Freeport-McMoRan 2005 Annual Report Download - page 30

฀ 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฀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.฀
฀ The฀joint฀venture฀agreement฀provides฀for฀adjustments฀to฀the฀
specified฀annual฀metal฀sharing฀amounts฀upon฀the฀occurrence฀
of฀certain฀events฀that฀cause฀an฀extended฀interruption฀in฀
production฀to฀occur,฀including฀events฀such฀as฀the฀fourth-quarter฀
2003฀Grasberg฀open-pit฀slippage฀and฀debris฀flow.฀As฀a฀result฀
of฀the฀Grasberg฀slippage฀and฀debris฀flow฀events,฀the฀2004฀
specified฀amounts฀attributable฀100฀percent฀to฀PT฀Freeport฀
Indonesia฀were฀reduced฀by฀172฀million฀recoverable฀pounds฀
for฀copper฀and฀272,000฀recoverable฀ounces฀for฀gold.฀Pursuant฀
to฀agreements฀in฀2005฀and฀early฀2006฀with฀Rio฀Tinto,฀these฀
reductions฀were฀offset฀by฀increases฀in฀the฀specified฀amounts฀
attributable฀100฀percent฀to฀PT฀Freeport฀Indonesia฀totaling฀62฀
million฀recoverable฀pounds฀for฀copper฀and฀170,000฀recoverable฀
ounces฀for฀gold฀in฀2005,฀and฀110฀million฀recoverable฀pounds฀
for฀copper฀and฀102,000฀recoverable฀ounces฀for฀gold฀in฀2021.฀
฀ Under฀our฀joint฀venture฀arrangements,฀Rio฀Tinto฀has฀a฀40฀
percent฀interest฀in฀PT฀Freeport฀Indonesia’s฀Contract฀of฀Work฀
and฀in฀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฀Mining฀exploration฀joint฀venture฀covering฀
approximately฀0.5฀million฀acres฀contiguous฀to฀Block฀B฀and฀
one฀of฀Eastern฀Minerals’฀blocks.฀
Outlook
Annual฀sales฀totaled฀1.46฀billion฀pounds฀of฀copper฀and฀฀฀฀฀฀฀฀
2.8฀million฀ounces฀of฀gold฀in฀2005,฀increases฀of฀47฀percent฀
for฀copper฀and฀93฀percent฀for฀gold฀compared฀with฀2004.฀
PT฀Freeport฀Indonesia’s฀operations฀in฀2005฀benefited฀from฀
access฀to฀higher-grade฀material฀while฀operations฀in฀2004฀were฀
focused฀on฀recovery฀efforts฀from฀the฀fourth-quarter฀2003฀
slippage฀and฀debris฀flow฀events฀at฀the฀Grasberg฀open฀pit.
฀ At฀the฀Grasberg฀open-pit฀mine,฀the฀sequencing฀in฀mining฀
areas฀with฀varying฀ore฀grades฀causes฀fluctuations฀in฀the฀timing฀
of฀ore฀production,฀which฀impacts฀sales฀volumes,฀particularly฀
for฀gold.฀PT฀Freeport฀Indonesia฀has฀updated฀its฀mine฀plans฀to฀
incorporate฀2005฀results฀and฀revised฀estimates฀on฀mining฀฀
rates฀in฀the฀Grasberg฀open฀pit.฀Based฀on฀its฀current฀mine฀plan,฀
PT฀Freeport฀Indonesia฀estimates฀its฀share฀of฀sales฀for฀2006฀฀฀
will฀approximate฀1.3฀billion฀pounds฀of฀copper฀and฀1.7฀million฀
ounces฀of฀gold.฀Average฀annual฀sales฀volumes฀over฀the฀five-
year฀period฀from฀2006฀through฀2010฀are฀expected฀to฀
approximate฀1.3฀billion฀pounds฀of฀copper฀and฀1.9฀million฀
ounces฀of฀gold.฀As฀a฀result฀of฀lower฀than฀targeted฀mining฀
rates,฀ore฀from฀a฀high-grade฀section฀in฀the฀primary฀ore฀area,฀
“6฀North,”฀previously฀expected฀to฀be฀mined฀in฀late฀2006฀has฀
been฀deferred฀to฀early฀2007.฀Accordingly,฀our฀current฀mine฀
plans฀also฀alter฀the฀timing฀of฀subsequent฀years’฀ore฀production฀
compared฀with฀previous฀plans.฀These฀revised฀production฀
estimates฀do฀not฀have฀a฀significant฀economic฀effect฀since฀the฀
deferrals฀occur฀within฀months฀overlapping฀annual฀periods.฀
Efforts฀are฀under฀way฀to฀improve฀productivity฀of฀mining฀
activities฀which฀would฀increase฀mining฀rates฀and฀advance฀the฀
timing฀of฀metal฀production.฀฀
฀ Sales฀volumes฀may฀vary฀from฀these฀estimates฀depending฀on฀
the฀areas฀being฀mined฀within฀the฀Grasberg฀open฀pit.฀Quarterly฀
variations฀in฀sales฀volumes฀are฀expected฀to฀vary฀significantly.฀
Based฀on฀current฀estimates฀of฀average฀annual฀sales฀volumes฀
over฀the฀next฀five฀years฀and฀copper฀prices฀of฀approximately฀
$2.00฀per฀pound฀and฀gold฀prices฀of฀approximately฀$550฀per฀
ounce,฀the฀impact฀on฀our฀annual฀cash฀flow฀for฀each฀฀฀฀฀฀฀฀฀฀฀฀
$0.10฀per฀pound฀change฀in฀copper฀prices฀would฀approximate฀
$65฀million,฀including฀the฀effects฀of฀price฀changes฀on฀
related฀royalty฀costs,฀and฀for฀each฀$25฀per฀ounce฀change฀in฀
gold฀prices฀would฀approximate฀$24฀million.฀
Copper฀and฀Gold฀Markets
As฀shown฀in฀the฀graphs฀below,฀world฀metal฀prices฀for฀copper฀
have฀fluctuated฀during฀the฀period฀from฀1992฀through฀January฀
2006฀with฀the฀London฀Metal฀Exchange฀(LME)฀spot฀copper฀
price฀varying฀from฀a฀low฀of฀approximately฀$0.60฀per฀pound฀in฀
2001฀to฀a฀high฀of฀$2.24฀per฀pound฀on฀January฀30,฀2006,฀and฀
world฀gold฀prices฀have฀fluctuated฀during฀the฀period฀from฀1998฀
through฀January฀2006฀from฀a฀low฀of฀approximately฀$250฀per฀
ounce฀in฀1999฀to฀a฀high฀of฀approximately฀$569฀per฀ounce฀on฀
January฀31,฀2006.฀Copper฀and฀gold฀prices฀are฀affected฀by฀
numerous฀factors฀beyond฀our฀control฀as฀described฀further฀in฀
our฀Form฀10-K฀for฀the฀year฀ended฀December฀31,฀2005.
Management’s Discussion and Analysis
฀27฀|฀2005฀ANNUAL฀REPORT฀฀฀FINANCIAL฀&฀OPERATING฀INFORMATION