Freeport-McMoRan 2004 Annual Report Download - page 27

Management’s Discussion and Analysis
2004 ANNUAL REPORT |฀25
present฀value฀costs.฀A฀decrease฀of฀one฀percent฀in฀the฀
discount฀rates฀used฀has฀a฀similar฀effect฀resulting฀in฀an฀
approximate฀16฀percent฀increase฀in฀the฀discounted฀present฀
value฀costs.฀After฀discounting฀the฀projected฀cash฀flows,฀a฀
market฀risk฀premium฀of฀10฀percent฀was฀applied฀to฀the฀total฀
to฀reflect฀what฀a฀third฀party฀might฀require฀to฀assume฀these฀
asset฀retirement฀obligations.฀The฀market฀risk฀premium฀
was฀based฀on฀market-based฀estimates฀of฀rates฀that฀a฀third฀
party฀would฀have฀to฀pay฀to฀insure฀its฀exposure฀to฀possible฀
future฀increases฀in฀the฀value฀of฀these฀obligations.
At฀January฀1,฀2003,฀we฀estimated฀the฀fair฀value฀of฀our฀
aggregate฀asset฀retirement฀obligations฀to฀be฀$28.5฀million.฀
We฀recorded฀the฀fair฀value฀of฀these฀obligations฀and฀the฀
related฀additional฀assets฀as฀of฀January฀1,฀2003.฀The฀net฀
difference฀between฀our฀previously฀recorded฀reclamation฀
and฀closure฀cost฀liability฀and฀the฀amounts฀estimated฀under฀
SFAS฀No.฀143,฀after฀taxes฀and฀minority฀interest,฀resulted฀
in฀a฀gain฀of฀$9.1฀million฀(after฀reduction฀by฀$8.5฀million฀
for฀taxes฀and฀minority฀interest฀sharing),฀$0.06฀per฀share฀
on฀a฀diluted฀basis,฀which฀was฀recognized฀as฀a฀cumulative฀
effect฀adjustment฀for฀a฀change฀in฀accounting฀principle.฀As฀a฀
result฀of฀adopting฀SFAS฀No.฀143,฀we฀expect฀our฀future฀
depreciation฀and฀amortization฀expense฀to฀be฀lower฀and฀
our฀production฀costs฀to฀be฀higher,฀with฀no฀significant฀net฀
impact฀on฀earnings฀for฀the฀near฀term.
The฀effect฀of฀adopting฀SFAS฀No.฀143฀was฀to฀increase฀
net฀income฀by฀approximately฀$1฀million,฀$0.01฀per฀share฀
for฀2003.฀Had฀we฀followed฀SFAS฀No.฀143฀during฀2002,฀net฀
income฀would฀have฀increased฀by฀approximately฀$0.5฀million฀
or฀less฀than฀$0.01฀per฀share.
At฀December฀31,฀2004฀and฀2003,฀PT฀Freeport฀Indonesia฀
revised฀its฀estimates฀for฀(1)฀changes฀in฀the฀projected฀
timing฀of฀certain฀reclamation฀costs฀because฀of฀the฀slippage฀
and฀debris฀flow฀events฀in฀the฀Grasberg฀open฀pit,฀(2)฀
changes฀in฀certain฀cost฀estimates,฀and฀(3)฀additional฀
asset฀retirement฀obligations฀incurred฀during฀2003.฀We฀
estimated฀PT฀Freeport฀Indonesia’s฀aggregate฀asset฀retire-
ment฀obligations฀to฀be฀about฀$149฀million฀at฀December฀
31,฀2004,฀and฀$130฀million฀at฀December฀31,฀2003.฀An฀
analysis฀of฀PT฀Freeport฀Indonesia’s฀discounted฀asset฀retire-
ment฀obligation฀follows฀(in฀millions):฀฀
฀2004฀ 2003฀
฀ Asset฀retirement฀obligation฀at฀
฀ ฀ beginning฀of฀year฀ $฀25.7฀ $฀27.9
฀ Accretion฀expense฀ ฀ 2.8฀ ฀ 2.7
฀ Revisions฀for฀changes฀in฀estimates฀ ฀(6.5)฀ ฀(4.3)
฀ Liabilities฀incurred฀ ฀ —฀ ฀ 0.6
฀ Liabilities฀settled฀ ฀ —฀ ฀(1.2)
฀ Asset฀retirement฀obligation฀at฀end฀of฀year฀ $฀22.0฀ $฀25.7
The฀expected฀deferral฀of฀certain฀costs฀was฀the฀primary฀
change฀in฀estimates฀that฀caused฀the฀decline฀in฀the฀obligation฀
balance฀over฀the฀last฀two฀years.฀These฀changes฀reduced฀
the฀related฀asset฀balance฀and฀are฀not฀expected฀to฀have฀a฀
material฀impact฀on฀future฀net฀income.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated฀revenues฀include฀PT฀Freeport฀Indonesia’s฀sale฀of฀
copper฀concentrates,฀which฀also฀contain฀significant฀quanti-
ties฀of฀gold฀and฀silver,฀and฀the฀sale฀by฀Atlantic฀Copper฀of฀
copper฀anodes,฀cathodes,฀wire฀and฀wire฀rod,฀and฀gold฀in฀
anodes฀and฀slimes.฀Consolidated฀revenues฀and฀net฀income฀
vary฀significantly฀with฀fluctuations฀in฀the฀market฀prices฀of฀
copper฀and฀gold฀and฀other฀factors.฀PT฀Freeport฀Indonesia’s฀
intercompany฀sales฀to฀Atlantic฀Copper฀are฀eliminated฀in฀
consolidation.฀Consolidated฀revenues฀were฀$2.4฀billion฀for฀
2004,฀compared฀with฀$2.2฀billion฀for฀2003,฀reflecting฀
significantly฀higher฀copper฀and฀gold฀prices฀partly฀offset฀by฀
lower-grade฀ore฀and฀reduced฀mill฀throughput฀as฀PT฀Freeport฀
Indonesia฀accelerated฀the฀removal฀of฀overburden฀and฀mined฀
low-grade฀ore฀prior฀to฀restoring฀safe฀access฀to฀the฀higher-
grade฀ore฀areas฀in฀its฀Grasberg฀open-pit฀mine฀following฀the฀
fourth-quarter฀2003฀slippage฀and฀debris฀flow฀events฀(see฀
“Mining฀and฀Exploration฀Operations฀–฀PT฀Freeport฀Indonesia฀
Operating฀Results”).฀Atlantic฀Copper’s฀2004฀revenues฀were฀
adversely฀affected฀by฀its฀scheduled฀major฀maintenance฀turn-
around฀(see฀“Smelting฀and฀Refining฀Operations฀–฀Atlantic฀
Copper฀Operating฀Results”)฀partly฀offset฀by฀higher฀copper฀and฀
gold฀prices.฀Consolidated฀revenues฀in฀2003฀benefited฀from฀
higher฀copper฀and฀gold฀price฀realizations฀and฀higher฀gold฀
sales฀volumes,฀partly฀offset฀by฀lower฀copper฀sales฀volumes฀
when฀compared฀with฀2002฀revenues฀of฀$1.9฀billion.
Consolidated฀production฀and฀delivery฀costs฀were฀higher฀in฀
2004฀at฀$1,450.3฀million฀compared฀with฀$1,071.3฀million฀for฀
2003฀and฀$938.5฀million฀for฀2002.฀The฀increase฀in฀2004฀was฀
primarily฀because฀of฀higher฀costs฀of฀concentrate฀purchases฀at฀
Atlantic฀Copper฀caused฀by฀higher฀metals฀prices,฀higher฀produc-
tion฀costs฀at฀PT฀Freeport฀Indonesia฀and฀the฀costs฀of฀Atlantic฀
Copper’s฀smelter฀turnaround.฀Production฀and฀delivery฀costs฀in฀
2003฀were฀higher฀than฀in฀2002฀primarily฀because฀of฀higher฀
concentrates฀costs฀at฀Atlantic฀Copper฀caused฀by฀the฀increase฀
in฀copper฀and฀gold฀prices฀during฀the฀year.฀Consolidated฀
depreciation฀and฀amortization฀expense฀was฀$206.4฀million฀in฀
2004,฀$230.8฀million฀in฀2003฀and฀$260.4฀million฀in฀2002.฀
Depreciation฀and฀amortization฀expense฀decreased฀each฀year฀
during฀the฀last฀three฀years฀primarily฀because฀a฀large฀portion฀
of฀our฀depreciation฀is฀calculated฀on฀a฀unit-of-production฀basis฀฀
and฀our฀copper฀sales฀volumes฀at฀PT฀Freeport฀Indonesia฀
declined฀each฀year.
Exploration฀expenses฀increased฀to฀$8.7฀million฀in฀2004,฀
from฀$6.4฀million฀in฀2003฀and฀$3.1฀million฀in฀2002,฀reflecting฀
increased฀exploration฀drilling฀in฀Block฀A.฀Our฀2004฀drilling฀