fair
value
estimated in accordance with the provisions of SFAS No. 123R. In addition,
other
stock-based awards charged to expense under SFAS No. 123 continue to be charged
to expense under SFAS No. 123R. These include restricted stock units and SARs.
Results for prior periods have not been restated. FCX has elected to recognize
compensation costs for awards that vest over several years on a straight-line
basis over the vesting period. FCX’s stock option awards provide for employees
to receive an additional year of vesting after an employee retires. For awards
granted after January 1, 2006, to retirement-eligible employees, FCX records
one
year of amortization of the awards’ value on the date of grant. Certain
restricted stock units are performance based awards with accelerated vesting
upon retirement. Therefore, in accordance with SFAS No. 123R and consistent
with
prior years’ accounting, FCX recognizes the compensation cost for restricted
stock units granted to retirement-eligible employees in the period during which
the employee performs the service related to the grant. The services are
performed in the calendar year preceding the date of grant. In addition, prior
to adoption of SFAS No. 123R, FCX recognized forfeitures as they occurred in
its
SFAS No. 123 pro forma disclosures. Beginning January 1, 2006, FCX includes
estimated forfeitures in its compensation cost and updates the estimated
forfeiture rate through the final vesting date of the awards.
As
a
result of adopting SFAS No. 123R on January 1, 2006, FCX’s income before income
taxes and minority interests for the three months ended June 30, 2006, was
$6.8
million lower and net income was $4.0 million ($0.02 per basic and diluted
share) lower, and FCX’s income before income taxes and minority interests for
the six months ended June 30, 2006, was $15.9 million lower and net income
was
$9.3
million ($0.05 per basic share and $0.04 per diluted share) lower than if it
had
continued to account for share-based compensation under APB Opinion No.
25.
Prior
to
the adoption of SFAS No. 123R, FCX presented all tax benefits resulting from
the
exercise of stock options as operating cash flows in its Consolidated Statements
of Cash Flows. SFAS No. 123R requires the cash flows generated by tax benefits
resulting from tax deductions in excess of the compensation cost recognized
for
those options (excess tax benefits) to be classified as financing cash flows.
The $22.5 million excess tax benefit classified as a financing cash inflow
in
the Consolidated Statements of Cash Flows for the six months ended June 30,
2006, would have been classified as an operating cash inflow if FCX had not
adopted SFAS No. 123R.
Stock-Based
Compensation Plans.
As
discussed above, FCX currently has six stock-based compensation plans and all
are shareholder approved. As of June 30, 2006, only four of the plans, which
are
discussed below, have awards available for grant.
FCX’s
1999 Stock Incentive Plan (the 1999 Plan) and 2003 Stock Incentive Plan (the
2003 Plan) provide for the issuance of stock options, SARs, restricted stock
units and other stock-based awards. Each plan allows FCX to grant awards for
up
to 8.0 million common shares to eligible participants. In May 2004, FCX’s
shareholders approved the 2004 Director Compensation Plan (the 2004 Plan).
The
2004 Plan authorizes awards of options and restricted stock units for up to
1.0
million shares and the one-time grant of 66,882 SARs. In May 2006, FCX’s
shareholders approved the 2006 Stock Incentive Plan (the 2006 Plan). The 2006
Plan provides for the issuance of stock options, SARs, restricted stock units
and other stock-based awards. The 2006 Plan allows FCX to grant awards for
up to
12.0 million common shares to eligible participants.
Awards
granted under all of the plans generally expire 10 years after the date of
grant
and vest in 25 percent annual increments beginning one year from the date of
grant. The plans provide for employees to receive the following year’s vesting
after retirement and provide for accelerated vesting if there is a change in
control (as defined in the plans). Awards for 12.0 million shares under the
2006
Plan, 0.5 million shares under the 2004 Plan, 1.1 million shares under the
2003
Plan and 0.1 million shares under the 1999 Plan were available for new grants
as
of June 30, 2006.
FCX
also
has a restricted stock program that allows FCX senior executives to elect to
receive restricted stock units under each plan in place of all or part of their
cash incentive compensation. Restricted stock unit grants vest over three years
and are valued on the date of grant at 50 percent above the cash incentive
compensation that the employee elects to replace. Dividends on restricted stock
units accrue and are subject to the awards vesting. Stock option and SAR awards
do not receive dividends.
Stock-Based
Compensation Cost.
Compensation cost charged against earnings for stock-based awards is shown
below
(in thousands). FCX did not capitalize any stock-based compensation costs to
fixed assets during the periods presented.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Stock
options awarded to employees (including directors)
|
|
$
|
6,849
|
|
$
|
526
|
a
|
$
|
15,877
|
|
$
|
1,034
|
a
|
Stock
options awarded to nonemployees
|
|
|
372
|
|
|
268
|
|
|
859
|
|
|
587
|
|
Restricted
stock units in lieu of cash awards
|
|
|
4,351
|
|
|
3,042
|
|
|
6,829
|
|
|
6,063
|
|
Restricted
stock units awarded to directors
|
|
|
870
|
|
|
57
|
|
|
956
|
|
|
99
|
|
Stock
appreciation rights
|
|
|
(327
|
)
|
|
(430
|
)
|
|
952
|
|
|
99
|
|
Total
stock-based compensation costb
|
|
|
12,115
|
|
|
3,463
|
|
|
25,473
|
|
|
7,882
|
|
Tax
benefit
|
|
|
(4,038
|
)
|
|
(918
|
)
|
|
(8,955
|
)
|
|
(2,220
|
)
|
Minority
interest share
|
|
|
(595
|
)
|
|
(136
|
)
|
|
(1,319
|
)
|
|
(330
|
)
|
Impact
on net income
|
|
$
|
7,482
|
|
$
|
2,409
|
|
$
|
15,199
|
|
$
|
5,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Represents
amortization of the intrinsic value of FCX’s Class A stock options that
were converted to Class B stock options in
2002.
|
b. |
Amounts
are before Rio Tinto’s share of joint venture reimbursements for employee
exercises of in-the-money stock options which reduced general and
administrative expenses by $2.6 million in the 2006 quarter, $0.1
million
in the 2005 quarter, $7.1 million in the 2006 six-month period and
$3.0
million in the 2005 six-month
period.
|
The
following table illustrates the effect on net income and earnings per share
for
the three months ended June 30, 2005 and the six months ended June 30, 2005,
if
FCX had applied the fair value recognition provisions of SFAS No. 123 to
stock-based awards granted under FCX’s stock-based compensation plans (in
thousands, except per share amounts):
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June
30, 2005
|
|
|
June
30, 2005
|
|
Net
income applicable to common stock, as reported
|
|
$
|
175,247
|
|
|
$
|
305,642
|
|
Add:
Stock-based employee compensation expense
|
|
|
|
|
|
|
|
|
included
in reported net income for stock option
|
|
|
|
|
|
|
|
|
conversions,
SARs and restricted stock units,
|
|
|
|
|
|
|
|
|
net
of taxes and minority interests
|
|
|
1,898
|
|
|
|
4,457
|
|
Deduct:
Total stock-based employee compensation
|
|
|
|
|
|
|
|
|
expense
determined under fair value-based method
|
|
|
|
|
|
|
|
|
for
all awards, net of taxes and minority interests
|
|
|
(5,339
|
)
|
|
|
(10,754
|
)
|
Pro
forma net income applicable to common stock
|
|
$
|
171,806
|
|
|
$
|
299,345
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.98
|
|
|
$
|
1.71
|
|
Basic
- pro forma
|
|
$
|
0.96
|
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.91
|
|
|
$
|
1.62
|
|
Diluted
- pro forma
|
|
$
|
0.89
|
|
|
$
|
1.56
|
|
|
|
|
|
|
|
|
|
|
For
the
pro forma computations, the values of option grants were calculated on the
dates
of grant using the Black-Scholes-Merton option pricing model and amortized
to
expense on a straight-line basis over the options’ vesting periods. No other
discounts or restrictions related to vesting or the likelihood of vesting of
stock options were applied. The following table summarizes the calculated
average fair values and weighted-average assumptions used to determine the
fair
value of FCX’s stock option grants under SFAS No. 123 during the 2005 periods
presented.
|
Three
Months
|
|
|
Six
Months
|
|
|
Ended
|
|
|
Ended
|
|
|
June
30, 2005
|
|
|
June
30, 2005
|
|
Fair
value per stock option
|
$
|
12.90
|
|
|
$
|
13.97
|
|
Risk-free
interest rate
|
|
3.7
|
%
|
|
|
3.9
|
%
|
Expected
volatility rate
|
|
45
|
%
|
|
|
46
|
%
|
Expected
life of options (in years)
|
|
6
|
|
|
|
6
|
|
Assumed
annual dividend
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Options
and SARs.
A
summary of options outstanding as of June 30, 2006, including 145,871 SARs,
and
changes during the six months ended June 30, 2006 follow:
Table of Contents
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
|
|
|
Weighted
|
|
Remaining
|
|
Intrinsic
|
|
|
Number
of
|
|
Average
|
|
Contractual
|
|
Value
|
|
|
Options
|
|
Option
Price
|
|
Term
(years)
|
|
($000)
|
|
Balance
at January 1
|
7,355,612
|
|
$
|
31.43
|
|
|
|
|
|
|
Granted
|
1,116,250
|
|
|
62.96
|
|
|
|
|
|
|
Exercised
|
(2,545,133
|
)
|
|
26.62
|
|
|
|
|
|
|
Expired/Forfeited
|
(61,574
|
)
|
|
38.99
|
|
|
|
|
|
|
Balance
at June 30
|
5,865,155
|
|
|
39.47
|
|
8.13
|
|
$
|
101,904
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable at June 30
|
567,860
|
|
|
22.10
|
|
7.10
|
|
$
|
18,918
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair
value of each option award is estimated on the date of grant using a
Black-Scholes-Merton option valuation model. The assumptions used to value
stock
option awards during the six months ended June 30, 2006, are noted in the
following table. Expected volatility is based on implied volatilities from
traded options on FCX’s stock and historical volatility of FCX’s stock. FCX uses
historical data to estimate future option exercises, forfeitures and expected
life of the options. When appropriate, separate groups of employees that have
similar historical exercise behavior are considered separately for valuation
purposes. The expected dividend rate is calculated as the annual dividend
(excludes supplemental dividends) at the date of grant divided by the average
stock price for the one-year period preceding the grant date. The risk-free
interest rate is based on Federal Reserve rates in effect for bonds with
maturity dates equal to the expected term of the option at the grant
date.
Expected
volatility
|
|
33.3%-42.2
|
%
|
|
Weighted
average volatility
|
|
37.7
|
%
|
|
Expected
life of options (in years)
|
|
4.0
|
|
|
Expected
dividend rate
|
|
2.9
|
%
|
|
Risk-free
interest rate
|
|
4.4
|
%
|
|
The
grant-date fair value of options granted during the three months ended March
31,
2006, was $17.93 per option and during the three months ended June 30, 2006,
was
$15.25 per option. The total intrinsic value of options exercised during the
three months ended June 30, 2006, was $32.2 million and during the six months
ended June 30, 2006, was $93.8 million. As of June 30, 2006, FCX had $60.9
million of total unrecognized compensation cost related to unvested stock
options expected to be recognized over a weighted average period of 1.3
years.
The
following table includes amounts related to exercises of stock options and
SARs
and vesting of restricted stock units during the periods presented (in millions,
except shares tendered for taxes):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
FCX
shares tendered to pay the exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
and/or
the minimum required taxesa
|
|
451,743
|
|
|
-
|
|
|
809,634
|
|
|
524,907
|
|
Cash
received from stock option exercises
|
$
|
10.1
|
|
$
|
0.5
|
|
$
|
35.3
|
|
$
|
7.7
|
|
Actual
tax benefit realized for the tax deductions
|
|
|
|
|
|
|
|
|
|
|
|
|
from
stock option exercises
|
$
|
10.3
|
|
$
|
0.2
|
|
$
|
29.9
|
|
$
|
6.1
|
|
Amounts
FCX paid for employee taxes related
|
|
|
|
|
|
|
|
|
|
|
|
|
to
stock option exercises
|
$
|
7.5
|
|
$
|
-
|
|
$
|
21.5
|
|
$
|
5.7
|
|
Amounts
FCX paid for exercised SARs
|
$
|
0.2
|
|
$
|
0.1
|
|
$
|
2.0
|
|
$
|
0.1
|
|
a.
|
Under
terms of the related plans, upon exercise of stock options and vesting
of
restricted stock units, employees may tender FCX shares to FCX to
pay the
exercise price and/or the minimum required
taxes.
|
Restricted
Stock Units.
As
discussed above, FCX has a restricted stock program that allows FCX senior
executives to elect to receive restricted stock units in place of all or part
of
their annual cash incentive compensation. The annual cash incentive is a
function of FCX’s consolidated operating cash flows for the preceding year.
These awards of restricted stock units are considered performance-based awards.
To compensate for certain restrictions and the risk of forfeiture, the
restricted stock units are awarded at a 50 percent premium to the market value
on the date of grant. The awards vest ratably over three years and vesting
accelerates upon retirement. For retirement-eligible executives, the fair value
of the restricted stock units is estimated based on projected operating cash
flows for the year and is charged to expense ratably over the year the cash
flows are generated.
FCX
grants restricted stock units to its directors under the 2004 Plan. The
restricted stock units vest over four years and are valued on the date of grant
based on the average high and low price of FCX common stock. The fair value
of
the restricted stock units is amortized over the four-year vesting period or
the
period until the director becomes retirement-eligible, whichever is shorter.
Upon a director’s retirement, all unvested restricted stock units immediately
vest. For retirement-eligible directors, the fair value of restricted stock
units is recognized on the date of grant.
FCX
granted 20,000 restricted stock units in the three months ended June 30, 2006,
20,000 restricted stock units in the three months ended June 30, 2005, 352,677
restricted stock units in the six months ended June 30, 2006 and 143,044
restricted stock units in the six months ended June 30, 2005. A summary of
outstanding unvested restricted stock units as of June 30, 2006, and activity
during the six months ended June 30, 2006 is presented below:
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
|
Number
of
|
|
Remaining
|
|
Intrinsic
|
|
|
Restricted
|
|
Contractual
|
|
Value
|
|
|
Stock
Units
|
|
Term
(years)
|
|
($000)
|
|
Balance
at January 1
|
317,258
|
|
|
|
|
|
|
Granted
|
352,677
|
|
|
|
|
|
|
Vested
|
(139,350
|
)
|
|
|
|
|
|
Forfeited
|
-
|
|
|
|
|
|
|
Balance
at June 30
|
530,585
|
|
2.55
|
|
$
|
29,400
|
|
|
|
|
|
|
|
|
|
The
grant-date fair value of restricted stock units granted during the three months
ended March 31, 2006, was $21.2 million. Because this is a performance-based
award and the requisite service period under SFAS No. 123R is considered to
be
the calendar year prior to the grant date, the entire value of this award on
the
date of grant was charged to expense during the calendar year prior to the
date
of grant.
The
grant-date fair value of restricted stock units granted during the three months
ended June 30, 2006, was $1.1 million. The total intrinsic value of restricted
stock units vesting during the three months ended June 30, 2006, was $0.4
million and during the six months ended June 30, 2006, was $8.7 million. As
of
June 30, 2006, FCX had $1.2 million of total unrecognized compensation cost
related to unvested restricted stock units expected to be recognized over a
weighted average period of 1.3 years.
On
January 1, 2006, FCX adopted Emerging Issues Task Force Issue No. 04-6,
“Accounting for Stripping Costs Incurred during Production in the Mining
Industry” (EITF 04-6), which requires that stripping costs incurred during
production be considered costs of the extracted minerals and included as a
component of inventory to be recognized in cost of sales in the same period
as
the revenue from the sale of inventory. Upon adoption of EITF 04-6, FCX recorded
its deferred mining costs asset ($285.4 million) at December 31, 2005, net
of
taxes, minority interest share and inventory effects ($135.9 million), as a
cumulative effect adjustment to reduce its retained earnings on January 1,
2006.
In addition, stripping costs incurred in 2006 and later periods are now charged
to cost of sales as incurred. As a result of adopting EITF 04-6 on January
1,
2006, FCX’s income before income taxes and minority interests for the three
months ended
June
30,
2006, was $5.9 million lower and net income was $3.2 million ($0.02 per basic
share and $0.01 per diluted share) lower, and FCX’s income before income taxes
and minority interests for the six months ended June 30, 2006, was $38.7 million
lower and net income was $20.6 million ($0.11 per basic share and $0.09 per
diluted share) lower than if it had not adopted EITF 04-6 and continued to
defer
stripping costs. Adoption of the new guidance has no impact on FCX’s cash
flows.
FCX’s
basic net income per share of common stock was calculated by dividing net income
applicable to common stock by the weighted-average number of common shares
outstanding during the year. The following is a reconciliation of net income
and
weighted-average common shares outstanding for purposes of calculating diluted
net income per share (in thousands, except per share amounts):
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income before preferred dividends
|
|
$
|
382,380
|
|
$
|
190,372
|
|
$
|
649,155
|
|
$
|
335,892
|
|
Preferred
dividends
|
|
|
(15,125
|
)
|
|
(15,125
|
)
|
|
(30,250
|
)
|
|
(30,250
|
)
|
Net
income applicable to common stock
|
|
|
367,255
|
|
|
175,247
|
|
|
618,905
|
|
|
305,642
|
|
Plus
income impact of assumed conversion of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5½%
Convertible Perpetual Preferred Stock
|
|
|
15,125
|
|
|
15,125
|
|
|
30,250
|
|
|
30,250
|
|
7%
Convertible Senior Notes
|
|
|
5,070
|
|
|
10,287
|
|
|
10,175
|
|
|
20,609
|
|
Diluted
net income applicable to common stock
|
|
$
|
387,450
|
|
$
|
200,659
|
|
$
|
659,330
|
|
$
|
356,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
188,506
|
|
|
178,324
|
|
|
188,211
|
|
|
178,822
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable upon conversion, exercise or vesting of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5½%
Convertible Perpetual Preferred Stock
|
|
|
22,004
|
|
|
21,152
|
|
|
21,868
|
|
|
21,034
|
|
7%
Convertible Senior Notes
|
|
|
9,995
|
|
|
18,625
|
|
|
10,077
|
|
|
18,625
|
|
Dilutive
stock options
|
|
|
881
|
|
|
1,408
|
|
|
966
|
|
|
1,555
|
|
Restricted
stock
|
|
|
725
|
|
|
481
|
|
|
672
|
|
|
480
|
|
Weighted
average common shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purposes
of calculating diluted net income per share
|
|
|
222,111
|
|
|
219,990
|
|
|
221,794
|
|
|
220,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share of common stock
|
|
$
|
1.74
|
|
$
|
0.91
|
|
$
|
2.97
|
|
$
|
1.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
stock options with exercise prices greater than the average market price of
FCX’s common stock during the period are excluded from the computation of
diluted net income per share of common stock. FCX’s convertible instruments are
also excluded when including the conversion of these instruments increases
reported diluted net income per share. A recap of the excluded amounts follows
(in thousands, except exercise prices):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Weighted
average options
|
1,006
|
|
5,463
|
|
842
|
|
2,732
|
|
Weighted
average exercise price
|
$63.77
|
|
$36.98
|
|
$63.77
|
|
$36.98
|
|
|
|
|
|
|
|
|
|
|
The
components of inventories follow (in thousands):
|
|
|
June
30,
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
PT
Freeport Indonesia:
|
Concentrates
and stockpiles -
|
|
|
|
|
|
|
|
|
Average
cost
|
|
$
|
30,706
|
|
$
|
14,723
|
|
Atlantic
Copper:
|
Concentrates
- First in, first out (FIFO)
|
|
|
245,708
|
|
|
137,740
|
|
|
Work
in process - FIFO
|
|
|
197,892
|
|
|
144,951
|
|
|
Finished
goods - FIFO
|
|
|
4,602
|
|
|
2,975
|
|
Total
product inventories
|
|
|
478,908
|
|
|
300,389
|
|
Total
materials and supplies, net
|
|
|
312,034
|
|
|
264,630
|
|
Total
inventories
|
|
$
|
790,942
|
|
$
|
565,019
|
|
|
|
|
|
|
|
|
|
The
average cost method was used to determine the cost of essentially all materials
and supplies inventory. Materials and supplies inventory is net of obsolescence
reserves totaling $17.2 million at June 30, 2006, and $16.6 million at December
31, 2005.
6.
|
DEBT
AND EQUITY TRANSACTIONS
|
As
of
June 30, 2006, FCX had total outstanding debt of $1.1 billion. Total debt was
reduced by a net $184.1 million during the first six months of 2006, including
$167.4 million for the mandatory redemption of FCX’s Gold-Denominated Preferred
Stock, Series II in February 2006. The mandatory redemption was based on average
gold prices at the time of redemption ($548.92 per ounce) and totaled $236.4
million, resulting in
a
$69.0 million loss recognized in revenues ($36.6 million to net income or $0.17
per share). Other debt reductions during the first six months of 2006
included:
· |
privately
negotiated transactions to induce conversion of $16.0 million of
7%
Convertible Senior Notes due 2011 into 0.5 million shares of FCX
common
stock and
|
· |
purchases
in open-market transactions of $11.5 million of 10⅛% Senior Notes due 2010
for $12.6 million.
|
As
a
result of the induced conversions and open-market transactions, FCX recorded
charges of $2.2 million ($1.5 million to net income, net of related reduction
of
interest expense, or $0.01 per share) in the first six months of 2006. In July
2006, FCX induced conversion of an additional $14.5 million of 7% Convertible
Senior Notes due 2011 into 0.5 million shares of FCX common stock.
In
July
2006, FCX and PT Freeport Indonesia entered into an amended credit agreement
for
a $465 million revolving credit facility compared with its previous $195 million
facility that was scheduled to mature in September 2006. The new facility,
which
can be expanded to up to $500 million with additional lender commitments,
matures in 2009 and no amounts are outstanding under the facility.
On
August
1, 2006, FCX funded the final scheduled annual redemption payment on its
Silver-Denominated Preferred Stock for $25.8 million. The mandatory redemption
will result in a $12.5 million decrease in debt and a reduction of revenues
of
$13.3 million, $7.0 million to net income, in the third quarter of
2006.
Interest
expense excludes capitalized interest of $2.3 million in the second quarter
of
2006, $1.0 million in the second quarter of 2005, $4.1 million in the first
six
months of 2006 and $1.9 million in the first six months of
2005.
Table of Contents
The
components of net periodic pension benefit cost for the three months ended
June
30, 2006 and 2005 follow (in thousands):
|
FCX
|
|
PT
Freeport Indonesia
|
|
Atlantic
Copper
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
$
|
(17
|
)
|
$
|
165
|
|
$
|
958
|
|
$
|
900
|
|
$
|
-
|
|
$
|
-
|
|
Interest
cost
|
|
463
|
|
|
596
|
|
|
1,240
|
|
|
940
|
|
|
1,164
|
|
|
1,239
|
|
Expected
return on plan assets
|
|
39
|
|
|
(234
|
)
|
|
(617
|
)
|
|
(353
|
)
|
|
-
|
|
|
-
|
|
Amortization
of prior service cost
|
|
1,051
|
|
|
1,019
|
|
|
238
|
|
|
225
|
|
|
-
|
|
|
-
|
|
Amortization
of net actuarial loss
|
|
14
|
|
|
-
|
|
|
136
|
|
|
178
|
|
|
230
|
|
|
231
|
|
Net
periodic benefit cost
|
$
|
1,550
|
|
$
|
1,546
|
|
$
|
1,955
|
|
$
|
1,890
|
|
$
|
1,394
|
|
$
|
1,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
components of net periodic pension benefit cost for the six months ended June
30, 2006 and 2005 follow (in thousands):
|
FCX
|
|
PT
Freeport Indonesia
|
|
Atlantic
Copper
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
$
|
92
|
|
$
|
344
|
|
$
|
1,904
|
|
$
|
1,831
|
|
$
|
-
|
|
$
|
-
|
|
Interest
cost
|
|
861
|
|
|
1,114
|
|
|
2,466
|
|
|
1,912
|
|
|
2,278
|
|
|
2,528
|
|
Expected
return on plan assets
|
|
379
|
|
|
(256
|
)
|
|
(1,226
|
)
|
|
(718
|
)
|
|
-
|
|
|
-
|
|
Amortization
of prior service cost
|
|
2,102
|
|
|
1,963
|
|
|
472
|
|
|
457
|
|
|
-
|
|
|
-
|
|
Amortization
of net actuarial loss
|
|
28
|
|
|
-
|
|
|
270
|
|
|
362
|
|
|
451
|
|
|
472
|
|
Net
periodic benefit cost
|
$
|
3,462
|
|
$
|
3,165
|
|
$
|
3,886
|
|
$
|
3,844
|
|
$
|
2,729
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FCX
has
two operating segments: “mining and exploration” and “smelting and refining.”
The mining and exploration segment consists of FCX’s Indonesian activities
including PT Freeport Indonesia’s copper and gold mining operations, PT
Puncakjaya Power’s power-generating operations (after eliminations with PT
Freeport Indonesia) and FCX’s Indonesian exploration activities. The smelting
and refining segment includes Atlantic Copper’s operations in Spain and PT
Freeport Indonesia’s equity investment in PT Smelting in Gresik, Indonesia. The
segment data presented below were prepared on the same basis as FCX’s
consolidated financial statements.
|
|
Mining
and
Exploration
|
|
Smelting
and
Refining
|
|
Eliminations
and
Other
|
|
FCX
Total
|
|
|
|
(In
Thousands)
|
|
Three
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,035,168
|
a
|
$
|
593,134
|
|
$
|
(202,100
|
)
|
$
|
1,426,202
|
|
Production
and delivery
|
|
|
281,308
|
|
|
560,375
|
|
|
(236,076
|
)b
|
|
605,607
|
|
Depreciation
and amortization
|
|
|
33,910
|
|
|
7,410
|
|
|
2,035
|
|
|
43,355
|
|
Exploration
expenses
|
|
|
2,709
|
|
|
-
|
|
|
69
|
|
|
2,778
|
|
General
and administrative expenses
|
|
|
55,689
|
c
|
|
3,529
|
|
|
(24,083
|
)c
|
|
35,135
|
|
Operating
income
|
|
$
|
661,552
|
|
$
|
21,820
|
|
$
|
55,955
|
|
$
|
739,327
|
|
Equity
in PT Smelting earnings
|
|
$
|
-
|
|
$
|
2,006
|
|
$
|
-
|
|
$
|
2,006
|
|
Interest
expense, net
|
|
$
|
1,608
|
|
$
|
4,824
|
|
$
|
14,592
|
|
$
|
21,024
|
|
Provision
for income taxes
|
|
$
|
237,001
|
|
$
|
-
|
|
$
|
73,243
|
|
$
|
310,244
|
|
Capital
expenditures
|
|
$
|
56,392
|
|
$
|
2,669
|
|
$
|
(838
|
)
|
$
|
58,223
|
|
Total
assets
|
|
$
|
3,890,148
|
d
|
$
|
1,035,415
|
e
|
$
|
183,976
|
|
$
|
5,109,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
and
Exploration
|
|
Smelting
and Refining
|
|
Eliminations and
Other
|
|
FCX
Total
|
|
|
|
(In
Thousands)
|
|
Three
months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
678,386
|
a
|
$
|
331,897
|
|
$
|
(107,374
|
)
|
$
|
902,909
|
|
Production
and delivery
|
|
|
223,355
|
|
|
321,909
|
|
|
(154,678
|
)b
|
|
390,586
|
|
Depreciation
and amortization
|
|
|
44,217
|
|
|
7,141
|
|
|
2,801
|
|
|
54,159
|
|
Exploration
expenses
|
|
|
2,272
|
|
|
-
|
|
|
70
|
|
|
2,342
|
|
General
and administrative expenses
|
|
|
18,425
|
c
|
|
2,901
|
|
|
4,053
|
c
|
|
25,379
|
|
Operating
income (loss)
|
|
$
|
390,117
|
|
$
|
(54
|
)
|
$
|
40,380
|
|
$
|
430,443
|
|
Equity
in PT Smelting earnings
|
|
$
|
-
|
|
$
|
2,562
|
|
$
|
-
|
|
$
|
2,562
|
|
Interest
expense, net
|
|
$
|
5,897
|
|
$
|
4,387
|
|
$
|
25,008
|
|
$
|
35,292
|
|
Provision
for income taxes
|
|
$
|
138,007
|
|
$
|
-
|
|
$
|
50,677
|
|
$
|
188,684
|
|
Capital
expenditures
|
|
$
|
29,939
|
|
$
|
3,139
|
|
$
|
(33
|
)
|
$
|
33,045
|
|
Total
assets
|
|
$
|
3,870,969
|
d
|
$
|
717,707
|
e
|
$
|
369,588
|
|
$
|
4,958,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,831,951
|
a
|
$
|
1,109,238
|
|
$
|
(428,865
|
)
|
$
|
2,512,324
|
|
Production
and delivery
|
|
|
567,985
|
|
|
1,051,812
|
|
|
(536,275
|
)b
|
|
1,083,522
|
|
Depreciation
and amortization
|
|
|
67,683
|
|
|
14,816
|
|
|
4,106
|
|
|
86,605
|
|
Exploration
expenses
|
|
|
5,246
|
|
|
-
|
|
|
108
|
|
|
5,354
|
|
General
and administrative expenses
|
|
|
137,995
|
c
|
|
7,304
|
|
|
(79,533
|
)c
|
|
65,766
|
|
Operating
income
|
|
$
|
1,053,042
|
|
$
|
35,306
|
|
$
|
182,729
|
|
$
|
1,271,077
|
|
Equity
in PT Smelting earnings
|
|
$
|
-
|
|
$
|
5,565
|
|
$
|
-
|
|
$
|
5,565
|
|
Interest
expense, net
|
|
$
|
4,881
|
|
$
|
10,271
|
|
$
|
28,543
|
|
$
|
43,695
|
|
Provision
for income taxes
|
|
$
|
381,692
|
|
$
|
-
|
|
$
|
150,274
|
|
$
|
531,966
|
|
Capital
expenditures
|
|
$
|
105,332
|
|
$
|
6,182
|
|
$
|
(1,169
|
)
|
$
|
110,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,365,784
|
a
|
$
|
604,013
|
|
$
|
(263,823
|
)
|
$
|
1,705,974
|
|
Production
and delivery
|
|
|
417,233
|
|
|
585,486
|
|
|
(247,127
|
)
|
|
755,592
|
|
Depreciation
and amortization
|
|
|
91,142
|
|
|
14,230
|
|
|
5,713
|
|
|
111,085
|
|
Exploration
expenses
|
|
|
4,164
|
|
|
-
|
|
|
98
|
|
|
4,262
|
|
General
and administrative expenses
|
|
|
51,607
|
c
|
|
5,905
|
|
|
(10,519
|
)c
|
|
46,993
|
|
Operating
income (loss)
|
|
$
|
801,638
|
|
$
|
(1,608
|
)
|
$
|
(11,988
|
)
|
$
|
788,042
|
|
Equity
in PT Smelting earnings
|
|
$
|
-
|
|
$
|
5,158
|
|
$
|
-
|
|
$
|
5,158
|
|
Interest
expense, net
|
|
$
|
11,624
|
|
$
|
8,192
|
|
$
|
53,024
|
|
$
|
72,840
|
|
Provision
for income taxes
|
|
$
|
283,326
|
|
$
|
-
|
|
$
|
69,386
|
|
$
|
352,712
|
|
Capital
expenditures
|
|
$
|
53,508
|
|
$
|
5,863
|
|
$
|
(80
|
)
|
$
|
59,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Includes
PT Freeport Indonesia’s sales to PT Smelting totaling $325.4 million in
the 2006 quarter, $194.9 million in the 2005 quarter, $607.9 million
in
the 2006 six-month period and $429.0 million in the 2005 six-month
period.
|
b. |
Includes
deferral (recognition) of intercompany profits on 25 percent of PT
Freeport Indonesia’s sales to PT Smelting, for which the final sale to
third parties has not occurred, totaling $7.8 million in the 2006
quarter,
$(2.6) million in the 2005 quarter and $(13.0) million in the 2006
six-month period.
|
c. |
Includes
charges to the mining and exploration segment for the in-the-money
value
of FCX stock option exercises which are eliminated in consolidation
totaling $29.4 million in the 2006 quarter, $0.7 million in the 2005
quarter, $85.5 million in the 2006 six-month period and $17.4 million
in
the 2005 six-month period.
|
d. |
Includes
PT Freeport Indonesia’s trade receivables with PT Smelting totaling $257.6
million at June 30, 2006, and $71.9 million at June 30,
2005.
|
e. |
Includes
PT Freeport Indonesia’s equity investment in PT Smelting totaling $40.6
million at June 30, 2006, and $52.9 million at June 30,
2005.
|
A
summary
of FCX’s comprehensive income is shown below (in thousands).
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income
|
|
$
|
382,380
|
|
$
|
190,372
|
|
$
|
649,155
|
|
$
|
335,892
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized derivatives’ fair value, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$1.4 million for the three months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006,
$0.8 million for the three months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005,
$(0.1) million for the six months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
and $1.0 million for the six months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
(12,846
|
)a
|
|
(1,047
|
)
|
|
(10,805
|
)
|
|
(1,345
|
)
|
Reclass
to earnings, net of taxes of $0.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
the three months ended June 30, 2006, $1.0 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
the six months ended June 30, 2006 and $0.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
the 2005 periods
|
|
|
1,055
|
|
|
(192
|
)
|
|
340
|
|
|
(95
|
)
|
Total
comprehensive income
|
|
$
|
370,589
|
|
$
|
189,133
|
|
$
|
638,690
|
|
$
|
334,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Relates
to unrealized losses on PT Smelting’s hedging contracts to fix a portion
of its revenues through 2007. At June 30, 2006, FCX had $10.9 million
in
accumulated other comprehensive income related to these
contracts.
|
11.
|
RATIO
OF EARNINGS TO FIXED CHARGES
|
The
ratio
of earnings to fixed charges for the first six months of 2006 was 26.5 to 1
compared with 10.7 to 1 for the 2005 period. For this calculation, earnings
consist of income from continuing operations before income taxes, minority
interests and fixed charges. Fixed charges include interest and that portion
of
rent deemed representative of interest.
TO
THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan
COPPER & GOLD INC.
We
have
reviewed the condensed consolidated balance sheet of Freeport-McMoRan Copper
& Gold Inc. and its subsidiaries as of June 30, 2006 and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 2006 and 2005, and the consolidated statements of cash flows
for
the six-month periods ended June 30, 2006 and 2005. These financial statements
are the responsibility of the Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based
on
our review, we are not aware of any material modifications that should be made
to the condensed consolidated financial statements referred to above for them
to
be in conformity with U.S. generally accepted accounting
principles.
We
have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
of
Freeport-McMoRan Copper & Gold Inc. as of December 31, 2005, and the related
consolidated statements of income, stockholder’s equity, and cash flows for the
year then ended (not presented herein), and in our report dated February 24,
2006, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2005, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
ERNST
& YOUNG LLP
New
Orleans, Louisiana
August
1,
2006
OVERVIEW
In
management’s discussion and analysis, “we,” “us” and “our” refer to
Freeport-McMoRan Copper & Gold Inc. (FCX) and its consolidated subsidiaries.
References to “aggregate” amounts mean the total of our share and Rio Tinto
plc’s share as our joint venture partner. You should read this discussion in
conjunction with our financial statements, the related discussion and analysis
of financial condition and results of operations and the discussion of our
“Business and Properties” in our Form 10-K for the year ended December 31, 2005,
filed with the Securities and Exchange Commission. The results of operations
reported and summarized below are not necessarily indicative of future operating
results. References to “Notes” are Notes included in our “Notes to Consolidated
Financial Statements.” Per share amounts are on a diluted basis unless otherwise
noted.
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. Our principal asset is a majority ownership interest in the
Grasberg minerals district, which, based on the latest available data, contains
the largest single copper reserve and the largest single gold reserve of any
mine in the world.
PT
Freeport Indonesia, our principal operating subsidiary, operates under an
agreement, called a Contract of Work, with the Government of Indonesia. The
Contract of Work allows us to conduct exploration, mining and production
activities in a 24,700-acre area called Block A located in Papua, Indonesia.
Under the Contract of Work, PT Freeport Indonesia also conducts exploration
activities (which are currently suspended, but are under review for resumption)
in an approximate 500,000-acre area called Block B in Papua. All of our proven
and probable mineral reserves and current mining operations are located in
Block
A.
We
own
90.64 percent of PT Freeport Indonesia, including 9.36 percent owned through
our
wholly owned subsidiary, PT Indocopper Investama. The Government of Indonesia
owns the remaining 9.36 percent of PT Freeport Indonesia. 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. In response to this request and in view of
the
potential benefits of having additional Indonesian ownership in our project,
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
also
operate through a majority-owned subsidiary, PT Puncakjaya Power (Puncakjaya
Power), and through Atlantic Copper, S.A. (Atlantic Copper) and PT Irja Eastern
Minerals (Eastern Minerals), our other principal wholly owned subsidiaries.
Puncakjaya Power’s sole business is to supply power to PT Freeport Indonesia’s
operations. Atlantic Copper’s operations are in Spain and involve the smelting
and refining of copper concentrates and the marketing of refined copper and
precious metals in slimes. Eastern Minerals conducts mineral exploration
activities (which are currently suspended) in Papua, Indonesia. PT Freeport
Indonesia owns a 25 percent interest in PT Smelting, an Indonesian company
which
operates a copper smelter and refinery in Gresik, Indonesia.
In
1996,
we established joint ventures with Rio Tinto, an international mining company
with headquarters in London, England. One joint venture covers PT Freeport
Indonesia’s mining operations in Block A and gives Rio Tinto, through 2021, a 40
percent interest in certain assets and future production exceeding specified
annual amounts of copper, gold and silver in Block A, and, after 2021, a 40
percent interest in all production from Block A. Operating, nonexpansion capital
and administrative costs are shared proportionately between PT Freeport
Indonesia and Rio Tinto based on the ratio of (a) the incremental revenues
from
production from our expansion completed in 1998 to (b) total revenues from
Block
A, including production from PT Freeport Indonesia’s previously existing
reserves. PT Freeport Indonesia receives 100 percent of the cash flow from
specified annual amounts of copper, gold and silver through 2021, calculated
by
reference to its proven and probable reserves as of December 31, 1994, and
60
percent of all remaining cash flow.
Outlook
PT
Freeport Indonesia’s share of annual sales in 2006 is currently projected to
approximate 1.2 billion pounds of copper and 1.7 million ounces of gold,
compared with previous estimates of 1.3 billion pounds and 1.7 million ounces.
The reduction in estimated copper sales primarily reflects operational issues
experienced in the second quarter and the impact of mine plan revisions to
incorporate geotechnical data. Efforts are under way to improve productivity
of
mining activities, which would increase mining rates and advance timing of
metal
production. At the Grasberg open-pit mine, the sequencing in mining areas with
varying ore grades causes fluctuations in the timing of ore production,
resulting in varying quarterly and annual copper and gold sales. During 2006,
approximately 63 percent of copper and 55 percent of gold sales are expected
in
the second half of the year, including 280.0 million pounds of copper and
320,000 ounces of gold in the third quarter and 475.0 million pounds of copper
and 610,000 ounces of gold in the fourth quarter of 2006. The achievement of
PT
Freeport Indonesia’s sales estimates will be dependent, among other factors, on
the achievement of targeted mining rates, the successful operation of PT
Freeport Indonesia’s production facilities and the impact of weather conditions
at the end of fiscal periods on concentrate loading activities.
Our
mine
plans are based on latest available data and studies, which take into account
factors such as mining and milling rates, ore grades and recoveries, economic
conditions and geologic/geotechnical considerations. We update these plans
to
incorporate new data and conditions, with the objective of operating safely,
managing risks and maximizing economic values. While ongoing analyses may alter
current expectations, we have revised in July 2006 our five-year mine plan
as
follows:
|
|
PT
Freeport Indonesia’s Share of Sales
|
|
|
|
Previous
Estimate
|
|
Current
Estimate
|
|
Year
|
|
Copper
|
|
Gold
|
|
Copper
|
|
Gold
|
|
|
|
(Billion
Lbs.)
|
|
(Million
Ozs.)
|
|
(Billion
Lbs.)
|
|
(Million
Ozs.)
|
|
2006
|
|
1.3
|
|
1.7
|
|
1.2
|
|
1.7
|
|
2007
|
|
1.2
|
|
2.0
|
|
1.1
|
|
1.8
|
|
2008
|
|
1.5
|
|
2.4
|
|
1.4
|
|
1.9
|
|
2009
|
|
1.2
|
|
1.6
|
|
1.2
|
|
1.8
|
|
2010
|
|
1.3
|
|
1.9
|
|
1.3
|
|
2.1
|
|
Total
|
|
6.5
|
|
9.6
|
|
6.2
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
5-Year
Average
|
|
1.3
|
|
1.9
|
|
1.24
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
Percent
Change
|
|
|
|
|
|
(4.6
|
)%
|
(3.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
These
revisions include updated estimates for 2006 and design changes to incorporate
recent geotechnical data, resulting in deferral of production of certain
high-grade ore from 2007 and 2008 into future periods. The revised mine plans
also incorporate an anticipated expansion of the Deep Ore Zone (DOZ) underground
mine to 80,000 metric tons of ore per day. The preliminary economics of this
project appear highly attractive. The mine plan changes affect the timing of
metal production and do not impact ultimate recoverable reserves. PT Freeport
Indonesia’s initiatives to improve productivity and mining rates are an
important factor in the ability to meet or potentially to exceed these
plans.
We
are
also continuing to analyze our longer range mine plans to assess the optimal
design of the Grasberg open pit, which may affect the timing of our development
of the Grasberg underground block cave ore body. Our previous plan included
the
transition from the Grasberg open pit to the Grasberg underground block cave
ore
body in 2015. We expect to complete the current studies on longer range plans
by
year-end 2006.
Sales
volumes may vary from these estimates depending on the areas being mined within
the Grasberg open pit. Quarterly variations in sales volumes are expected to
be
significant. Based on current estimated sales volumes for the remainder of
2006
and copper prices of approximately $3.00 per pound and gold prices of
approximately $600 per ounce, we expect to generate operating cash flows
approximating $1.6
billion
in 2006, with over $1.2 billion in the second half of the year. The impact
on
our projected 2006 cash flows for each $0.10 per pound change in copper prices
in the balance of the year would approximate $38 million, including the effects
of price changes on related royalty costs, and for each $25 per ounce change
in
gold prices in the balance of the year would approximate $12
million.
Copper
and Gold Markets
As
shown
in the graphs below, world metal prices for copper have fluctuated during the
period from 1992 through July 2006 with the London Metal Exchange (LME) spot
copper price varying from a low of approximately $0.60 per pound in 2001 to
a
record high of approximately $3.99 per pound on May 12, 2006, and world gold
prices have fluctuated during the period from 1998 through July 2006 from a
low
of approximately $250 per ounce in 1999 to a high of approximately $726 per
ounce on May 12, 2006. Current copper and gold prices reflect significantly
higher levels of direct investment by commodity investors. This high level
of
activity can be expected to result in higher levels of volatility in copper
and
gold prices and in the share prices of FCX and other commodity producers. Copper
and gold prices are affected by numerous factors beyond our control as described
further in our Form 10-K for the year ended December 31, 2005.
*
Excludes Shanghai stocks, producer, consumer and merchant stocks.
The
graph
above presents LME spot copper prices and reported stocks of copper at the
LME
and New York Commodity Exchange (COMEX) through July 31, 2006. Since 2003 and
through 2005, global demand has exceeded supply, evidenced by the decline in
warehouse inventories. LME and COMEX inventories have risen from the 2005 lows
in recent months but combined stocks of approximately 100,000 metric tons at
June 30, 2006 represent less than two days of global consumption. Copper prices
averaged $3.29 per pound in the second quarter of 2006, with prices ranging
from
$2.52 per pound to a record high of $3.99 per pound. Copper prices have remained
strong in July 2006 and the LME spot price closed at $3.56 per pound on July
31,
2006. Disruptions associated with strikes, unrest and other operational issues
have resulted in a continuation of low levels of inventory. Future copper prices
are expected to continue to be influenced by demand from China, economic
performance in the United States (U.S.) and other industrialized countries,
the
timing of the development of new supplies of copper,
production
levels of mines and copper smelters and the level of direct participation by
investors. We consider the current underlying supply and demand conditions
in
the global copper markets to be positive for our company.
The
environment for gold continues to be positive with gold prices recently reaching
new 25-year highs above $700 per ounce before declining to $600 per ounce.
Gold
prices continue to be supported by increased investment demand for gold, ongoing
geopolitical tensions, a weak U.S. dollar, inflationary pressures, falling
production from older mines, limited development of new mines and actions by
gold producers to reduce hedge positions. Gold prices averaged $628 per ounce
in
the second quarter of 2006, with prices ranging from $567 per ounce to $726
per
ounce. The London gold price closed at $633 per ounce on July 31,
2006.
CONSOLIDATED
RESULTS
Summary
comparative results for the second-quarter and six-month periods follow (in
millions, except per share amounts):
|
Second
Quarter
|
|
Six
Months
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
|
$
|
1,426.2
|
|
$
|
902.9
|
|
$
|
2,512.3
|
|
$
|
1,706.0
|
|
Operating
income
|
|
739.3
|
|
|
430.4
|
|
|
1,271.1
|
|
|
788.0
|
|
Net
income applicable to common stock
|
|
367.3
|
|
|
175.2
|
|
|
618.9
|
|
|
305.6
|
|
Diluted
net income per share of common stock
|
|
1.74
|
|
|
0.91
|
|
|
2.97
|
|
|
1.62
|
|
Consolidated
revenues include PT Freeport Indonesia’s sale of copper concentrates, which also
contain significant quantities of gold and silver, and the sale by Atlantic
Copper of copper anodes, copper cathodes, and gold in anodes and slimes.
Consolidated revenues for the second quarter of 2006 and the first six months
of
2006 were higher than consolidated revenues for the 2005 periods, reflecting
substantially higher copper and gold prices than the 2005 periods, partly offset
by lower PT Freeport Indonesia sales volumes. PT Freeport Indonesia mined lower
grade ore and reported lower production and sales in the second quarter of
2006
and the first six months of 2006, compared with the 2005 periods.
At
June
30, 2006, we had consolidated embedded derivatives on copper sales totaling
185.1 million pounds recorded at an average price of $3.34 per pound. Final
prices on these sales will be established over the next several months pursuant
to terms of sales contracts. We estimate that a five-cent change in the average
price used for these embedded derivatives and realized prices for these sales
would have an approximate $9 million impact on our 2006 consolidated revenues
and an approximate $5 million impact on our 2006 consolidated net
income.
Second-quarter
2006 consolidated revenues included net additions of $146.6 million ($77.7
million to net income or $0.35 per share) primarily for final pricing of
concentrates sold in prior quarters, compared with $12.6 million ($6.7 million
to net income or $0.03 per share) to second-quarter 2005 revenues. Six-month
2006 consolidated revenues included net additions of $137.9 million ($73.1
million to net income or $0.33 per share) compared with $8.7 million ($4.6
million to net income or $0.02 per share) for the six-month 2005 period,
primarily for final pricing of concentrates sold in prior years.
Consolidated
revenues and net income vary significantly with fluctuations in the market
prices of copper and gold, sales volumes and other factors. Based on PT Freeport
Indonesia’s projected share of copper sales for the remainder of 2006 (755.0
million pounds) and assuming an average price of $3.00 per pound of copper,
each
$0.10 per pound change in the average price realized in the balance of the
year
would have an approximate $76 million impact on our annual revenues and an
approximate $38 million impact on our annual net income. A $25 per ounce change
in the average price realized in the balance of the year on PT Freeport
Indonesia’s projected share of gold sales for the remainder of 2006 (930,000
ounces) would have an approximate $23 million impact on our annual revenues
and
an approximate $12 million impact on our annual net income.
We
currently have no copper or gold price protection contracts relating to our
mine
production. We had outstanding gold-denominated and silver-denominated preferred
stock with dividends and redemption amounts determined by commodity prices.
Our
Gold-Denominated Preferred Stock, Series II was redeemed in February 2006,
resulting in a $69.0 million reduction in revenues ($36.6 million to net income
or $0.17 per share), and the final scheduled redemption of our
Silver-Denominated Preferred Stock occurred on August 1, 2006 (see “Capital
Resources and Liquidity - Financing Activities”).
Consolidated
production and delivery costs were higher for the 2006 periods than the 2005
periods. The increases were primarily because of higher costs of concentrate
purchases at Atlantic Copper caused by higher metals prices and higher
production costs at PT Freeport Indonesia primarily caused by the adoption
of
Emerging Issues Task Force Issue No. 04-6, “Accounting for Stripping Costs
Incurred during Production in the Mining Industry” (EITF 04-6). See Note 3 and
“New Accounting Standards.”
Consolidated
depreciation and amortization expense decreased to $43.4 million in the second
quarter of 2006 and $86.6 million in the first six months of 2006, compared
with
$54.2 million in the second quarter of 2005 and $111.1 million in the first
six
months of 2005, primarily because of lower copper sales volumes at PT Freeport
Indonesia during the 2006 periods. Exploration expenses increased to $2.8
million in the second quarter of 2006 and $5.4 million in the first six months
of 2006 from $2.3 million in the second quarter of 2005 and $4.3 million in
the
first six months of 2005 (see “Mining and Exploration - PT Freeport Indonesia
Exploration Activities”). Consolidated general and administrative expenses
increased to $35.1 million in the second quarter of 2006 and $65.8 million
in
the first six months of 2006 from $25.4 million in the second quarter of 2005
and $47.0 million in the first six months of 2005 (see “Other Financial
Results”).
Net
interest expense decreased to $21.0 million in the second quarter of 2006 and
$43.7 million in the first six months of 2006 from $35.3 million in the second
quarter of 2005 and $72.8 million in the first six months of 2005 primarily
because of lower debt levels. In the first six months of 2006, we induced
conversion of $16.0 million of 7% Convertible Senior Notes due 2011 into 0.5
million shares of FCX common stock and purchased in open market transactions
$11.5 million of 10⅛% Senior Notes due 2010 for $12.6 million. As a result of
the induced conversions and open market transactions, we recorded losses on
early extinguishment and conversion of debt totaling $2.2 million ($1.5 million
to net income, net of related reduction of interest expense, or $0.01 per share)
in the first six months of 2006 (see “Capital
Resources
and Liquidity - Financing Activities”). We are continuing to assess
opportunities to repay debt in advance of scheduled maturities.
Other
income includes interest income of $4.8 million in the second quarter of 2006,
$3.3 million in the second quarter of 2005, $11.8 million in the first six
months of 2006 and $7.0 million in the first six months of 2005. Other income
also includes the impact of translating into U.S. dollars Atlantic Copper’s net
euro-denominated liabilities, primarily its retiree pension obligations. Changes
in the U.S. dollar/euro exchange rate require us to adjust the dollar value
of
our net euro-denominated liabilities and record the adjustment in earnings.
The
exchange rate was $1.18 per euro at December 31, 2005, $1.21 per euro at March
31, 2006 and $1.27 per euro at June 30, 2006. Exchange rate effects on our
net
income from euro-denominated liabilities were gains (losses) of $(0.4) million
in the second quarter of 2006, $3.4 million in the second quarter of 2005,
$(1.6) million in the first six months of 2006 and $6.3 million in the first
six
months of 2005. In the second quarter of 2006, Atlantic Copper recorded an
$8.6
million ($8.6 million to net income or $0.04 per share) gain to other income
for
the disposition of land in a transaction with the local Spanish government.
In
the transaction, the provincial government granted Atlantic Copper development
rights estimated to be worth $8.6 million in exchange for property owned by
Atlantic Copper. Atlantic Copper expects to sell these development rights and
certain non-operating properties in the third quarter of 2006 for an amount
in
excess of its book value.
PT
Freeport Indonesia’s Contract of Work provides for a 35 percent corporate income
tax rate. PT Indocopper Investama pays a 30 percent corporate income tax on
dividends it receives from its 9.36 percent ownership in PT Freeport Indonesia.
In addition, the tax treaty between Indonesia and the U.S. provides for a
withholding tax rate of 10 percent on dividends and interest that PT Freeport
Indonesia and PT Indocopper Investama pay to their parent company, FCX. We
currently record no income taxes at Atlantic Copper, which is subject to
taxation in Spain, because it has not generated significant taxable income
in
recent years and has substantial tax loss carryforwards for which we have
provided no net financial statement benefit. We receive no consolidated tax
benefit from these losses because they cannot be used to offset PT Freeport
Indonesia’s profits in Indonesia, but can be utilized to offset Atlantic
Copper’s future profits.
Parent
company costs consist primarily of interest, depreciation and amortization,
and
general and administrative expenses. We receive minimal, if any, tax benefit
from these costs, including interest expense, primarily because our parent
company normally generates no taxable income from U.S. sources. As a result,
our
provision for income taxes as a percentage of our consolidated income before
income taxes and minority interests will vary as PT Freeport Indonesia’s income
changes, absent changes in Atlantic Copper and parent company costs. Summaries
of the approximate significant components of the calculation of our consolidated
provision for income taxes are shown below (in thousands, except
percentages).
Table of
Contents
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Mining
and exploration segment operating incomea
|
$
|
690,977
|
|
$
|
390,780
|
|
$
|
1,138,504
|
|
$
|
819,087
|
|
Mining
and exploration segment interest expense, net
|
|
(1,608
|
)
|
|
(5,897
|
)
|
|
(4,881
|
)
|
|
(11,624
|
)
|
Intercompany
operating profit recognized (deferred)
|
|
34,208
|
|
|
48,350
|
|
|
108,419
|
|
|
(15,220
|
)
|
Income
before taxes
|
|
723,577
|
|
|
433,233
|
|
|
1,242,042
|
|
|
792,243
|
|
Indonesian
corporate income tax rate
|
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
Corporate
income taxes
|
|
253,252
|
|
|
151,632
|
|
|
434,715
|
|
|
277,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
PT Freeport Indonesia net income
|
|
470,325
|
|
|
281,601
|
|
|
807,327
|
|
|
514,958
|
|
Withholding
tax on FCX’s equity share
|
|
9.064
|
%
|
|
9.064
|
%
|
|
9.064
|
%
|
|
9.064
|
%
|
Withholding
taxes
|
|
42,630
|
|
|
25,524
|
|
|
73,176
|
|
|
46,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PT
Indocopper Investama corporate income tax
|
|
11,247
|
|
|
6,957
|
|
|
16,870
|
|
|
21,081
|
|
Other,
net
|
|
3,115
|
|
|
4,571
|
|
|
7,205
|
|
|
7,670
|
|
FCX
consolidated provision for income taxes
|
$
|
310,244
|
|
$
|
188,684
|
|
$
|
531,966
|
|
$
|
352,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FCX
consolidated effective tax rate
|
|
42
|
%
|
|
46
|
%
|
|
43
|
%
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Excludes
charges for the in-the-money value of FCX stock option exercises,
which
are eliminated in consolidation, totaling $29.4 million for the 2006
quarter, $0.7 million for the 2005 quarter, $85.5 million for the
2006
six-month period and $17.4 million for the 2005 six-month
period.
|
RESULTS
OF OPERATIONS
We
have
two operating segments: “mining and exploration” and “smelting and refining.”
The mining and exploration segment consists of our Indonesian activities
including PT Freeport Indonesia’s copper and gold mining operations, Puncakjaya
Power’s power generating operations (after eliminations with PT Freeport
Indonesia) and our Indonesian exploration activities, including those of Eastern
Minerals. The smelting and refining segment includes Atlantic Copper’s
operations in Spain and PT Freeport Indonesia’s equity investment in PT
Smelting. Summary comparative operating income (loss) data by segment follow
(in
millions):
|
Second
Quarter
|
|
Six
Months
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Mining
and explorationa
|
$
|
661.5
|
|
$
|
390.1
|
|
$
|
1,053.0
|
|
$
|
801.6
|
|
Smelting
and refining
|
|
21.8
|
|
|
(0.1
|
)
|
|
35.3
|
|
|
(1.6
|
)
|
Intercompany
eliminations and othera,
b
|
|
56.0
|
|
|
40.4
|
|
|
182.8
|
|
|
(12.0
|
)
|
FCX
operating income
|
$
|
739.3
|
|
$
|
430.4
|
|
$
|
1,271.1
|
|
$
|
788.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Includes
charges to the mining and exploration segment for the in-the-money
value
of FCX stock option exercises, which are eliminated in consolidation,
totaling $29.4 million in the 2006 quarter, $0.7 million in the 2005
quarter, $85.5 million for the 2006 six-month period and $17.4 million
for
the 2005 six-month period.
|
b. |
We
defer recognizing profits on PT Freeport Indonesia’s sales to Atlantic
Copper and on 25 percent of PT Freeport Indonesia’s sales to PT Smelting
until their sales of final products to third parties. Changes in
the
amount of these deferred profits impacted operating income by $34.2
million in the second quarter of 2006, $48.3 million in the second
quarter
of 2005, $108.4 million in the first six months of 2006 and $(15.2)
million in the first six months of 2005. Our consolidated earnings
can
fluctuate materially depending on the timing and prices of these
sales. At
June 30, 2006, our deferred profits to be recognized in future periods’
operating income totaled $114.2 million, $60.5 million to net income,
after taxes and minority interest
sharing.
|
MINING
AND EXPLORATION
PT
Freeport Indonesia Operating Results
|
|
|
Second
Quarter
|
|
Six
Months
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
PT
Freeport Indonesia Operating Data, Net of Rio Tinto’s
Interest
|
|
|
|
|
|
|
Copper
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
Production
(000s of pounds)
|
|
|
237,100
|
|
302,300
|
|
458,400
|
|
637,900
|
|
Production
(metric tons)
|
|
|
107,500
|
|
137,100
|
|
207,900
|
|
289,300
|
|
Sales
(000s of pounds)
|
|
|
220,100
|
|
313,700
|
|
445,300
|
|
641,800
|
|
Sales
(metric tons)
|
|
|
99,900
|
|
142,300
|
|
202,000
|
|
291,100
|
|
Average
realized price per pound
|
|
|
$3.33
|
|
$1.53
|
|
$3.27
|
|
$1.54
|
|
Gold
(recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
307,300
|
|
591,300
|
|
769,100
|
|
1,200,700
|
|
Sales
|
|
|
278,000
|
|
616,400
|
|
750,500
|
|
1,211,700
|
|
Average
realized price per ounce
|
|
|
$613.77
|
|
$428.23
|
|
$492.73
|
a
|
$427.54
|
|
|
|
|
|
|
|
|
|
|
|
|
PT
Freeport Indonesia, 100% Aggregate Operating Data
|
|
|
|
|
|
|
|
|
Ore
milled (metric tons per day)
|
|
|
223,700
|
|
211,800
|
|
220,200
|
|
205,600
|
|
Average
ore grade
|
|
|
|
|
|
|
|
|
|
|
Copper
(percent)
|
|
|
0.72
|
|
0.98
|
|
0.72
|
|
1.06
|
|
Gold
(grams per metric ton)
|
|
|
0.67
|
|
1.43
|
|
0.79
|
|
1.52
|
|
Recovery
rates (percent)
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
|
84.1
|
|
87.4
|
|
83.3
|
|
88.5
|
|
Gold
|
|
|
76.4
|
|
83.8
|
|
78.8
|
|
83.3
|
|
Copper
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
Production
(000s of pounds)
|
|
|
258,800
|
|
349,200
|
|
505,400
|
|
739,500
|
|
Production
(metric tons)
|
|
|
117,300
|
|
158,400
|
|
229,200
|
|
335,400
|
|
Sales
(000s of pounds)
|
|
|
239,900
|
|
362,500
|
|
491,200
|
|
743,900
|
|
Sales
(metric tons)
|
|
|
108,800
|
|
164,400
|
|
222,800
|
|
337,400
|
|
Gold
(recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
325,700
|
|
727,400
|
|
796,400
|
|
1,491,300
|
|
Sales
|
|
|
293,800
|
|
758,600
|
|
780,100
|
|
1,501,800
|
|
a.
|
Amount
was $585.34 before a loss resulting from redemption of FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
PT
Freeport Indonesia mined lower grade ore and reported lower production and
sales
in the second quarter of 2006 and the first six months of 2006, compared with
the 2005 periods. PT Freeport Indonesia’s share of second-quarter 2006
production totaled 237.1 million pounds of copper and 307,300 ounces of gold.
PT
Freeport Indonesia experienced weather-related shipping delays at the end of
June, resulting in PT Freeport Indonesia’s share of second-quarter 2006 copper
sales of 220.1 million pounds being lower than the previous estimate of 235.0
million pounds announced on June 5, 2006. PT Freeport Indonesia’s share of
second-quarter 2006 gold sales of 278,000 ounces slightly exceeded the previous
estimate of 275,000 ounces. In May 2006, PT Freeport Indonesia encountered
a
relatively small section of ore in the “6 North” pushback with abnormally high
clay content, which adversely affected ore flow, mill recoveries and concentrate
grades. Operations improved during June as PT Freeport Indonesia gained access
to better ore types. For the six-month periods, copper and gold sales volumes
totaled 445.3 million pounds of copper and 750,500 ounces of gold in 2006,
compared with sales of 641.8 million pounds of copper and 1,211,700 ounces
of
gold in 2005.
Mill
throughput, which varies depending on ore types being processed, averaged
223,700 metric tons of ore per day in the second quarter of 2006, 211,800 metric
tons in the second quarter of 2005, 220,200 metric tons in the first six months
of 2006 and 205,600 metric tons in the first six months of 2005. Mill rates
are
expected to average over 220,000 metric tons per day during the second half
of
2006. Operations were temporarily suspended for an approximate four-day period
in February 2006 when illegal miners (“gold panners”) blocked a road leading to
our mill. While this situation was resolved peacefully by Indonesian government
authorities, we continue to work with the government to resolve the legal and
security concerns presented by the increased presence of gold panners in our
area of operations. Approximate average daily throughput processed at our mill
facilities from each of our producing mines follows (metric tons of ore per
day):
|
Second
Quarter
|
|
Six
Months
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Grasberg
open pit
|
176,500
|
|
169,500
|
|
174,700
|
|
163,400
|
|
Deep
Ore Zone underground mine
|
47,200
|
|
42,300
|
|
45,500
|
|
42,200
|
|
Total
mill throughput
|
223,700
|
|
211,800
|
|
220,200
|
|
205,600
|
|
|
|
|
|
|
|
|
|
|
In
the
second quarter of 2006, copper ore grades averaged 0.72 percent and recovery
rates averaged 84.1 percent, compared with 0.98 percent and 87.4 percent for
the
second quarter of 2005. Gold ore grades averaged 0.67 grams per metric ton
(g/t)
and recovery rates averaged 76.4 percent in the second quarter of 2006, compared
with 1.43 g/t and 83.8 percent for the second quarter of 2005. The 2006 ore
grades and recoveries for copper and gold reflect the mining of lower grade
material compared with the extraordinarily high grades mined in 2005 and
abnormally high clay content associated with mining a relatively small section
of ore in the “6 North” pushback. Average ore grades are expected to improve in
the second half of 2006 with the highest grades expected to be mined in the
fourth quarter.
Production
from the DOZ underground mine averaged 47,200 metric tons of ore per day in
the
second quarter of 2006, representing 21 percent of mill throughput. DOZ
continues to perform above design capacity of 35,000 metric tons of ore per
day.
PT Freeport Indonesia is expanding the capacity of the DOZ underground operation
to a sustained rate of 50,000 metric tons of ore per day with the installation
of a second crusher and additional ventilation, expected to be completed by
mid-2007. PT Freeport Indonesia’s share of capital expenditures for the DOZ
expansion totaled approximately $8 million in the first six months of 2006
(approximately $27 million incurred through June 30, 2006) and is expected
to
approximate $37 million through the projected 2007 ramp-up, with approximately
$16 million estimated for 2006. PT Freeport Indonesia is completing plans that
are anticipated to expand the capacity of the DOZ mine to 80,000 metric tons
of
ore per day. The DOZ mine, a block cave operation, is one of the world’s largest
underground mines.
In
2004,
PT Freeport Indonesia commenced its “Common Infrastructure” project, which will
provide access to its large undeveloped underground ore bodies located in the
Grasberg minerals district through a tunnel system located approximately 400
meters deeper than its existing underground tunnel system. In addition to
providing access to our underground ore bodies, the tunnel system will enable
PT
Freeport Indonesia to conduct future exploration in prospective areas associated
with currently identified ore bodies. PT Freeport Indonesia’s share of capital
expenditures for its Common Infrastructure project totaled approximately $7
million in the first six months of 2006 and is estimated to total approximately
$8 million in 2006. The Common Infrastructure project is progressing according
to plan. Work on the Grasberg underground ore body has begun with PT Freeport
Indonesia’s share of capital expenditures totaling approximately $3 million in
the first six months of 2006. Projected 2006 capital expenditures for the
Grasberg underground ore body approximate $23 million.
PT
Freeport Indonesia is also proceeding with plans to develop Big Gossan, a
high-grade deposit located near the existing milling complex. Our Board of
Directors has approved this project and aggregate capital expenditures from
2005
to 2009 for Big Gossan are expected to total approximately $225 million ($195
million net to PT Freeport Indonesia, with approximately $50 million in 2006).
PT Freeport Indonesia’s share of capital expenditures for Big Gossan totaled
approximately $29 million in the first six months of 2006. Production is
expected to ramp up to 7,000 metric tons per day by 2010 (average annual
aggregate
incremental
production of 135 million pounds of copper and 65,000 ounces of gold, with
PT
Freeport Indonesia receiving 60 percent of these amounts). The Big Gossan mine
is being developed as an open-stope mine with cemented backfill, an established
mining methodology expected to be higher-cost than the block-cave method used
at
the DOZ mine.
PT
Freeport Indonesia Revenues
A
summary
of changes in PT Freeport Indonesia revenues between the periods follows (in
millions):
|
Second
|
|
Six
|
|
|
Quarter
|
|
Months
|
|
PT
Freeport Indonesia revenues - prior year period
|
$
|
678.4
|
|
$
|
1,365.8
|
|
Price
realizations:
|
|
|
|
|
|
|
Copper
|
|
395.7
|
|
|
767.3
|
|
Gold
|
|
51.6
|
|
|
48.9
|
|
Sales
volumes:
|
|
|
|
|
|
|
Copper
|
|
(143.6
|
)
|
|
(303.0
|
)
|
Gold
|
|
(144.9
|
)
|
|
(197.2
|
)
|
Adjustments,
primarily for copper pricing on prior year open sales
|
|
237.2
|
|
|
196.2
|
|
Treatment
charges, royalties and other
|
|
(39.2
|
)
|
|
(46.0
|
)
|
PT
Freeport Indonesia revenues - current year period
|
$
|
1,035.2
|
|
$
|
1,832.0
|
|
|
|
|
|
|
|
|
Realized
copper prices more than doubled to an average of $3.33 per pound in the second
quarter of 2006 from $1.53 in the second quarter of 2005. Realized gold prices
improved by 43 percent to an average of $613.77 per ounce from $428.23 in the
second quarter of 2005. Realized copper prices also more than doubled to an
average of $3.27 per pound in the first six months of 2006 from $1.54 in the
2005 period. Realized gold prices in the first six months of 2006 averaged
$492.73 per ounce; including a reduction of $92.61 per ounce for revenue
adjustments associated with the first-quarter 2006 redemption of our
Gold-Denominated Preferred Stock, Series II; compared to $427.54 in the first
six months of 2005.
As
discussed above, PT Freeport Indonesia’s share of second-quarter 2006 copper
sales of 220.1 million pounds and gold sales of 278,000 ounces were lower than
second-quarter 2005 sales of 313.7 million pounds of copper and 616,400 ounces
of gold. For the six-month periods, copper and gold sales volumes totaled 445.3
million pounds of copper and 750,500 ounces of gold in 2006, compared with
sales
of 641.8 million pounds of copper and 1,211,700 ounces of gold in
2005.
Treatment
charges vary with the volume of metals sold and the price of copper, and
royalties vary with the volume of metals sold and the prices of copper and
gold.
Market rates for treatment and refining charge rates began to increase
significantly in late 2004. A large part of the increase relates to the price
participation component of our concentrate sales agreements. Royalties totaled
$22.9 million in the second quarter of 2006 and $42.9 million in the first
six
months of 2006 compared with $17.7 million in the second quarter of 2005 and
$36.5 million in the first six months of 2005, reflecting higher metal prices
partly offset by lower sales volumes.
Substantially
all of PT Freeport Indonesia’s concentrate sales contracts provide final copper
pricing in a specified future period based on prices quoted on the LME. PT
Freeport Indonesia records revenues and invoices its customers based on LME
prices at the time of shipment. Under accounting rules, these terms create
an
“embedded derivative” in our concentrate sales contracts which must be adjusted
to fair value through earnings each period until the date of final copper
pricing. PT Freeport Indonesia’s second-quarter 2006 revenues include net
additions of $269.2 million for adjustments to the fair value of embedded copper
derivatives in concentrate sales contracts, compared with $11.5 million in
the
second quarter of 2005. PT Freeport Indonesia’s six-month 2006 revenues included
net additions of $452.1 million for adjustments to the fair value of embedded
derivatives in concentrate sales contracts, compared with $37.2 million in
the
2005 period.
PT
Freeport Indonesia has long-term contracts to provide approximately 60 percent
of Atlantic Copper’s copper concentrate requirements at market prices and nearly
all of PT Smelting’s copper concentrate requirements. Under the PT Smelting
contract, for the first 15 years of PT Smelting’s operations beginning December
1998, the treatment and refining charges on the majority of the concentrate
PT
Freeport Indonesia provides 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 2004, when it
declined to a minimum of $0.21 per pound. PT Smelting’s rates for 2006 are
expected to exceed the minimum $0.21 per pound (see “Smelting and Refining”).
Current rates are substantially higher than the minimum rate.
PT
Freeport Indonesia Costs
Gross
Profit per Pound of Copper/per Ounce of Gold and Silver
|
|
|
|
Three
Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of copper sold (000s)
|
|
220,100
|
|
|
220,100
|
|
|
|
|
|
|
|
Ounces
of gold sold
|
|
|
|
|
|
|
|
278,000
|
|
|
|
|
Ounces
of silver sold
|
|
|
|
|
|
|
|
|
|
|
835,200
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
|
$3.33
|
|
|
$3.33
|
|
|
$613.77
|
|
|
$11.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net non-
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
and nonrecurring costs shown below
|
|
1.23
|
|
|
0.98
|
|
|
184.56
|
|
|
3.76
|
|
Gold
and silver credits
|
|
(0.85
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.49
|
a
|
|
0.39
|
b
|
|
73.03
|
b
|
|
1.49
|
b
|
Royalty
on metals
|
|
0.11
|
|
|
0.09
|
|
|
15.62
|
|
|
0.32
|
|
Unit
net cash costsc
|
|
0.98
|
|
|
1.46
|
|
|
273.21
|
|
|
5.57
|
|
Depreciation
and amortization
|
|
0.15
|
|
|
0.12
|
|
|
23.10
|
|
|
0.47
|
|
Noncash
and nonrecurring costs, net
|
|
0.05
|
|
|
0.04
|
|
|
7.09
|
|
|
0.14
|
|
Total
unit costs
|
|
1.18
|
|
|
1.62
|
|
|
303.40
|
|
|
6.18
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
1.12
|
|
|
1.12
|
|
|
18.47
|
|
|
1.14
|
|
PT
Smelting intercompany profit elimination
|
|
(0.03
|
)
|
|
(0.03
|
)
|
|
(5.35
|
)
|
|
(0.11
|
)
|
Gross
profit per pound/ounce
|
|
$3.24
|
|
|
$2.80
|
|
|
$323.49
|
|
|
$6.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Includes
$14.4 million or $0.07 per pound for adjustments to prior quarters’
concentrate sales subject to final pricing to reflect the impact
on
treatment charges resulting from the increase in copper prices since
March
31, 2006.
|
b. |
Includes
$11.5 million or $0.05 per pound for copper, $2.7 million or $9.84
per
ounce for gold and $0.2 million or $0.20 per ounce for silver for
adjustments to prior quarters’ concentrate sales subject to final pricing
to reflect the impact on treatment charges resulting from the increase
in
copper prices since March 31, 2006.
|
c. |
For
a reconciliation of unit net cash costs to production and delivery
costs
applicable to sales reported in FCX’s consolidated financial statements
refer to “Product Revenues and Production
Costs.”
|
Table of Contents
Three
Months Ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of copper sold (000s)
|
|
313,700
|
|
|
313,700
|
|
|
|
|
|
|
|
Ounces
of gold sold
|
|
|
|
|
|
|
|
616,400
|
|
|
|
|
Ounces
of silver sold
|
|
|
|
|
|
|
|
|
|
|
1,057,700
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
|
$1.53
|
|
|
$1.53
|
|
|
$428.23
|
|
|
$7.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net non-
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
and nonrecurring costs shown below
|
|
0.71
|
a
|
|
0.45
|
b
|
|
126.01
|
b
|
|
2.06
|
b
|
Gold
and silver credits
|
|
(0.87
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.21
|
|
|
0.14
|
|
|
38.68
|
|
|
0.63
|
|
Royalty
on metals
|
|
0.06
|
|
|
0.03
|
|
|
10.11
|
|
|
0.17
|
|
Unit
net cash costsc
|
|
0.11
|
|
|
0.62
|
|
|
174.80
|
|
|
2.86
|
|
Depreciation
and amortization
|
|
0.14
|
|
|
0.09
|
|
|
25.20
|
|
|
0.41
|
|
Noncash
and nonrecurring costs, net
|
|
0.01
|
|
|
0.01
|
|
|
1.30
|
|
|
0.02
|
|
Total
unit costs
|
|
0.26
|
|
|
0.72
|
|
|
201.30
|
|
|
3.29
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
0.04
|
|
|
0.04
|
|
|
0.12
|
|
|
(0.03
|
)
|
PT
Smelting intercompany profit recognized
|
|
0.01
|
|
|
0.01
|
|
|
1.45
|
|
|
0.02
|
|
Gross
profit per pound/ounce
|
|
$1.32
|
|
|
$0.86
|
|
|
$228.50
|
|
|
$3.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Net
of deferred mining costs totaling $20.6 million or $0.07 per pound.
Following adoption of EITF 04-6 on January 1, 2006 (see Note 3 and
“New
Accounting Standards”), stripping costs are no longer
deferred.
|
b.
|
Net
of deferred mining costs totaling $13.2 million or $0.04 per pound
for
copper, $7.2 million or $11.74 per ounce for gold and $0.2 million
or
$0.19 per ounce for silver (see Note a
above).
|
Six
Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of copper sold (000s)
|
|
445,300
|
|
|
445,300
|
|
|
|
|
|
|
|
Ounces
of gold sold
|
|
|
|
|
|
|
|
750,500
|
|
|
|
|
Ounces
of silver sold
|
|
|
|
|
|
|
|
|
|
|
1,542,300
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
|
$3.27
|
|
|
$3.27
|
|
|
$492.73
|
a
|
|
$11.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net non-
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
and nonrecurring costs shown below
|
|
1.23
|
|
|
0.93
|
|
|
172.18
|
|
|
3.38
|
|
Gold
and silver credits
|
|
(1.07
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.43
|
b
|
|
0.32
|
c
|
|
60.19
|
c
|
|
1.18
|
c
|
Royalty
on metals
|
|
0.09
|
|
|
0.07
|
|
|
13.52
|
|
|
0.27
|
|
Unit
net cash costsd
|
|
0.68
|
|
|
1.32
|
|
|
245.89
|
|
|
4.83
|
|
Depreciation
and amortization
|
|
0.15
|
|
|
0.11
|
|
|
21.35
|
|
|
0.42
|
|
Noncash
and nonrecurring costs, net
|
|
0.05
|
|
|
0.04
|
|
|
6.96
|
|
|
0.14
|
|
Total
unit costs
|
|
0.88
|
|
|
1.47
|
|
|
274.20
|
|
|
5.39
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
0.30
|
e
|
|
0.45
|
|
|
26.40
|
|
|
0.82
|
|
PT
Smelting intercompany profit recognized
|
|
0.03
|
|
|
0.02
|
|
|
4.09
|
|
|
0.08
|
|
Gross
profit per pound/ounce
|
|
$2.72
|
|
|
$2.27
|
|
|
$249.02
|
|
|
$6.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Amount
was $585.34 before a loss resulting from redemption of FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
b. |
Includes
$12.4 million or $0.03 per pound for adjustments to 2005 concentrate
sales
subject to final pricing to reflect the impact on treatment charges
resulting from the increase in copper prices since December 31,
2005.
|
c. |
Includes
$9.3 million or $0.02 per pound for copper, $2.9 million or $3.91
per
ounce for gold and $0.1 million or $0.08 per ounce for silver for
adjustments to 2005 concentrate sales subject to final pricing to
reflect
the impact on treatment charges resulting from the increase in copper
prices since December 31, 2005.
|
d. |
For
a reconciliation of unit net cash costs to production and delivery
costs
applicable to sales reported in FCX’s consolidated financial statements
refer to “Product Revenues and Production
Costs.”
|
e. |
Includes
a $69.0 million or $0.16 per pound loss on the redemption of FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
Six
Months Ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of copper sold (000s)
|
|
641,800
|
|
|
641,800
|
|
|
|
|
|
|
|
Ounces
of gold sold
|
|
|
|
|
|
|
|
1,211,700
|
|
|
|
|
Ounces
of silver sold
|
|
|
|
|
|
|
|
|
|
|
2,328,000
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
|
$1.54
|
|
|
$1.54
|
|
|
$427.54
|
|
|
$7.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net non-
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
and nonrecurring costs shown below
|
|
0.65
|
a
|
|
0.42
|
b
|
|
115.39
|
b
|
|
1.92
|
b
|
Gold
and silver credits
|
|
(0.83
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.21
|
|
|
0.14
|
|
|
38.80
|
|
|
0.65
|
|
Royalty
on metals
|
|
0.06
|
|
|
0.04
|
|
|
10.17
|
|
|
0.17
|
|
Unit
net cash costsc
|
|
0.09
|
|
|
0.60
|
|
|
164.36
|
|
|
2.74
|
|
Depreciation
and amortization
|
|
0.14
|
|
|
0.09
|
|
|
25.38
|
|
|
0.42
|
|
Noncash
and nonrecurring costs, net
|
|
0.01
|
|
|
0.01
|
|
|
0.78
|
|
|
0.01
|
|
Total
unit costs
|
|
0.24
|
|
|
0.70
|
|
|
190.52
|
|
|
3.17
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
0.04
|
|
|
0.04
|
|
|
(2.47
|
)
|
|
0.06
|
|
PT
Smelting intercompany profit elimination
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
-
|
|
Gross
profit per pound/ounce
|
|
$1.34
|
|
|
$0.88
|
|
|
$234.54
|
|
|
$3.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Net
of deferred mining costs totaling $52.8 million or $0.08 per pound.
Following adoption of EITF 04-6 on January 1, 2006 (see Note 3 and
“New
Accounting Standards”), stripping costs are no longer
deferred.
|
b. |
Net
of deferred mining costs totaling $34.4 million or $0.05 per pound
for
copper, $17.8 million or $14.70 per ounce for gold and $0.6 million
or
$0.25 per ounce for silver (see Note a
above).
|
We
present gross profit per pound of copper using both a “by-product” method and a
“co-product” method. We use the by-product method in our presentation of gross
profit per pound of copper because (1) the majority of our revenues are copper
revenues, (2) we produce and sell one product, concentrates, which contains
copper, gold and silver, (3) it is not possible to specifically assign our
costs
to revenues from the copper, gold and silver we produce in concentrates, (4)
it
is the method used to compare mining operations in certain industry publications
and (5) it is the method used by our management and our Board of Directors
to
monitor our operations. In the co-product method presentation, costs are
allocated to the different products based on their relative revenue values,
which will vary to the extent our metals sales volumes and realized prices
change.
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. Higher unit site production and
delivery
costs in the 2006 periods, compared with the 2005 periods, primarily reflected
lower sales volumes resulting from mine sequencing in the Grasberg open pit,
the
impact of adopting EITF 04-6 (see Note a above, Note 3 and “New Accounting
Standards”) and higher input costs, including energy.
While
lower volumes constitute the largest component of variance on a unit basis,
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. Our energy
costs, which approximate 22 percent of PT Freeport Indonesia’s production costs,
primarily include purchases of 100 million gallons of diesel per year and
650,000 metric tons of coal per year. Diesel prices have risen by more than
120
percent since 2002 and our coal costs are approximately 40 percent higher.
The
costs of other consumables, including steel and reagents, also have increased.
Our costs have been affected by the stronger Australian dollar against the
U.S.
dollar (approximate 40 percent increase since the beginning of 2003), which
comprise approximately 15 percent of PT Freeport Indonesia’s production costs.
We are pursuing cost reduction initiatives to mitigate the impacts of these
increases.
Unit
treatment charges vary with the price of copper, and unit royalty costs vary
with prices of copper and gold. In addition, market rates for treatment charges
have increased significantly since 2004 and will vary based on PT Freeport
Indonesia’s customer mix. The copper royalty rate payable by PT Freeport
Indonesia under its Contract of Work 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.
In
connection with our fourth concentrator mill expansion completed in 1998, PT
Freeport Indonesia agreed to pay the Government of Indonesia additional
royalties (royalties not required by the Contract of Work) to provide further
support to the local governments and the people of the Indonesian province
of
Papua (see Note 1 in our 2005 Annual Report on Form 10-K). The additional
royalties are paid on metal from production from PT Freeport Indonesia’s milling
facilities above 200,000 metric tons of ore per day. PT Freeport Indonesia’s
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 the 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.
Second-quarter
2006 royalty costs totaled $22.9 million, compared with $17.7 million in the
second quarter of 2005. Additional royalties, discussed above, totaled $1.4
million in the 2005 quarter and none in the 2006 quarter. Royalty costs totaled
$42.9 million, including a $1.4 million final adjustment related to 2005 sales,
in the first six months of 2006, compared with $36.5 million in the 2005 period.
Additional royalties, discussed above, totaled $3.2 million in the first six
months of 2005 and none in 2006. If copper prices average $3.00 per pound and
gold prices average $600 per ounce during the remainder of 2006, we would expect
royalty costs to total approximately $116 million ($0.10 per pound of copper)
in
2006. These estimates assume 2006 sales volumes of 1.2 billion pounds of copper
and 1.7 million ounces of gold.
As
a
result of the lower copper production and sales volumes in the 2006 periods,
PT
Freeport Indonesia’s unit depreciation rate increased compared with the 2005
periods. Because certain assets are depreciated on a straight-line basis, the
unit rate will vary with the level of copper production and sales. In addition,
changes to the long-range mine plan discussed above that impact the timing
of
transitioning from the Grasberg open pit to the Grasberg underground block
cave
will impact unit rates.
Unit
Net
Cash Costs: By-Product Method - Unit net cash costs per pound of copper
calculated using a by-product method is a measure intended to provide investors
with information about the cash generating capacity of our mining operations
expressed on a basis relating to our primary metal product, copper. PT Freeport
Indonesia uses this measure for the same purpose and for monitoring operating
performance by its mining operations. This information differs from measures
of
performance determined in accordance with generally accepted accounting
principles and should not be considered in isolation or as a substitute for
measures of performance determined in accordance with generally accepted
accounting principles. This measure is presented by other copper and gold mining
companies, although our measures may not be comparable to similarly titled
measures reported by other companies.
Unit
site
production and delivery costs in the second quarter and first six months of
2006
averaged $1.23 per pound of copper, $0.52 per pound higher than the $0.71
reported in the second quarter of 2005 and $0.58 per pound higher than the
$0.65
reported in the first six months of 2005. Unit site production and delivery
costs in the 2006 periods were adversely affected by lower copper sales volumes.
In addition, PT Freeport Indonesia adopted EITF 04-6 and no longer defers
stripping costs. For 2005, unit costs benefited from the deferral of stripping
costs totaling $0.07 per pound in the second quarter and $0.08 per pound in
the
first six months.
Gold
and
silver credits averaged $0.85 per pound in the second quarter of 2006 and $1.07
per pound in the first six months of 2006, compared with $0.87 per pound in
the
second quarter of 2005 and $0.83 per pound in the first six months of 2005.
The
increase for the first six months of 2006 compared with the first six months
of
2005 reflects lower copper sales volumes and higher average realized gold
prices. Treatment charges increased to $0.49 per pound in the second quarter
of
2006 and to $0.43 per pound in the first six months of 2006 from $0.21 per
pound
in the 2005 periods primarily because of higher market rates and higher copper
prices, including the effects of price participation under our concentrate
sales
agreements. In addition, unit treatment charges include adjustments to prior
period concentrate sales subject to final pricing to reflect the impact on
treatment charges resulting from the increase in copper prices totaling $0.07
per pound in the second quarter of 2006 and $0.03 per pound in the first six
months of 2006. Royalties of $0.11 per pound in the 2006 quarter and $0.09
per
pound in the 2006 six-month period were higher than the year-ago periods ($0.06
per pound) because of higher copper and gold prices.
Assuming
average copper prices of $3.00 per pound and average gold prices of $600 per
ounce for the remainder of 2006 and achievement of current 2006 sales estimates,
PT Freeport Indonesia estimates that its annual 2006 unit net cash costs,
including gold and silver credits, would approximate $0.66 per pound. Estimated
unit net cash costs for 2006 are projected to be higher than the 2005 average,
primarily because of lower 2006 copper and gold sales volumes, higher treatment
charges and royalties attributable to increased copper prices and the change
in
the accounting treatment of stripping costs. Because the majority of PT Freeport
Indonesia’s costs are fixed, unit costs vary with the volumes sold and will
therefore be lower during the third and fourth quarters of 2006 compared to
the
projected annual average. Estimated average 2006 unit net cash costs are higher
than previous estimates of $0.54 per pound, primarily reflecting the impact
of
higher copper prices on treatment charges and royalties, lower copper volumes
and higher energy costs. Unit net cash costs for 2006 would change by
approximately $0.02 per pound for each $25 per ounce change in the average
price
of gold for the balance of the year.
Unit
Net
Cash Costs: Co-Product Method - Using the co-product method, unit site
production and delivery costs in the second quarter of 2006 averaged $0.98
per
pound of copper, compared with $0.45 in the 2005 quarter. Unit site production
and delivery costs in the first six months of 2006 averaged $0.93 per pound
of
copper, compared with $0.42 in the 2005 period. For gold, unit site production
and delivery costs in the second quarter of 2006 averaged $185 per ounce,
compared with $126 in the 2005 quarter. Unit site production and delivery costs
in the first six months of 2006 averaged $172 per ounce, compared with $115
in
the 2005 period. As discussed above, unit site production and delivery costs
in
the 2006 periods were impacted by the lower sales volumes resulting from lower
ore grades and the adoption of EITF 04-6. Treatment charges per pound and per
ounce were higher in the 2006 periods primarily because of higher market rates
and copper prices. In addition, unit treatment charges include adjustments
to
prior period concentrate sales subject to final pricing to reflect the impact
of
the increase in copper prices totaling $0.05 per pound for copper and $9.84
per
ounce for gold in the second quarter of 2006 and $0.02 per pound for copper
and
$3.91 per ounce for gold in the first six months of 2006. Royalties per pound
and per ounce were also higher in the 2006 periods because of higher copper
and
gold prices compared with the 2005 periods.
PT
Freeport Indonesia Exploration Activities
PT
Freeport Indonesia’s exploration efforts in 2006 are focused on testing
extensions of the Deep Grasberg and Kucing Liar mine complex, the resource
potential below the previously mined Ertsberg deposit and other targets in
Block
A, the existing producing area of the Grasberg minerals district. We continue
to
assess the timing of resumption of suspended exploration activities in areas
outside Block A.
The
Indonesian government previously approved suspensions of our field exploration
activities outside of our current mining operations area, which have been in
suspension 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. The current
suspensions were granted for one-year periods ending November 15, 2006, for
Eastern Minerals; February 26, 2007, for Block B; and March 30, 2007, for 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 of Block A
depends on the resolution of these matters.
SMELTING
AND REFINING
Our
investment in smelters serves an important role in our concentrate marketing
strategy. 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.
Low smelter treatment and refining charges in recent years adversely affected
the operating results of Atlantic Copper and benefited the operating results
of
PT Freeport Indonesia’s mining operations. Market rates for treatment and
refining charges have increased significantly since late 2004 as worldwide
smelter availability was insufficient to accommodate increased mine production.
Higher treatment and refining charges benefit our smelter operations and
adversely affect our mining operations. Taking into account taxes and minority
ownership interests, an equivalent change in smelting and refining charge rates
essentially offsets in our consolidated operating results.
Atlantic
Copper Operating Results
|
|
|
|
|
(In
Millions)
|
Second
Quarter
|
|
Six
Months
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Gross
profit
|
$25.3
|
|
$2.8
|
|
$42.6
|
|
$4.3
|
|
Add
depreciation and amortization expense
|
7.4
|
|
7.1
|
|
14.8
|
|
14.2
|
|
Other
|
0.5
|
|
1.1
|
|
0.1
|
|
2.1
|
|
Cash
margin
|
$33.2
|
|
$11.0
|
|
$57.5
|
|
$20.6
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) (in millions)
|
$21.8
|
|
$(0.1
|
)
|
$35.3
|
|
$(1.6
|
)
|
Concentrate
and scrap treated (metric tons)
|
228,900
|
|
246,900
|
|
479,600
|
|
462,700
|
|
Anodes
production (000s of pounds)
|
138,700
|
|
159,400
|
|
295,800
|
|
306,800
|
|
Treatment
rates per pound
|
$0.34
|
|
$0.21
|
|
$0.32
|
|
$0.19
|
|
Cathodes
sales (000s of pounds)
|
131,100
|
|
140,800
|
|
267,700
|
|
273,400
|
|
Cathode
cash unit cost per pounda
|
$0.21
|
|
$0.18
|
|
$0.20
|
|
$0.18
|
|
Gold
sales in anodes and slimes (ounces)
|
199,000
|
|
178,900
|
|
444,600
|
|
246,200
|
|
|
|
a. |
For
a reconciliation of cathode cash unit cost per pound to production
costs
applicable to sales reported in FCX’s consolidated financial statements
refer to “Product Revenues and Production Costs”
below.
|
Atlantic
Copper’s operating cash margin was $33.2 million in the second quarter of 2006,
compared with $11.0 million in the 2005 quarter, and $57.5 million in the first
six months of 2006, compared with $20.6 million in the 2005 period. Atlantic
Copper reported operating income of $21.8 million in the second quarter of
2006
and $35.3 million for the first six months of 2006, compared with operating
losses of $0.1 million in the 2005 quarter and $1.6 million in the 2005
six-month period. The positive results in the 2006 periods primarily reflect
higher treatment charges. The next major maintenance activity at Atlantic Copper
is a 22-day maintenance turnaround currently scheduled for 2007.
Atlantic
Copper treated 228,900 metric tons of concentrate and scrap in the second
quarter of 2006, compared with 246,900 metric tons in the 2005 quarter. For
the
six-month periods, concentrate and scrap
treated
totaled 479,600 metric tons in 2006 and 462,700 metric tons in 2005. Cathode
production totaled 131.5 million pounds and sales totaled 131.1 million pounds
during the second quarter of 2006, compared with cathode production of 137.8
million pounds and sales of 140.8 million pounds during the second quarter
of
2005. For the six-month periods, cathode production totaled 260.9 million pounds
and sales totaled 267.7 million pounds during 2006, compared with cathode
production of 269.5 million pounds and sales of 273.4 million pounds during
2005.
Atlantic
Copper’s treatment charges (including price participation), which reflect
charges paid by PT Freeport Indonesia and third parties to Atlantic Copper
to
smelt and refine concentrates, averaged $0.34 per pound during the second
quarter of 2006, $0.21 per pound during the second quarter of 2005, $0.32 per
pound during the first six months of 2006 and $0.19 per pound during the first
six months of 2005. The significant increase in treatment charges in the 2006
periods reflects higher market rates and price participation under the terms
of
Atlantic Copper’s concentrate purchase and sales agreements. Price participation
totaled $0.09 per pound in the second quarter of 2006 and $0.08 per pound in
the
first six months of 2006 (compared with $0.03 per pound in the 2005 periods).
Treatment charge rates have increased significantly since late 2004 with
increased mine production and higher copper prices. Assuming copper prices
of
$3.00 per pound for the remainder of 2006, Atlantic Copper expects these rates
to average approximately $0.32 per pound in 2006. Atlantic Copper’s cathode cash
unit cost per pound of copper averaged $0.21 in the second quarter of 2006,
$0.18 in the second quarter of 2005, $0.20 in the first six months of 2006
and
$0.18 in the first six months of 2005. Higher unit costs in the 2006 periods
primarily reflect the impact of lower volumes.
We
defer
recognizing profits on PT Freeport Indonesia’s sales to Atlantic Copper and on
25 percent of PT Freeport Indonesia’s sales to PT Smelting until the final sales
to third parties occur. Changes in these net deferrals resulted in additions
to
our operating income totaling $34.2 million ($18.1 million to net income or
$0.08 per share) in the second quarter of 2006 and $108.4 million ($57.4 million
to net income or $0.26 per share) in the first six months of 2006. For the
2005
periods, changes in these net deferrals resulted in an addition to our operating
income totaling $48.3 million ($25.7 million to net income or $0.12 per share)
in the second quarter and a reduction of $15.2 million ($8.5 million to net
income or $0.04 per share) in the first six months. At June 30, 2006, our net
deferred profits on PT Freeport Indonesia concentrate inventories at Atlantic
Copper and PT Smelting to be recognized in future periods’ net income after
taxes and minority interest sharing totaled $60.5 million. Based on copper
prices of $3.00 per pound and gold prices of $600 per ounce for the third
quarter of 2006 and current shipping schedules, we estimate the net change
in
deferred profits on intercompany sales will result in a decrease to net income
of approximately $10 million in the third quarter of 2006. The actual change
in
deferred intercompany profits may differ substantially from this estimate
because of changes in the timing of shipments to affiliated smelters and metal
prices.
The
majority of Atlantic Copper’s revenues are denominated in U.S. dollars; however,
operating costs, other than concentrate purchases, and certain asset and
liability accounts are denominated in euros. Atlantic Copper’s estimated annual
euro payments total approximately 100 million euros. A $0.05 increase or
decrease in the exchange rate would result in an approximate $5 million change
in annual costs. The exchange rate on June 30, 2006, was $1.27 per
euro.
As
of
June 30, 2006, FCX’s net investment in Atlantic Copper totaled approximately
$144 million, FCX had a $189.5 million loan outstanding to Atlantic Copper
and
Atlantic Copper’s debt to third parties under nonrecourse financing arrangements
totaled $22.1 million.
Atlantic
Copper had euro-denominated net monetary liabilities at June 30, 2006, totaling
$15.0 million recorded at an exchange rate of $1.27 per euro. The exchange
rate
was $1.18 per euro at December 31, 2005 and $1.21 per euro at March 31, 2006.
Adjustments to Atlantic Copper’s euro-denominated net monetary liabilities to
reflect changes in the exchange rate are recorded in other income (expense)
and
totaled $(0.4) million in the second quarter of 2006, $3.4 million in the second
quarter of 2005, $(1.6) million in the first six months of 2006 and $6.3 million
in the first six months of 2005.
Table of Contents
PT
Smelting Operating Results
|
Second
Quarter
|
|
Six
Months
|
|
(In
Millions)
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
PT
Freeport Indonesia sales to PT Smelting
|
$325.4
|
|
$194.9
|
|
$607.9
|
|
$429.0
|
|
Equity
in PT Smelting earnings
|
2.0
|
|
2.6
|
|
5.6
|
|
5.2
|
|
PT
Freeport Indonesia operating profits (deferred) recognized
|
(7.8
|
)
|
2.6
|
|
13.0
|
|
-
|
|
|
|
|
|
|
|
|
|
|
PT
Freeport Indonesia accounts for its 25 percent interest in PT Smelting using
the
equity method and provides PT Smelting with substantially all of its concentrate
requirements. PT Smelting treated 187,500 metric tons of concentrate in the
second quarter of 2006, 230,700 metric tons in the second quarter of 2005,
421,900 metric tons in the first six months of 2006 and 457,100 metric tons
in
the first six months of 2005. PT Smelting completed a 22-day maintenance
turnaround in the second quarter of 2006 which resulted in lower production
during the period, and the next major maintenance turnaround is scheduled for
2008. PT Smelting is currently expanding its production capacity from 250,000
metric tons of copper metal per year to 270,000 metric tons of copper metal
per
year. PT Smelting produced 127.3 million pounds of cathodes and sold 129.6
million pounds of cathodes in the second quarter of 2006, compared with
production of 146.1 million pounds and sales of 145.5 million pounds in the
second quarter of 2005. For the first six months of 2006, cathode production
totaled 269.7 million pounds and sales totaled 270.3 million pounds, compared
with cathode production of 289.6 million pounds and sales of 289.2 million
pounds for the first six months of 2005. PT Smelting’s cathode cash unit costs
averaged $0.25 per pound in the second quarter of 2006 and $0.19 per pound
in
the first six months of 2006, compared with $0.10 per pound in both of the
2005
periods, primarily reflecting the impact of the maintenance turnaround discussed
above and higher energy costs in the 2006 periods (see “Product Revenues and
Production Costs”).
In
late
2005 and early 2006, PT Smelting entered into hedging contracts to fix a portion
of its revenues through 2007. FCX’s share of the unrealized losses on these
contracts totaled $10.9 million as of June 30, 2006, and is recorded in
accumulated other comprehensive income in stockholders’ equity.
OTHER
FINANCIAL RESULTS
The
FCX/Rio Tinto joint ventures incurred $3.9 million of aggregate exploration
costs in the second quarter of 2006, $3.7 million in the second quarter of
2005,
$7.8 million in the first six months of 2006 and $6.7 million in the first
six
months of 2005. As discussed above in “PT Freeport Indonesia Exploration
Activities,” our exploration program for 2006 is focused on testing extensions
of the Deep Grasberg and Kucing Liar mine complex, the resource potential below
the previously mined Ertsberg deposit and other targets in Block A. Our share
of
these exploration costs, which are charged to expense, totaled $2.8 million
in
the second quarter of 2006, $2.3 million in the second quarter of 2005, $5.4
million in the first six months of 2006 and $4.3 million in the first six months
of 2005.
Consolidated
general and administrative expenses increased to $35.1 million in the second
quarter of 2006, compared with $25.4 million in the year-ago period. For the
first six months of 2006, general and administrative expenses increased to
$65.8
million, compared with $47.0 million for the first six months of 2005. The
increases in the 2006 periods primarily relate to increased incentive
compensation, including stock-based compensation, and charitable contributions.
On January 1, 2006, we adopted Statement of Financial Accounting Standards
No.
123 (revised 2004), “Share-Based Payment” or “SFAS No. 123R.” Stock-based
compensation costs totaled $12.1 million in the second quarter of 2006,
including $6.3 million charged to general and administrative expenses, $3.5
million in the second quarter of 2005, including $2.2 million charged to general
and administrative expenses, $25.5 million in the first six months of 2006,
including $13.2 million charged to general and administrative expenses, and
$7.9
million in the first six months of 2005, including $5.3 million charged to
general and administrative expenses.
Our
parent company charges PT Freeport Indonesia for the in-the-money value of
exercised employee stock options. These charges are eliminated in consolidation;
however, PT Freeport Indonesia shares a
portion
of these charges with Rio Tinto and Rio Tinto’s reimbursements reduce our
consolidated general and administrative expenses. General and administrative
expenses are net of Rio Tinto’s share of joint venture reimbursements for
employee stock option exercises, which decreased general and administrative
expenses by $2.6 million in the second quarter of 2006, $0.1 million in the
second quarter of 2005, $7.1 million in the first six months of 2006 and $3.0
million in the first six months of 2005. In accordance with our joint venture
agreement, Rio Tinto’s percentage share of PT Freeport Indonesia’s general and
administrative expenses varies with metal sales volumes and prices and totaled
approximately 8 percent in the first six months of 2006, compared with 16
percent in the first six months of 2005.
Total
consolidated interest cost (before capitalization) was $23.3 million in the
second quarter of 2006, $36.3 million in the second quarter of 2005, $47.8
million in the first six months of 2006 and $74.7 million in the first six
months of 2005. Interest costs decreased primarily because we reduced average
debt levels, with significant reductions in 2005. Our interest cost for 2006
is
expected to be lower compared to 2005 primarily because of the 2005 debt
reductions. See “Capital Resources and Liquidity - Financing Activities” for
further discussion. Capitalized interest totaled $2.3 million in the second
quarter of 2006, $1.0 million in the second quarter of 2005, $4.1 million in
the
first six months of 2006 and $1.9 million in the first six months of
2005.
Foreign
Currency Exchange Risk
The
functional currency for our operations in Indonesia and Spain is the U.S.
dollar. 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.
Generally, our results are positively affected when the U.S. dollar strengthens
in relation to those foreign currencies and adversely affected when the U.S.
dollar weakens in relation to those foreign currencies.
One
U.S.
dollar was equivalent to 9,825 rupiah at December 31, 2005, 9,066 rupiah at
March 31, 2006, and 9,288 rupiah at June 30, 2006. PT Freeport Indonesia
recorded gains (losses) to production costs totaling $(0.2) million in the
second quarter of 2006, $0.4 million in the second quarter of 2005, $(0.1)
million in the first six months of 2006 and $0.1 million in the first six months
of 2005 related to its rupiah-denominated net monetary assets and liabilities.
PT Freeport Indonesia’s labor costs are mostly rupiah denominated. At estimated
aggregate annual rupiah payments of 1.6 trillion for operating costs and an
exchange rate of 9,288 rupiah to one U.S. dollar, the exchange rate as of June
30, 2006, a one-thousand-rupiah increase in the exchange rate would result
in an
approximate $16 million decrease in aggregate annual operating costs. A
one-thousand-rupiah decrease in the exchange rate would result in an approximate
$20 million increase in aggregate annual operating costs.
Approximately
15 percent of PT Freeport Indonesia’s total purchases of materials, supplies and
services are denominated in Australian dollars. The exchange rate was $0.73
to
one Australian dollar at December 31, 2005, $0.72 to one Australian dollar
at
March 31, 2006, and $0.74 to one Australian dollar at June 30, 2006. At
estimated annual aggregate Australian dollar payments of 225 million and an
exchange rate of $0.74 to one Australian dollar, the exchange rate as of June
30, 2006, a $0.01 increase or decrease in the exchange rate would result in
an
approximate $2 million change in aggregate annual operating costs.
At
times,
PT Freeport Indonesia has entered into foreign currency forward contracts to
hedge a portion of its aggregate anticipated Indonesian rupiah and/or Australian
dollar payments. As of June 30, 2006, PT Freeport Indonesia had foreign currency
contracts to hedge 375.0 billion in rupiah payments, including certain
rupiah-based capital expenditures, or approximately 47 percent of aggregate
projected rupiah payments for the remainder of 2006, at an average exchange
rate
of 10,111 rupiah to one U.S. dollar. PT Freeport Indonesia accounts for these
contracts as cash flow hedges.
CAPITAL
RESOURCES AND LIQUIDITY
Our
operating cash flows vary with prices realized for copper and gold sales, our
production levels, production costs, cash payments for income taxes and
interest, other working capital changes and other factors. Based on current
mine
plans and subject to future copper and gold prices, we expect to generate cash
flows significantly greater than our budgeted capital expenditures and scheduled
debt maturities, providing opportunities to reduce debt further and return
cash
to shareholders through dividends and share purchases. Common stock dividends
totaled $352.5 million in the first six months of 2006, including $94.2 million
($0.50 per share) for a supplemental dividend paid on March 31, 2006 and $140.4
million ($0.75 per share) for a supplemental dividend paid on June 30, 2006.
Our
current regular annual common stock dividend, which is declared by our Board,
is
$1.25 per share, paid at a quarterly rate of $0.3125 per share. On August 1,
2006, our Board declared a supplemental dividend of $0.75 per share payable
September 29, 2006 to shareholders of record on September 14, 2006.
We
purchased 2.0 million shares of our common stock for $99.8 million ($49.94
per
share average) during the second quarter of 2006 and have purchased a total
of
7.8 million shares for $279.5 million ($36.05 per share average) under the
Board
authorized 20-million share open market purchase program. As of July 31, 2006,
12.2 million shares remain available under the Board authorized 20-million
share
open market purchase program.
The
potential payment of future regular and supplemental dividends will be
determined by our Board of Directors and will be dependent upon many factors,
including our cash flows and financial position, copper and gold prices, and
general economic and market conditions. The timing of future purchases of our
common stock is dependent upon a number of factors including the price of our
common shares, our cash flows and financial position, copper and gold prices
and
general economic and market conditions.
Operating
Activities
We
generated operating cash flows totaling $375.9 million, net of $519.2 million
that we used for working capital, during the first six months of 2006, compared
with $620.5 million, including $162.6 million from working capital sources,
during the first six months of 2005. Using estimated sales volumes for the
remainder of 2006 and assuming average prices of $3.00 per pound of copper
and
$600 per ounce of gold for the remainder of 2006, we would generate operating
cash flows approximating $1.6 billion in 2006, with over $1.2 billion in the
second half of the year.
Investing
Activities
Total
capital expenditures of $110.3 million in the first six months of 2006 were
nearly double the $59.3 million reported in the 2005 period. Our capital
expenditures for the 2006 period included approximately $8 million for the
DOZ
expansion, $7 million for the Common Infrastructure project and $29 million
for
Big Gossan. Capital expenditures, including approximately $120 million for
long-term projects, are estimated to total $250 million for 2006. In the first
quarter of 2005, PT Freeport Indonesia received the $23.2 million balance of
its
share of insurance settlement proceeds related to its open-pit slippage claim,
$2.0 million of which represented a recovery of property losses.
Financing
Activities
As
of
June 30, 2006, we had total unrestricted cash and cash equivalents of $357.8
million and total outstanding debt of approximately $1.1 billion. Total debt
was
reduced by a net $184.1 million during the first six months of 2006, including
$167.4 million for the mandatory redemption of FCX’s Gold-Denominated Preferred
Stock, Series II. The mandatory redemption was based on average gold prices
at
the time of redemption ($548.92 per ounce) and totaled $236.4 million, resulting
in a $69.0 million loss recognized in revenues ($36.6 million to net income
or
$0.17 per share). Other debt reductions in the first half of 2006
included:
· |
privately
negotiated transactions to induce conversion of $16.0 million of
7%
Convertible Senior Notes due 2011 into 0.5 million shares of FCX
common
stock and
|
Table
of Contents
· |
purchases
in open-market transactions of $11.5 million of 10⅛% Senior Notes due 2010
for $12.6 million.
|
As
a
result of the induced conversions and open-market transactions, we recorded
charges of $2.2 million ($1.5 million to net income, net of related reduction
of
interest expense, or $0.01 per share) in the first six months of 2006. In July
2006, we induced conversion of an additional $14.5 million of 7% Convertible
Senior Notes due 2011 into 0.5 million shares of FCX common stock.
Following
the debt repayments and redemption during the first six months of 2006, we
have
$92.1 million, including $25.8 million for the final redemption of our
Silver-Denominated Preferred Stock, in debt maturities for the remainder of
2006, which can be funded with the $357.8 million of cash on hand. Debt
maturities total $58.5 million for the three-year period of 2007 through
2009.
In
July
2006, FCX and PT Freeport Indonesia entered into an amended credit agreement
for
a $465 million revolving credit facility compared with its previous $195 million
facility that was scheduled to mature in September 2006. The new facility,
which
can be expanded to up to $500 million with additional lender commitments,
matures in 2009 and no amounts are outstanding under the facility.
On
August
1, 2006, we funded the final scheduled annual redemption payment on our
Silver-Denominated Preferred Stock for $25.8 million. The mandatory redemption
will result in a $12.5 million decrease in debt and a reduction of revenues
of
$13.3 million, $7.0 million to net income, in the third quarter of
2006.
During
the first six months of 2005, total debt was reduced by $169.8 million,
primarily reflecting a prepayment of $187.0 million of bank debt associated
with
Puncakjaya Power’s power-generating facilities at PT Freeport Indonesia’s mining
operations and repurchases of $11.0 million of our 7.50% Senior Notes due 2006
and 7.20% Senior Notes due 2026, net of changes in other
borrowings.
In
the
first six months of 2006, total common stock dividends were $352.5 million
($1.88 per share), including two supplemental dividends of $0.50 per share
on
March 31, 2006, and $0.75 per share on June 30, 2006. Since December 2004,
we
have paid six supplemental dividends totaling $551.7 million ($3.00 per share).
In the first six months of 2005, we paid our regular quarterly dividend ($0.25
per share) in February and May and a supplemental common stock dividend of
$0.50
per share in March, for total common stock dividends of $179.7 million for
the
2005 period. The declaration and payment of dividends is at the discretion
of
our Board of Directors. The amount of our current quarterly cash dividend
($0.3125 per share) on our common stock and the possible payment of additional
future supplemental cash dividends will depend on our financial results, cash
requirements, future prospects and other factors deemed relevant by our Board
of
Directors.
During
the first six months of 2006 and 2005, cash dividends on preferred stock of
$30.3 million represent dividends on our 5½% Convertible Perpetual Preferred
Stock. Each share of preferred stock was initially convertible into 18.8019
shares of our common stock, equivalent to an initial conversion price of
approximately $53.19 per common share. The conversion rate is adjustable upon
the occurrence of certain events, including any quarter that our common stock
dividend exceeds $0.20 per share. As a result of the quarterly and supplemental
common stock dividends paid through June 2006 discussed above, each share of
preferred stock is now convertible into 20.2481 shares of FCX common stock,
equivalent to a conversion price of approximately $49.39 per common share.
Cash
dividends to minority interests represent dividends paid to the minority
interest owners of PT Freeport Indonesia and Puncakjaya Power. Pursuant to
the
restricted payment covenants in our 10⅛% Senior Notes and 6⅞% Senior Notes, the
amount available for dividend payments, purchases of our common stock and other
restricted payments as of June 30, 2006, was approximately $625
million.
In
2003,
our Board of Directors approved a new open market share purchase program for
up
to 20 million shares, which replaced our previous program. Through July 31,
2006, we acquired 7.8 million shares for $279.5 million ($36.05 per share
average), including 2.0 million shares in the second quarter of 2006 for $99.8
million ($49.94 per share average), and 12.2 million shares remain
available. The timing of future purchases of our common stock is dependent
on
many factors including the price of our common shares,
our
cash
flows and financial position, copper and gold prices and general economic and
market conditions.
Debt
Maturities. Below
is
a summary (in millions) of our total debt maturities based on loan balances
as
of June 30, 2006, and the original issue amount for mandatorily redeemable
preferred stock.
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Equipment
loans and other
|
$
|
6.8
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
10.2
|
|
$
|
3.8
|
|
7.50%
Senior Notes due 2006
|
|
55.4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Atlantic
Copper debt
|
|
4.1
|
|
|
18.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Redeemable
preferred stock
|
|
12.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
10⅛%
Senior Notes due 2010
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
272.4
|
|
|
-
|
|
7%
Convertible Senior Notes due 2011a
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
307.7
|
|
6⅞%
Senior Notes due 2014
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
340.3
|
|
7.20%
Senior Notes due 2026
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.2
|
|
Total
debt maturities
|
$
|
78.8
|
|
$
|
31.5
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
282.6
|
|
$
|
652.0
|
|
Pro
forma adjustments
|
|
13.3
|
b
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(14.5
|
)c
|
Pro
forma debt maturities
|
$
|
92.1
|
|
$
|
31.5
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
282.6
|
|
$
|
637.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Conversion
price is $30.87 per share.
|
b. |
Represents
the additional amount due above the original issue amount of our
Silver-Denominated Preferred Stock. The adjustment is based on the
August
2006 redemption amount.
|
c. |
Represents
the amount of 7% Convertible Senior Notes due 2011 that we induced
conversion of in July 2006 (see
above).
|
NEW
ACCOUNTING STANDARDS
Accounting
for Stock-Based Compensation.
As of
June 30, 2006, we had four stock-based employee compensation plans and two
stock-based director compensation plans. Prior to January 1, 2006, we accounted
for options granted under all of our plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations, as permitted by SFAS
No. 123, “Accounting for Stock-Based Compensation.” APB Opinion No. 25 required
compensation cost for stock options to be recognized based on the difference
on
the date of grant, if any, between the quoted market price of the stock and
the
amount an employee must pay to acquire the stock (i.e., the intrinsic value).
Because all the plans require that the option exercise price be at least the
market price on the date of grant, we recognized no compensation cost on the
grant or exercise of our employees’ options through December 31, 2005. Other
awards under the plans did result in compensation costs being recognized in
earnings based on the projected intrinsic value for restricted stock units
to be
granted in lieu of cash compensation and the intrinsic value on the reporting
or
exercise date for cash-settled stock appreciation rights (SARs).
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123R using the modified prospective transition method. Under that transition
method, compensation cost recognized in 2006 includes: (a) compensation costs
for all stock option awards granted to employees prior to, but not yet vested
as
of January 1, 2006, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS No. 123, and (b) compensation cost for
all
stock option awards granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123R. Fair value of stock option awards granted to employees was calculated
using the Black-Scholes-Merton option-pricing model before and after adoption
of
SFAS No. 123R. Other stock-based awards charged to expense under SFAS No. 123
continue to be charged to expense under SFAS No. 123R (see Note 2). These
include restricted stock units granted in lieu of certain cash compensation
and
SARs, which are settled in cash. Results for prior periods have not been
restated.
As
a
result of adopting SFAS No. 123R on January 1, 2006, our income before income
taxes and minority interests for the three months ended June 30, 2006, was
$6.8
million lower and net income was $4.0 million ($0.02 per basic and diluted
share) lower, and our income before income taxes and minority
interests
for the six months ended June 30, 2006, was $15.9 million lower and net income
was $9.3 million ($0.05 per basic share and $0.04 per diluted share) lower
than
if we had continued to account for share-based compensation under APB Opinion
No. 25.
Prior
to
the adoption of SFAS No. 123R, we presented all tax benefits resulting from
the
exercise of stock options as operating cash flows in the Consolidated Statements
of Cash Flows. SFAS No. 123R requires the cash flows generated by tax benefits
resulting from tax deductions in excess of the compensation cost recognized
for
those options (excess tax benefits) to be classified as financing cash flows.
The $22.5 million excess tax benefit classified as a financing cash inflow
in
the Consolidated Statements of Cash Flows for the six months ended June 30,
2006
would have been classified as an operating cash inflow if we had not adopted
SFAS No. 123R.
Compensation
cost charged against earnings for stock-based awards is shown below (in
thousands). We did not capitalize any stock-based compensation costs to fixed
assets during the periods presented.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Production
and delivery costs
|
|
$
|
5,505
|
|
$
|
1,288
|
|
$
|
11,584
|
|
$
|
2,582
|
|
General
and administrative expenses
|
|
|
6,294
|
a
|
|
2,175
|
a,
b
|
|
13,146
|
a
|
|
5,300
|
a,
b
|
Exploration
expenses
|
|
|
316
|
|
|
-
|
|
|
743
|
|
|
-
|
|
Total
stock-based compensation cost
|
|
$
|
12,115
|
|
$
|
3,463
|
|
$
|
25,473
|
|
$
|
7,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Amounts
are before Rio Tinto’s share of joint venture reimbursements for employee
exercises of in-the-money stock options which reduced general and
administrative expenses by $2.6 million in the 2006 quarter, $0.1
million
in the 2005 quarter, $7.1 million in the 2006 six-month period and
$3.0
million in the 2005 six-month
period.
|
b.
|
Includes
amortization of the intrinsic value of FCX’s Class A stock options that
were converted to Class B stock options in 2002 totaling $0.5 million
for
the 2005 quarter and $1.0 million for the 2005 six-month
period.
|
As
of
June 30, 2006, total compensation cost related to nonvested stock option awards
not yet recognized in earnings was $60.9 million.
Deferred
Mining Costs.
On
January 1, 2006, we adopted EITF 04-6, which requires that stripping costs
incurred during production be considered costs of the extracted minerals and
included as a component of inventory to be recognized in cost of sales in the
same period as the revenue from the sale of inventory. Upon adoption of EITF
04-6, we recorded our deferred mining costs asset ($285.4 million) at December
31, 2005, net of taxes, minority interest share and inventory effects ($135.9
million), as a cumulative effect adjustment to reduce our retained earnings
on
January 1, 2006. In addition, stripping costs incurred in 2006 and later periods
are now charged to cost of sales as incurred. As a result of adopting EITF
04-6
on January 1, 2006, our income before income taxes and minority interests for
the three months ended June 30, 2006, was $5.9 million lower and net income
was
$3.2 million ($0.02 per basic share and $0.01 per diluted share) lower, and
our
income before income taxes and minority interests for the six months ended
June
30, 2006, was $38.7 million lower and net income was $20.6 million ($0.11 per
basic share and $0.09 per diluted share) lower than if we had not adopted EITF
04-6 and continued to defer stripping costs. Adoption of the new guidance has
no
impact on our cash flows.
Accounting
for Uncertainty in Income Taxes.
In June
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” (FIN 48). FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold
a
tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for the first fiscal year
beginning after December 15, 2006. We are reviewing the provisions of FIN 48
and
have not yet determined the impact of adoption.
Table of Contents
PRODUCT
REVENUES AND PRODUCTION COSTS
PT
Freeport Indonesia Product Revenues and Unit Net Cash Costs
All
amounts used in both the by-product and co-product method presentations are
included in our recorded results under generally accepted accounting principles.
We separately identify certain of these amounts as shown in the following
reconciliation to amounts reported in our consolidated financial statements
and
as explained here.
1. |
We
show adjustments to copper revenues for prior period open sales as
separate line items. Because such copper pricing adjustments do not
result
from current period sales, we have reflected these separately from
revenues on current period sales.
|
2. |
Noncash
and nonrecurring costs consist of items such as stock-based compensation
costs starting January 1, 2006 (see “New Accounting Standards”),
write-offs of equipment or unusual charges. They are removed from
site
production and delivery costs in the calculation of unit net cash
costs.
|
3. |
Gold
and silver revenues, excluding any impacts from redemption of our
gold-and
silver-denominated preferred stocks, are reflected as credits against
site
production and delivery costs in the by-product
method.
|
Three
Months Ended June 30, 2006
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Thousands)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
741,511
|
|
$
|
741,511
|
|
$
|
175,763
|
|
$
|
10,750
|
|
$
|
928,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
270,904
|
|
|
216,458
|
|
|
51,308
|
|
|
3,138
|
|
|
270,904
|
|
Gold
and silver credits
|
|
(186,513
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
107,196
|
a
|
|
85,652
|
b
|
|
20,302
|
b
|
|
1,242
|
b
|
|
107,196
|
|
Royalty
on metals
|
|
22,934
|
|
|
18,325
|
|
|
4,344
|
|
|
265
|
|
|
22,934
|
|
Unit
net cash costs
|
|
214,521
|
|
|
320,435
|
|
|
75,954
|
|
|
4,645
|
|
|
401,034
|
|
Depreciation
and amortization
|
|
33,910
|
|
|
27,095
|
|
|
6,422
|
|
|
393
|
|
|
33,910
|
|
Noncash
and nonrecurring costs, net
|
|
10,404
|
|
|
8,313
|
|
|
1,970
|
|
|
121
|
|
|
10,404
|
|
Total
unit costs
|
|
258,835
|
|
|
355,843
|
|
|
84,346
|
|
|
5,159
|
|
|
445,348
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
237,274
|
|
|
237,274
|
|
|
-
|
|
|
-
|
|
|
237,274
|
|
PT
Smelting intercompany profit elimination
|
|
(7,849
|
)
|
|
(6,271
|
)
|
|
(1,487
|
)
|
|
(91
|
)
|
|
(7,849
|
)
|
Gross
profit
|
$
|
712,101
|
|
$
|
616,671
|
|
$
|
89,930
|
|
$
|
5,500
|
|
$
|
712,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
Revenues
|
|
Production
and Delivery
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
928,024
|
|
$
|
270,904
|
|
$
|
33,910
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
10,404
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(107,196
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Royalty
per above
|
|
(22,934
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales per above
|
|
237,274
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Mining
and exploration segment
|
|
1,035,168
|
|
|
281,308
|
|
|
33,910
|
|
|
|
|
|
|
|
Smelting
and refining segment
|
|
593,134
|
|
|
560,375
|
|
|
7,410
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
(202,100
|
)
|
|
(236,076
|
)
|
|
2,035
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
statements
|
$
|
1,426,202
|
|
$
|
605,607
|
|
$
|
43,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2005
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Thousands)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
480,076
|
|
$
|
480,076
|
|
$
|
264,040
|
|
$
|
7,406
|
|
$
|
751,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
221,071
|
c
|
|
141,221
|
d
|
|
77,671
|
d
|
|
2,179
|
d
|
|
221,071
|
|
Gold
and silver credits
|
|
(271,446
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
67,867
|
|
|
43,354
|
|
|
23,844
|
|
|
669
|
|
|
67,867
|
|
Royalty
on metals
|
|
17,741
|
|
|
11,333
|
|
|
6,233
|
|
|
175
|
|
|
17,741
|
|
Unit
net cash costs
|
|
35,233
|
|
|
195,908
|
|
|
107,748
|
|
|
3,023
|
|
|
306,679
|
|
Depreciation
and amortization
|
|
44,217
|
|
|
28,246
|
|
|
15,535
|
|
|
436
|
|
|
44,217
|
|
Noncash
and nonrecurring costs, net
|
|
2,284
|
|
|
1,459
|
|
|
802
|
|
|
23
|
|
|
2,284
|
|
Total
unit costs
|
|
81,734
|
|
|
225,613
|
|
|
124,085
|
|
|
3,482
|
|
|
353,180
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
12,472
|
|
|
12,472
|
|
|
-
|
|
|
-
|
|
|
12,472
|
|
PT
Smelting intercompany profit recognized
|
|
2,552
|
|
|
1,630
|
|
|
897
|
|
|
25
|
|
|
2,552
|
|
Gross
profit
|
$
|
413,366
|
|
$
|
268,565
|
|
$
|
140,852
|
|
$
|
3,949
|
|
$
|
413,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
Revenues
|
|
Production
and Delivery
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
751,522
|
|
$
|
221,071
|
|
$
|
44,217
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
2,284
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(67,867
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Royalty
per above
|
|
(17,741
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales per above
|
|
12,472
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Mining
and exploration segment
|
|
678,386
|
|
|
223,355
|
|
|
44,217
|
|
|
|
|
|
|
|
Smelting
and refining segment
|
|
331,897
|
|
|
321,909
|
|
|
7,141
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
(107,374
|
)
|
|
(154,678
|
)
|
|
2,801
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
statements
|
$
|
902,909
|
|
$
|
390,586
|
|
$
|
54,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
$14.4 million or $0.07 per pound for adjustments to prior quarters’
concentrate sales subject to final pricing to reflect the impact
on
treatment charges resulting from the increase in copper prices since
March
31, 2006.
|
b.
|
Includes
$11.5 million or $0.05 per pound for copper, $2.7 million or $9.84
per
ounce for gold and $0.2 million or $0.20 per ounce for silver for
adjustments to prior quarters’ concentrate sales subject to final pricing
to reflect the impact on treatment charges resulting from the increase
in
copper prices since March 31, 2006.
|
c.
|
Net
of deferred mining costs totaling $20.6 million or $0.07 per pound.
Following adoption of EITF 04-6 on January 1, 2006 (see Note 3 and
New
Accounting Standards), stripping costs are no longer
deferred.
|
d.
|
Net
of deferred mining costs totaling $13.2 million or $0.04 per pound
for
copper, $7.2 million or $11.74 per ounce for gold and $0.2 million
or
$0.19 per ounce for silver (see Note c
above).
|
Table of
Contents
Six
Months Ended June 30, 2006
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Thousands)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
1,460,234
|
|
$
|
1,460,234
|
|
$
|
458,561
|
|
$
|
18,507
|
|
$
|
1,937,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
545,913
|
|
|
411,480
|
|
|
129,218
|
|
|
5,215
|
|
|
545,913
|
|
Gold
and silver credits
|
|
(477,068
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
190,839
|
a
|
|
143,844
|
b
|
|
45,172
|
b
|
|
1,823
|
b
|
|
190,839
|
|
Royalty
on metals
|
|
42,869
|
|
|
32,312
|
|
|
10,147
|
|
|
410
|
|
|
42,869
|
|
Unit
net cash costs
|
|
302,553
|
|
|
587,636
|
|
|
184,537
|
|
|
7,448
|
|
|
779,621
|
|
Depreciation
and amortization
|
|
67,683
|
|
|
51,016
|
|
|
16,021
|
|
|
646
|
|
|
67,683
|
|
Noncash
and nonrecurring costs, net
|
|
22,072
|
|
|
16,637
|
|
|
5,224
|
|
|
211
|
|
|
22,072
|
|
Total
unit costs
|
|
392,308
|
|
|
655,289
|
|
|
205,782
|
|
|
8,305
|
|
|
869,376
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales and gold hedging
|
|
128,357
|
c
|
|
197,319
|
|
|
(68,962
|
)
|
|
-
|
|
|
128,357
|
|
PT
Smelting intercompany profit recognized
|
|
12,979
|
|
|
9,783
|
|
|
3,072
|
|
|
124
|
|
|
12,979
|
|
Gross
profit
|
$
|
1,209,262
|
|
$
|
1,012,047
|
|
$
|
186,889
|
|
$
|
10,326
|
|
$
|
1,209,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
Revenues
|
|
Production
and Delivery
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
1,937,302
|
|
$
|
545,913
|
|
$
|
67,683
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
22,072
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(190,839
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Royalty
per above
|
|
(42,869
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales and hedging per above
|
|
128,357
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Mining
and exploration segment
|
|
1,831,951
|
|
|
567,985
|
|
|
67,683
|
|
|
|
|
|
|
|
Smelting
and refining segment
|
|
1,109,238
|
|
|
1,051,812
|
|
|
14,816
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
(428,865
|
)
|
|
(536,275
|
)
|
|
4,106
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
statements
|
$
|
2,512,324
|
|
$
|
1,083,522
|
|
$
|
86,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2005
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Thousands)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
995,096
|
|
$
|
995,096
|
|
$
|
515,038
|
|
$
|
16,506
|
|
$
|
1,526,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
414,425
|
d
|
|
270,131
|
e
|
|
139,813
|
e
|
|
4,481
|
e
|
|
414,425
|
|
Gold
and silver credits
|
|
(531,544
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
139,353
|
|
|
90,833
|
|
|
47,013
|
|
|
1,507
|
|
|
139,353
|
|
Royalty
on metals
|
|
36,519
|
|
|
23,804
|
|
|
12,320
|
|
|
395
|
|
|
36,519
|
|
Unit
net cash costs
|
|
58,753
|
|
|
384,768
|
|
|
199,146
|
|
|
6,383
|
|
|
590,297
|
|
Depreciation
and amortization
|
|
91,142
|
|
|
59,408
|
|
|
30,749
|
|
|
985
|
|
|
91,142
|
|
Noncash
and nonrecurring costs, net
|
|
2,808
|
|
|
1,831
|
|
|
947
|
|
|
30
|
|
|
2,808
|
|
Total
unit costs
|
|
152,703
|
|
|
446,007
|
|
|
230,842
|
|
|
7,398
|
|
|
684,247
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
15,016
|
|
|
15,016
|
|
|
-
|
|
|
-
|
|
|
15,016
|
|
PT
Smelting intercompany profit elimination
|
|
(25
|
)
|
|
(16
|
)
|
|
(9
|
)
|
|
-
|
|
|
(25
|
)
|
Gross
profit
|
$
|
857,384
|
|
$
|
564,089
|
|
$
|
284,187
|
|
$
|
9,108
|
|
$
|
857,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
Revenues
|
|
Production
and Delivery
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
1,526,640
|
|
$
|
414,425
|
|
$
|
91,142
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
2,808
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(139,353
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Royalty
per above
|
|
(36,519
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales per above
|
|
15,016
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Mining
and exploration segment
|
|
1,365,784
|
|
|
417,233
|
|
|
91,142
|
|
|
|
|
|
|
|
Smelting
and refining segment
|
|
604,013
|
|
|
585,486
|
|
|
14,230
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
(263,823
|
)
|
|
(247,127
|
)
|
|
5,713
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
statements
|
$
|
1,705,974
|
|
$
|
755,592
|
|
$
|
111,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
$12.4 million or $0.03 per pound for adjustments to 2005 concentrate
sales
subject to final pricing to reflect the impact on treatment charges
resulting from the increase in copper prices since December 31,
2005.
|
b.
|
Includes
$9.3 million or $0.02 per pound for copper, $2.9 million or $3.91
per
ounce for gold and $0.1 million or $0.08 per ounce for silver for
adjustments to 2005 concentrate sales subject to final pricing to
reflect
the impact on treatment charges resulting from the increase in copper
prices since December 31, 2005.
|
c.
|
Includes
a $69.0 million or $0.16 per pound loss on the redemption of FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
d.
|
Net
of deferred mining costs totaling $52.8 million or $0.08 per pound.
Following adoption of EITF 04-6 on January 1, 2006 (see Note 3 and
New
Accounting Standards), stripping costs are no longer
deferred.
|
e.
|
Net
of deferred mining costs totaling $34.4 million or $0.05 per pound
for
copper, $17.8 million or $14.70 per ounce for gold and $0.6 million
or
$0.25 per ounce for silver (see Note d
above).
|
CATHODE
CASH UNIT COST
Cathode
cash unit cost per pound of copper is a measure intended to provide investors
with information about the costs incurred to produce cathodes at our smelting
operations in Spain and Indonesia. We use this measure for the same purpose
and
for monitoring operating performance at our smelting operations. This
information differs from measures of performance determined in accordance with
generally accepted accounting principles and should not be considered in
isolation or as a substitute for measures of performance determined in
accordance with generally accepted accounting principles. Other smelting
companies present this measure, although Atlantic Copper’s and PT Smelting’s
measures may not be comparable to similarly titled measures reported by other
companies.
Atlantic
Copper Cathode Cash Unit
Cost Per Pound Of Copper
The
reconciliation below presents reported production costs for our smelting and
refining segment (Atlantic Copper) and subtracts or adds components of those
costs that do not directly relate to the process of converting copper
concentrates to cathodes. The adjusted production costs amounts are used to
calculate Atlantic Copper’s cathode cash unit cost per pound of copper (in
thousands, except per pound amounts):
Table of Contents
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Smelting
and refining segment production costs reported
|
|
|
|
|
|
|
|
|
|
|
|
|
in
FCX’s consolidated financial statements
|
$
|
560,375
|
|
$
|
321,909
|
|
$
|
1,051,812
|
|
$
|
585,486
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
material purchase costs
|
|
(409,477
|
)
|
|
(209,199
|
)
|
|
(735,418
|
)
|
|
(406,470
|
)
|
Production
costs of anodes sold
|
|
(1,524
|
)
|
|
(2,368
|
)
|
|
(6,049
|
)
|
|
(5,766
|
)
|
Other
|
|
3,335
|
|
|
179
|
|
|
4,447
|
|
|
(1,034
|
)
|
Credits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
and silver revenues
|
|
(118,816
|
)
|
|
(78,473
|
)
|
|
(248,859
|
)
|
|
(110,421
|
)
|
Acid
and other by-product revenues
|
|
(6,279
|
)
|
|
(7,291
|
)
|
|
(12,938
|
)
|
|
(14,591
|
)
|
Production
costs used in calculating cathode cash unit
|
|
|
|
|
|
|
|
|
|
|
|
|
cost
per pound
|
$
|
27,614
|
|
$
|
24,757
|
|
$
|
52,995
|
|
$
|
47,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of cathode produced
|
|
131,500
|
|
|
137,800
|
|
|
260,900
|
|
|
269,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cathode
cash unit cost per pound
|
$
|
0.21
|
|
$
|
0.18
|
|
$
|
0.20
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PT
Smelting Cathode Cash Unit
Cost Per Pound of Copper
The
calculation below presents PT Smelting’s reported operating costs and subtracts
or adds components of those costs that do not directly relate to the process
of
converting copper concentrates to cathodes. PT Smelting’s operating costs are
then reconciled to PT Freeport Indonesia’s equity in PT Smelting earnings
reported in FCX’s consolidated financial statements (in thousands, except per
pound amounts):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Operating
costs - PT Smelting (100%)
|
$
|
31,438
|
|
$
|
17,623
|
|
$
|
55,404
|
|
$
|
36,074
|
|
Add:
Gold and silver refining charges
|
|
1,039
|
|
|
1,119
|
|
|
2,505
|
|
|
2,075
|
|
Less:
Acid and other by-product revenues
|
|
(3,666
|
)
|
|
(3,641
|
)
|
|
(7,402
|
)
|
|
(7,502
|
)
|
Other
|
|
3,522
|
|
|
(400
|
)
|
|
1,922
|
|
|
(898
|
)
|
Production
costs used in calculating cathode cash unit
|
|
|
|
|
|
|
|
|
|
|
|
|
cost
per pound
|
$
|
32,333
|
|
$
|
14,701
|
|
$
|
52,429
|
|
$
|
29,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of cathode produced
|
|
127,300
|
|
|
146,100
|
|
|
269,700
|
|
|
289,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cathode
cash unit cost per pound
|
$
|
0.25
|
|
$
|
0.10
|
|
$
|
0.19
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs per above
|
$
|
(31,438
|
)
|
$
|
(17,623
|
)
|
$
|
(55,404
|
)
|
$
|
(36,074
|
)
|
Other
costs
|
|
(528,549
|
)
|
|
(312,792
|
)
|
|
(1,000,584
|
)
|
|
(590,943
|
)
|
Revenue
and other income
|
|
568,252
|
|
|
340,904
|
|
|
1,078,729
|
|
|
648,130
|
|
PT
Smelting net income
|
|
8,265
|
|
|
10,489
|
|
|
22,741
|
|
|
21,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PT
Freeport Indonesia’s 25% equity interest
|
|
2,066
|
|
|
2,622
|
|
|
5,685
|
|
|
5,278
|
|
Amortization
of excess investment cost
|
|
(60
|
)
|
|
(60
|
)
|
|
(120
|
)
|
|
(120
|
)
|
Equity
in PT Smelting earnings reported in FCX’s
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated
financial statements
|
$
|
2,006
|
|
$
|
2,562
|
|
$
|
5,565
|
|
$
|
5,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAUTIONARY
STATEMENT
Our
discussion and analysis contains forward-looking statements in which we discuss
our expectations regarding future performance. Forward-looking statements are
all statements other than historical facts, such as those regarding anticipated
sales volumes, ore grades, commodity prices, general and administrative
expenses, unit net cash costs, operating cash flows, royalty costs, capital
expenditures, debt repayments and refinancing, debt maturities, treatment charge
rates, depreciation rates, exploration
efforts
and results, dividend payments, liquidity and other financial commitments.
We
caution you that these statements are not guarantees of future performance,
and
our actual results may differ materially from those projected, anticipated
or
assumed in the forward-looking statements. Important factors that can cause
our
actual results to differ materially from those anticipated in the
forward-looking statements include unanticipated mining, milling and other
processing problems, accidents that lead to personal injury or property damage,
persistent commodity price reductions, changes in political, social or economic
circumstances in our area of operations, variances in ore grades, labor
relations, adverse weather conditions, the speculative nature of mineral
exploration, fluctuations in interest rates and other adverse financial market
conditions, and other factors described in more detail under the heading “Risk
Factors” in our Form 10-K for the year ended December 31, 2005.
There
have been no significant changes in our market risks since the year ended
December 31, 2005. For more information, please read the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for
the
year ended December 31, 2005.
(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 quarterly
report on Form 10-Q. 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 Securities and Exchange Commission
filings.
(b) Changes
in internal controls.
There
has been no change in our internal control over financial reporting that
occurred during the second quarter that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
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.
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 described in our Form 10-K for the year ended December
31, 2005, 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 are cooperating with these requests.
The
risk
factors included in our Annual Report on Form 10-K for the year ended December
31, 2005, have not materially changed other than the updates set forth below,
which should be read in conjunction with our 2005 Form 10-K.
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.
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.
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 2006, the Government of Indonesia created a joint team
for
“Periodic Evaluation on Implementation of the PT-FI Contract of Work (COW)” to
conduct a periodic evaluation every five years. The team consists of five
working groups, whose members are from relevant ministries or agencies, covering
production, state revenues, community development, environmental issues and
security issues. We have conducted numerous working meetings with these groups.
The joint team has indicated that it will issue its report shortly. We cannot
assure you that the report will conclude that we are complying with all of
the
provisions of PT Freeport Indonesia’s Contract of Work. Separately, the
Indonesian House of Representatives created a working committee on PT Freeport
Indonesia. Members of this group have also visited our operations and held
a
number of hearings in Jakarta. We will continue to work with these groups to
respond to their questions about our operations and our compliance with PT
Freeport Indonesia’s COW.
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 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.
In
March
2006, the Indonesian Ministry of Environment announced the preliminary results
of its PROPER environmental management audit, acknowledging the effectiveness
of
PT Freeport Indonesia’s environmental management practices in some areas while
making several suggestions for improvement in others. We are working with the
Ministry of Environment to address the issues raised as we complete the audit
process.
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.
(a)
In
July 2006, we privately negotiated transactions with holders to induce
conversion of $14.5 million of our $575 million 7% Convertible Senior Notes
due
2011 into 0.5 million shares of our common stock. This transaction is in
reliance on the exemption from registration provided under Section 3(a)(9)
of
the Securities Act of 1933.
(c)
The
following table sets forth common shares we repurchased during the three-month
period ended June 30, 2006.
|
|
|
|
|
|
Current
Programa
|
Period
|
|
Total
Shares
Purchased
|
|
Average
Price Paid Per Share
|
|
Shares
Purchased
|
|
Shares
Available for Purchase
|
|
|
|
|
|
|
|
|
|
|
April
1 to 30, 2006
|
|
-
|
|
$
|
-
|
|
-
|
|
14,244,200
|
|
|
|
|
|
|
|
|
|
|
May
1 to 31, 2006
|
|
-
|
|
|
-
|
|
-
|
|
14,244,200
|
|
|
|
|
|
|
|
|
|
|
June
1 to 30, 2006
|
|
1,997,900
|
|
|
49.94
|
|
1,997,900
|
|
12,246,300
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,997,900
|
|
|
49.94
|
|
1,997,900
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
In
October 2003, our Board of Directors approved an open market share
purchase program for up to 20 million shares, which replaced our
previous
program. The program does not have an expiration
date.
|
Our
annual meeting of stockholders was held on May 4, 2006 (the “Annual Meeting”).
Proxies were solicited pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended. The following matters were submitted to a vote of
security holders during our Annual Meeting:
|
|
Votes
Cast For
|
|
Authority
Withheld
|
1.
Election of Directors:
|
|
|
|
|
Robert
J. Allison, Jr.
|
|
146,967,385
|
|
15,793,239
|
Robert
A. Day
|
|
158,967,066
|
|
3,793,558
|
Gerald
J. Ford
|
|
161,144,159
|
|
1,616,465
|
H.
Devon Graham, Jr.
|
|
149,795,985
|
|
12,964,639
|
J.
Bennett Johnston
|
|
151,476,785
|
|
11,283,839
|
Bobby
Lee Lackey
|
|
147,930,403
|
|
14,830,221
|
Gabrielle
K. McDonald
|
|
151,498,577
|
|
11,262,047
|
James
R. Moffett
|
|
158,787,892
|
|
3,972,732
|
B.
M. Rankin, Jr.
|
|
151,510,240
|
|
11,250,384
|
J.
Stapleton Roy
|
|
151,536,776
|
|
11,223,848
|
J.
Taylor Wharton
|
|
147,946,553
|
|
14,814,071
|
There
were no abstentions with respect to the election of directors.
|
|
|
|
|
|
|
|
Broker
|
|
|
For
|
|
Against
|
|
Abstentions
|
|
Non-Votes
|
2.
Ratification of Ernst & Young LLP
|
|
|
|
|
|
|
|
|
as
independent auditors
|
|
161,510,837
|
|
225,729
|
|
1,010,479
|
|
-
|
3.
Proposal to adopt 2006 Stock
|
|
|
|
|
|
|
|
|
Incentive
Plan
|
|
93,317,417
|
|
48,580,101
|
|
1,335,262
|
|
-
|
4.
Stockholder proposal urging
|
|
|
|
|
|
|
|
|
management
review its
|
|
|
|
|
|
|
|
|
policies
relating to financial
|
|
|
|
|
|
|
|
|
support
of the Indonesian
|
|
|
|
|
|
|
|
|
Government
security personnel
|
|
8,828,837
|
|
115,848,160
|
|
18,555,783
|
|
19,514,265
|
The
exhibits to this report are listed in the Exhibit Index beginning on Page E-1
hereof.
FREEPORT-McMoRan
COPPER & GOLD INC.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
FREEPORT-McMoRan
COPPER & GOLD INC.
By:
/s/
C. Donald Whitmire, Jr.
C.
Donald
Whitmire, Jr.
Vice
President and
Controller-Financial
Reporting
(authorized
signatory and
Principal
Accounting Officer)
Date:
August 3, 2006
Freeport-McMoRan
Copper & Gold Inc.
Exhibit
Number Description
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
|
|
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.
|
|
|
|
4.2
|
|
Amended
and Restated Credit Agreement dated as of July 25, 2006, by and among
FCX,
PT Freeport Indonesia, JPMorgan Chase Bank, N.A. as Administrative
Agent,
Issuing Bank, Security Agent, JAA Security Agent and Syndication
Agent,
Citibank, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
The Bank of Nova Scotia, as Co-Documentation Agents, U.S. Bank National
Association, as FI Trustee, J.P. Morgan Securities Inc., as Sole
Lead
Arranger and Sole Bookrunner, and the several financial institutions
that
are parties thereto. Incorporated by reference to Exhibit 10.1 to
the
Current Report on Form 8-K of FCX dated July 25, 2006 and filed July
26,
2006.
|
|
|
|
4.3
|
|
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).
|
4.4
|
|
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.
|
|
|
|
4.5
|
|
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.
|
|
|
|
4.6
|
|
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.
|
|
|
|
4.7
|
|
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).
|
4.8
|
|
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.
|
|
|
|
4.9
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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).
|
|
|
|
|
|
Executive
Compensation Plans and Arrangements (Exhibits 10.8 through
10.58)
|
|
|
|
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).
|
|
|
|
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.
|
|
|
|
10.10
|
|
FCX
President’s
Award Program. Incorporated by reference to Exhibit 10.7 to the FCX
November 5, 2001 Form S-3.
|
|
|
|
10.11
|
|
FCX
1995 Stock Option Plan, as amended and restated. Incorporated by
reference
to Exhibit 10.3 to the Current Report on Form 8-K of FCX dated May
2, 2006
(the FCX May 2, 2006 Form 8-K).
|
|
|
|
10.12
|
|
FCX
Amended and Restated 1999 Stock Incentive Plan, as amended and restated.
Incorporated by reference to Exhibit 10.2 to the FCX May 2, 2006
Form
8-K.
|
10.13
|
|
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.
|
|
|
|
10.14
|
|
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.
|
|
|
|
10.15
|
|
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.
|
|
|
|
10.16
|
|
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).
|
|
|
|
10.17
|
|
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).
|
|
|
|
10.18
|
|
FCX
2003 Stock Incentive Plan, as amended and restated. Incorporated
by
reference to Exhibit 10.1 to the FCX May 2, 2006 Form
8-K.
|
|
|
|
10.19
|
|
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.
|
|
|
|
10.20
|
|
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.
|
|
|
|
10.21
|
|
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.
|
|
|
|
10.22
|
|
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.
|
|
|
|
10.23
|
|
FCX
2004 Director Compensation Plan. Incorporated by reference to Exhibit
10.24 to the FCX 2005 Second Quarter Form 10-Q.
|
|
|
|
10.24
|
|
Form
of Amendment No. 1 to Notice of Grant of Nonqualified Stock Options
and
Stock Appreciation Rights under the 2004 Director Compensation Plan.
Incorporated by reference to Exhibit 10.4 to the FCX May 2, 2006
Form
8-K.
|
|
|
|
10.25
|
|
FCX
2006 Stock Incentive Plan. Incorporated by reference to Exhibit 10.6
to
the FCX May 2, 2006 Form 8-K.
|
|
|
|
10.26
|
|
Form
of Notice of Grant of Nonqualified Stock Options under the 2006 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.7 to the
FCX May
2, 2006 Form 8-K.
|
|
|
|
10.27
|
|
Form
of Restricted Stock Unit Agreement under the 2006 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.8 to the FCX May 2, 2006
Form
8-K.
|
|
|
|
10.28
|
|
Form
of Performance-Based Restricted Stock Unit Agreement under the 2006
Stock
Incentive Plan. Incorporated by reference to Exhibit 10.9 to the
FCX May
2, 2006 Form 8-K.
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10.29
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FCX
Director Compensation. Incorporated by reference to Exhibit 10.25
to the
FCX 2004 Form 10-K.
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10.30
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FCX
Supplemental Executive Retirement Plan dated February 26, 2004.
Incorporated by reference to Exhibit 10.26 to the FCX 2004 Form
10-K.
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10.31
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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.
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10.32
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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.
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10.33
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FCX
Executive Services Program. Incorporated by reference to Exhibit
10.5 to
the FCX May 2, 2006 Form 8-K.
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10.34
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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.
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10.35
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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).
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10.36
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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.
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10.37
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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).
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10.38
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Supplemental
Consulting Agreement with Kissinger Associates and Kent Associates,
effective as of January 1, 2006. Incorporated by reference to Exhibit
10.35 to the Annual Report on Form 10-K of FCX for the fiscal year
ended
December 31, 2005 (the FCX 2005 Form 10-K).
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10.39
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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.
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10.40
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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.
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10.41
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Supplemental
Letter Agreement between FMS and B. M. Rankin, Jr., effective as
of
January 1, 2006. Incorporated by reference to Exhibit 10.38 to the
FCX
2005 Form 10-K.
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10.42
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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.
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10.43
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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.
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10.44
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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.
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10.45
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Supplemental
Consulting Agreement between FMS and J. Bennett Johnston, Jr., effective
as of January 1, 2006. Incorporated by reference to Exhibit 10.42
to the
FCX 2005 Form 10-K.
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10.46
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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.
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10.47
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Supplemental
Letter Agreement, between FMS and Gabrielle K. McDonald, effective
as of
January 1, 2006. Incorporated by reference to Exhibit 10.44 to the
FCX
2005 Form 10-K.
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10.48
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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.
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10.49
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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.
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10.50
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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.
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10.51
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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.
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10.52
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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.
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10.53
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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.
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10.54
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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.
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10.55
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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.
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10.56
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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.
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10.57
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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.
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10.58
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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.
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Letter
from Ernst & Young LLP regarding unaudited interim financial
statements.
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Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d -
14(a).
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Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d -
14(a).
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Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.
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Certification
of Principal Financial Officer pursuant to 18 U.S.C Section
1350.
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