Freeport-McMoRan 2005 Annual Report Download - page 45

฀ 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฀the฀final฀sales฀to฀third฀
parties฀occur.฀Changes฀in฀these฀net฀deferrals฀resulted฀in฀
reductions฀to฀our฀operating฀income฀totaling฀$145.0฀million฀
($77.8฀million฀to฀net฀income฀or฀$0.35฀per฀share)฀in฀2005,฀
compared฀with฀$24.7฀million฀($12.7฀million฀to฀net฀income฀
or฀$0.07฀per฀share)฀in฀2004.฀At฀December฀31,฀2005,฀our฀฀฀฀฀฀฀฀฀
net฀deferred฀profits฀on฀PT฀Freeport฀Indonesia฀concentrate฀
inventories฀at฀Atlantic฀Copper฀and฀PT฀Smelting฀to฀be฀
recognized฀in฀future฀periods’฀net฀income฀after฀taxes฀and฀
minority฀interest฀sharing฀totaled฀$119.8฀million.฀Based฀on฀
copper฀prices฀of฀$2.00฀per฀pound฀and฀gold฀prices฀of฀$550฀per฀
ounce฀for฀the฀first฀quarter฀of฀2006฀and฀current฀shipping฀
schedules,฀we฀expect฀that฀the฀net฀change฀in฀deferred฀profits฀
on฀intercompany฀sales฀will฀result฀in฀an฀increase฀to฀net฀income฀
of฀approximately฀$60฀million฀in฀the฀first฀quarter฀of฀2006.฀The฀
actual฀change฀in฀deferred฀intercompany฀profits฀may฀differ฀
substantially฀from฀this฀estimate฀because฀of฀changes฀in฀the฀
timing฀of฀shipments฀to฀affiliated฀smelters฀and฀metal฀prices.
฀ As฀of฀December฀31,฀2005,฀FCX’s฀net฀investment฀in฀Atlantic฀
Copper฀totaled฀approximately฀$115฀million,฀FCX฀had฀a฀
$189.5฀million฀loan฀outstanding฀to฀Atlantic฀Copper฀and฀
Atlantic฀Copper’s฀debt฀to฀third฀parties฀under฀nonrecourse฀
financing฀arrangements฀totaled฀$5.0฀million.฀In฀March฀2004,฀
we฀used฀a฀portion฀of฀the฀proceeds฀from฀the฀sale฀of฀our฀
67 /8 % ฀Senior฀Notes฀to฀fund฀Atlantic฀Copper’s฀repayment฀of฀
$162.4฀million฀of฀its฀borrowings฀(see฀“Capital฀Resources฀฀฀
and฀Liquidity฀–฀Financing฀Activities”).฀Atlantic฀Copper฀recorded฀
a฀$3.7฀million฀($0.02฀per฀share)฀accounting฀charge฀for฀
losses฀on฀early฀extinguishment฀of฀debt฀in฀2004฀related฀to฀
these฀debt฀repayments.
Atlantic฀Copper฀Operating฀Results฀–฀฀
2004฀Compared฀with฀2003
As฀discussed฀above,฀Atlantic฀Copper฀completed฀a฀51-day฀
scheduled฀major฀maintenance฀turnaround฀in฀May฀2004,฀
adversely฀affecting฀2004฀results.฀Atlantic฀Copper’s฀operating฀
cash฀margin฀was฀a฀$24.4฀million฀deficit฀in฀2004,฀compared฀
with฀a฀positive฀$22.4฀million฀in฀2003.฀The฀deficit฀in฀2004฀was฀
primarily฀because฀of฀Atlantic฀Copper’s฀major฀maintenance฀
turnaround.
฀ Atlantic฀Copper฀treated฀768,100฀metric฀tons฀of฀concentrate฀
and฀scrap฀in฀2004,฀compared฀with฀964,400฀metric฀tons฀in฀
2003.฀Cathode฀production฀totaled฀454.7฀million฀pounds฀and฀
sales฀totaled฀479.2฀million฀pounds฀during฀2004,฀compared฀
with฀cathode฀production฀of฀544.7฀million฀pounds฀and฀sales฀of฀
546.8฀million฀pounds฀during฀2003.฀Atlantic฀Copper’s฀cathode฀
cash฀unit฀cost฀per฀pound฀of฀copper,฀before฀currency฀hedging,฀
averaged฀$0.25฀in฀2004฀and฀$0.16฀in฀2003.฀Unit฀costs฀for฀
2004฀were฀adversely฀affected฀by฀lower฀production฀and฀higher฀
costs฀from฀the฀maintenance฀turnaround.฀Treatment฀charges฀
(including฀price฀participation)฀were฀at฀historically฀low฀levels,฀
averaging฀$0.16฀per฀pound฀for฀2004฀and฀2003.
฀ Atlantic฀Copper฀reported฀operating฀losses฀of฀$83.5฀million฀
in฀2004฀and฀$21.8฀million฀in฀2003.฀The฀higher฀losses฀in฀2004฀
include฀a฀$12.0฀million฀charge฀for฀workforce฀reductions,฀lower฀
treatment฀charges฀and฀lower฀production฀levels,฀compared฀with฀
2003.฀The฀effect฀of฀the฀51-day฀turnaround฀on฀Atlantic฀Copper’s฀
results฀for฀2004฀was฀approximately฀$40฀million,฀including฀an฀
approximate฀$12฀million฀impact฀from฀lower฀volumes.
฀ During฀2004,฀Atlantic฀Copper฀undertook฀a฀cost฀reduction฀
and฀operational฀enhancement฀plan฀designed฀to฀reduce฀฀฀฀฀฀฀
unit฀costs,฀including฀a฀reduction฀in฀workforce,฀and฀enhance฀
operational฀and฀administrative฀efficiencies.฀In฀addition,฀฀฀฀฀฀฀฀฀฀฀฀฀
in฀December฀2004,฀Atlantic฀Copper฀completed฀a฀sale฀of฀its฀
wire฀rod฀and฀wire฀assets฀for฀$18.3฀million฀cash,฀resulting฀in฀฀฀฀฀฀฀฀฀฀฀
a฀$7.5฀million฀gain.฀The฀sale฀has฀enabled฀Atlantic฀Copper฀to฀
simplify฀its฀business฀and฀management฀structure฀and฀reduce฀
working฀capital฀requirements.
PT฀Smelting฀Operating฀Results
Years฀Ended฀December฀31,฀ 2005฀ 2004฀ 2003
(In฀Millions)฀
PT฀Freeport฀Indonesia฀sales฀to฀
฀ PT฀Smelting฀ $฀1,008.5฀ $฀696.0฀ $฀510.2
Equity฀in฀PT฀Smelting฀earnings฀ ฀ 9.3฀ ฀ 2.0฀ ฀ 5.6
PT฀Freeport฀Indonesia฀operating฀
฀ profits฀(deferred)฀recognized฀฀ ฀ (23.6)฀ ฀(13.8)฀ ฀ 7.0
PT฀Smelting฀Operating฀Results฀–฀฀
2005฀Compared฀with฀2004
PT฀Freeport฀Indonesia฀accounts฀for฀its฀25฀percent฀฀฀฀฀฀฀฀
interest฀in฀PT฀Smelting฀using฀the฀equity฀method฀and฀provides฀
PT฀Smelting฀with฀substantially฀all฀of฀its฀concentrate฀
requirements฀(see฀Note฀9).฀During฀the฀second฀quarter฀฀฀฀฀฀฀฀฀
of฀2004,฀PT฀Smelting฀completed฀a฀31-day฀maintenance฀
turnaround฀and฀resumed฀normal฀operations.฀Major฀
maintenance฀turnarounds฀of฀this฀duration฀typically฀occur฀
approximately฀every฀four฀years฀for฀PT฀Smelting,฀with฀
significantly฀shorter฀term฀maintenance฀turnarounds฀in฀the฀
interim.฀PT฀Smelting฀has฀an฀18-day฀maintenance฀turnaround฀
scheduled฀for฀mid-2006฀and฀its฀next฀major฀maintenance฀
turnaround฀is฀scheduled฀for฀2008.฀PT฀Smelting฀also฀completed฀
Management’s Discussion and Analysis
฀42฀|฀FREEPORT-McMoRan฀COPPER฀&฀GOLD฀INC.฀฀฀FINANCIAL฀&฀OPERATING฀INFORMATION