Freeport-McMoRan 2004 Annual Report Download - page 33

Management’s Discussion and Analysis
2004 ANNUAL REPORT |฀31
impact฀of฀the฀fourth-quarter฀2003฀open-pit฀slippage฀and฀debris฀
flow฀events฀and฀the฀subsequent฀clean-up฀efforts.฀At฀the฀DOZ฀
underground฀mine,฀production฀averaged฀40,500฀metric฀tons฀of฀
ore฀per฀day฀for฀2003,฀compared฀with฀21,800฀metric฀tons฀of฀ore฀
per฀day฀for฀2002.฀Production฀from฀the฀Intermediate฀Ore฀Zone฀
averaged฀6,800฀metric฀tons฀of฀ore฀per฀day฀for฀2003฀and฀19,300฀
metric฀tons฀of฀ore฀per฀day฀for฀2002.
PT฀Freeport฀Indonesia฀reported฀record-low฀average฀unit฀net฀
cash฀production฀costs฀of฀a฀net฀credit฀of฀$(0.02)฀per฀pound฀
in฀2003,฀compared฀with฀$0.08฀per฀pound฀in฀2002.฀Unit฀site฀
production฀and฀delivery฀costs฀in฀2003฀averaged฀$0.48฀per฀
pound฀of฀copper,฀$0.12฀per฀pound฀higher฀than฀the฀$0.36฀in฀
2002฀primarily฀because฀of฀lower฀copper฀sales฀volumes.฀Higher฀
mine฀maintenance฀costs,฀stronger฀Indonesian฀and฀Australian฀
currencies฀and฀higher฀energy฀costs฀also฀resulted฀in฀higher฀
costs฀compared฀with฀2002.฀
Gold฀credits฀for฀2003฀of฀$0.70฀per฀pound฀were฀higher฀
than฀the฀gold฀credits฀of฀$0.48฀per฀pound฀in฀2002฀primarily฀
because฀of฀higher฀gold฀sales฀volumes฀and฀prices฀in฀2003.฀Gold฀
ore฀grades฀for฀2003฀improved฀by฀24฀percent฀to฀1.54฀grams฀per฀
metric฀ton฀in฀2003฀from฀1.24฀grams฀per฀metric฀ton฀in฀2002.฀
As฀a฀result฀of฀the฀lower฀copper฀production฀and฀sales฀in฀2003,฀
PT฀Freeport฀Indonesia’s฀depreciation฀rate฀per฀pound฀of฀copper฀
increased฀to฀$0.15฀for฀2003฀compared฀with฀$0.14฀for฀2002.
PT Freeport Indonesia Sales Outlook
PT฀Freeport฀Indonesia฀sells฀its฀copper฀concentrates฀primarily฀
under฀long-term฀sales฀agreements฀denominated฀in฀U.S.฀
dollars,฀mostly฀to฀companies฀in฀Asia฀and฀Europe฀and฀to฀inter-
national฀trading฀companies.฀PT฀Freeport฀Indonesia’s฀share฀of฀
sales฀for฀2005฀is฀projected฀to฀approximate฀1.5฀billion฀pounds฀
of฀copper฀and฀2.9฀million฀ounces฀of฀gold,฀and฀to฀average฀
1.36฀billion฀pounds฀of฀copper฀and฀2.2฀million฀ounces฀of฀gold฀
annually฀over฀the฀next฀five฀years฀(2005-2009).฀PT฀Freeport฀
Indonesia฀expects฀its฀sales฀for฀the฀first฀quarter฀of฀2005฀
to฀approximate฀310฀million฀pounds฀of฀copper฀and฀520,000฀
ounces฀of฀gold.฀Also,฀based฀on฀the฀current฀mine฀plan฀for฀
2005,฀PT฀Freeport฀Indonesia฀estimates฀approximately฀54฀
percent฀of฀its฀copper฀and฀60฀percent฀of฀its฀gold฀will฀be฀
produced฀in฀the฀second฀half฀of฀2005.฀Because฀of฀the฀nature฀
of฀the฀Grasberg฀ore฀body,฀the฀sequencing฀in฀mining฀will฀
cause฀ore฀grades฀to฀vary฀from฀quarter฀to฀quarter,฀particularly฀
for฀gold.
PT฀Freeport฀Indonesia฀has฀long-term฀contracts฀to฀provide฀
approximately฀60฀percent฀of฀Atlantic฀Copper’s฀copper฀concen-
trate฀requirements฀at฀market฀prices฀and฀nearly฀all฀of฀
PT฀Smelting’s฀copper฀concentrate฀requirements.฀Under฀the฀
PT฀Smelting฀contract,฀for฀the฀first฀15฀years฀of฀PT฀Smelting’s฀
operations฀beginning฀December฀1998,฀the฀treatment฀and฀
refining฀charges฀on฀the฀majority฀of฀the฀concentrate฀PT฀Freeport฀
Indonesia฀provides฀will฀not฀fall฀below฀specified฀minimum฀
rates,฀subject฀to฀renegotiation฀in฀2008.฀The฀rate฀was฀$0.23฀
per฀pound฀during฀the฀period฀from฀the฀commencement฀of฀
PT฀Smelting’s฀operations฀in฀1998฀until฀April฀2004,฀when฀it฀
declined฀to฀a฀minimum฀of฀$0.21฀per฀pound.฀Market฀rates,฀
excluding฀price฀participation,฀under฀long-term฀contracts฀
settled฀in฀late฀2004฀approximate฀$0.21฀per฀pound.
Exploration and Reserves
During฀2004,฀net฀additions฀and฀revisions฀to฀the฀aggregate฀
proven฀and฀probable฀reserves฀at฀the฀Grasberg฀mining฀complex฀
totaled฀approximately฀141฀million฀metric฀tons฀of฀ore฀repre-
senting฀increases฀of฀2.9฀billion฀recoverable฀pounds฀of฀copper,฀
2.2฀million฀recoverable฀ounces฀of฀gold฀and฀18.9฀million฀
recoverable฀ounces฀of฀silver.฀The฀additions฀were฀primarily฀the฀
result฀of฀positive฀drilling฀results฀at฀the฀Deep฀Mill฀Level฀Zone฀
ore฀body,฀a฀146-million-metric-ton฀ore฀body.฀We฀expect฀to฀
complete฀additional฀engineering฀studies฀evaluating฀drilling฀
results฀on฀the฀western฀side฀of฀the฀ore฀body฀in฀2005,฀
which฀could฀increase฀the฀size฀of฀the฀ore฀body.฀Our฀aggregate฀
exploration฀budget฀for฀2005,฀including฀Rio฀Tinto’s฀share,฀is฀
expected฀to฀total฀approximately฀$21฀million฀($15฀million฀for฀
our฀share)฀with฀most฀of฀the฀effort฀focused฀on฀testing฀the฀
Mill฀Level฀Zone฀and฀Deep฀Mill฀Level฀Zone฀deposits฀to฀the฀
northwest,฀expansion฀of฀the฀underground฀Grasberg฀resource,฀
and฀testing฀reconnaissance฀targets฀along฀the฀Wanagon฀and฀
Idenberg฀fault฀trends.฀Net฀of฀Rio฀Tinto’s฀share,฀PT฀Freeport฀
Indonesia’s฀share฀of฀proven฀and฀probable฀recoverable฀reserves฀
as฀of฀December฀31,฀2004,฀was฀40.5฀billion฀pounds฀of฀copper,฀
46.5฀million฀ounces฀of฀gold฀and฀124.5฀million฀ounces฀of฀
silver.฀FCX’s฀equity฀interest฀in฀proven฀and฀probable฀recov-
erable฀reserves฀as฀of฀December฀31,฀2004,฀was฀36.7฀billion฀
pounds฀of฀copper,฀42.1฀million฀ounces฀of฀gold฀and฀112.8฀
million฀ounces฀of฀silver฀(see฀Note฀13฀of฀“Notes฀to฀Consolidated฀
Financial฀Statements”).฀PT฀Freeport฀Indonesia’s฀share฀of฀
reserve฀additions฀replaced฀approximately฀175฀percent฀of฀its฀
2004฀copper฀production,฀90฀percent฀of฀2004฀gold฀production฀
and฀330฀percent฀of฀2004฀silver฀production.฀Estimated฀recov-
erable฀reserves฀were฀assessed฀using฀a฀copper฀price฀of฀$0.85฀
per฀pound฀and฀a฀gold฀price฀of฀$270฀per฀ounce.฀If฀we฀adjusted฀
metal฀prices฀used฀in฀our฀reserve฀estimates฀to฀the฀approxi-
mate฀average฀London฀spot฀prices฀for฀the฀past฀three฀years฀
($0.94฀per฀pound฀of฀copper฀and฀$361฀per฀ounce฀of฀gold),฀
the฀additions฀to฀proven฀and฀probable฀reserves฀would฀not฀be฀
material฀to฀reported฀reserves.
The฀Indonesian฀government฀previously฀approved฀suspen-
sions฀of฀our฀field฀exploration฀activities฀outside฀of฀our฀
current฀mining฀operations฀area,฀which฀have฀been฀in฀suspen-
sion฀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฀
February฀26,฀2005,฀for฀Block฀B;฀March฀31,฀2005,฀for฀PT฀Nabire฀