FCX 1Q06 10Q
|
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
|
FORM
10-Q
|
|
(Mark
One)
|
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended March 31, 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
|
70112
|
(Address
of principal executive offices)
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(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
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
March
31, 2006, there were issued and outstanding 188,465,573 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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3
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4
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5
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6
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14
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Item
2. Management's Discussion and Analysis of
Financial Condition
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and
Results of Operations
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15
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Item
3. Quantitative and Qualitative
Disclosures about Market Risk
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37
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38
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38
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38
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38
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Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
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38
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38
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39
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E-1
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FREEPORT-McMoRan
COPPER & GOLD INC.
FREEPORT-McMoRan
COPPER & GOLD INC.
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
Thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
284,070
|
|
|
$
|
763,599
|
|
Accounts
receivable
|
|
|
616,090
|
|
|
|
687,969
|
|
Inventories
|
|
|
612,522
|
|
|
|
565,019
|
|
Prepaid
expenses and other
|
|
|
13,989
|
|
|
|
5,795
|
|
Total
current assets
|
|
|
1,526,671
|
|
|
|
2,022,382
|
|
Property,
plant, equipment and development costs, net
|
|
|
3,095,779
|
|
|
|
3,088,931
|
|
Deferred
mining costs
|
|
|
-
|
|
|
|
285,355
|
|
Other
assets
|
|
|
114,824
|
|
|
|
119,999
|
|
Investment
in PT Smelting
|
|
|
58,918
|
|
|
|
33,539
|
|
Total
assets
|
|
$
|
4,796,192
|
|
|
$
|
5,550,206
|
|
|
|
|
|
|
|
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
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Current
liabilities:
|
|
|
|
|
|
|
|
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Accounts
payable and accrued liabilities
|
|
$
|
433,731
|
|
|
$
|
573,560
|
|
Current
portion of long-term debt and short-term borrowings
|
|
|
90,077
|
|
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|
253,350
|
|
Accrued
income taxes
|
|
|
56,231
|
|
|
|
327,041
|
|
Rio
Tinto share of joint venture cash flows
|
|
|
33,015
|
|
|
|
125,809
|
|
Unearned
customer receipts
|
|
|
32,746
|
|
|
|
57,184
|
|
Accrued
interest payable
|
|
|
12,980
|
|
|
|
32,034
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|
Total
current liabilities
|
|
|
658,780
|
|
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1,368,978
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Long-term
debt, less current portion:
|
|
|
|
|
|
|
|
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Senior
notes
|
|
|
612,900
|
|
|
|
624,365
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Convertible
senior notes
|
|
|
312,667
|
|
|
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323,667
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|
Equipment
and other loans
|
|
|
51,171
|
|
|
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54,529
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|
Atlantic
Copper debt
|
|
|
34,455
|
|
|
|
37
|
|
Total
long-term debt, less current portion
|
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|
1,011,193
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|
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1,002,598
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Accrued
postretirement benefits and other liabilities
|
|
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217,228
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|
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210,259
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Deferred
income taxes
|
|
|
831,113
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|
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902,386
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Minority
interests
|
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|
215,601
|
|
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222,991
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Stockholders’
equity:
|
|
|
|
|
|
|
|
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Convertible
perpetual preferred stock
|
|
|
1,100,000
|
|
|
|
1,100,000
|
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Class
B common stock
|
|
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29,898
|
|
|
|
29,696
|
|
Capital
in excess of par value of common stock
|
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2,303,626
|
|
|
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2,212,246
|
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Retained
earnings
|
|
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1,035,300
|
|
|
|
1,086,191
|
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Accumulated
other comprehensive income
|
|
|
11,989
|
|
|
|
10,749
|
|
Common
stock held in treasury
|
|
|
(2,618,536
|
)
|
|
|
(2,595,888
|
)
|
Total
stockholders’ equity
|
|
|
1,862,277
|
|
|
|
1,842,994
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
4,796,192
|
|
|
$
|
5,550,206
|
|
The
accompanying notes are an integral part of these financial
statements.
Table of
Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
|
Three
Months Ended
March
31,
|
|
|
2006
|
|
2005
|
|
|
(In
Thousands, Except Per Share Amounts)
|
|
Revenues
|
$
|
1,086,122
|
|
$
|
803,065
|
|
Cost
of sales:
|
|
|
|
|
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Production
and delivery
|
|
477,915
|
|
|
365,006
|
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Depreciation
and amortization
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43,250
|
|
|
56,926
|
|
Total
cost of sales
|
|
521,165
|
|
|
421,932
|
|
Exploration
expenses
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|
2,576
|
|
|
1,920
|
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General
and administrative expenses
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30,631
|
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|
21,614
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|
Total
costs and expenses
|
|
554,372
|
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|
445,466
|
|
Operating
income
|
|
531,750
|
|
|
357,599
|
|
Equity
in PT Smelting earnings
|
|
3,559
|
|
|
2,596
|
|
Interest
expense, net
|
|
(22,671
|
)
|
|
(37,548
|
)
|
(Losses)
gains on early extinguishment and conversion of debt
|
|
(1,973
|
)
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|
37
|
|
Other
income, net
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|
4,958
|
|
|
7,952
|
|
Income
before income taxes and minority interests
|
|
515,623
|
|
|
330,636
|
|
Provision
for income taxes
|
|
(221,722
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)
|
|
(164,028
|
)
|
Minority
interests in net income of consolidated subsidiaries
|
|
(27,126
|
)
|
|
(21,088
|
)
|
Net
income
|
|
266,775
|
|
|
145,520
|
|
Preferred
dividends
|
|
(15,125
|
)
|
|
(15,125
|
)
|
Net
income applicable to common stock
|
$
|
251,650
|
|
$
|
130,395
|
|
|
|
|
|
|
|
|
Net
income per share of common stock:
|
|
|
|
|
|
|
Basic
|
|
$1.34
|
|
|
$0.73
|
|
Diluted
|
|
$1.23
|
|
|
$0.70
|
|
|
|
|
|
|
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
187,916
|
|
|
179,320
|
|
Diluted
|
|
221,477
|
|
|
200,126
|
|
|
|
|
|
|
|
|
Dividends
paid per share of common stock
|
|
$0.8125
|
|
|
$0.75
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|
|
|
|
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|
The
accompanying notes are an integral part of these financial
statements.
FREEPORT-McMoRan
COPPER & GOLD INC.
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
Thousands)
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
266,775
|
|
|
$
|
145,520
|
|
Adjustments
to reconcile net income to net cash (used in) provided by
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
43,250
|
|
|
|
56,926
|
|
Minority
interests’ share of net income
|
|
|
27,126
|
|
|
|
21,088
|
|
Stock-based
compensation
|
|
|
9,637
|
|
|
|
940
|
|
Long-term
compensation and postretirement benefits
|
|
|
7,416
|
|
|
|
4,251
|
|
Losses
(gains) on early extinguishment and conversion of debt
|
|
|
1,973
|
|
|
|
(37
|
)
|
Deferred
income taxes
|
|
|
41,886
|
|
|
|
(12,020
|
)
|
Equity
in PT Smelting earnings
|
|
|
(3,559
|
)
|
|
|
(2,596
|
)
|
Increase
in deferred mining costs
|
|
|
-
|
|
|
|
(32,219
|
)
|
(Recognition)
elimination of profit on PT Freeport Indonesia sales
|
|
|
|
|
|
|
|
|
to
PT Smelting
|
|
|
(20,828
|
)
|
|
|
2,576
|
|
Provision
for inventory obsolescence
|
|
|
1,500
|
|
|
|
1,500
|
|
Other
|
|
|
2,190
|
|
|
|
(500
|
)
|
(Increases)
decreases in working capital:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
65,150
|
|
|
|
34,774
|
|
Inventories
|
|
|
(40,318
|
)
|
|
|
18,997
|
|
Prepaid
expenses and other
|
|
|
(7,284
|
)
|
|
|
(6,901
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(157,573
|
)
|
|
|
(73,027
|
)
|
Rio
Tinto share of joint venture cash flows
|
|
|
(92,794
|
)
|
|
|
2,493
|
|
Accrued
income taxes
|
|
|
(268,300
|
)
|
|
|
473
|
|
Increase
in working capital
|
|
|
(501,119
|
)
|
|
|
(23,191
|
)
|
Net
cash (used in) provided by operating activities
|
|
|
(123,753
|
)
|
|
|
162,238
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
PT
Freeport Indonesia capital expenditures
|
|
|
(48,609
|
)
|
|
|
(23,522
|
)
|
Atlantic
Copper and other capital expenditures
|
|
|
(3,513
|
)
|
|
|
(2,724
|
)
|
Sale
of assets
|
|
|
2,003
|
|
|
|
-
|
|
Investment
in PT Smelting and other
|
|
|
(317
|
)
|
|
|
(85
|
)
|
Proceeds
from insurance settlement
|
|
|
-
|
|
|
|
2,016
|
|
Net
cash used in investing activities
|
|
|
(50,436
|
)
|
|
|
(24,315
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
|
55,509
|
|
|
|
37,428
|
|
Repayments
of debt
|
|
|
(201,016
|
)
|
|
|
(220,245
|
)
|
Redemption
of step-up preferred stock
|
|
|
-
|
|
|
|
(215
|
)
|
Cash
dividends paid:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
(153,155
|
)
|
|
|
(134,740
|
)
|
Preferred
stock
|
|
|
(15,125
|
)
|
|
|
(15,126
|
)
|
Minority
interests
|
|
|
(18,744
|
)
|
|
|
(47,431
|
)
|
Net
proceeds from exercised stock options
|
|
|
11,140
|
|
|
|
1,511
|
|
Excess
tax benefit from exercised stock options
|
|
|
16,057
|
|
|
|
-
|
|
Other
|
|
|
(6
|
)
|
|
|
(13
|
)
|
Net
cash used in financing activities
|
|
|
(305,340
|
)
|
|
|
(378,831
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(479,529
|
)
|
|
|
(240,908
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
763,599
|
|
|
|
551,450
|
|
Cash
and cash equivalents at end of period
|
|
$
|
284,070
|
|
|
$
|
310,542
|
|
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 three-month period ended March
31,
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
March 31, 2006, FCX has three 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
to retirement-eligible employees, FCX records one year of amortization of the
awards’ value on the date of grant. 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 March 31, 2006, was
$9.0
million lower and net income was $5.2 million ($0.03 per basic share and $0.02
per diluted share) lower than if it had continued to account for share-based
compensation under APB Opinion No. 25. Basic earnings per share would have
been
$1.37 per share and diluted earnings per share would have been $1.25 per share
for the three months ended March 31, 2006, if
FCX
had
not adopted SFAS No. 123R, compared to reported earnings of $1.34 per basic
share and $1.23 per diluted share.
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 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 $16.1 million excess tax benefit classified as a financing cash inflow
in
the Consolidated Statements of Cash Flows for the three months ended March
31,
2006, would have been classified as an operating cash inflow if FCX had not
adopted SFAS No. 123R.
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
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Stock
options awarded to employees (including directors)
|
|
$
|
9,028
|
|
$
|
508
|
a
|
Stock
options awarded to nonemployees
|
|
|
456
|
|
|
319
|
|
Restricted
stock units in lieu of cash awards
|
|
|
2,478
|
|
|
3,021
|
|
Stock
appreciation rights
|
|
|
1,279
|
|
|
529
|
|
Total
compensation cost
|
|
|
13,241
|
|
|
4,377
|
|
Tax
benefit
|
|
|
(4,904
|
)
|
|
(1,302
|
)
|
Minority
interest share
|
|
|
(722
|
)
|
|
(194
|
)
|
Impact
on net income
|
|
$
|
7,615
|
|
$
|
2,881
|
|
|
|
|
|
|
|
|
|
a.
|
Represents
amortization of the intrinsic value of FCX’s Class A stock options that
were converted to Class B stock options in
2002.
|
The
following table illustrates the effect on net income and earnings per share
for
the three months ended March 31, 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):
Net
income applicable to common stock, as reported
|
|
$
|
130,395
|
|
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
|
|
|
2,559
|
|
Deduct:
Total stock-based employee compensation
|
|
|
|
|
expense
determined under fair value-based method
|
|
|
|
|
for
all awards, net of taxes and minority interests
|
|
|
(5,415
|
)
|
Pro
forma net income applicable to common stock
|
|
$
|
127,539
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.73
|
|
Basic
- pro forma
|
|
$
|
0.71
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.70
|
|
Diluted
- pro forma
|
|
$
|
0.67
|
|
|
|
|
|
|
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 fair
values and assumptions used to
determine
the fair value of FCX’s stock option grants under SFAS No. 123 during the three
months ended March 31, 2005.
Fair
value per stock option
|
$
|
13.99
|
|
|
Risk-free
interest rate
|
|
3.9
|
%
|
|
Expected
volatility rate
|
|
46
|
%
|
|
Expected
life of options (in years)
|
|
6
|
|
|
Assumed
annual dividend
|
$
|
1.00
|
|
|
Stock-Based
Compensation Plans.
As
discussed above, FCX currently has five stock-based compensation plans and
all
are shareholder approved. As of March 31, 2006, only three 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. 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.
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.
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 0.6 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 March 31, 2006.
Options
and SARs.
A
summary of options outstanding as of March 31, 2006, including 152,427 SARs,
and
changes during the three months ended March 31, 2006 follows:
|
|
|
|
|
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
|
1,016,250
|
|
|
63.77
|
|
|
|
|
|
|
Exercised
|
(1,565,336
|
)
|
|
21.89
|
|
|
|
|
|
|
Expired/Forfeited
|
(7,500
|
)
|
|
30.81
|
|
|
|
|
|
|
Balance
at March 31
|
6,799,026
|
|
|
38.47
|
|
8.25
|
|
$
|
148,904
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable at March 31
|
1,473,481
|
|
|
29.62
|
|
7.38
|
|
$
|
44,425
|
|
|
|
|
|
|
|
|
|
|
|
|
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 three months ended March 31, 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. The total intrinsic value of options exercised
during the three months ended March 31, 2006, was $61.5 million. As of March
31,
2006, FCX had $66.6 million of total unrecognized compensation cost related
to
unvested stock options expected to be recognized over a weighted average period
of 1.4 years.
Cash
received from stock option exercises totaled $25.2 million for the three months
ended March 31, 2006, and $7.2 million for the three months ended March 31,
2005. The actual tax benefit realized for the tax deductions from stock option
exercises totaled $19.6 million for the three months ended March 31, 2006 and
$5.9 million for the three months ended March 31, 2005. 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. Shares
tendered to FCX for these purposes totaled 357,891 shares for the three months
ended March 31, 2006, and 524,907 shares for the three months ended March 31,
2005. FCX paid $14.0 million during the three months ended March 31, 2006,
and
$5.7 million during the three months ended March 31, 2005, for employee taxes.
FCX paid $1.8 million during the three months ended March 31, 2006, for
exercised SARs. There were no SARs exercised during the three months ended
March
31, 2005.
Restricted
Stock Units.
As
discussed above, FCX has a restricted stock program that allows FCX senior
executives to elect to receive restricted stock units under the plans 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
granted 332,677 restricted stock units in the three months ended March 31,
2006,
and 123,044 restricted stock units in the three months ended March 31, 2005.
A
summary of outstanding unvested restricted stock units as of March 31, 2006,
and
activity during the three months ended March 31, 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
|
332,677
|
|
|
|
|
|
|
Vested
|
(131,301
|
)
|
|
|
|
|
|
Forfeited
|
-
|
|
|
|
|
|
|
Balance
at March 31
|
518,634
|
|
2.29
|
|
$
|
30,999
|
|
|
|
|
|
|
|
|
|
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 total intrinsic value of restricted stock units vesting during
the
three months ended March 31, 2006, was $8.2 million.
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 March 31, 2006, was $32.8 million lower and net income was $17.4
million ($0.09 per basic share and $0.08 per diluted share) lower than if it
had
continued to defer stripping costs. Basic earnings per share would have been
$1.43 per share and diluted earnings per share would have been $1.31 per share
for the three months ended March 31, 2006, if FCX had not adopted EITF 04-6,
compared to reported earnings of $1.34 per basic share and $1.23 per diluted
share. 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
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Net
income before preferred dividends
|
|
$
|
266,775
|
|
$
|
145,520
|
|
Preferred
dividends
|
|
|
(15,125
|
)
|
|
(15,125
|
)
|
Net
income applicable to common stock
|
|
|
251,650
|
|
|
130,395
|
|
Plus
income impact of assumed conversion of:
|
|
|
|
|
|
|
|
5½%
Convertible Perpetual Preferred Stock
|
|
|
15,125
|
|
|
-
|
|
7%
Convertible Senior Notes
|
|
|
5,101
|
|
|
10,323
|
|
Diluted
net income applicable to common stock
|
|
$
|
271,876
|
|
$
|
140,718
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
187,916
|
|
|
179,320
|
|
Add:
|
|
|
|
|
|
|
|
Shares
issuable upon conversion, exercise or vesting of:
|
|
|
|
|
|
|
|
5½%
Convertible Perpetual Preferred Stock
|
|
|
21,732
|
|
|
-
|
|
7%
Convertible Senior Notes
|
|
|
10,159
|
|
|
18,625
|
|
Dilutive
stock options
|
|
|
1,052
|
|
|
1,701
|
|
Restricted
stock
|
|
|
618
|
|
|
480
|
|
Weighted
average common shares outstanding for purposes of
calculating
|
|
|
|
|
|
|
|
diluted
net income per share
|
|
|
221,477
|
|
|
200,126
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share of common stock
|
|
$
|
1.23
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
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 March 31,
|
|
|
|
2006
|
|
2005
|
|
Weighted
average outstanding options
|
|
677,500
|
|
-
|
|
Weighted
average exercise price
|
|
$63.77
|
|
-
|
|
Dividends
on 5½% Convertible Perpetual Preferred Stock
|
|
-
|
|
$15,125
|
|
Weighted
average shares issuable upon conversion
|
|
-
|
|
20,915
|
|
The
components of inventories follow (in thousands):
|
|
|
March
31,
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
PT
Freeport Indonesia:
|
Concentrates
and stockpiles -
|
|
|
|
|
|
|
|
|
Average
cost
|
|
$
|
5,466
|
|
$
|
14,723
|
|
Atlantic
Copper:
|
Concentrates
- First in, first out (FIFO)
|
|
|
130,966
|
|
|
137,740
|
|
|
Work
in process - FIFO
|
|
|
184,729
|
|
|
144,951
|
|
|
Finished
goods - FIFO
|
|
|
1,214
|
|
|
2,975
|
|
Total
product inventories
|
|
|
322,375
|
|
|
300,389
|
|
Total
materials and supplies, net
|
|
|
290,147
|
|
|
264,630
|
|
Total
inventories
|
|
$
|
612,522
|
|
$
|
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 $16.6 million at March 31, 2006, and December 31,
2005.
6.
|
DEBT
AND EQUITY TRANSACTIONS
|
As
of
March 31, 2006, FCX had total outstanding debt of $1.1 billion. Debt was reduced
by a net $154.7 million during the first quarter 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 included privately negotiated transactions
to
induce conversion of $11.0 million of 7% Convertible Senior Notes due 2011
into
0.4 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 conversion
and open-market transactions, FCX recorded charges of $2.0 million ($1.3 million
to net income, net of related reduction of interest expense, or $0.01 per share)
in the first quarter of 2006. In April 2006, FCX induced conversion of an
additional $5.0 million of 7% Convertible Senior Notes due 2011 into 0.2 million
shares of FCX common stock.
The
components of net periodic pension benefit cost for the three months ended
March
31, 2006 and 2005 follow (in thousands):
|
FCX
|
|
PT
Freeport Indonesia
|
|
Atlantic
Copper
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
$
|
109
|
|
$
|
179
|
|
$
|
946
|
|
$
|
931
|
|
$
|
-
|
|
$
|
-
|
|
Interest
cost
|
|
398
|
|
|
518
|
|
|
1,226
|
|
|
972
|
|
|
1,114
|
|
|
1,289
|
|
Expected
return on plan assets
|
|
340
|
|
|
(22
|
)
|
|
(609
|
)
|
|
(365
|
)
|
|
-
|
|
|
-
|
|
Amortization
of prior service cost
|
|
1,051
|
|
|
944
|
|
|
234
|
|
|
232
|
|
|
-
|
|
|
-
|
|
Amortization
of net actuarial loss
|
|
14
|
|
|
-
|
|
|
134
|
|
|
184
|
|
|
221
|
|
|
241
|
|
Net
periodic benefit cost
|
$
|
1,912
|
|
$
|
1,619
|
|
$
|
1,931
|
|
$
|
1,954
|
|
$
|
1,335
|
|
$
|
1,530
|
|
Interest
expense excludes capitalized interest of $1.8 million in the first quarter
of
2006 and $0.9 million in the first quarter of 2005.
9.
BUSINESS SEGMENTS
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 March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
796,783
|
a
|
$
|
516,104
|
|
$
|
(226,765
|
)
|
$
|
1,086,122
|
|
Production
and delivery
|
|
|
286,677
|
|
|
491,437
|
|
|
(300,199
|
)b
|
|
477,915
|
|
Depreciation
and amortization
|
|
|
33,773
|
|
|
7,406
|
|
|
2,071
|
|
|
43,250
|
|
Exploration
expenses
|
|
|
2,537
|
|
|
-
|
|
|
39
|
|
|
2,576
|
|
General
and administrative expenses
|
|
|
82,306
|
c
|
|
3,775
|
|
|
(55,450
|
)c
|
|
30,631
|
|
Operating
income
|
|
$
|
391,490
|
|
$
|
13,486
|
|
$
|
126,774
|
|
$
|
531,750
|
|
Equity
in PT Smelting earnings
|
|
$
|
-
|
|
$
|
3,559
|
|
$
|
-
|
|
$
|
3,559
|
|
Interest
expense, net
|
|
$
|
3,273
|
|
$
|
5,447
|
|
$
|
13,951
|
|
$
|
22,671
|
|
Provision
for income taxes
|
|
$
|
144,691
|
|
$
|
-
|
|
$
|
77,031
|
|
$
|
221,722
|
|
Capital
expenditures
|
|
$
|
48,940
|
|
$
|
3,513
|
|
$
|
(331
|
)
|
$
|
52,122
|
|
Total
assets
|
|
$
|
3,729,867
|
d
|
$
|
963,594
|
e
|
$
|
102,731
|
|
$
|
4,796,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
687,398
|
a
|
$
|
272,116
|
|
$
|
(156,449
|
)
|
$
|
803,065
|
|
Production
and delivery
|
|
|
193,878
|
|
|
263,577
|
|
|
(92,449
|
)b
|
|
365,006
|
|
Depreciation
and amortization
|
|
|
46,925
|
|
|
7,089
|
|
|
2,912
|
|
|
56,926
|
|
Exploration
expenses
|
|
|
1,892
|
|
|
-
|
|
|
28
|
|
|
1,920
|
|
General
and administrative expenses
|
|
|
33,182
|
c
|
|
3,004
|
|
|
(14,572
|
)c
|
|
21,614
|
|
Operating
income (loss)
|
|
$
|
411,521
|
|
$
|
(1,554
|
)
|
$
|
(52,368
|
)
|
$
|
357,599
|
|
Equity
in PT Smelting earnings
|
|
$
|
-
|
|
$
|
2,596
|
|
$
|
-
|
|
$
|
2,596
|
|
Interest
expense, net
|
|
$
|
5,727
|
|
$
|
3,805
|
|
$
|
28,016
|
|
$
|
37,548
|
|
Provision
for income taxes
|
|
$
|
145,319
|
|
$
|
-
|
|
$
|
18,709
|
|
$
|
164,028
|
|
Capital
expenditures
|
|
$
|
23,569
|
|
$
|
2,724
|
|
$
|
(47
|
)
|
$
|
26,246
|
|
Total
assets
|
|
$
|
3,849,871
|
d
|
$
|
771,158
|
e
|
$
|
168,674
|
|
$
|
4,789,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
PT Freeport Indonesia’s sales to PT Smelting totaling $282.5 million in
the 2006 quarter and $234.2 million in the 2005
quarter.
|
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 $(20.8) million in the 2006
quarter and $2.6 million in the 2005
quarter.
|
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 $56.0 million in the 2006 quarter and $16.8 million in the
2005
quarter.
|
d.
|
Includes
PT Freeport Indonesia’s trade receivables with PT Smelting totaling $149.6
million at March 31, 2006, and $120.4 million at March 31,
2005.
|
e.
|
Includes
PT Freeport Indonesia’s equity investment in PT Smelting totaling $58.9
million at March 31, 2006, and $47.8 million at March 31,
2005.
|
10.
COMPREHENSIVE INCOME
A
summary
of FCX’s comprehensive income is shown below (in thousands).
|
Three
Months Ended March 31,
|
|
|
2006
|
|
2005
|
|
Net
income
|
$
|
266,775
|
|
$
|
145,520
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
Change
in unrealized derivatives’ fair value, net of
|
|
|
|
|
|
|
taxes
of $1.6 million for 2006 and $0.2 million for 2005
|
|
2,040
|
|
|
(298
|
)
|
Reclass
to earnings, net of taxes of $0.6 million for 2006
|
|
(715
|
)
|
|
97
|
|
Minimum
pension liability adjustment
|
|
(86
|
)
|
|
(315
|
)
|
Total
comprehensive income
|
$
|
268,014
|
|
$
|
145,004
|
|
|
|
|
|
|
|
|
11. |
RATIO
OF EARNINGS TO FIXED CHARGES
|
The
ratio
of earnings to fixed charges for the first three months of 2006 was 21.5 to
1
compared with 9.4 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 March 31, 2006 and the related
consolidated statements of income and cash flows for the three-month periods
ended March 31, 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
April
24,
2006
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
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.”
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 available year-end 2004 reserve
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 expected to approximate
1.3 billion pounds of copper and 1.7 million ounces of gold, including 280
million pounds of copper and 275 thousand ounces of gold in the second quarter
of 2006. 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 60 percent of copper and 56 percent of gold sales are expected
in
the second half of the year. Because of the significant level of copper and
gold
expected to be mined late in the year, the achievement of PT Freeport
Indonesia’s 2006 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 systems and concentrate loading
systems.
Based
on
our current mine plans, we previously reported estimates for annual sales over
the five-year period from 2006 through 2010 to average approximately 1.3 billion
pounds of copper and 1.9 million ounces of gold. 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. We are currently undertaking
studies to incorporate recent geotechnical data in our future mine plans. These
studies are expected to be completed and mine plans revised in the third quarter
of 2006. While ongoing analyses may alter current expectations, the analyses
to
date indicate that the revisions would result in the deferral of certain
high-grade ore previously expected to be mined in 2007 and 2008 to future years.
While the annual impacts may be significant, preliminary estimates of total
metal sales volumes for PT Freeport Indonesia are expected to be within five
percent of the previously reported projected amounts for the five-year period
from 2006 through 2010. We are also incorporating the new data into 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 block cave ore
body.
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 $2.25 per pound and gold prices of
approximately $550 per ounce, we expect to generate operating cash flows
approximating $1.2 billion in 2006. 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 $50 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 $15 million.
Copper
and Gold Markets
As
shown
in the graphs below, world metal prices for copper have fluctuated during the
period from 1992 through April 2006 with the London Metal Exchange (LME) spot
copper price varying from a low of approximately $0.60 per pound in 2001 to
a
high of approximately $3.36 per pound on April 26, 2006, and world gold prices
have fluctuated during the period from 1998 through April 2006 from a low of
approximately $250 per ounce in 1999 to a high of approximately $645 per ounce
on April 20, 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 significantly 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 April 28, 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 150,000 metric tons at
March 31, 2006 represent approximately four days of global consumption. Despite
previous market forecasts that prices would decline in 2005 and again in 2006,
prices have continued to rise to new highs as projected increases in supply
have
fallen short of expectations, even though global demand is weaker than generally
anticipated. Copper prices averaged $2.24 per pound in the first quarter of
2006, with prices ranging from $2.06 per pound to a multi-year high of $2.51
per
pound. Copper prices have remained strong in April 2006 and the LME spot price
closed at $3.28 per pound on April 28, 2006. Global copper demand has been
lower
than expectations; however, disruptions associated with strikes, unrest and
other operational issues continue to keep inventories at low levels. Many market
analysts expect copper supplies will increase somewhat in 2006 and prices to
moderate from current levels. Nevertheless, analysts’ price expectations for
2006 are significantly higher than they were earlier in the year, with the
continuation of very low inventory levels, the potential for supply disruptions
and the absence of major new mines being developed. 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 and production levels of mines and
copper smelters. 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 $600 per ounce, 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
$554 per ounce in the first quarter of 2006, with prices ranging from $521
per
ounce to $584 per ounce. The London gold price closed at $644 per ounce on
April 28, 2006.
CONSOLIDATED
RESULTS
Summary
comparative results for the first-quarter periods follow (in millions, except
per share amounts):
|
First
Quarter
|
|
|
2006
|
|
2005
|
|
Revenues
|
$
|
1,086.1
|
|
$
|
803.1
|
|
Operating
income
|
|
531.8
|
|
|
357.6
|
|
Net
income applicable to common stock
|
|
251.7
|
|
|
130.4
|
|
Diluted
net income per share of common stock
|
|
1.23
|
|
|
0.70
|
|
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 2006 quarter were 35 percent higher than
consolidated revenues for the 2005 quarter, reflecting substantially higher
copper and gold prices than the 2005 quarter, partly offset by lower PT Freeport
Indonesia sales volumes. As anticipated, PT Freeport Indonesia mined lower
grade
ore and reported lower production and sales in the first quarter of 2006,
compared with the 2005 period.
At
March
31, 2006, we had consolidated embedded derivatives on copper sales totaling
199.0 million pounds recorded at an average price of $2.46 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
$10 million impact on our 2006 consolidated revenues and an approximate $5
million impact on our 2006 consolidated net income.
First-quarter
2006 consolidated revenues included net additions of $110.2 million ($58.4
million to net income or $0.26 per diluted share) primarily for final pricing
of
concentrates sold in the previous year, compared with $9.9 million ($5.2 million
to net income or $0.03 per diluted share) in the first quarter of
2005.
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 (1.05
billion pounds) and assuming an average price of $2.25 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 $100 million impact on our annual revenues and an
approximate $50 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 (1.2 million
ounces) would have an approximate $30 million impact on our annual revenues
and
an approximate $15 million impact on our annual net income.
On
limited past occasions, in response to market conditions, we have entered into
copper and gold price protection contracts for a portion of our expected future
mine production to mitigate the risk of adverse price fluctuations. 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 diluted share), and the final scheduled redemption for our
Silver-Denominated Preferred Stock is in August 2006 (see “Capital Resources and
Liquidity - Financing Activities”).
Consolidated
production and delivery costs were higher in the first quarter of 2006 at $477.9
million compared with $365.0 million for the 2005 quarter. The increase was
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.”
As
previously reported on March 23, 2006, a mud/topsoil slide involving
approximately 75,000 metric tons of material occurred from a mountain ridge
above service facilities supporting PT Freeport Indonesia’s mining facilities.
Regrettably, three contract workers were fatally injured in the event. The
material damaged a mess hall and an adjacent area. As a result of investigations
by PT Freeport Indonesia and the Indonesian Department of Energy and Mineral
Resources, we are conducting geotechnical studies to identify any potential
hazards to facilities from slides. The existing early warning system for
potential slides, based upon rainfall and other factors, has also been expanded.
PT Freeport Indonesia recorded a charge of $1.9 million ($1.0 million to net
income or less than $0.01 per diluted share) in the first quarter of 2006 for
damages related to this event. The event did not directly involve operations
within the Grasberg open-pit mine or PT Freeport Indonesia’s milling
operations.
Consolidated
depreciation and amortization expense decreased to $43.3 million in the first
quarter of 2006 compared with $56.9 million in the first quarter of 2005,
primarily because of lower copper sales volumes at PT Freeport Indonesia during
the 2006 quarter. Exploration expenses increased to $2.6 million in the first
quarter of 2006 from $1.9 million in the first quarter of 2005 (see “Mining and
Exploration - Exploration Activities”). Consolidated general and administrative
expenses increased to $30.6 million in the first quarter of 2006 from $21.6
million in the first quarter of 2005 (see “Other Financial
Results”).
Net
interest expense decreased to $22.7 million in the first quarter of 2006 from
$37.5 million in the first quarter of 2005 primarily because of lower debt
levels. In the first quarter of 2006, we induced conversion of $11.0 million
of
7% Convertible Senior Notes due 2011 into 0.4 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 conversion and open market transactions, we recorded
losses on early extinguishment and conversion of debt totaling of $2.0 million
($1.3 million to net income, net of related reduction of interest expense,
or
$0.01 per share) in the first quarter 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 $7.0 million in the first quarter of 2006
and
$3.9 million in the first quarter 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, and $1.21 per euro at March 31,
2006. Exchange rate effects on our net income from euro-denominated liabilities
were gains (losses) of $(1.1) million in the first quarter of 2006 and $2.8
million in the first quarter of 2005.
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).
|
Three
Months Ended
|
|
|
March
31,
|
|
|
2006
|
|
2005
|
|
Mining
and exploration segment operating incomea
|
$
|
447,527
|
|
$
|
428,307
|
|
Mining
and exploration segment interest expense, net
|
|
(3,273
|
)
|
|
(5,727
|
)
|
Intercompany
operating profit recognized (deferred)
|
|
74,211
|
|
|
(63,570
|
)
|
Income
before taxes
|
|
518,465
|
|
|
359,010
|
|
Indonesian
corporate income tax rate
|
|
35
|
%
|
|
35
|
%
|
Corporate
income taxes
|
|
181,463
|
|
|
125,654
|
|
|
|
|
|
|
|
|
Approximate
PT Freeport Indonesia net income
|
|
337,002
|
|
|
233,356
|
|
Withholding
tax on FCX’s equity share
|
|
9.064
|
%
|
|
9.064
|
%
|
Withholding
taxes
|
|
30,546
|
|
|
21,151
|
|
|
|
|
|
|
|
|
PT
Indocopper Investama corporate income tax
|
|
5,623
|
|
|
14,124
|
|
Other,
net
|
|
4,090
|
|
|
3,099
|
|
FCX
consolidated provision for income taxes
|
$
|
221,722
|
|
$
|
164,028
|
|
|
|
|
|
|
|
|
FCX
consolidated effective tax rate
|
|
43
|
%
|
|
50
|
%
|
|
|
|
|
|
|
|
a. |
Excludes
charges for the in-the-money value of FCX stock option exercises,
which
are eliminated in consolidation, totaling $56.0 million for the 2006
quarter and $16.8 million for the 2005
quarter.
|
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):
|
First
Quarter
|
|
|
2006
|
|
2005
|
|
Mining
and explorationa
|
$
|
391.5
|
|
$
|
411.5
|
|
Smelting
and refining
|
|
13.5
|
|
|
(1.6
|
)
|
Intercompany
eliminations and othera,
b
|
|
126.8
|
|
|
(52.3
|
)
|
FCX
operating income
|
$
|
531.8
|
|
$
|
357.6
|
|
|
|
|
|
|
|
|
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 $56.0 million in the 2006 quarter and $16.8 million in the
2005
quarter.
|
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 $74.2
million in the 2006 quarter and $(63.6) million in the 2005 quarter.
Our
consolidated earnings can fluctuate materially depending on the timing
and
prices of these sales. At March 31, 2006, our deferred profits to
be
recognized in future periods’ operating income totaled $148.4 million,
$78.7 million to net income, after taxes and minority interest
sharing.
|
MINING
AND EXPLORATION
PT
Freeport Indonesia Operating Results
|
|
|
First
Quarter
|
|
|
|
|
2006
|
|
|
2005
|
|
PT
Freeport Indonesia Operating Data, Net of Rio Tinto’s
Interest
|
|
|
|
|
Copper
(recoverable)
|
|
|
|
|
|
|
|
Production
(000s of pounds)
|
|
|
221,300
|
|
|
335,600
|
|
Production
(metric tons)
|
|
|
100,400
|
|
|
152,200
|
|
Sales
(000s of pounds)
|
|
|
225,200
|
|
|
328,100
|
|
Sales
(metric tons)
|
|
|
102,100
|
|
|
148,800
|
|
Average
realized price per pound
|
|
|
$2.43
|
|
|
$1.51
|
|
Gold
(recoverable ounces)
|
|
|
|
|
|
|
|
Production
|
|
|
461,800
|
|
|
609,400
|
|
Sales
|
|
|
472,500
|
|
|
595,300
|
|
Average
realized price per ounce
|
|
|
$405.54
|
a
|
|
$426.74
|
|
a.
|
Amount
was $556.00 before a loss resulting from redemption of FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
|
|
|
|
|
|
|
|
PT
Freeport Indonesia, 100% Aggregate Operating Data
|
|
|
|
|
|
|
|
Ore
milled (metric tons per day)
|
|
|
216,800
|
|
|
199,400
|
|
Average
ore grade
|
|
|
|
|
|
|
|
Copper
(percent)
|
|
|
0.72
|
|
|
1.14
|
|
Gold
(grams per metric ton)
|
|
|
0.92
|
|
|
1.62
|
|
Recovery
rates (percent)
|
|
|
|
|
|
|
|
Copper
|
|
|
82.5
|
|
|
89.6
|
|
Gold
|
|
|
80.6
|
|
|
82.7
|
|
Copper
(recoverable)
|
|
|
|
|
|
|
|
Production
(000s of pounds)
|
|
|
246,600
|
|
|
390,300
|
|
Production
(metric tons)
|
|
|
111,900
|
|
|
177,000
|
|
Sales
(000s of pounds)
|
|
|
251,300
|
|
|
381,400
|
|
Sales
(metric tons)
|
|
|
114,000
|
|
|
173,000
|
|
Gold
(recoverable ounces)
|
|
|
|
|
|
|
|
Production
|
|
|
470,700
|
|
|
763,900
|
|
Sales
|
|
|
486,300
|
|
|
743,200
|
|
|
|
|
|
|
|
|
|
PT
Freeport Indonesia Revenues
A
summary
of changes in PT Freeport Indonesia revenues between the periods follows (in
millions):
|
2006
|
|
PT
Freeport Indonesia revenues - prior year period
|
$
|
687.4
|
|
Price
realizations:
|
|
|
|
Copper
|
|
206.4
|
|
Gold
|
|
(10.0
|
)
|
Sales
volumes:
|
|
|
|
Copper
|
|
(155.7
|
)
|
Gold
|
|
(52.4
|
)
|
Adjustments,
primarily for copper pricing on prior year
|
|
|
|
open
sales
|
|
128.5
|
|
Treatment
charges, royalties and other
|
|
(7.4
|
)
|
PT
Freeport Indonesia revenues - current year period
|
$
|
796.8
|
|
|
|
|
|
As
anticipated, PT Freeport Indonesia mined lower grade ore and reported lower
production and sales in the first quarter of 2006, compared with the 2005
period. Copper and gold sales totaled 225.2 million pounds of copper and 472.5
thousand ounces of gold in the first quarter of 2006, compared with sales of
328.1 million pounds of copper and 595.3 thousand ounces of gold in the 2005
period.
Mill
throughput, which varies depending on ore types being processed, averaged
216,800 metric tons of ore per day in the first quarter of 2006, compared with
199,400 metric tons of ore in the first quarter of 2005. First-quarter mill
rates were impacted by an approximate four-day interruption in February 2006
associated with protests by illegal miners. Mill rates will vary during 2006
depending on ore types mined and are expected to average over 220,000 metric
tons of ore per day during the remainder 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):
|
First
Quarter
|
|
|
2006
|
|
2005
|
|
Grasberg
open pit
|
173,000
|
|
157,300
|
|
Deep
Ore Zone underground mine
|
43,800
|
|
42,100
|
|
Total
mill throughput
|
216,800
|
|
199,400
|
|
|
|
|
|
|
First-quarter
2006 copper ore grades averaged 0.72 percent, compared with 1.14 percent for
the
first quarter of 2005. First-quarter 2006 copper recovery rates averaged 82.5
percent, compared with 89.6 percent for the first quarter of 2005. Gold ore
grades averaged 0.92 grams per metric ton (g/t) in the first quarter of 2006,
compared with 1.62 g/t for the first quarter of 2005. First-quarter 2006 gold
recovery rates averaged 80.6 percent, compared with 82.7 percent for the first
quarter of 2005. First-quarter 2006 ore grades and recoveries from copper and
gold reflect the expected mining of lower grade material compared with the
extraordinarily high grades mined in 2005. Average ore grades are expected
to be
higher in the second half of 2006 than in the first half of 2006 with the
highest grades expected to be mined in the fourth quarter.
Production
from the Deep Ore Zone (DOZ) underground mine averaged 43,800 metric tons of
ore
per day in the first quarter of 2006, representing 20 percent of mill
throughput. DOZ continued 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 per day with
the
installation of a second crusher and additional ventilation, expected to be
completed by 2007. PT Freeport Indonesia’s share of capital expenditures for the
DOZ expansion totaled approximately $4 million in the first quarter of 2006
and
is expected to approximate $37 million through the projected 2007 ramp-up,
with
approximately $16 million estimated for 2006. 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 $3
million in the first quarter of 2006 and is estimated to total approximately
$6
million in 2006. The Common Infrastructure project is progressing according
to
plan. Work on the Grasberg underground ore body is scheduled to begin in 2006
with projected capital expenditures of approximately $21 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 $14 million in the first quarter 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’s share of first-quarter 2006 sales of 225.2 million pounds
of copper and 472.5 thousand ounces of gold, was approximately 15 million pounds
below previous estimates for copper and 132.5 thousand ounces above previous
estimates for gold. First-quarter 2005 sales volumes totaled 328.1 million
pounds of copper and 595.3 thousand ounces of gold. Realized copper prices
improved by 61 percent to an average of $2.43 per pound in the first quarter
of
2006 from $1.51 in the first quarter of
2005.
Realized gold prices in the first quarter of 2006 averaged $405.54 per ounce;
including a reduction of $150.46 per ounce for revenue adjustments associated
with the redemption of our Gold-Denominated Preferred Stock, Series II; compared
to $426.74 in the first quarter of 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. Royalties totaled $19.9 million in the first quarter
of 2006, compared with $18.8 million in the first quarter 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 first-quarter 2006 revenues include net
additions of $184.6 million for adjustments to the fair value of embedded copper
derivatives in concentrate sales contracts, compared with $25.7 million in
the
first quarter of 2005.
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 past 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 $0.21 per pound (see “Smelting and Refining”).
Current rates are substantially higher than the minimum rate.
Gross
Profit per Pound of Copper (¢)/per Ounce of Gold and Silver
($)
|
|
|
|
Three
Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of copper sold (000s)
|
|
225,200
|
|
|
225,200
|
|
|
|
|
|
|
|
Ounces
of gold sold
|
|
|
|
|
|
|
|
472,500
|
|
|
|
|
Ounces
of silver sold
|
|
|
|
|
|
|
|
|
|
|
707,100
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
|
242.9
|
¢
|
|
242.9
|
¢
|
|
$405.54
|
a
|
|
$9.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net non-
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
and nonrecurring costs shown below
|
|
122.1
|
|
|
79.6
|
|
|
197.43
|
|
|
3.62
|
|
Gold
and silver credits
|
|
(129.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
37.1
|
b
|
|
24.2
|
c
|
|
60.05
|
c
|
|
1.10
|
c
|
Royalty
on metals
|
|
8.9
|
|
|
5.8
|
|
|
14.31
|
|
|
0.26
|
|
Unit
net cash costsd
|
|
39.1
|
|
|
109.6
|
|
|
271.79
|
|
|
4.98
|
|
Depreciation
and amortization
|
|
15.0
|
|
|
9.8
|
|
|
24.25
|
|
|
0.44
|
|
Noncash
and nonrecurring costs, net
|
|
5.2
|
|
|
3.4
|
|
|
8.38
|
|
|
0.15
|
|
Total
unit costs
|
|
59.3
|
|
|
122.8
|
|
|
304.42
|
|
|
5.57
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
28.0
|
e
|
|
58.7
|
|
|
47.03
|
|
|
1.20
|
|
PT
Smelting intercompany profit recognized
|
|
9.2
|
|
|
6.0
|
|
|
14.95
|
|
|
0.27
|
|
Gross
profit per pound/ounce
|
|
220.8
|
¢
|
|
184.8
|
¢
|
|
$163.10
|
|
|
$5.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Amount
was $556.00 before a loss resulting from redemption of FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
b. |
Includes
$10.1 million or 4.5 cents per pound for adjustments to December
31, 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
$6.6 million or 2.9 cents per pound for copper, $3.4 million or $7.25
per ounce for gold and $0.1 million or $0.13 per ounce for silver
for
adjustments to December 31, 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 30.6 cents per pound loss on the redemption of
FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
Three
Months Ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of copper sold (000s)
|
|
328,100
|
|
|
328,100
|
|
|
|
|
|
|
|
Ounces
of gold sold
|
|
|
|
|
|
|
|
595,300
|
|
|
|
|
Ounces
of silver sold
|
|
|
|
|
|
|
|
|
|
|
1,270,300
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
|
151.3
|
¢
|
|
151.3
|
¢
|
|
$426.74
|
|
|
$7.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net non-
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
and nonrecurring costs shown below
|
|
58.9
|
a
|
|
38.8
|
b
|
|
107.20
|
b
|
|
1.82
|
b
|
Gold
and silver credits
|
|
(79.3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
21.8
|
|
|
14.3
|
|
|
39.63
|
|
|
0.67
|
|
Royalty
on metals
|
|
5.7
|
|
|
3.8
|
|
|
10.41
|
|
|
0.18
|
|
Unit
net cash costsc
|
|
7.1
|
|
|
56.9
|
|
|
157.24
|
|
|
2.67
|
|
Depreciation
and amortization
|
|
14.3
|
|
|
9.4
|
|
|
26.02
|
|
|
0.44
|
|
Noncash
and nonrecurring costs, net
|
|
0.2
|
|
|
0.1
|
|
|
0.29
|
|
|
-
|
|
Total
unit costs
|
|
21.6
|
|
|
66.4
|
|
|
183.55
|
|
|
3.11
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
6.4
|
|
|
6.4
|
|
|
(5.10
|
)
|
|
0.11
|
|
PT
Smelting intercompany profit elimination
|
|
(0.8
|
)
|
|
(0.5
|
)
|
|
(1.43
|
)
|
|
(0.02
|
)
|
Gross
profit per pound/ounce
|
|
135.3
|
¢
|
|
90.8
|
¢
|
|
$236.66
|
|
|
$4.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Net
of deferred mining costs totaling $32.2 million or 9.8 cents 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 $21.2 million or 6.5 cents per
pound for
copper, $10.6 million or $17.86 per ounce for gold and $0.4 million
or
$0.30 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. In addition, we have experienced significant increases in
our
production costs in recent years primarily as a result of higher energy costs
and costs of other consumables, higher mining costs and milling rates, labor
costs and other factors. 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 (approximately 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.
Higher
unit site production and delivery costs in the first quarter of 2006, compared
with the first quarter of 2005, primarily reflected the anticipated 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.
Unit
treatment charges vary with the price of copper, and unit royalty costs vary
with prices of copper and gold. In addition, treatment charges 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.
First-quarter
2006 royalty costs totaled $19.9 million, including a $1.4 million final
adjustment related to 2005 sales, compared with royalty costs of $18.8 million
in the first quarter of 2005. Additional royalties, discussed above, totaled
$1.9 million in the 2005 quarter and none in 2006. If copper prices average
$2.25 per pound and gold prices average $550 per ounce during the remainder
of
2006, we would expect royalty costs to total approximately $74 million ($0.07
per pound of copper) for the remainder of 2006. These estimates assume 2006
sales volumes of 1.3 billion pounds of copper and 1.7 million ounces of
gold.
As
a
result of the lower copper production and sales volumes in the first quarter
of
2006, PT Freeport Indonesia’s unit depreciation rate increased compared with the
2005 quarter. Because certain assets are depreciated on a straight-line basis,
the unit rate will vary with the level of copper production and
sales.
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 first quarter of 2006 averaged $1.22 per
pound of copper, $0.63 per pound higher than the $0.59 reported in the first
quarter of 2005. Unit site production and delivery costs in the first quarter
of
2006 were adversely affected by the anticipated lower copper sales volumes.
In
addition, PT Freeport Indonesia adopted EITF 04-6 and no longer defers stripping
costs. First-quarter 2005 unit costs benefited from a $0.10 per pound deferral
of stripping costs.
Gold
and
silver credits increased to $1.29 per pound in the first quarter of 2006,
compared with $0.79 per pound in the first quarter of 2005, reflecting lower
copper volumes and higher average realized gold prices, before a loss resulting
from redemption of FCX’s Gold-Denominated Preferred Stock, Series II, in the
2006 quarter. Treatment charges increased to $0.37 per pound in the first
quarter of 2006 from $0.22 per pound in the first quarter of 2005 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 a $0.045 per pound adjustment to December 31, 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.
Royalties of $0.09 per pound in the first quarter of 2006 were almost $0.03
per
pound above the 2005 period primarily because of higher copper and gold
prices.
Assuming
2006 average copper prices of $2.25 per pound and average gold prices of $550
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 $0.54 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, the
change in the accounting treatment of stripping costs and higher market rates
for treatment charges. Because the majority of PT Freeport Indonesia’s costs are
fixed, unit costs vary with the volumes sold and will therefore be higher during
the second and third quarters of 2006 and lower during the fourth quarter
compared to the projected annual average. Unit net cash costs for 2006 would
change by approximately $0.025 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 first quarter of 2006 averaged $0.80 per
pound of copper, compared with $0.39 in the 2005 period. For gold, unit site
production and delivery costs in the first quarter of 2006 averaged $197 per
ounce, compared with $107 in the 2005 period. As discussed above, unit site
production and delivery costs in the first quarter of 2006 were impacted by
the
anticipated 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
first
quarter of 2006 primarily because of higher market rates and copper prices.
In
addition, unit treatment charges include a $0.03 per pound adjustment for copper
and a $7.25 per ounce adjustment for gold to December 31, 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. Royalties per pound
and per ounce were also higher in the first quarter of 2006 because of higher
copper and gold prices compared with the 2005 period.
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 and 9,066 rupiah
at
March 31, 2006. PT Freeport Indonesia recorded gains (losses) to production
costs totaling $0.1 million in the first quarter of 2006 and $(0.4) million
in
the first quarter 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 9,066 rupiah to one U.S. dollar, the
exchange rate as of March 31, 2006, a one-thousand-rupiah increase in the
exchange rate would result in an approximate $18 million decrease in aggregate
annual operating costs. A one-thousand-rupiah decrease in the exchange rate
would result in an approximate $22 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, and $0.72 to one Australian dollar
at March 31, 2006. At estimated annual aggregate Australian dollar payments
of
225 million and an exchange rate of $0.72 to one Australian dollar, the exchange
rate
as
of
March 31, 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 March 31, 2006, PT Freeport Indonesia had foreign
currency contracts to hedge 555.0 billion in rupiah payments, including certain
rupiah-based capital expenditures, or approximately 46 percent of aggregate
projected rupiah payments for the remainder of 2006, at an average exchange
rate
of 10,094 rupiah to one U.S. dollar. PT Freeport Indonesia accounts for these
contracts as cash flow hedges.
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)
|
First
Quarter
|
|
|
2006
|
|
2005
|
|
Gross
profit
|
$17.3
|
|
$1.5
|
|
Add
depreciation and amortization expense
|
7.4
|
|
7.1
|
|
Other
|
(0.4
|
)
|
1.0
|
|
Cash
margin
|
$24.3
|
|
$9.6
|
|
|
|
|
|
|
Operating
income (loss) (in millions)
|
$13.5
|
|
$(1.6
|
) |
Concentrate
and scrap treated (metric tons)
|
250,700
|
|
215,800
|
|
Anodes
production (000s of pounds)
|
157,100
|
|
147,400
|
|
Treatment
rates per pound
|
$0.29
|
|
$0.17
|
|
Cathodes
sales (000s of pounds)
|
136,600
|
|
132,600
|
|
Cathode
cash unit cost per pounda
|
$0.20
|
|
$0.17
|
|
Gold
sales in anodes and slimes (ounces)
|
245,600
|
|
67,300
|
|
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 $24.3 million in the first quarter of 2006,
compared with $9.6 million in the 2005 period. Atlantic Copper reported
operating income of $13.5 million in the first quarter of 2006, compared with
an
operating loss of $1.6 million in the 2005 period. The positive results in
the
2006 period primarily reflect higher treatment charges. There are no planned
major maintenance activities scheduled at Atlantic Copper in 2006 and a 22-day
maintenance turnaround currently scheduled for 2007.
Atlantic
Copper treated 250,700 metric tons of concentrate and scrap in the first quarter
of 2006, compared with 215,800 metric tons in the 2005 period, which was
affected by maintenance issues. Cathode production totaled 129.4 million pounds
and sales totaled 136.6 million pounds during the first quarter of 2006,
compared with cathode production of 131.7 million pounds and sales of 132.6
million pounds during the first quarter of 2005. Atlantic Copper’s treatment
charges (including price participation), which are what PT Freeport Indonesia
and third parties pay Atlantic Copper to smelt and refine concentrates, averaged
$0.29 per pound during the first quarter of 2006 and $0.17 per pound during
the
first quarter of 2005. The significant increase in treatment charges in the
2006
period reflects higher market rates and $0.07 per pound ($0.03 per pound in
the
first quarter of 2005) for price participation under the terms of Atlantic
Copper’s concentrate purchase and sales agreements. Treatment charge rates have
increased significantly since late 2004 with increased mine production and
higher copper prices. Assuming copper prices of $2.25 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 $0.20 in the first quarter of 2006 and $0.17 in the first
quarter of 2005. Higher unit costs in the 2006 period reflect the impact of
a
higher 2006 gold payable factor in Atlantic Copper’s concentrate purchase and
sales agreements.
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 an addition
to our operating income totaling $74.2 million ($39.3 million to net income
or
$0.18
per diluted share) in the first quarter of 2006, compared with a reduction
of
$63.6 million ($34.2 million to net income or $0.17 per diluted share) in the
first quarter of 2005. At March 31, 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 $78.7 million. Based on copper prices of $2.25 per pound and
gold prices of $550 per ounce for the second quarter of 2006 and current
shipping schedules, we estimate the net change in deferred profits on
intercompany sales will result in an increase to net income of approximately
$20
million in the second 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 March 31, 2006, was $1.21 per
euro.
As
of
March 31, 2006, FCX’s net investment in Atlantic Copper totaled approximately
$121 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 $43.2 million.
Atlantic
Copper had euro-denominated net monetary liabilities at March 31, 2006, totaling
$10.7 million recorded at an exchange rate of $1.21 per euro. The exchange
rate
was $1.18 per euro at December 31, 2005. 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 $(1.1) million in the
first quarter of 2006 and $2.8 million in the first quarter of
2005.
PT
Smelting Operating Results
|
First
Quarter
|
|
(In
Millions)
|
2006
|
|
2005
|
|
PT
Freeport Indonesia sales to PT Smelting
|
$
|
282.5
|
|
$
|
234.2
|
|
Equity
in PT Smelting earnings
|
|
3.6
|
|
|
2.6
|
|
PT
Freeport Indonesia operating profits recognized (deferred)
|
|
20.8
|
|
|
(2.6
|
)
|
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 234,400 metric tons of concentrate in the
first quarter of 2006 and 226,400 metric tons in the first quarter of 2005.
During 2006, PT Smelting plans to expand 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 142.4 million pounds of cathodes and sold 140.7
million pounds of cathodes in the first quarter of 2006, compared with
production of 143.5 million pounds and sales of 143.7 million pounds in the
first quarter of 2005. PT Smelting’s cathode cash unit costs averaged $0.15 per
pound in the first quarter of 2006 and $0.10 per pound in the first quarter
of
2005, primarily reflecting higher energy costs in the 2006 period (see “Product
Revenues and Production Costs”). PT Smelting has an 18-day maintenance
turnaround scheduled for mid-2006 and its next major maintenance turnaround
is
scheduled for 2008.
OTHER
FINANCIAL RESULTS
The
FCX/Rio Tinto joint ventures incurred $3.9 million of aggregate exploration
costs in the first quarter of 2006 and $3.0 million in the first quarter of
2005. As discussed above in “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 $2.6 million in the first quarter of 2006 and $1.9
million in the first quarter of 2005.
Consolidated
general and administrative expenses increased to $30.6 million in the first
quarter of 2006, compared with $21.6 million in the year-ago period. 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 $13.2 million in the 2006 quarter, including $6.7 million charged to
general and administrative expenses, and $4.4 million in the 2005 quarter,
including $3.1 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 $4.5 million
in the first quarter of 2006 and $2.9 million in the first quarter 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 quarter
of
2006, compared with 16 percent in the first quarter of 2005. Adjusted
allocations of other employee-related costs, based on an annual assessment
of
the area benefited, resulted in an approximate $2.5 million increase in general
and administrative expenses in the 2006 quarter compared with the 2005
quarter.
Total
consolidated interest cost (before capitalization) was $24.4 million in the
first quarter of 2006 and $38.4 million in the first quarter 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
decrease compared to 2005 primarily because of the 2005 debt reductions. See
“Capital Resources and Liquidity - Financing Activities” for further discussion.
Capitalized interest totaled $1.8 million in the first quarter of 2006 and
$0.9
million in the first quarter of 2005.
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 $153.2 million in the first quarter of 2006, including $94.2 million
($0.50 per share) for a supplemental dividend paid on March 31, 2006. Our
current regular annual common stock dividend is $1.25 per share, paid at a
quarterly rate of $0.3125 per share. On May 2, 2006, our Board of Directors
declared a supplemental dividend of $0.75 per share payable June 30, 2006 to
shareholders of record on June 15, 2006. Our Board of Directors will continue
to
review our dividend policy.
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
Our
net
cash used in operating activities totaled $123.8 million during the first
quarter of 2006, including $501.1 million in working capital requirements.
In
the first quarter of 2005, we generated operating cash flows totaling $162.2
million, net of $23.2 million that we used for working capital. First-quarter
2006 operating cash flows were impacted by $453.7 million of income tax
payments, including $328.4 million attributable to 2005 results, other working
capital requirements totaling $172.7 million and a $44.9 million net use of
operating cash resulting from the loss on the redemption of FCX’s
Gold-Denominated Preferred Stock, Series II. Using estimated sales volumes
for
the remainder of 2006 and assuming average prices of $2.25 per pound of copper
and $550 per ounce of gold for the remainder of 2006, we would generate
operating cash flows approximating $1.2 billion in 2006, with over $1.3 billion
in the remaining three quarters of the year.
Investing
Activities
Total
capital expenditures of $52.1 million in the first quarter of 2006 were nearly
double the $26.2 million reported in the first quarter of 2005. Our capital
expenditures for the 2006 quarter included approximately $4 million for the
DOZ
expansion, $3 million for the Common Infrastructure project and $14 million
for
Big Gossan. Capital expenditures, including approximately $115 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
March 31, 2006, we had total unrestricted cash and cash equivalents of $284.1
million and total outstanding debt of approximately $1.1 billion. Total debt
was
reduced by a net $154.7 million during the quarter, 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
diluted share). Other first-quarter debt reductions included privately
negotiated transactions to induce conversion of $11.0 million of 7% Convertible
Senior Notes due 2011 into 0.4 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 conversion and open market
transactions, we recorded charges of $2.0 million ($1.3 million to net income,
net of related reduction of interest expense, or $0.01 per diluted share) in
the
first quarter of 2006. In April 2006, we induced conversion of an additional
$5.0 million of 7% Convertible Senior Notes due 2011 into 0.2 million shares
of
FCX common stock.
Following
the first quarter debt repayments and redemption, we have $86.7 million in
debt
maturities for the remainder of 2006, which can be funded with the $284.1
million of cash on hand. Debt maturities total $75.0 million for the three-year
period of 2007 through 2009.
During
the first quarter of 2005, debt was reduced by $183.0 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
February 2006, we paid our current regular quarterly dividend ($0.3125 per
share) and on March 31, 2006, we paid a supplemental common stock dividend
of
$0.50 per share for total first-quarter 2006 common stock dividends of $153.2
million. Since December 2004, we have paid five supplemental dividends totaling
$411.3 million ($2.25 per share). In the first quarter of 2005, we paid a
regular quarterly dividend ($0.25 per share) in February and a supplemental
common stock dividend of $0.50 per share in March, for total first-quarter
2005
common stock dividends of $134.7 million. 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.
Cash
dividends on preferred stock of $15.1 million in each of the first quarters
of
2005 and 2006, 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 March 2006 discussed above, each share
of
preferred stock is now convertible into 19.9225 shares of FCX common stock,
equivalent to a conversion price of approximately $50.20 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 March 31, 2006, was approximately $740
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 April 28,
2006, under this new program, we acquired 2.4 million shares in 2005 for $80.2
million, $33.83 per share average, and 3.4 million shares in 2004 for $99.5
million, $29.39 per share average, and 14.2 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 March 31, 2006, and original issue amounts for mandatorily redeemable
preferred stock.
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Equipment
loans and other
|
$
|
10.1
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
10.2
|
|
$
|
3.8
|
|
7.50%
Senior Notes due 2006
|
|
55.4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Atlantic
Copper debt
|
|
8.7
|
|
|
34.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Redeemable
preferred stock
|
|
12.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
10⅛%
Senior Notes due 2010
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
272.4
|
|
|
-
|
|
7%
Convertible Senior Notes due 2011a
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
312.7
|
|
6⅞%
Senior Notes due 2014
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
340.3
|
|
7.20%
Senior Notes due 2026
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.2
|
|
Total
debt maturities
|
$
|
86.7
|
|
$
|
48.0
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
282.6
|
|
$
|
657.0
|
|
Pro
forma adjustments
|
|
15.5
|
b
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5.0
|
)c
|
Pro
forma debt maturities
|
$
|
102.2
|
|
$
|
48.0
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
282.6
|
|
$
|
652.0
|
|
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. We calculated the adjustment
using the
March 31, 2006, London silver fixing price for one ounce of silver
($11.76) in the London bullion market (which determines the
Silver-Denominated Preferred Stock redemption
amount).
|
c. |
Includes
the 7% Convertible Senior Notes due 2011 that we induced conversion
of in
April 2006 (see above).
|
NEW
ACCOUNTING STANDARDS
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 March 31, 2006, was $32.8 million lower and net income
was $17.4 million ($0.09 per basic share and $0.08 per diluted share) lower
than
if we had continued to defer stripping costs. Basic earnings per share would
have been $1.43 per share and diluted earnings per share would have been $1.31
per share for the three months ended March 31, 2006, if we had not adopted
EITF
04-6, compared to reported earnings of $1.34 per basic share and $1.23 per
diluted share. Adoption of the new guidance has no impact on our cash
flows.
Accounting
for Stock-Based Compensation.
As of
March 31, 2006, we had three 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 March 31, 2006, was
$9.0
million lower and net income was $5.2 million ($0.03 per basic share and $0.02
per diluted share) lower than if we had continued to account for share-based
compensation under APB Opinion No. 25. Basic earnings per share would have
been
$1.37
per
share
and diluted earnings per share would have been $1.25 per share for the three
months ended March 31, 2006, if we had not adopted SFAS No. 123R, compared
to
reported earnings of $1.34 per basic share and $1.23 per diluted
share.
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 $16.1 million excess tax benefit classified as a financing cash inflow
in
the Consolidated Statements of Cash Flows for the three months ended March
31,
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
March
31,
|
|
|
|
2006
|
|
2005
|
|
Production
and delivery costs
|
|
$
|
6,077
|
|
$
|
1,294
|
|
General
and administrative expenses
|
|
|
6,737
|
a
|
|
3,083
|
a,
b
|
Exploration
expenses
|
|
|
427
|
|
|
-
|
|
Total
stock-based compensation cost
|
|
$
|
13,241
|
|
$
|
4,377
|
|
|
|
|
|
|
|
|
|
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 $4.5 million in the 2006 quarter and $2.9
million in the 2005 quarter.
|
b.
|
Includes
$0.5 million for amortization of the intrinsic value of FCX’s Class A
stock options that were converted to Class B stock options in
2002.
|
As
of
March 31, 2006, total compensation cost related to nonvested stock option awards
not yet recognized in earnings was $66.6 million.
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, which consist of items such as stock-based
compensation costs starting January 1, 2006, write-offs of equipment
or
unusual charges, have not been material. 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.
|
Table of
Contents
Three
Months Ended March 31, 2006
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Thousands)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
543,138
|
|
$
|
543,138
|
|
$
|
282,799
|
|
$
|
7,757
|
|
$
|
833,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
275,008
|
|
|
179,163
|
|
|
93,286
|
|
|
2,559
|
|
|
275,008
|
|
Gold
and silver credits
|
|
(290,556
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
83,642
|
a
|
|
54,491
|
b
|
|
28,373
|
b
|
|
778
|
b
|
|
83,642
|
|
Royalty
on metals
|
|
19,935
|
|
|
12,988
|
|
|
6,762
|
|
|
185
|
|
|
19,935
|
|
Unit
net cash costs
|
|
88,029
|
|
|
246,642
|
|
|
128,421
|
|
|
3,522
|
|
|
378,585
|
|
Depreciation
and amortization
|
|
33,773
|
|
|
22,003
|
|
|
11,456
|
|
|
314
|
|
|
33,773
|
|
Noncash
and nonrecurring costs, net
|
|
11,669
|
|
|
7,602
|
|
|
3,958
|
|
|
109
|
|
|
11,669
|
|
Total
unit costs
|
|
133,471
|
|
|
276,247
|
|
|
143,835
|
|
|
3,945
|
|
|
424,027
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales and gold hedging
|
|
66,666
|
|
|
135,628
|
|
|
(68,962
|
)
|
|
-
|
|
|
66,666
|
|
PT
Smelting intercompany profit recognized
|
|
20,828
|
|
|
13,569
|
|
|
7,065
|
|
|
194
|
|
|
20,828
|
|
Gross
profit
|
$
|
497,161
|
|
$
|
416,088
|
|
$
|
77,067
|
|
$
|
4,006
|
|
$
|
497,161
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
Revenues
|
|
Production
and Delivery
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
833,694
|
|
$
|
275,008
|
|
$
|
33,773
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
11,669
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(83,642
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Royalty per above
|
|
(19,935
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales and hedging per above
|
|
66,666
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Mining
and exploration segment
|
|
796,783
|
|
|
286,677
|
|
|
33,773
|
|
|
|
|
|
|
|
Smelting
and refining segment
|
|
516,104
|
|
|
491,437
|
|
|
7,406
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
(226,765
|
)
|
|
(300,199
|
)
|
|
2,071
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
statements
|
$
|
1,086,122
|
|
$
|
477,915
|
|
$
|
43,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2005
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Thousands)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
500,413
|
|
$
|
500,413
|
|
$
|
250,998
|
|
$
|
9,100
|
|
$
|
760,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
193,354
|
c
|
|
127,226
|
d
|
|
63,814
|
d
|
|
2,314
|
d
|
|
193,354
|
|
Gold
and silver credits
|
|
(260,098
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
71,486
|
|
|
47,037
|
|
|
23,594
|
|
|
855
|
|
|
71,486
|
|
Royalty
on metals
|
|
18,778
|
|
|
12,356
|
|
|
6,197
|
|
|
225
|
|
|
18,778
|
|
Unit
net cash costs
|
|
23,520
|
|
|
186,619
|
|
|
93,605
|
|
|
3,394
|
|
|
283,618
|
|
Depreciation
and amortization
|
|
46,925
|
|
|
30,877
|
|
|
15,487
|
|
|
561
|
|
|
46,925
|
|
Noncash
and nonrecurring costs, net
|
|
524
|
|
|
345
|
|
|
173
|
|
|
6
|
|
|
524
|
|
Total
unit costs
|
|
70,969
|
|
|
217,841
|
|
|
109,265
|
|
|
3,961
|
|
|
331,067
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
17,151
|
|
|
17,151
|
|
|
-
|
|
|
-
|
|
|
17,151
|
|
PT
Smelting intercompany profit elimination
|
|
(2,576
|
)
|
|
(1,695
|
)
|
|
(850
|
)
|
|
(31
|
)
|
|
(2,576
|
)
|
Gross
profit
|
$
|
444,019
|
|
$
|
298,028
|
|
$
|
140,883
|
|
$
|
5,108
|
|
$
|
444,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
$10.1 million or 4.5 cents per pound for adjustments to December
31, 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
$6.6 million or 2.9 cents per pound for copper, $3.4 million or $7.25
per ounce for gold and $0.1 million or $0.13 per ounce for silver
for
adjustments to December 31, 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.
|
Net
of deferred mining costs totaling $32.2 million or 9.8 cents 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 $21.2 million or 6.5 cents per
pound for
copper, $10.6 million or $17.86 per ounce for gold and $0.4 million
or
$0.30 per ounce for silver (see Note c
above).
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
Revenues
|
|
Production
and Delivery
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
760,511
|
|
$
|
193,354
|
|
$
|
46,925
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
524
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(71,486
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Royalty per above
|
|
(18,778
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales per above
|
|
17,151
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Mining
and exploration segment
|
|
687,398
|
|
|
193,878
|
|
|
46,925
|
|
|
|
|
|
|
|
Smelting
and refining segment
|
|
272,116
|
|
|
263,577
|
|
|
7,089
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
(156,449
|
)
|
|
(92,449
|
)
|
|
2,912
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
statements
|
$
|
803,065
|
|
$
|
365,006
|
|
$
|
56,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
Three
Months Ended
March
31,
|
|
|
2006
|
|
2005
|
|
Smelting
and refining segment production costs reported in FCX’s
|
|
|
|
|
|
|
consolidated
financial statements
|
$
|
491,437
|
|
$
|
263,577
|
|
Less:
|
|
|
|
|
|
|
Raw
material purchase costs
|
|
(325,940
|
)
|
|
(197,271
|
)
|
Production
costs of anodes sold
|
|
(4,273
|
)
|
|
(3,435
|
)
|
Other
|
|
1,169
|
|
|
(1,160
|
)
|
Credits:
|
|
|
|
|
|
|
Gold
and silver revenues
|
|
(130,044
|
)
|
|
(31,948
|
)
|
Acid
and other by-product revenues
|
|
(6,659
|
)
|
|
(7,300
|
)
|
Production
costs used in calculating cathode cash unit cost per pound
|
$
|
25,690
|
|
$
|
22,463
|
|
|
|
|
|
|
|
|
Pounds
of cathode produced
|
|
129,400
|
|
|
131,700
|
|
|
|
|
|
|
|
|
Cathode
cash unit cost per pound
|
$
|
0.20
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
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
March
31,
|
|
|
2006
|
|
2005
|
|
Operating
costs - PT Smelting (100%)
|
$
|
23,966
|
|
$
|
18,451
|
|
Add:
Gold and silver refining charges
|
|
1,466
|
|
|
956
|
|
Less:
Acid and other by-product revenues
|
|
(3,737
|
)
|
|
(3,860
|
)
|
Other
|
|
(429
|
)
|
|
(502
|
)
|
Production
costs used in calculating cathode cash unit cost per pound
|
$
|
21,266
|
|
$
|
15,045
|
|
|
|
|
|
|
|
|
Pounds
of cathode produced
|
|
142,400
|
|
|
143,500
|
|
|
|
|
|
|
|
|
Cathode
cash unit cost per pound
|
$
|
0.15
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
Operating
costs per above
|
$
|
(23,966
|
)
|
$
|
(18,451
|
)
|
Other
costs
|
|
(472,038
|
)
|
|
(278,151
|
)
|
Revenue
and other income
|
|
510,478
|
|
|
307,226
|
|
PT
Smelting net income
|
|
14,474
|
|
|
10,624
|
|
|
|
|
|
|
|
|
PT
Freeport Indonesia’s 25% equity interest
|
|
3,619
|
|
|
2,656
|
|
Amortization
of excess investment cost
|
|
(60
|
)
|
|
(60
|
)
|
Equity
in PT Smelting earnings reported in FCX’s consolidated
|
|
|
|
|
|
|
financial
statements
|
$
|
3,559
|
|
$
|
2,596
|
|
|
|
|
|
|
|
|
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 first 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. We are also responding
to
various requests from Indonesian authorities related to our
operations.
There
have been no material changes to our risk factors since the year ended December
31, 2005. For more information, please read Item 1A included in our Form 10-K
for the year ended December 31, 2005.
(a)
In
April 2006, we privately negotiated transactions with holders to induce
conversion of $5.0 million of our $575 million 7% Convertible Senior Notes
due
2011 into 0.2 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)
In
October 2003, our Board of Directors approved a new open market share purchase
program for up to 20 million shares, which replaced our previous program. The
program does not have an expiration date. No shares were purchased during the
three-month period ended March 31, 2006, and 14.2 million shares remain
available for purchase.
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:
May
9, 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
|
|
Deposit
Agreement dated as of July 25, 1994, among FCX, Mellon, as Depositary,
and
holders of depositary receipts (Silver-Denominated Depositary Receipts)
evidencing certain Depositary Shares, each of which, in turn, initially
represented 0.025 shares of Silver-Denominated Preferred Stock.
Incorporated by reference to Exhibit 4.7 to the Quarterly Report
on Form
10-Q of FCX for the quarter ended June 30, 2002 (the FCX 2002 Second
Quarter Form 10-Q).
|
|
|
|
4.2
|
|
Form
of Silver-Denominated Depositary Receipt. Incorporated by reference
to
Exhibit 4.8 to the FCX 2002 Second Quarter Form 10-Q.
|
|
|
|
4.3
|
|
Certificate
of Designations of 5½% Convertible Perpetual Preferred Stock of FCX.
Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K
of FCX dated March 30, 2004 and filed March 31, 2004.
|
|
|
|
4.4
|
|
Amended
and Restated Credit Agreement dated as of September 30, 2003, but
effective as of October 2, 2003, among FCX, PT Freeport Indonesia,
the
several financial institutions that are parties thereto, U.S. Bank
Trust
National Association, as PT Freeport Indonesia Trustee, J.P. Morgan
Securities Inc., as Arranger, and JPMorgan Chase Manhattan Bank as
Administrative Agent, Issuing Bank, Security Agent, JAA Security
Agent and
Documentation Agent. Incorporated by reference to Exhibit 4.7 to
the
Quarterly Report on Form 10-Q of FCX for the quarter ended September
30,
2003.
|
|
|
|
4.5
|
|
Senior
Indenture dated as of November 15, 1996, from FCX to The Chase Manhattan
Bank, as Trustee. Incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-3 of FCX filed November 5, 2001
(the FCX
November 5, 2001 Form S-3).
|
4.6
|
|
First
Supplemental Indenture dated as of November 18, 1996, from FCX to
The
Chase Manhattan Bank, as Trustee, providing for the issuance of the
Senior
Notes and supplementing the Senior Indenture dated November 15, 1996,
from
FCX to such Trustee, providing for the issuance of the 7.50% Senior
Notes
due 2006 and the 7.20% Senior Notes due 2026. Incorporated by reference
to
Exhibit 4.5 to the FCX November 5, 2001 Form S-3.
|
|
|
|
4.7
|
|
Indenture
dated as of January 29, 2003, from FCX to The Bank of New York, as
Trustee, with respect to the 10⅛%
Senior Notes due 2010. Incorporated by reference to Exhibit 4.1 to
the
Current Report on Form 8-K of FCX dated February 6,
2003.
|
|
|
|
4.8
|
|
Indenture
dated as of February 11, 2003, from FCX to The Bank of New York,
as
Trustee, with respect to the 7% Convertible Senior Notes due 2011.
Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K
of FCX dated February 11, 2003 and filed February 25,
2003.
|
|
|
|
4.9
|
|
Indenture
dated as of February 3, 2004, from FCX to The Bank of New York, as
Trustee, with respect to the 6⅞% Senior Notes due 2014. Incorporated by
reference to Exhibit 4.12 to the Annual Report on Form 10-K of FCX
for the
fiscal year ended December 31, 2003 (the FCX 2003 Form
10-K).
|
|
|
|
4.10
|
|
Rights
Agreement dated as of May 3, 2000, between FCX and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent. Incorporated by reference to Exhibit
4.26 to the Quarterly Report on Form 10-Q of FCX for the quarter
ended
March 31, 2000.
|
|
|
|
4.11
|
|
Amendment
No. 1 to Rights Agreement dated as of February 26, 2002, between
FCX and
Mellon Investor Services. Incorporated by reference to Exhibit 4.16
to the
FCX 2002 First Quarter Form 10-Q.
|
|
|
|
10.1
|
|
Contract
of Work dated December 30, 1991, between the Government of the Republic
of
Indonesia and PT Freeport Indonesia. Incorporated by reference to
Exhibit
10.1 to the FCX November 5, 2001 Form S-3.
|
|
|
|
10.2
|
|
Contract
of Work dated August 15, 1994, between the Government of the Republic
of
Indonesia and PT Irja Eastern Minerals Corporation. Incorporated
by
reference to Exhibit 10.2 to the FCX November 5, 2001 Form
S-3.
|
|
|
|
10.3
|
|
Participation
Agreement dated as of October 11, 1996, between PT Freeport Indonesia
and
P.T. RTZ-CRA Indonesia with respect to a certain contract of work.
Incorporated by reference to Exhibit 10.4 to the FCX November 5,
2001 Form
S-3.
|
|
|
|
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
10.59)
|
|
|
|
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.
|
|
|
|
10.29
|
|
FCX
Director Compensation. Incorporated by reference to Exhibit 10.25
to the
FCX 2004 Form 10-K.
|
|
|
|
10.30
|
|
FCX
Supplemental Executive Retirement Plan dated February 26, 2004.
Incorporated by reference to Exhibit 10.26 to the FCX 2004 Form
10-K.
|
|
|
|
10.31
|
|
Amendment
No. 1 to FCX Supplemental Executive Retirement Plan. Incorporated
by
reference to Exhibit 10.1 to the Current Report on Form 8-K of FCX
dated
May 3, 2005.
|
|
|
|
10.32
|
|
FCX
2005 Annual Incentive Plan. Incorporated by reference to Exhibit
10.1 to
the Current Report on Form 8-K of FCX dated May 5,
2005.
|
|
|
|
10.33
|
|
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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Amended
FM Services Company Financial Counseling and Tax Return Preparation
and
Certification Program. Incorporated by reference to Exhibit 10.20
to the
FCX 2003 First Quarter Form 10-Q.
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10.36
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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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10.37
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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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10.38
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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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10.39
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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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10.40
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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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10.41
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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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10.42
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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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10.43
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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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10.44
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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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10.45
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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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10.46
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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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10.47
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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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10.48
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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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10.49
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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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10.50
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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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10.51
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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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10.52
|
|
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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10.53
|
|
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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|
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10.54
|
|
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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10.55
|
|
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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10.56
|
|
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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10.57
|
|
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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|
10.58
|
|
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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10.59
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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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