Freeport-McMoRan 2005 Annual Report Download - page 35

compared฀with฀2003฀primarily฀because฀a฀large฀portion฀of฀฀฀฀฀฀฀฀฀฀฀฀฀
our฀depreciation฀is฀calculated฀on฀a฀unit-of-production฀basis฀
and฀our฀copper฀sales฀volumes฀at฀PT฀Freeport฀Indonesia฀
declined฀in฀2004.
฀ Exploration฀expenses฀totaled฀$8.8฀million฀in฀2005,฀฀฀฀฀฀฀฀
$8.7฀million฀in฀2004฀and฀$6.4฀million฀in฀2003.฀Our฀exploration฀
program฀for฀2005฀focused฀on฀drilling฀at฀the฀Mill฀Level฀Zone฀
and฀Deep฀Mill฀Level฀Zone฀deposits฀and฀the฀Grasberg฀
underground฀extension฀to฀the฀Kucing฀Liar฀deposit.฀Our฀2005฀
drilling฀efforts฀resulted฀in฀additions฀to฀our฀proven฀and฀
probable฀reserves฀as฀of฀December฀31,฀2005฀(see฀“Exploration฀
and฀Reserves”).฀All฀approved฀exploration฀costs฀in฀the฀joint฀
venture฀areas฀with฀Rio฀Tinto฀are฀generally฀shared฀60฀percent฀
by฀us฀and฀40฀percent฀by฀Rio฀Tinto.฀The฀FCX/Rio฀Tinto฀฀
joint฀ventures’฀2006฀exploration฀budgets฀total฀approximately฀
$15฀million฀($10฀million฀for฀our฀share).
฀ Consolidated฀general฀and฀administrative฀expenses฀increased฀
to฀$103.9฀million฀in฀2005฀from฀$89.9฀million฀in฀2004,฀primarily฀
reflecting฀higher฀incentive฀compensation฀costs฀associated฀with฀
stronger฀financial฀performance฀and฀pursuant฀to฀established฀
plans฀under฀which฀certain฀compensation฀plans฀are฀based฀on฀
annual฀operating฀cash฀flow฀results,฀which฀were฀significantly฀
higher฀in฀2005฀compared฀with฀2004.฀General฀and฀administrative฀
expenses฀in฀2005฀also฀include฀$3.4฀million฀in฀administrative฀
costs฀incurred฀following฀Hurricane฀Katrina฀and฀for฀
contributions฀to฀hurricane-relief฀efforts.฀Our฀parent฀company฀
charges฀PT฀Freeport฀Indonesia฀for฀the฀in-the-money฀฀฀฀฀฀฀฀฀
value฀of฀exercised฀employee฀stock฀options.฀These฀charges฀
are฀eliminated฀in฀consolidation;฀however,฀PT฀Freeport฀
Indonesia฀shares฀a฀portion฀of฀these฀charges฀with฀Rio฀Tinto฀
and฀Rio฀Tinto’s฀reimbursements฀reduce฀our฀consolidated฀
general฀and฀administrative฀expenses.฀General฀and฀
administrative฀expenses฀are฀net฀of฀Rio฀Tinto’s฀share฀of฀joint฀
venture฀reimbursements฀for฀employee฀stock฀option฀exercises,฀
which฀decreased฀general฀and฀administrative฀expenses฀by฀฀฀฀
$9.2฀million฀in฀2005฀and฀$7.0฀million฀in฀2004.฀In฀accordance฀
with฀our฀joint฀venture฀agreement,฀Rio฀Tinto’s฀percentage฀
share฀of฀PT฀Freeport฀Indonesia’s฀general฀and฀administrative฀
expenses฀varies฀with฀metal฀sales฀volumes฀and฀prices฀and฀
totaled฀approximately฀16฀percent฀in฀2005฀compared฀with฀
approximately฀8฀percent฀in฀2004.฀Estimated฀general฀and฀
administrative฀expenses฀for฀2006฀are฀expected฀to฀approximate฀
the฀2005฀level.฀
฀ General฀and฀administrative฀expenses฀increased฀by฀฀฀฀฀฀฀฀฀฀
$9.6฀million฀to฀$89.9฀million฀in฀2004฀from฀$80.3฀million฀in฀
2003.฀General฀and฀administrative฀expenses฀for฀2004฀include฀a฀
$2.2฀million฀charge฀for฀Atlantic฀Copper’s฀workforce฀reduction฀
plan฀(see฀“Smelting฀and฀Refining฀Operations฀–฀Atlantic฀
Copper฀Operating฀Results”).฀As฀a฀percentage฀of฀revenues,฀
general฀and฀administrative฀expenses฀were฀2.5฀percent฀in฀2005,฀
3.8฀percent฀in฀2004฀and฀3.6฀percent฀in฀2003.
฀ PT฀Freeport฀Indonesia฀maintains฀property฀damage฀and฀
business฀interruption฀insurance฀related฀to฀its฀operations.฀In฀
December฀2004,฀we฀entered฀into฀an฀insurance฀settlement฀
agreement฀and฀settled฀all฀claims฀that฀arose฀from฀the฀
fourth-quarter฀2003฀slippage฀and฀debris฀flow฀events฀in฀the฀
Grasberg฀open-pit฀mine.฀Our฀insurers฀agreed฀to฀pay฀us฀an฀
aggregate฀of฀$125.0฀million฀in฀connection฀with฀our฀claims.฀
After฀considering฀our฀joint฀venture฀partner’s฀interest฀in฀the฀
proceeds,฀PT฀Freeport฀Indonesia’s฀share฀of฀proceeds฀totaled฀
$95.0฀million.฀As฀a฀result฀of฀the฀settlement,฀we฀recorded฀in฀our฀
Consolidated฀Statements฀of฀Income฀an฀$87.0฀million฀gain฀on฀
insurance฀settlement฀for฀the฀business฀interruption฀recovery฀
and฀an฀$8.0฀million฀gain฀to฀production฀costs฀for฀the฀property฀
loss฀recovery฀for฀a฀net฀gain฀of฀$48.8฀million฀($0.26฀per฀share),฀
after฀taxes฀and฀minority฀interest฀sharing,฀in฀2004.
฀ Total฀consolidated฀interest฀cost฀(before฀capitalization)฀฀฀฀฀
was฀$135.8฀million฀in฀2005,฀$151.0฀million฀in฀2004฀and฀
$200.0฀million฀in฀2003.฀Interest฀costs฀decreased฀from฀฀฀฀฀฀
2003฀through฀2005฀primarily฀because฀we฀reduced฀average฀
debt฀levels฀during฀the฀three-year฀period฀with฀significant฀
reductions฀in฀2005.฀Over฀the฀past฀three฀years,฀we฀completed฀฀฀
a฀number฀of฀transactions฀that฀resulted฀in฀total฀debt฀reductions,฀
including฀mandatorily฀redeemable฀preferred฀stock,฀of฀฀฀฀฀฀฀฀฀฀
$1.2฀billion.฀Our฀interest฀cost฀for฀2006฀is฀expected฀to฀decrease฀
compared฀to฀2005,฀reflecting฀annual฀interest฀cost฀savings฀of฀
approximately฀$48฀million฀from฀the฀2005฀debt฀reductions.฀See฀
“Capital฀Resources฀and฀Liquidity฀–฀Financing฀Activities”฀for฀
further฀discussion.฀Capitalized฀interest฀totaled฀$4.1฀million฀in฀
2005,฀$2.9฀million฀in฀2004฀and฀$3.0฀million฀in฀2003.
฀ Losses฀on฀early฀extinguishment฀and฀conversion฀of฀debt฀
totaled฀$52.2฀million฀($40.2฀million฀to฀net฀income฀or฀฀฀฀฀฀฀฀฀฀
$0.18฀per฀share,฀net฀of฀related฀reduction฀of฀interest฀expense)฀in฀
2005,฀$14.0฀million฀($7.4฀million฀to฀net฀income฀or฀$0.04฀per฀
share,฀net฀of฀related฀reduction฀of฀interest฀expense)฀in฀2004฀
and฀$34.6฀million฀($31.9฀million฀to฀net฀income฀or฀$0.20฀per฀
share,฀net฀of฀related฀reduction฀of฀interest฀expense)฀in฀2003.฀
฀ Gains฀on฀sales฀of฀assets฀totaled฀$6.6฀million฀($4.9฀million฀
to฀net฀income฀or฀$0.02฀per฀share)฀in฀2005฀from฀the฀sale฀฀฀฀฀฀฀฀฀฀฀฀
of฀land฀in฀Arizona฀held฀by฀a฀joint฀venture฀in฀which฀we฀own฀a฀
50฀percent฀interest.฀The฀joint฀venture฀previously฀was฀engaged฀
in฀a฀copper฀mining฀research฀project฀in฀Arizona.฀Gains฀on฀
sales฀of฀assets฀totaled฀$28.8฀million฀in฀2004฀as฀a฀result฀of฀two฀
transactions.฀The฀first฀transaction฀was฀the฀sale฀to฀a฀real฀estate฀
Management’s Discussion and Analysis
฀32฀|฀FREEPORT-McMoRan฀COPPER฀&฀GOLD฀INC.฀฀฀FINANCIAL฀&฀OPERATING฀INFORMATION