Freeport-McMoRan 2010 Annual Report Download - page 42

MANAGEMENT’S DISCUSSION AND ANALYSIS
FREEPORT-McMoRan COPPER & GOLD INC. 2010 Annual Report
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affiliated smelters, Atlantic Copper and PT Smelting (PT Freeport
Indonesia’s 25-percent owned copper smelter and refinery in
Indonesia — refer to Note 2 for further discussion), and the remainder
to other customers.
Refer to Note 2 for further discussion of our joint ventures with
Rio Tinto plc and to Note 14 for further discussion of PT Freeport
Indonesia’s Contract of Work with the Government of Indonesia.
Development Activities. We have several projects in progress in the
Grasberg minerals district, including development of the large-scale,
high-grade underground ore bodies located beneath and adjacent
to the Grasberg open pit. Aggregate capital spending on these
projects approximated $288 million for the year 2010 ($228 million
net to PT Freeport Indonesia). Over the next five years, aggregate
capital spending on these projects is expected to average $600 million
per year ($470 million net to PT Freeport Indonesia). Considering
the long-term nature and large size of these projects, actual costs
could differ materially from these estimates.
The following provides additional information on these projects,
including the continued development of the Common Infrastructure
project, the Grasberg Block Cave and Big Gossan underground mines,
the completed expansion of the Deep Ore Zone (DOZ) underground
mine and development of the Deep Mill Level Zone (DMLZ) ore body.
Common Infrastructure and Grasberg Block Cave. In 2004,
PT Freeport Indonesia commenced its Common Infrastructure project
to provide access to its large undeveloped underground ore bodies
located in the Grasberg minerals district through a tunnel system
located approximately 400 meters deeper than its existing
underground tunnel system. In addition to providing access to our
underground ore bodies, the tunnel system will enable PT Freeport
Indonesia to conduct future exploration in prospective areas
associated with currently identified ore bodies. The tunnel system has
reached the Big Gossan terminal and development of the lower
Big Gossan infrastructure is ongoing. We have also advanced
development of the Grasberg spur and have completed the tunneling
required to reach the Grasberg underground ore body. Development
continues on the Grasberg Block Cave terminal infrastructure and
mine access.
In 2008, we completed the feasibility study for the development of
the Grasberg Block Cave underground mine, which accounts for over
one-third of our reserves in Indonesia. Production at the Grasberg
Block Cave mine is currently scheduled to commence at the end of
mining the Grasberg open pit, which is currently expected to continue
until mid-2016. The timing of the transition to underground
Grasberg Block Cave mine development will continue to be assessed.
Aggregate mine development capital for the Grasberg Block Cave
mine and associated Common Infrastructure is expected to
approximate $3.7 billion (to be incurred between 2008 and 2021),
with PT Freeport Indonesia’s share totaling approximately
$3.4 billion. Aggregate project costs totaling $260 million have been
incurred through December 31, 2010, of which $143 million was
incurred during 2010. Targeted production rates once the Grasberg
Block Cave mining operation reaches full capacity are expected to
approximate 160,000 metric tons of ore per day.
Big Gossan. The Big Gossan underground mine is a high-grade
deposit located near PT Freeport Indonesia’s existing milling
complex. The Big Gossan mine is being developed as an open-stope
mine with backfill consisting of mill tailings and cement, an
established mining methodology expected to be higher cost than the
block-cave method used at the DOZ mine. Production, which began
in fourth-quarter 2010, is designed to ramp up to 7,000 metric tons
of ore per day by late 2012 (equal to average annual aggregate
incremental production of 125 million pounds of copper and 65,000
ounces of gold, with PT Freeport Indonesia receiving 60 percent of
these amounts). The aggregate capital investment for this project is
currently estimated at approximately $535 million, with PT Freeport
Indonesia’s share totaling approximately $500 million. Aggregate
project costs of $444 million have been incurred through
December 31, 2010, of which $67 million was incurred during 2010.
DOZ Expansion. PT Freeport Indonesia’s further expansion of
the DOZ mine to 80,000 metric tons of ore per day was completed in
first-quarter 2010. The capital cost for this expansion approximated
$100 million, with PT Freeport Indonesia’s share totaling
approximately $60 million. The success of the development of the
DOZ mine, one of the world’s largest underground mines, provides
confidence in the future development of PT Freeport Indonesia’s
large-scale undeveloped underground ore bodies.
DMLZ. The DMLZ ore body lies below the DOZ mine at the
2,590-meter elevation and represents the downward continuation of
mineralization in the Ertsberg East Skarn system and neighboring
Ertsberg porphyry. The DMLZ feasibility study was completed
in fourth-quarter 2009. We plan to mine the ore body using a
block-cave method with production beginning in 2015, near
completion of mining at the DOZ. Drilling efforts continue to
determine the extent of this ore body. We continue to develop the
Common Infrastructure project and tunnels from mill level. In 2009,
we completed a portion of the spur to the DMLZ mine and reached
the edge of the DMLZ terminal and development continued on
terminal infrastructure and mine access in 2010. Aggregate mine
development capital costs for the DMLZ are expected to
approximate $2.0 billion (to be incurred from 2009 to 2020),
with PT Freeport Indonesia’s share totaling approximately $1.2 billion.
Aggregate project costs totaling $103 million have been incurred
through December 31, 2010, including $78 million during 2010.
Targeted production rates once the DMLZ mining operation reaches
full capacity are expected to approximate 80,000 metric tons of
ore per day.