Freeport-McMoRan 2004 Annual Report Download - page 40

Management’s Discussion and Analysis
38฀| FREEPORT-McMoRan COPPER & GOLD INC.
Environmental Matters
We฀believe฀that฀we฀conduct฀our฀Indonesian฀operations฀
pursuant฀to฀applicable฀permits฀and฀that฀we฀comply฀in฀all฀
material฀respects฀with฀applicable฀Indonesian฀environmental฀
laws,฀rules฀and฀regulations.฀We฀have฀had฀three฀independent฀
environmental฀audits฀conducted฀by฀internationally฀recognized฀
environmental฀consulting฀and฀auditing฀firms.฀Audits฀were฀
completed฀in฀1996฀by฀Dames฀&฀Moore,฀in฀1999฀by฀Montgomery฀
Watson,฀and฀in฀2002฀by฀SGS฀International฀Certification฀
Services฀Indonesia,฀a฀member฀of฀the฀Société฀Générale฀
de฀Surveillance฀group.฀The฀2002฀audit฀found฀that฀the฀overall฀
approach฀to฀practical฀management฀of฀environmental฀issues฀at฀
PT฀Freeport฀Indonesia฀is฀considered฀to฀be฀very฀sound.฀There฀
were฀no฀audit฀findings฀requiring฀corrective฀action.
In฀connection฀with฀obtaining฀our฀environmental฀approvals฀
from฀the฀Indonesian฀government,฀we฀committed฀to฀
performing฀a฀one-time฀environmental฀risk฀assessment฀on฀the฀
impacts฀of฀our฀tailings฀management฀plan.฀We฀completed฀this฀
extensive฀environmental฀risk฀assessment฀with฀more฀than฀90฀
scientific฀studies฀conducted฀over฀four฀years฀and฀submitted฀
it฀to฀the฀Indonesian฀government฀in฀December฀2002.฀We฀
developed฀the฀risk฀assessment฀study฀with฀input฀from฀an฀
independent฀review฀panel,฀which฀included฀representatives฀
from฀the฀Indonesian฀government,฀academia฀and฀non-govern-
mental฀organizations.฀The฀risks฀that฀we฀identified฀during฀
this฀process฀were฀in฀line฀with฀our฀impact฀projections฀of฀the฀
tailings฀management฀program฀contained฀in฀our฀environmental฀
approval฀documents.
We฀will฀determine฀our฀ultimate฀reclamation฀and฀closure฀
activities฀based฀on฀applicable฀laws฀and฀regulations฀and฀
our฀assessment฀of฀appropriate฀remedial฀activities฀in฀the฀
circumstances฀after฀consultation฀with฀governmental฀authori-
ties,฀affected฀local฀residents฀and฀other฀affected฀parties.฀As฀
of฀December฀31,฀2004,฀we฀estimated฀aggregate฀reclamation฀
and฀closure฀obligations฀to฀be฀approximately฀$149฀million฀for฀
PT฀Freeport฀Indonesia฀and฀$18฀million฀for฀Atlantic฀Copper.฀
Estimates฀of฀the฀ultimate฀reclamation฀and฀closure฀costs฀we฀
will฀incur฀in฀the฀future฀involve฀complex฀issues฀requiring฀
integrated฀assessments฀over฀a฀period฀of฀many฀years฀and฀are฀
subject฀to฀revision฀over฀time,฀and฀actual฀costs฀may฀vary฀
from฀our฀estimates.฀Some฀reclamation฀costs฀will฀be฀incurred฀
during฀mining฀activities,฀while฀most฀closure฀costs฀and฀the฀
remaining฀reclamation฀costs฀will฀be฀incurred฀at฀the฀end฀of฀
the฀Grasberg฀open-pit฀mining฀operations฀and฀at฀the฀end฀of฀all฀
mining฀activities,฀which฀are฀currently฀estimated฀to฀continue฀
for฀more฀than฀35฀years.
In฀1996,฀we฀began฀contributing฀to฀a฀cash฀fund฀($6.0฀
million฀balance฀at฀December฀31,฀2004)฀designed฀to฀accu-
mulate฀at฀least฀$100฀million฀by฀the฀end฀of฀our฀Indonesian฀
mining฀activities.฀We฀plan฀to฀use฀this฀fund,฀including฀accrued฀
interest,฀to฀pay฀mine฀closure฀and฀reclamation฀costs.฀Any฀
costs฀in฀excess฀of฀the฀$100฀million฀fund฀would฀be฀funded฀
by฀operational฀cash฀flow฀or฀other฀sources.฀Future฀changes฀
in฀regulations฀could฀require฀us฀to฀incur฀additional฀costs฀
which฀would฀be฀charged฀against฀future฀operations.฀Estimates฀
involving฀environmental฀matters฀are฀by฀their฀nature฀imprecise฀
and฀can฀be฀expected฀to฀be฀revised฀over฀time฀because฀of฀
changes฀in฀government฀regulations,฀operations,฀technology฀
and฀inflation.
The฀cost฀of฀complying฀with฀environmental฀laws฀is฀a฀funda-
mental฀cost฀of฀our฀business.฀We฀incurred฀aggregate฀environ-
mental฀capital฀expenditures฀and฀other฀environmental฀costs฀
totaling฀$65.1฀million฀in฀2004,฀$72.1฀million฀in฀2003฀and฀
$62.6฀million฀in฀2002,฀including฀tailings฀management฀levee฀
maintenance฀and฀mine฀reclamation.฀In฀2005,฀we฀expect฀to฀
incur฀approximately฀$21฀million฀of฀aggregate฀environmental฀
capital฀expenditures฀and฀$39฀million฀of฀other฀environmental฀
costs.฀These฀environmental฀expenditures฀are฀part฀of฀our฀
overall฀2005฀operating฀budget.
DISCLOSURES ABOUT MARKET RISKS
Commodity Price Risk
Our฀consolidated฀revenues฀include฀PT฀Freeport฀Indonesia’s฀
sale฀of฀copper฀concentrates,฀which฀also฀contain฀significant฀
quantities฀of฀gold฀and฀silver,฀and฀Atlantic฀Copper’s฀sale฀of฀
copper฀anodes,฀cathodes,฀wire฀rod,฀wire฀and฀precious฀metals฀
in฀slimes.฀Atlantic฀Copper฀sold฀its฀wire฀rod฀and฀wire฀assets฀in฀
December฀2004.฀Our฀consolidated฀revenues฀and฀net฀income฀
vary฀significantly฀with฀fluctuations฀in฀the฀market฀prices฀
฀ ฀ 1฀Year฀ Years฀ Years฀ More฀Than
฀ Total฀ or฀Less฀ 2-3฀ 4-5฀ 5฀Years
PT฀Freeport฀Indonesia฀funding฀of฀mine฀closure฀and฀reclamation฀fund฀ $฀ 21.6a฀ $฀ 0.9฀ $฀ 1.4฀ $฀ 1.4฀ $฀17.9
Atlantic฀Copper฀contractual฀obligation฀to฀insurance฀company฀ $฀118.1฀ $฀ 9.8฀ $฀19.7฀ $฀19.7฀ $฀68.9
Atlantic฀Copper฀contracts฀to฀purchase฀concentrates฀at฀market฀prices฀
฀ (in฀thousand฀metric฀tons)฀ ฀1,234฀ ฀415฀ ฀659฀ ฀160฀ ฀ —
Aggregate฀operating฀leases,฀including฀Rio฀Tinto’s฀shareb฀$฀ 39.9฀ $฀ 7.6฀ $฀13.5฀ $฀12.6฀ $฀ 6.2
Open฀purchase฀orders฀at฀December฀31,฀2004฀ $฀ 44.7฀ $฀44.7฀ ฀ —฀ ฀ —฀ ฀ —
a.฀ Funding฀plus฀accrued฀interest฀are฀projected฀to฀accumulate฀to฀$100.0฀million฀by฀the฀end฀of฀our฀Indonesian฀mining฀activities.฀
b.฀ Minimum฀payments฀under฀operating฀leases฀have฀not฀been฀reduced฀by฀aggregate฀minimum฀sublease฀rentals฀of฀$1.1฀million฀due฀under฀noncancelable฀subleases.