Freeport-McMoRan 2005 Annual Report Download - page 53

its฀price฀risk฀whenever฀its฀physical฀purchases฀and฀sales฀pricing฀
periods฀do฀not฀match.฀At฀December฀31,฀2005,฀Atlantic฀
Copper฀had฀net฀contracts,฀with฀a฀fair฀value฀of฀$2.2฀million,฀to฀
purchase฀22.5฀million฀pounds฀of฀copper฀at฀an฀average฀price฀฀
of฀$1.90฀per฀pound฀through฀April฀2006.
Foreign฀Currency฀Exchange฀Risk
The฀functional฀currency฀for฀our฀operations฀in฀Indonesia฀and฀
Spain฀is฀the฀U.S.฀dollar.฀All฀of฀our฀revenues฀and฀a฀significant฀
portion฀of฀our฀costs฀are฀denominated฀in฀U.S.฀dollars;฀
however,฀some฀costs฀and฀certain฀asset฀and฀liability฀accounts฀
are฀denominated฀in฀Indonesian฀rupiah,฀Australian฀dollars฀฀฀฀฀฀฀฀฀฀
or฀euros.฀Generally,฀our฀results฀are฀positively฀affected฀when฀the฀
U.S.฀dollar฀strengthens฀in฀relation฀to฀those฀foreign฀currencies฀
and฀adversely฀affected฀when฀the฀U.S.฀dollar฀weakens฀in฀relation฀
to฀those฀foreign฀currencies.
฀ One฀U.S.฀dollar฀was฀equivalent฀to฀9,825฀rupiah฀at฀
December฀31,฀2005,฀9,270฀rupiah฀at฀December฀31,฀2004,฀and฀
8,437฀rupiah฀at฀December฀31,฀2003.฀PT฀Freeport฀Indonesia฀
recorded฀losses฀to฀production฀costs฀totaling฀$0.4฀million฀in฀
2005,฀$0.7฀million฀in฀2004฀and฀$3.0฀million฀in฀2003฀related฀to฀
its฀rupiah-denominated฀net฀monetary฀assets฀and฀liabilities.฀At฀
December฀31,฀2005,฀net฀liabilities฀totaled฀$14.4฀million฀at฀an฀
exchange฀rate฀of฀9,825฀rupiah฀to฀one฀U.S.฀dollar.฀PT฀Freeport฀
Indonesia’s฀labor฀costs฀are฀mostly฀rupiah฀denominated.฀At฀
estimated฀aggregate฀annual฀rupiah฀payments฀of฀1.6฀trillion฀for฀
operating฀costs฀and฀an฀exchange฀rate฀of฀9,825฀rupiah฀to฀฀฀฀฀฀฀฀
one฀U.S.฀dollar,฀the฀exchange฀rate฀as฀of฀December฀31,฀2005,฀a฀
one-thousand-rupiah฀increase฀in฀the฀exchange฀rate฀would฀
result฀in฀an฀approximate฀$15฀million฀decrease฀in฀aggregate฀
annual฀operating฀costs.฀A฀one-thousand-rupiah฀decrease฀in฀฀
the฀exchange฀rate฀would฀result฀in฀an฀approximate฀$19฀million฀
increase฀in฀aggregate฀annual฀operating฀costs.
฀ Approximately฀15฀percent฀of฀PT฀Freeport฀Indonesia’s฀
total฀purchases฀of฀materials,฀supplies฀and฀services฀are฀
denominated฀in฀Australian฀dollars.฀The฀exchange฀rate฀was฀
$0.73฀to฀one฀Australian฀dollar฀at฀December฀31,฀2005,฀$0.78฀฀฀฀฀฀฀฀
to฀one฀Australian฀dollar฀at฀December฀31,฀2004,฀and฀$0.75฀to฀
one฀Australian฀dollar฀at฀December฀31,฀2003.฀At฀estimated฀
annual฀aggregate฀Australian฀dollar฀payments฀of฀225฀million฀
and฀an฀exchange฀rate฀of฀$0.73฀to฀one฀Australian฀dollar,฀the฀
exchange฀rate฀as฀of฀December฀31,฀2005,฀a฀$0.01฀increase฀or฀
Management’s Discussion and Analysis
decrease฀in฀the฀exchange฀rate฀would฀result฀in฀an฀approximate฀
$2฀million฀change฀in฀aggregate฀annual฀operating฀costs.
฀ At฀times,฀PT฀Freeport฀Indonesia฀has฀entered฀into฀foreign฀
currency฀forward฀contracts฀to฀hedge฀a฀portion฀of฀its฀aggregate฀
anticipated฀Indonesian฀rupiah฀and/or฀Australian฀dollar฀
payments.฀In฀2005,฀PT฀Freeport฀Indonesia฀entered฀into฀foreign฀
currency฀contracts฀to฀hedge฀735.0฀billion฀in฀rupiah฀
payments,฀including฀certain฀rupiah-based฀capital฀expenditures,฀
or฀approximately฀46฀percent฀of฀aggregate฀projected฀฀฀฀฀฀฀฀฀
rupiah฀payments฀for฀2006,฀at฀an฀average฀exchange฀rate฀of฀
10,085฀rupiah฀to฀one฀U.S.฀dollar.฀PT฀Freeport฀Indonesia฀
accounts฀for฀these฀contracts฀as฀cash฀flow฀hedges.
฀ The฀majority฀of฀Atlantic฀Copper’s฀revenues฀are฀denominated฀
in฀U.S.฀dollars;฀however,฀operating฀costs,฀other฀than฀
concentrate฀purchases,฀and฀certain฀asset฀and฀liability฀accounts฀
are฀denominated฀in฀euros.฀Atlantic฀Copper’s฀estimated฀
annual฀euro฀payments฀total฀approximately฀100฀million฀euros.฀
A฀$0.05฀increase฀or฀decrease฀in฀the฀exchange฀rate฀would฀
result฀in฀an฀approximate฀$5฀million฀change฀in฀annual฀costs.฀
The฀exchange฀rate฀on฀December฀31,฀2005,฀was฀$1.18฀per฀euro.
฀ In฀connection฀with฀refinancing฀its฀debt฀in฀June฀2000,฀
Atlantic฀Copper’s฀lenders฀required฀it฀to฀hedge฀its฀anticipated฀
euro-denominated฀operating฀costs.฀This฀hedging฀requirement฀
was฀removed฀when฀Atlantic฀Copper฀refinanced฀the฀facility฀฀฀฀฀฀฀฀
in฀March฀2004.฀Atlantic฀Copper฀had฀no฀outstanding฀currency฀
hedging฀contracts฀at฀December฀31,฀2005.฀Atlantic฀Copper’s฀
operating฀results฀reflect฀gains฀on฀currency฀hedging฀contracts฀
totaling฀$9.6฀million฀in฀2003.
฀ Atlantic฀Copper฀had฀euro-denominated฀net฀monetary฀
liabilities฀at฀December฀31,฀2005,฀totaling฀$54.6฀million฀recorded฀
at฀an฀exchange฀rate฀of฀$1.18฀per฀euro.฀The฀exchange฀rate฀฀฀฀฀฀฀฀฀
was฀$1.36฀per฀euro฀at฀December฀31,฀2004,฀and฀$1.26฀per฀euro฀
at฀December฀31,฀2003.฀Adjustments฀to฀Atlantic฀Copper’s฀฀฀฀฀฀฀฀
euro-denominated฀net฀monetary฀liabilities฀to฀reflect฀changes฀
in฀the฀exchange฀rate฀are฀recorded฀in฀other฀income฀
(expense)฀and฀totaled฀$5.8฀million฀in฀2005,฀$(1.6)฀million฀in฀
2004฀and฀$(13.6)฀million฀in฀2003.
Interest฀Rate฀Risk
The฀table฀below฀presents฀average฀interest฀rates฀for฀our฀
scheduled฀maturities฀of฀principal฀for฀outstanding฀debt฀and฀fair฀
value฀at฀December฀31,฀2005฀(dollars฀in฀millions).
฀50฀|฀FREEPORT-McMoRan฀COPPER฀&฀GOLD฀INC.฀฀฀FINANCIAL฀&฀OPERATING฀INFORMATION
฀ 2006฀ 2007฀ 2008฀ 2009฀ 2010฀ Thereafter฀ Fair฀Value
Fixed-rate฀debt฀ $฀ 55.4฀ $฀ —฀ $฀ —฀ $฀ —฀ $฀283.9฀ $฀664.2฀ $฀1,305.0
฀ Average฀interest฀rate฀ ฀ 7.5%฀ ฀ —฀ ฀ —฀ ฀ —฀ ฀ 10.1%฀ ฀ 6.9%฀ ฀ 7.9%
Variable-rate฀debt฀ $฀198.0฀ $฀13.5฀ $฀13.5฀ $฀13.5฀ $฀ 10.2฀ $฀ 3.7฀ $฀ 314.5
฀ Average฀interest฀rate฀ ฀ 4.6%฀ ฀ 6.9%฀ ฀ 6.9%฀ ฀ 6.9%฀ ฀ 6.9%฀ ฀ 6.9%฀ ฀ 5.1%