Freeport-McMoRan 2005 Annual Report Download - page 34

for฀the฀corresponding฀time฀periods฀over฀which฀these฀costs฀
would฀be฀incurred.฀The฀inflation฀rates฀and฀discount฀rates฀฀฀฀฀฀฀฀฀฀฀฀฀
we฀used฀to฀calculate฀the฀fair฀value฀of฀PT฀Freeport฀Indonesia’s฀
asset฀retirement฀obligation฀are฀critical฀factors฀in฀the฀
calculation฀of฀future฀value฀and฀discounted฀present฀value฀
costs.฀An฀increase฀of฀one฀percent฀in฀the฀inflation฀rates฀used฀
results฀in฀an฀approximate฀17฀percent฀increase฀in฀the฀
discounted฀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฀diluted฀share,฀which฀was฀recognized฀as฀a฀cumulative฀
effect฀adjustment฀for฀a฀change฀in฀accounting฀principle.฀
฀ ฀ At฀least฀annually,฀PT฀Freeport฀Indonesia฀reviews฀its฀
estimates฀for฀(1)฀changes฀in฀the฀projected฀timing฀of฀certain฀
reclamation฀costs,฀(2)฀changes฀in฀cost฀estimates,฀and฀(3)฀
additional฀asset฀retirement฀obligations฀incurred฀during฀the฀
period.฀We฀estimated฀PT฀Freeport฀Indonesia’s฀aggregate฀
asset฀retirement฀obligations฀to฀be฀about฀$156฀million฀at฀
December฀31,฀2005,฀and฀$149฀million฀at฀December฀31,฀2004.฀
An฀analysis฀of฀PT฀Freeport฀Indonesia’s฀calculated฀fair฀value฀
of฀its฀asset฀retirement฀obligation฀follows฀(in฀millions):
฀2005฀ 2004฀ 2003
Asset฀retirement฀obligation฀
฀ at฀beginning฀of฀year฀ $฀22.0฀ $฀25.7฀ $฀27.9
Accretion฀expense฀ ฀ 2.7฀ ฀ 2.8฀ ฀ 2.7
Revisions฀for฀changes฀in฀estimates฀ ฀ —฀ ฀(6.5)฀ ฀(4.3)
Liabilities฀incurred฀ ฀ 1.8฀ ฀ —฀ ฀ 0.6
Liabilities฀settled฀ ฀ —฀ ฀ —฀ ฀(1.2)
Asset฀retirement฀obligation฀at฀
฀ end฀of฀year฀ $฀26.5฀ $฀22.0฀ $฀25.7
฀ The฀expected฀deferral฀of฀certain฀costs฀was฀the฀primary฀฀
change฀in฀estimates฀that฀caused฀the฀decline฀in฀the฀
obligation฀balance฀in฀2003฀and฀2004.฀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฀quantities฀
of฀gold฀and฀silver,฀and฀the฀sale฀by฀Atlantic฀Copper฀of฀copper฀
anodes,฀copper฀cathodes,฀wire฀rod,฀wire฀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.฀Consolidated฀revenues฀of฀$4.2฀
billion฀for฀2005฀were฀significantly฀higher฀than฀consolidated฀
revenues฀of฀$2.4฀billion฀for฀2004,฀reflecting฀substantially฀
higher฀copper฀and฀gold฀sales฀volumes฀and฀prices฀than฀2004.฀
The฀2004฀results฀were฀adversely฀affected฀by฀lower฀ore฀grades฀
and฀reduced฀mill฀throughput฀as฀PT฀Freeport฀Indonesia฀
completed฀efforts฀to฀restore฀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”).฀In฀addition,฀Atlantic฀Copper’s฀scheduled฀major฀
maintenance฀turnaround฀adversely฀affected฀its฀2004฀revenues฀
(see฀“Smelting฀and฀Refining฀Operations฀–฀Atlantic฀Copper฀
Operating฀Results”).฀Consolidated฀revenues฀in฀2004฀were฀
slightly฀higher฀compared฀with฀2003฀revenues฀of฀$2.2฀billion฀
as฀higher฀copper฀and฀gold฀prices฀in฀2004฀were฀partially฀offset฀฀฀฀
by฀the฀lower฀ore฀grades฀and฀reduced฀mill฀throughput฀in฀2004.
฀ Consolidated฀production฀and฀delivery฀costs฀were฀higher฀in฀
2005฀at฀$1.64฀billion฀compared฀with฀$1.45฀billion฀for฀2004฀and฀
$1.07฀billion฀for฀2003.฀The฀increase฀in฀2005฀was฀primarily฀
because฀of฀higher฀costs฀of฀concentrate฀purchases฀at฀Atlantic฀
Copper฀caused฀by฀increased฀production฀volumes฀and฀higher฀
metals฀prices฀and฀higher฀production฀costs฀at฀PT฀Freeport฀
Indonesia฀caused฀by฀higher฀energy฀costs.฀Production฀and฀
delivery฀costs฀in฀2004฀were฀higher฀than฀in฀2003฀primarily฀
because฀of฀higher฀costs฀of฀concentrate฀purchases฀at฀Atlantic฀
Copper฀caused฀by฀higher฀metals฀prices,฀higher฀production฀
costs฀at฀PT฀Freeport฀Indonesia฀and฀the฀costs฀of฀Atlantic฀
Copper’s฀smelter฀turnaround.฀Consolidated฀depreciation฀
and฀amortization฀expense฀was฀$251.5฀million฀in฀2005,฀฀฀฀฀฀฀
$206.4฀million฀in฀2004฀and฀$230.8฀million฀in฀2003.฀Depreciation฀
and฀amortization฀expense฀increased฀in฀2005฀compared฀with฀฀฀฀฀฀฀
2004,฀primarily฀because฀of฀higher฀copper฀sales฀volumes฀at฀฀฀฀฀฀
PT฀Freeport฀Indonesia฀during฀2005,฀and฀decreased฀in฀2004฀
Management’s Discussion and Analysis
฀31฀|฀2005฀ANNUAL฀REPORT฀฀฀FINANCIAL฀&฀OPERATING฀INFORMATION