Freeport-McMoRan 2004 Annual Report Download - page 34

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Management’s Discussion and Analysis
32฀| FREEPORT-McMoRan COPPER & GOLD INC.
represent฀a฀cost฀to฀PT฀Freeport฀Indonesia฀and฀income฀to฀
Atlantic฀Copper฀and฀PT฀Smelting.฀Through฀downstream฀integra-
tion,฀we฀are฀assured฀placement฀of฀a฀significant฀portion฀of฀
our฀concentrate฀production.฀While฀low฀smelting฀and฀refining฀
charges฀in฀recent฀years฀adversely฀affected฀the฀operating฀
results฀of฀Atlantic฀Copper,฀they฀benefited฀the฀operating฀
results฀of฀PT฀Freeport฀Indonesia’s฀mining฀operations,฀effec-
tively฀achieving฀a฀hedge฀for฀these฀charges.฀Treatment฀and฀
refining฀charge฀rates฀are฀currently฀increasing.฀Higher฀future฀
treatment฀and฀refining฀charges฀will฀benefit฀our฀smelter฀opera-
tions฀and฀adversely฀affect฀our฀mining฀operations.฀Taking฀
into฀account฀taxes฀and฀minority฀ownership฀interests,฀an฀
equivalent฀change฀in฀smelting฀and฀refining฀charge฀rates฀would฀
essentially฀offset฀in฀our฀consolidated฀operating฀results.
Atlantic Copper Operating Results –
2004 Compared with 2003
Atlantic฀Copper฀completed฀a฀51-day฀scheduled฀major฀mainte-
nance฀turnaround฀in฀May฀2004,฀adversely฀affecting฀2004฀results.฀
Atlantic฀Copper’s฀operating฀cash฀margin฀was฀a฀$24.4฀million฀
deficit฀in฀2004,฀compared฀with฀a฀positive฀$22.4฀million฀in฀2003.฀
The฀deficit฀in฀2004฀was฀primarily฀because฀of฀Atlantic฀Copper’s฀
major฀maintenance฀turnaround.฀Major฀maintenance฀turnarounds฀
of฀this฀duration฀typically฀occur฀approximately฀every฀nine฀years฀
for฀Atlantic฀Copper,฀with฀significantly฀shorter-term฀maintenance฀
turnarounds฀occurring฀in฀the฀interim.฀
Atlantic฀Copper฀treated฀768,100฀metric฀tons฀of฀concentrate฀
and฀scrap฀in฀2004,฀compared฀with฀964,400฀metric฀tons฀in฀
2003.฀Cathode฀production฀totaled฀454.7฀million฀pounds฀and฀
sales฀totaled฀479.2฀million฀pounds฀during฀2004,฀compared฀
with฀cathode฀production฀of฀544.7฀million฀pounds฀and฀sales฀
of฀546.8฀million฀pounds฀during฀2003.฀Atlantic฀Copper’s฀cathode฀
cash฀production฀costs฀per฀pound฀of฀copper,฀before฀currency฀
hedging,฀averaged฀$0.25฀in฀2004฀and฀$0.16฀in฀2003.฀Unit฀
costs฀for฀2004฀were฀adversely฀affected฀by฀lower฀production฀
and฀higher฀costs฀from฀the฀maintenance฀turnaround.฀Treatment฀
charges฀(including฀price฀participation),฀which฀are฀what฀PT฀
Freeport฀Indonesia฀and฀third฀parties฀pay฀Atlantic฀Copper฀to฀
smelt฀and฀refine฀concentrates,฀continued฀at฀historically฀low฀
levels฀averaging฀$0.16฀per฀pound฀for฀2004฀and฀2003.฀Excess฀
smelter฀capacity,฀combined฀with฀limited฀copper฀concentrate฀
availability,฀caused฀long-term฀treatment฀and฀refining฀rates฀
to฀decline฀since฀early฀1998.฀However,฀treatment฀and฀refining฀
rates฀increased฀in฀late฀2004,฀and฀Atlantic฀Copper฀expects฀
these฀higher฀rates฀to฀benefit฀its฀operations฀starting฀in฀2005.
Atlantic฀Copper฀reported฀operating฀losses฀of฀$83.5฀million฀
in฀2004฀and฀$21.8฀million฀in฀2003.฀The฀higher฀losses฀in฀2004฀
Bakti฀Mining;฀and฀November฀15,฀2004,฀for฀Eastern฀Minerals.฀
Recent฀Indonesian฀legislation฀permits฀open-pit฀mining฀in฀PT฀
Freeport฀Indonesia’s฀Block฀B฀area,฀subject฀to฀certain฀require-
ments.฀We฀are฀currently฀assessing฀these฀requirements฀and฀
security฀issues.฀The฀timing฀for฀our฀resumption฀of฀explora-
tion฀activities฀in฀our฀Contract฀of฀Work฀areas฀outside฀of฀Block฀
A฀depends฀on฀the฀resolution฀of฀these฀matters.฀
SMELTING AND REFINING OPERATIONS
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฀
Atlantic Copper Operating Results
Years฀Ended฀December฀31,฀ 2004฀ 2003฀ 2002
(In฀Millions)
฀
Gross฀(loss)฀profit฀฀ $฀ (69.4)฀ $฀ (10.7)฀ $฀ 11.2
Add฀depreciation฀and฀amortization฀expense฀ ฀ 28.6฀ ฀ 28.5฀ ฀ 27.7
Other฀ ฀ ฀ ฀ 16.4a฀ ฀ 4.6฀ ฀ 4.5
฀ Cash฀(deficit)฀margin฀฀ $฀ (24.4)b฀ $฀ 22.4฀ $฀ 43.4
Operating฀(loss)฀income฀(in฀millions)฀ $฀ (83.5)฀ $฀ (21.8)฀ $฀ 2.6
Concentrate฀and฀scrap฀treated฀(metric฀tons)฀ ฀768,100฀ ฀964,400฀ ฀1,016,700
Anodes฀production฀(000s฀of฀pounds)฀ ฀494,400฀ ฀640,000฀ ฀ 657,000
Treatment฀rates฀per฀pound฀ $฀ 0.16฀ $฀ 0.16฀ $฀ 0.17
Cathodes,฀wire฀rod฀and฀wire฀sales฀(000s฀of฀pounds)฀ ฀479,200฀ ฀546,800฀ ฀ 556,500
Cathode฀cash฀production฀cost฀per฀pound฀before฀hedging฀ $฀ 0.25฀ $฀ 0.16฀ $฀ 0.12
Gold฀sales฀in฀anodes฀and฀slimes฀(ounces)฀ ฀316,700฀ ฀929,700฀ ฀ 813,900
a.฀Includes฀a฀$9.8฀million฀charge฀for฀Atlantic฀Copper’s฀workforce฀reduction฀plan.
b.฀Includes฀costs฀related฀to฀Atlantic฀Copper’s฀51-day฀major฀maintenance฀turnaround฀totaling฀$27.5฀million.