Freeport-McMoRan 2005 Annual Report Download - page 44

SMELTING฀AND฀REFINING฀OPERATIONS
Our฀investment฀in฀smelters฀serves฀an฀important฀role฀in฀our฀
concentrate฀marketing฀strategy.฀PT฀Freeport฀Indonesia฀
generally฀sells฀approximately฀one-half฀of฀its฀concentrate฀
production฀to฀its฀affiliated฀smelters,฀Atlantic฀Copper฀and฀฀฀฀฀฀
PT฀Smelting,฀and฀the฀remainder฀to฀other฀customers.฀Treatment฀
charges฀for฀smelting฀and฀refining฀copper฀concentrates฀
represent฀a฀cost฀to฀PT฀Freeport฀Indonesia฀and฀income฀to฀
Atlantic฀Copper฀and฀PT฀Smelting.฀Through฀downstream฀
integration,฀we฀are฀assured฀placement฀of฀a฀significant฀portion฀
of฀our฀concentrate฀production.฀Low฀smelter฀treatment฀and฀
refining฀charges฀in฀recent฀years฀adversely฀affected฀the฀operating฀
results฀of฀Atlantic฀Copper฀and฀benefited฀the฀operating฀results฀
of฀PT฀Freeport฀Indonesia’s฀mining฀operations.฀Market฀rates฀for฀
treatment฀and฀refining฀charges฀have฀increased฀significantly฀
since฀late฀2004฀as฀worldwide฀smelter฀availability฀was฀insufficient฀
to฀accommodate฀increased฀mine฀production.฀Higher฀
treatment฀and฀refining฀charges฀benefit฀our฀smelter฀operations฀
and฀adversely฀affect฀our฀mining฀operations.฀Taking฀into฀
account฀taxes฀and฀minority฀ownership฀interests,฀an฀equivalent฀
change฀in฀smelting฀and฀refining฀charge฀rates฀essentially฀
offsets฀in฀our฀consolidated฀operating฀results.
Atlantic฀Copper฀Operating฀Results
Years฀Ended฀December฀31,฀ 2005฀ 2004฀ 2003
(In฀Millions)
Gross฀profit฀(loss)฀ ฀ $฀ 45.6฀ $฀ (69.4)฀ $฀ (10.7)
Add฀depreciation฀and฀
฀ amortization฀expense฀ ฀ ฀ 29.0฀ ฀ 28.6฀ ฀ 28.5
Other฀ ฀ ฀ ฀ ฀ 3.7฀ ฀ 16.4a฀ ฀ 4.6
฀ Cash฀margin฀(deficit)฀ ฀ $฀ 78.3฀ $฀ (24.4)b฀ $฀ 22.4
Operating฀income฀(loss)฀
฀ (in฀millions)฀ ฀ $฀ 34.8฀ $฀ (83.5)฀ $฀ (21.8)
Concentrate฀and฀scrap฀treated฀
฀ (metric฀tons)฀ ฀ ฀975,400฀ ฀768,100฀ ฀964,400
Anodes฀production฀
฀ (000s฀of฀pounds)฀ ฀ ฀626,600฀ ฀494,400฀ ฀640,000
Treatment฀rates฀per฀pound฀ ฀ $฀ 0.23฀ $฀ 0.16฀ $฀ 0.16
Cathodes,฀wire฀rod฀and฀wire฀฀
฀ sales฀(000s฀of฀pounds)฀ ฀ ฀548,600฀ ฀479,200฀ ฀546,800
Cathode฀cash฀unit฀cost฀
฀ per฀poundc฀ ฀ $฀ 0.17฀ $฀ 0.25฀ $฀ 0.16
Gold฀sales฀in฀anodes฀and฀
฀ slimes฀(ounces)฀ ฀ ฀542,800฀ ฀316,700฀ ฀929,700
a.฀ Includes฀a฀$9.8฀million฀charge฀for฀Atlantic฀Copper’s฀workforce฀฀ ฀
reduction฀plan.
b.฀ Includes฀costs฀related฀to฀Atlantic฀Copper’s฀51-day฀major฀maintenance฀
turnaround฀totaling฀$27.5฀million.
c.฀ For฀a฀reconciliation฀of฀cathode฀cash฀unit฀cost฀per฀pound฀to฀production฀
costs฀applicable฀to฀sales฀reported฀in฀FCX’s฀consolidated฀financial฀state-
ments฀refer฀to฀“Product฀Revenues฀and฀Production฀Costs”฀below.
Atlantic฀Copper฀Operating฀Results฀–฀฀
2005฀Compared฀with฀2004
Atlantic฀Copper’s฀operating฀cash฀margin฀was฀$78.3฀million฀in฀
2005,฀compared฀with฀a฀deficit฀of฀$24.4฀million฀in฀2004.฀The฀
deficit฀in฀2004฀was฀primarily฀attributable฀to฀Atlantic฀Copper’s฀
major฀maintenance฀turnaround,฀which฀began฀in฀March฀2004฀
and฀was฀completed฀in฀May฀2004.฀Atlantic฀Copper฀reported฀
operating฀income฀of฀$34.8฀million฀in฀2005,฀compared฀with฀
operating฀losses฀of฀$83.5฀million฀in฀2004.฀The฀positive฀results฀
in฀2005฀primarily฀reflect฀higher฀treatment฀charge฀rates,฀
realized฀benefits฀from฀a฀recent฀cost฀reduction฀and฀operational฀
enhancement฀effort฀and฀copper฀market฀pricing฀conditions,฀
partially฀offset฀by฀higher฀energy฀costs,฀compared฀with฀2004,฀
which฀included฀a฀51-day฀scheduled฀major฀maintenance฀
turnaround฀and฀a฀$12.0฀million฀charge฀for฀workforce฀
reductions.฀The฀maintenance฀turnaround฀adversely฀affected฀
costs฀and฀volumes฀resulting฀in฀impacts฀of฀approximately฀฀฀฀฀฀฀฀฀
$40฀million,฀including฀an฀approximate฀$12฀million฀impact฀
from฀lower฀volumes,฀on฀2004฀operating฀results฀and฀฀฀฀฀฀฀฀฀฀฀฀
net฀income.฀Major฀maintenance฀turnarounds฀typically฀occur฀
approximately฀every฀nine฀years฀for฀Atlantic฀Copper,฀฀฀฀฀฀฀฀฀฀
with฀significantly฀shorter฀term฀maintenance฀turnarounds฀
occurring฀in฀the฀interim.฀Atlantic฀Copper฀has฀a฀22-day฀
maintenance฀turnaround฀currently฀scheduled฀for฀2007.
฀ Atlantic฀Copper฀treated฀975,400฀metric฀tons฀of฀concentrate฀
and฀scrap฀in฀2005,฀compared฀with฀768,100฀metric฀tons฀in฀
2004.฀Cathode฀production฀totaled฀545.3฀million฀pounds฀and฀
sales฀totaled฀548.6฀million฀pounds฀during฀2005,฀compared฀
with฀cathode฀production฀of฀454.7฀million฀pounds฀and฀sales฀of฀
479.2฀million฀pounds฀during฀2004.฀Atlantic฀Copper’s฀
cathode฀cash฀unit฀cost฀per฀pound฀of฀copper฀averaged฀$0.17฀
in฀2005฀and฀$0.25฀in฀2004.฀Unit฀costs฀in฀2004฀were฀adversely฀
affected฀by฀lower฀production฀and฀higher฀costs฀from฀the฀
scheduled฀maintenance฀turnaround.฀Atlantic฀Copper’s฀
treatment฀charges฀(including฀price฀participation),฀which฀are฀
what฀PT฀Freeport฀Indonesia฀and฀third฀parties฀pay฀Atlantic฀
Copper฀to฀smelt฀and฀refine฀concentrates,฀averaged฀$0.23฀per฀
pound฀in฀2005฀and฀$0.16฀per฀pound฀in฀2004.฀Excess฀smelter฀
capacity,฀combined฀with฀limited฀copper฀concentrate฀availability,฀
resulted฀in฀historically฀low฀long-term฀treatment฀and฀refining฀
rates฀for฀the฀past฀several฀years.฀However,฀as฀discussed฀above,฀
treatment฀charge฀rates฀have฀increased฀significantly฀since฀฀
late฀2004฀with฀increased฀mine฀production฀and฀higher฀copper฀
prices.฀Atlantic฀Copper฀expects฀these฀higher฀rates฀to฀benefit฀its฀
2006฀operations฀with฀its฀average฀rates฀at฀current฀copper฀prices฀
projected฀to฀approximate฀$0.28฀per฀pound฀in฀2006.
Management’s Discussion and Analysis
฀41฀|฀2005฀ANNUAL฀REPORT฀฀฀FINANCIAL฀&฀OPERATING฀INFORMATION