Freeport-McMoRan 2003 Annual Report Download - page 22

20 FREEPORT-McMoRan COPPER & GOLD INC. 2003 Annual Report
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’s share as our joint
venture partner. The results of operations reported and
summarized below are not necessarily indicative of
future operating results. The following discussion
should be read together with our financial statements
and the related notes.
We are one of the world’s largest copper and gold
mining and production companies in terms of reserves
and production. We are also one of the lowest cost
copper producers in the world, after taking into
account credits for related gold and silver production.
Our principal asset is the Grasberg mine, which we
discovered in 1988. Grasberg contains the largest
single gold reserve and one of the largest copper
reserves of any mine in the world.
We operate through our majority-owned subsidiaries,
PT Freeport Indonesia and PT Puncakjaya Power, and
through PT Irja Eastern Minerals and Atlantic Copper,
S.A., our principal wholly owned subsidiaries. We
acquired an 85.7 percent ownership in Puncakjaya
Power in July 2003. Puncakjaya Power supplies power
to PT Freeport Indonesia’s operations (see Note 2 of
“Notes to Consolidated Financial Statements”).
Eastern Minerals conducts mineral exploration
activities (currently suspended) in Papua, Indonesia.
Atlantic Copper’s operations are in Spain and involve
the smelting and refining of copper concentrates and
the marketing of refined copper products and pre-
cious metals in slimes. PT Freeport Indonesia owns a
25 percent interest in PT Smelting, an Indonesian
company which operates a copper smelter and refin-
ery in Gresik, Indonesia.
PT Freeport Indonesia, our principal operating sub-
sidiary, 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. The Contract of Work also allows
us to explore for minerals in a 0.5-million-acre area
called Block B. All of our proven and probable mineral
reserves and current mining operations are located
in Block A. Eastern Minerals holds an additional
Contract of Work originally covering a 2.5-million-acre
area. Under the terms of Eastern Minerals’ Contract
of Work, we have already relinquished 1.3 million
acres and must relinquish an additional 0.6 million
acres soon after we resume exploration activities.
In addition to the PT Freeport Indonesia and Eastern
Minerals exploration acreage, we have the right to
conduct other mineral exploration activities in Papua
pursuant to a joint venture through PT Nabire Bakti
Mining. Field exploration activities outside of our
current mining operations in Block A have been
suspended since 2000 because of safety and secu-
rity issues and uncertainty relating to a possible
conflict between our mining and exploration rights in
certain forest areas covered by our Contracts of Work
and an Indonesian law enacted in 1999 prohibiting
open-pit mining in forest preservation areas.
Joint Ventures with Rio Tinto
In 1996, we established joint ventures with Rio Tinto
plc, an international mining company with headquar-
ters 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 in production above specified
levels from operations 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 most recent expansion completed in 1998 to
(b) total revenues from production 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.
Under our joint venture arrangements, Rio Tinto has
a 40 percent interest in PT Freeport Indonesia’s
Contract of Work and Eastern Minerals’ Contract of
Work. Rio Tinto also has the option to participate in 40
percent of any of our other future exploration projects
in Papua. Rio Tinto has elected to participate in 40
percent of our interest and cost in the PT Nabire Bakti
exploration joint venture covering approximately 0.5
million acres contiguous to Block B and one of Eastern
Minerals’ blocks. Rio Tinto owns approximately 12
percent of our currently outstanding common stock.
Operating Cash Flows and Debt Reductions
Our consolidated operating cash flows for 2003
totaled $572.1 million. In each of the last five years,
we generated in excess of $500 million in consolidated
operating cash flows with average prices of $0.76 per
pound for copper and $298 per ounce for gold.
During the last several years, we completed a series
MANAGEMENT’S DISCUSSION AND ANALYSIS