Freeport-McMoRan 2005 Annual Report Download - page 37

We฀have฀two฀operating฀segments:฀“mining฀and฀exploration”฀
and฀“smelting฀and฀refining.”฀The฀mining฀and฀exploration฀
segment฀consists฀of฀our฀Indonesian฀activities฀including฀฀฀฀฀฀฀฀฀฀฀฀฀
PT฀Freeport฀Indonesia’s฀copper฀and฀gold฀mining฀operations,฀
Puncakjaya฀Power’s฀power฀generating฀operations฀(after฀
eliminations฀with฀PT฀Freeport฀Indonesia)฀and฀our฀Indonesian฀
exploration฀activities,฀including฀those฀of฀Eastern฀Minerals.฀
The฀smelting฀and฀refining฀segment฀includes฀Atlantic฀Copper’s฀
operations฀in฀Spain฀and฀PT฀Freeport฀Indonesia’s฀equity฀
investment฀in฀PT฀Smelting.฀Summary฀comparative฀operating฀
income฀(loss)฀data฀by฀segment฀follow฀(in฀millions):
Years฀Ended฀December฀31,฀ 2005฀ 2004฀ 2003
Mining฀and฀explorationa฀$฀2,248.3฀ $฀744.8฀ $฀792.5
Smelting฀and฀refining฀ ฀ 34.8฀ ฀(83.5)฀ ฀(21.8)
Intercompany฀eliminations฀
฀ and฀othera,b฀฀ (105.8)฀ ฀ 42.3฀ ฀ 52.6
฀ FCX฀operating฀income฀ $฀2,177.3฀ $฀703.6฀ $฀823.3
a.฀ Includes฀charges฀to฀the฀mining฀and฀exploration฀segment฀for฀the฀in-the-
money฀value฀of฀FCX฀stock฀option฀exercises,฀which฀are฀eliminated฀in฀฀฀฀฀฀฀
consolidation,฀totaling฀$64.5฀million฀in฀2005,฀$87.3฀million฀in฀2004฀and฀
$57.8฀million฀in฀2003.
b.฀ We฀defer฀recognizing฀profits฀on฀PT฀Freeport฀Indonesia’s฀sales฀to฀Atlantic฀
Copper฀and฀on฀25฀percent฀of฀PT฀Freeport฀Indonesia’s฀sales฀to฀PT฀Smelting฀
until฀their฀sales฀of฀final฀products฀to฀third฀parties.฀Changes฀in฀the฀amount฀
of฀these฀deferred฀profits฀impacted฀operating฀income฀by฀$(145.0)฀million฀
in฀2005,฀$(24.7)฀million฀in฀2004฀and฀$13.8฀million฀in฀2003.฀Our฀con-
solidated฀earnings฀can฀fluctuate฀materially฀depending฀on฀the฀timing฀and฀
prices฀of฀these฀sales.฀At฀December฀31,฀2005,฀our฀deferred฀profits฀to฀be฀
recognized฀in฀future฀periods’฀operating฀income฀totaled฀$225.9฀million,฀
$119.8฀million฀to฀net฀income,฀after฀taxes฀and฀minority฀interest฀sharing.
MINING฀AND฀EXPLORATION฀OPERATIONS
A฀summary฀of฀changes฀in฀PT฀Freeport฀Indonesia฀revenues฀
follows฀(in฀millions):
฀ ฀ 2005฀ 2004
PT฀Freeport฀Indonesia฀revenues฀–฀prior฀year฀฀ $฀1,746.6฀ $฀1,744.6
฀ Sales฀volumes:
฀ ฀ Copper฀ ฀ ฀ ฀ 636.4฀ ฀ (249.0)
฀ ฀ Gold฀฀ ฀ ฀ ฀ 555.5฀ ฀ (376.4)
฀ Price฀realizations:
฀ ฀ Copper฀ ฀ ฀ ฀ 706.4฀ ฀ 545.4
฀ ฀ Gold฀฀ ฀ ฀ ฀ 122.6฀ ฀ 66.0
฀ Adjustments,฀primarily฀for฀copper฀
฀ ฀ pricing฀on฀prior฀year฀open฀sales฀฀ ฀ ฀ (1.4)฀ ฀ 4.9
฀ Treatment฀charges,฀royalties฀and฀other฀ ฀ ฀ (198.1)฀ ฀ 11.1
PT฀Freeport฀Indonesia฀revenues฀–฀
฀ current฀year฀ ฀ ฀ $฀3,568.0฀ $฀1,746.6
PT฀Freeport฀Indonesia฀Operating฀Results฀–฀฀
2005฀Compared฀with฀2004
PT฀Freeport฀Indonesia฀achieved฀significantly฀higher฀
production฀and฀sales฀and฀multiple฀operating฀records฀in฀2005,฀
reflecting฀higher฀ore฀grades฀and฀milling฀rates฀than฀in฀2004.฀
Copper฀and฀gold฀sales฀totaled฀1.46฀billion฀pounds฀of฀copper฀
and฀a฀record฀2.8฀million฀ounces฀of฀gold฀in฀2005,฀compared฀
with฀sales฀of฀1.0฀billion฀pounds฀of฀copper฀and฀1.4฀million฀
ounces฀of฀gold฀in฀2004.฀
฀ Mill฀throughput,฀which฀varies฀depending฀on฀ore฀types฀
being฀processed,฀averaged฀216,200฀metric฀tons฀of฀ore฀in฀2005,฀
compared฀with฀185,100฀metric฀tons฀of฀ore฀in฀2004.฀Following฀
the฀fourth-quarter฀2003฀Grasberg฀open-pit฀slippage฀and฀
debris฀flow฀events,฀we฀accelerated฀the฀removal฀of฀overburden฀
and฀mined฀low-grade฀ore฀prior฀to฀restoring฀safe฀access฀to฀
higher-grade฀ore฀areas฀in฀the฀second฀quarter฀of฀2004฀and฀
resuming฀normal฀milling฀rates฀in฀June฀2004.฀As฀a฀result,฀mill฀
throughput฀was฀lower฀in฀2004.฀Mill฀rates฀will฀vary฀during฀2006฀
depending฀on฀ore฀types฀mined฀and฀are฀expected฀to฀average฀
in฀excess฀of฀220,000฀metric฀tons฀of฀ore฀per฀day฀for฀the฀year.฀
Approximate฀average฀daily฀throughput฀processed฀at฀our฀mill฀
facilities฀from฀each฀of฀our฀producing฀mines฀follows฀(metric฀
tons฀of฀ore฀per฀day):
Years฀Ended฀December฀31,฀ ฀ 2005฀ 2004
Grasberg฀open฀pit฀ ฀ ฀ ฀174,200฀ ฀141,500
Deep฀Ore฀Zone฀฀ ฀ ฀ ฀ 42,000฀ ฀ 43,600
฀ Total฀฀ ฀ ฀ ฀ ฀216,200฀ ฀185,100
Copper฀ore฀grades฀averaged฀1.13฀percent฀in฀2005,฀compared฀
with฀0.87฀percent฀in฀2004,฀and฀copper฀recovery฀rates฀were฀
89.2฀percent,฀compared฀with฀88.6฀percent฀for฀2004.฀In฀2005,฀
gold฀ore฀grades฀averaged฀1.65฀grams฀per฀metric฀ton฀(g/t),฀
compared฀with฀0.88฀g/t฀in฀2004,฀and฀gold฀recovery฀rates฀
averaged฀83.1฀percent฀in฀2005,฀compared฀with฀81.8฀percent฀
in฀2004.฀The฀2005฀grades฀reflect฀the฀return฀to฀normal฀mining฀
operations฀at฀Grasberg,฀including฀accessing฀higher-grade฀
material฀in฀accordance฀with฀our฀mine฀plan.฀Copper฀and฀gold฀
ore฀grades฀are฀projected฀to฀be฀lower฀in฀2006฀when฀compared฀
with฀the฀2005฀ore฀grades฀because฀of฀mine฀sequencing.
฀ Production฀from฀the฀Deep฀Ore฀Zone฀(DOZ)฀underground฀
mine฀averaged฀42,000฀metric฀tons฀of฀ore฀per฀day฀in฀2005,฀
representing฀19฀percent฀of฀mill฀throughput฀as฀it฀continued฀to฀
perform฀above฀design฀capacity฀of฀35,000฀metric฀tons฀of฀ore฀
per฀day.฀PT฀Freeport฀Indonesia฀is฀expanding฀the฀capacity฀of฀
the฀DOZ฀underground฀operation฀to฀a฀sustained฀rate฀of฀50,000฀
metric฀tons฀per฀day฀with฀the฀installation฀of฀a฀second฀crusher฀
and฀additional฀ventilation,฀expected฀to฀be฀complete฀in฀2007.฀
PT฀Freeport฀Indonesia’s฀share฀of฀capital฀expenditures฀฀฀฀฀฀฀฀฀฀
for฀the฀DOZ฀expansion฀totaled฀approximately฀$16฀million฀in฀
2005฀and฀is฀expected฀to฀approximate฀$37฀million฀through฀
the฀projected฀2007฀ramp-up,฀with฀approximately฀$16฀million฀
estimated฀for฀2006.฀The฀DOZ฀mine,฀a฀block฀cave฀operation,฀฀฀฀฀฀฀฀฀฀
is฀one฀of฀the฀world’s฀largest฀underground฀mines.฀
Management’s Discussion and Analysis
฀34฀|฀FREEPORT-McMoRan฀COPPER฀&฀GOLD฀INC.฀฀฀FINANCIAL฀&฀OPERATING฀INFORMATION