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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
10-K
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(Mark
One)
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2006
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OR
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[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 1-9916
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Freeport-McMoRan
Copper & Gold Inc.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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74-2480931
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification No.)
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1615
Poydras Street
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New
Orleans, Louisiana
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70112
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(Address
of principal executive offices)
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(Zip
Code)
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(504)
582-4000
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(Registrant's
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class
B Common Stock, par value $0.10 per share
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New
York Stock Exchange
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10⅛%
Senior Notes due 2010 of the registrant
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New
York Stock Exchange
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7%
Convertible Senior Notes due 2011 of the registrant
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act R
Yes
0
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. 0
Yes
R
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. R
Yes
0
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
0
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Act. (Check
one):
R
Large
accelerated filer 0
Accelerated filer 0
Non-accelerated filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). 0
Yes
R
No
The
aggregate market value of common stock held by non-affiliates of the registrant
was approximately $9.4 billion on February 12, 2007, and approximately $9.3
billion on June 30, 2006.
On
February 12, 2007, there were issued and outstanding 197,157,825 shares of
Class
B Common Stock and on June 30, 2006, there were issued and outstanding
187,159,910 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
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Portions
of our Proxy Statement for our 2007 Annual Meeting are incorporated
by
reference into Part III (Items 10, 11, 12, 13 and 14) of this
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report.
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FREEPORT-McMoRan
COPPER & GOLD INC.
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i
All
of our periodic report filings with the Securities and Exchange Commission
(SEC)
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as
amended, are available, free of charge, through our web site, www.fcx.com,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports. These reports
and amendments are available through our web site as soon as reasonably
practicable after we electronically file or furnish such material to the SEC.
References to “Notes” are Notes in our “Notes to Consolidated Financial
Statements” included in our 2006 Annual Report incorporated herein by reference
(see “Item 8. Financial Statements and Supplementary Data”).
On
November 19, 2006, FCX and Phelps Dodge Corporation announced that they had
signed a definitive merger agreement whereby we will acquire Phelps Dodge for
approximately $25.9 billion in cash and stock, based on FCX’s closing stock
price on November 17, 2006, creating one of the largest publicly traded copper
companies. The combined company will be a new industry leader with large,
long-lived, geographically diverse assets and significant proven and probable
reserves of copper, gold and molybdenum. Completion of the transaction is
subject to a number of conditions, including receipt of FCX and Phelps Dodge
stockholder approval. On February 2, 2007, FCX and Phelps Dodge announced that
each company will hold a special meeting of its stockholders on March 14, 2007,
to vote on the proposed acquisition of Phelps Dodge by FCX. The transaction
is
expected to close in March 2007. The information contained in this Form 10-K
does not reflect the impact of us acquiring Phelps Dodge.
General
Through
our majority-owned subsidiary, PT Freeport Indonesia, we have one of the world’s
largest copper and gold mining and production operations in terms of reserves
and production. Our principal asset is the Grasberg minerals district. We
discovered the largest ore body in the district, Grasberg, in 1988. Based on
available year-end 2005 data provided by third-party industry consultants,
the
Grasberg minerals district contains the largest single copper reserve and the
largest single gold reserve of any mine in the world.
Our
principal operating subsidiary is PT Freeport Indonesia, a limited liability
company organized under the laws of the Republic of Indonesia and incorporated
in Delaware. We own approximately 90.64 percent of PT Freeport Indonesia, and
the Government of Indonesia owns the remaining approximate 9.36 percent. PT
Freeport Indonesia mines, processes and explores for ore containing copper,
gold
and silver. It operates in the remote highlands of the Sudirman Mountain Range
in the province of Papua, Indonesia, which is on the western half of the island
of New Guinea. PT Freeport Indonesia markets its concentrates containing copper,
gold and silver worldwide.
PT
Freeport Indonesia conducts its operations pursuant to an agreement, called
a
Contract of Work, with the Government of Indonesia (see “Contracts of Work”).
The Contract of Work allows us to conduct extensive mining, production and
exploration activities in a 24,700-acre area that we call Block A, which
contains the Grasberg minerals district, and governs our rights and obligations
relating to taxes, exchange controls, royalties, repatriation and other matters.
The Contract of Work also allows us to explore for minerals in an approximately
500,000-acre area that we call Block B. Exploration activities in Block B have
been suspended in recent years, but we expect to resume those activities in
2007. The primary term of our Contract of Work expires in 2021 and we can extend
it for two 10-year periods subject to Indonesian government approval, which
cannot be withheld or delayed unreasonably.
Another
of our operating subsidiaries, PT Irja Eastern Minerals, which we refer to
as
Eastern Minerals, holds an additional Contract of Work in Papua covering
approximately 1.2 million acres. Eastern Minerals conducts exploration
activities, which had been suspended in recent years, under this Contract of
Work (see “Contracts of Work”). In December 2006, Eastern Minerals received
approval from the Government of Indonesia to resume exploration activities
in
2007. We have a 100 percent ownership interest in Eastern Minerals.
In
1996,
we established joint ventures with Rio Tinto plc, which is an international
mining company with headquarters in London, England. Rio Tinto conducts mining
operations in North America, South America, Asia, Australia, Europe and southern
Africa. One of our joint ventures with Rio Tinto covers PT Freeport
Indonesia’s
mining
operations in Block A. This joint venture gives Rio Tinto, through 2021, a
40
percent interest in certain assets and in production above specified levels
from
operations in Block A and, after 2021, a 40 percent interest in all production
in Block A. Under our joint venture arrangements, Rio Tinto also has a 40
percent interest in PT Freeport Indonesia’s
Contract
of Work and Eastern Minerals’
Contract
of Work. In addition, Rio Tinto has the
1
option
to
participate in 40 percent of any of our other future exploration projects in
Papua. To date, Rio Tinto has elected to participate in all exploration
projects, including PT Nabire Bakti Mining.
Under
a
joint venture agreement through PT Nabire Bakti Mining, we conduct exploration
activities, which have been suspended in recent years (see “Contracts of Work”),
in an area covering approximately 500,000 acres in five parcels contiguous
to PT
Freeport Indonesia’s
Block B
and one of Eastern Minerals’
blocks.
We expect to resume exploration activities in PT Nabire Bakti Mining’s
exploration area in 2007.
At
December 31, 2006, PT Freeport Indonesia’s share of proven and probable
recoverable reserves totaled 38.8 billion pounds of copper and 41.1 million
ounces of gold, all of which are located in Block A. Our approximate 90.64
percent equity share of these proven and probable recoverable reserves totaled
35.2 billion pounds of copper and 37.2 million ounces of gold (see “Ore
Reserves”). In this annual report, we refer to (1) aggregate reserves, which
means all reserves for the operations we manage, (2) PT Freeport Indonesia’s
share of reserves, which means the reserves net of Rio Tinto’s interest under
our joint venture arrangements and which are the reserves reported as those
of
our operations in our consolidated financial statements and (3) our equity
share
of reserves, which is net of the 9.36 percent of PT Freeport Indonesia owned
by
the Government of Indonesia.
In
July
2003, we acquired the 85.7 percent ownership interest in PT Puncakjaya Power
owned by affiliates of Duke Energy Corporation. Puncakjaya Power is the owner
of
assets supplying power to PT Freeport Indonesia’s operations, including the 3x65
megawatt coal-fired power facilities (see “Infrastructure”).
We
also
smelt and refine copper concentrates in Spain and market the refined copper
products through our wholly owned subsidiary, Atlantic Copper, S.A. In addition,
PT Freeport Indonesia has a 25 percent interest in PT Smelting, an Indonesian
company that operates a copper smelter and refinery in Gresik, Indonesia. These
smelters play an important role in our concentrate marketing strategy, as
approximately one-half of PT Freeport Indonesia’s
concentrate production has been sold to Atlantic Copper and PT Smelting over
the
last several years (see “Investment in Smelters”).
The
diagram below shows our corporate structure.
_______________
(a)
FM
Services Company, a Delaware corporation, provides us and two other
publicly-traded companies with executive, administrative, financial, accounting,
legal, tax and similar services.
2
The
following four maps indicate:
- the
distance from the Grasberg minerals district in Papua to Bali (approximately
1,500 miles) and to Jakarta (approximately 2,000 miles);
- the
location of the Papua province in which we operate;
- the
location of our Contracts of Work areas within the Papua province;
and
- the
infrastructure of our Contract of Work project area.
3
4
5
6
Contracts
of Work
Through
Contracts of Work with the Government of Indonesia, PT Freeport Indonesia and
Eastern Minerals conduct their current exploration operations and PT Freeport
Indonesia conducts its mining operations in Indonesia. Both Contracts of Work
govern our rights and obligations relating to taxes, exchange controls,
royalties, repatriation and other matters. Both Contracts of Work were concluded
pursuant to the 1967 Foreign Capital Investment Law, which expresses
Indonesia’s
foreign
investment policy and provides basic guarantees of remittance rights and
protection against nationalization, a framework for economic incentives and
basic rules regarding other rights and obligations of foreign investors.
Specifically, the Contracts of Work provide that the Government of Indonesia
will not nationalize or expropriate PT Freeport Indonesia’s
or
Eastern Minerals’ mining operations. Any disputes regarding the provisions of
the Contracts of Work are subject to international arbitration. We have
experienced no disputes requiring arbitration during the 39 years we have
operated in Indonesia.
PT
Freeport Indonesia’s
Contract
of Work covers both Block A, which was first included in a 1967 Contract of
Work
that was replaced by a new Contract of Work in 1991, and Block B, to which
we
gained rights in 1991. The initial term of our Contract of Work expires in
December 2021, but we can extend it for two 10-year periods subject to
Indonesian government approval, which cannot be withheld or delayed
unreasonably. We originally had the rights to explore 6.5 million acres in
Block
B, but pursuant to the Contract of Work we have only retained the rights to
approximately 500,000 acres, following significant geological
assessment.
Eastern
Minerals signed its Contract of Work in August 1994. The Contract of Work
originally covered approximately 2.5 million acres. Eastern Minerals' Contract
of Work provides for a four-to-seven year exploratory term and a 30-year term
for mining operations. Subject to Indonesian government approval, which cannot
be withheld or delayed unreasonably, we can extend this period for two 10-year
periods. Eastern Minerals’ Contract of Work requires us to relinquish our rights
to 25 percent of the original 2.5-million-acre Contract of Work area at the
end
of each of three specified periods. As of December 31, 2006, we had relinquished
approximately 1.3 million acres and must relinquish an additional 0.6 million
acres at the end of the three-year exploration period, which can be extended
by
the Government of Indonesia for as many as two additional years. The exploration
activities under Eastern Minerals’ Contract of Work also had been suspended in
recent years; however, in December 2006, Eastern Minerals received approval
from
the Government of Indonesia to resume exploration activities in
2007.
We
suspended our exploration activities outside of Block A in recent years because
of safety and security issues and regulatory uncertainty relating to a possible
conflict between our mining and exploration rights in certain forest areas
and
an Indonesian Forestry law enacted in 1999 prohibiting open-pit mining in forest
preservation areas. In 2001, we requested and received from the Government
of
Indonesia formal temporary suspensions of our obligations under the Contracts
of
Work in all areas outside Block A. The current suspensions were granted for
one-year periods ending February 26, 2007, for Block B and March 30, 2007,
for
PT Nabire Bakti Mining. Recent Indonesian legislation permits open-pit mining
in
PT Freeport Indonesia’s
Block B
area, subject to certain requirements. Following an assessment of these
requirements and a review of security issues, we plan to resume exploration
activities in certain prospective Contract of Work areas outside of Block A
in
2007.
PT
Freeport Indonesia pays a copper royalty under its Contact of Work that varies
from 1.5 percent of copper net revenue at a copper price of $0.90 or less per
pound to 3.5 percent at a copper price of $1.10 or more per pound. The Contract
of Work royalty rate for gold and silver sales is 1.0 percent.
A
large
part of the mineral royalties under Government of Indonesia regulations are
designated to the provinces from which the minerals are extracted. In connection
with our “fourth concentrator mill expansion,” PT Freeport Indonesia agreed to
pay the Government of Indonesia additional royalties (royalties not required
by
our Contract of Work) to provide further support to the local governments and
the people of Papua. PT Freeport Indonesia pays the additional royalties on
production exceeding specified annual amounts of copper, gold and silver
expected to be generated when its milling facilities operate above 200,000
metric tons of ore per day. The additional royalty for copper equals the
Contract of Work royalty rate and for gold and silver equals twice the Contract
of Work royalty rates. Therefore, our royalty rate on copper net revenues from
production above the agreed levels is double the Contract of Work royalty rate,
and our royalty rates on gold and silver sales from production above the agreed
levels are triple the Contract of Work royalty rates.
PT
Freeport Indonesia’s
share of
the combined royalties, including the additional royalties which became
effective January 1, 1999, totaled $126.0 million in 2006, $103.7 million in
2005 and $43.5 million in 2004.
7
Republic of Indonesia
General.
The
Republic of Indonesia consists of more than 17,000 islands stretching 3,000
miles along the equator from Malaysia to Australia and is the fourth most
populous nation in the world with over 245 million people. Following many years
of Dutch colonial rule, Indonesia gained independence in 1945 and now has a
presidential republic system of government.
Our
mining complex was Indonesia’s
first
copper mining project and was the first major foreign investment in Indonesia
following the economic development program instituted by the Indonesian
government in 1967. We work closely with the central, provincial and local
governments in development efforts in the area surrounding our operations.
We
have had positive relations with the Indonesian government since we commenced
business activities in Indonesia in 1967, and we intend to continue to maintain
positive working relationships with the central, provincial and local branches
of the Indonesian government.
Political
Developments.
In May
1998, President Suharto, Indonesia’s
political leader for more than 30 years, resigned in the wake of an economic
crisis in Indonesia and other parts of Southeast Asia and in the face of growing
social unrest. Vice President B.J. Habibie succeeded Suharto. In June 1999,
Indonesia held a new parliamentary election on a generally peaceful basis as
the
first step in the process of electing a new president. In October 1999, in
accordance with the Indonesian constitution, the country’s
highest
political institution (the People’s
Consultative Assembly), composed of the newly elected national parliament along
with additional provincial and other representatives, elected Abdurrahman Wahid
as president and Megawati Sukarnoputri as vice president.
In
July
2001, the People’s
Consultative Assembly voted to remove President Wahid, and elected Vice
President Megawati Sukarnoputri as president. In October 2004, Susilo Bambang
Yudhoyono was elected as president in the nation’s first direct presidential
election.
Other
Developments.
In
February 2006, a group of illegal gold panners engaged in conflict with
Indonesian police and PT Freeport Indonesia security personnel when they were
requested to leave an area near our milling facilities. Following the incident,
the illegal panners blocked the road leading to the Grasberg mine and mill
in
protest and we temporarily suspended mining and milling operations as a
precautionary measure. The panners also vandalized some of our light vehicles
and offices near this area, causing approximately $2 million in damages. Our
port facilities continued to operate during the disruption and concentrate
shipments were not affected. The panners, mostly Papuans from outside our area
of operations, presented a list of aspirations, primarily relating to their
desire to share in the benefits of our existing initiatives and programs
provided for the Papuans who are the traditional residents of our operations
area. Mining and milling operations resumed after an approximate four-day
outage. During the incident at our mine and mill, protestors in Jakarta
vandalized the entrance floor of the office building housing our Indonesian
headquarters and staged a three-day rally outside the building. The Indonesian
police handled this matter, which did not disrupt our administrative functions
or damage any of our facilities.
On
August
31, 2002, three people were killed and 11 others were wounded in an ambush
by a
group of assailants. The assailants shot at several vehicles transporting
international contract teachers from PT Freeport Indonesia’s
school
in Tembagapura, their family members, and other contractors to PT Freeport
Indonesia on the road near Tembagapura, the mining town where the majority
of PT
Freeport Indonesia’s
personnel reside. Indonesian authorities and the United States Federal Bureau
of
Investigation (FBI) investigated the incident, which resulted in the U.S.
indictment of an alleged operational commander in the Free Papua
Movement/National Freedom Force. In January 2006, Indonesian Police arrested
this individual and 11 other Papuans. In November 2006, verdicts and sentencing
were announced for seven of the accused in the August 2002 shooting, including
a
life sentence for the confessed leader of the attack.
On
October 12, 2002, a bombing killed 202 people in the Indonesian province of
Bali, which is 1,500 miles west of our mining and milling operations. Indonesian
authorities arrested 35 people in connection with this bombing and 29 of those
arrested have been tried and convicted. On August 5, 2003, 12 people were killed
and over 100 others were injured by a car bomb detonated outside of the JW
Marriott Hotel in Jakarta, Indonesia. On September 9, 2004, 11 people were
killed and over 200 others injured by a car bomb detonated in front of the
Australian embassy. On October 1, 2005, three suicide bombers killed 19 people
and wounded over 100 others in Bali. International terrorist organizations
are
suspected in each of these incidents. In November 2005, Indonesian Police raided
a house in East Java that resulted in the death of other accused terrorists
linked to these bombings. Our mining and milling operations were not interrupted
by these incidents, but our corporate offices in Jakarta sustained damages
and
relocated for several months as a result of the September 2004
bombing.
8
The
Government of Indonesia, which provides security for PT Freeport
Indonesia’s
personnel and operations (see “Security Matters”), has expressed a strong
commitment to protect natural resources businesses operating in Indonesia,
including PT Freeport Indonesia, with heightened security following the
incidents discussed above.
Economic
and Social Conditions.
The
Indonesian economy grew by an estimated 6 percent in 2006 and 2005. The
Indonesian currency, the rupiah, averaged approximately 9,150 rupiah to one
United States (U.S.) dollar during 2006 and closed at 8,989 rupiah to one U.S.
dollar on December 29, 2006, compared with 9,825 rupiah to one U.S. dollar
on
December 30, 2005.
Despite
gradual improvements on the economic front, Indonesia’s
recovery
remains vulnerable to ongoing political and social tensions. Pro-independence
movements have been prominent in certain areas, especially in the province
of
Aceh, and to a lesser extent in Papua. In 2005, the Government of Indonesia
and
the Free Aceh Movement reached a peace agreement, which included the withdrawal
of 24,000 military troops from Aceh. Subsequently, the U.S. restored full
relations with the Indonesian military after a 14-year moratorium, partly
because of the successes by the Government of Indonesia in fighting terrorism
and in reaching a peaceful agreement in Aceh.
The
area
surrounding our mining development is sparsely populated by indigenous people
and former residents of other areas of Indonesia, some of whom have resettled
in
Papua under the Government of Indonesia’s
transmigration program. A segment of the local population is opposing Indonesian
rule over Papua, and several separatist groups have sought political
independence for the province. In addition to the August 31, 2002, shooting
incident, there have been sporadic attacks on civilians by separatists and
sporadic but highly publicized conflicts between separatists and the Indonesian
military in Papua.
In
2001,
new autonomy laws became effective in Indonesia. The laws were intended to
shift
a greater share of revenues and greater control of economic, regulatory and
social affairs to Indonesia’s 31 provinces and over 300 regencies. The central
government and the provinces continue to consider the implementation and
administration of these new responsibilities.
Our
Contracts of Work and the Government of Indonesia.
The
Indonesian government has assured investors that existing contracts would be
honored. In our 39 years of operating in Indonesia, the Indonesian government
has always honored its commitments to us. Our belief that our Contracts of
Work
will continue to be honored is further supported by U.S. laws, which prohibit
U.S. aid to countries that nationalize property owned by, or take steps to
nullify a contract with, a U.S. citizen or company at least 50 percent owned
by
U.S. citizens if the foreign country does not within a reasonable time take
appropriate steps to provide full value compensation or other relief under
international law.
In
July
2004, we received a request from the Indonesian Department of Energy and Mineral
Resources that we offer to sell shares in PT Indocopper Investama to Indonesian
nationals at fair market value. PT Indocopper Investama, which we wholly own,
has an approximate 9.36 percent ownership interest in PT Freeport Indonesia.
In
response to this request and in view of the potential benefits of having
additional Indonesian ownership in our operations, we have agreed to consider
a
potential sale of an interest in PT Indocopper Investama at fair market value.
Neither our Contract of Work nor Indonesian law requires us to divest any
portion of our ownership interest in PT Freeport Indonesia or PT Indocopper
Investama.
Our
Investment in Indonesia and Papua.
We have
a board-approved policy on social, employment and human rights, and have
comprehensive and extensive social, cultural and community development programs,
to which we have committed significant financial and managerial resources.
See
“Social Development, Employment and Human Rights.” These policies and programs
are designed to address the impact of our operations on the local villages
and
people and to provide assistance for the development of the local people. While
we believe these efforts serve to avoid damage to and disruptions of our
operations, our operations could be adversely affected by social, economic
and
political forces beyond our control.
PT
Freeport Indonesia contributes to the economies of Papua and the Republic of
Indonesia through the payment of taxes, dividends and royalties; economic
development programs; infrastructure development; employment and the purchase
of
local and national goods. PT Freeport Indonesia has frequently been one of
the
largest taxpayers in the Republic of Indonesia. In addition, it pays royalties
on all minerals removed from the ground. Royalty payments are based on the
volumes and prices of minerals sold in accordance with the terms of PT Freeport
Indonesia’s Contract of Work, as discussed above.
9
Since
it
began development activities more than 35 years ago, PT Freeport Indonesia
has
made significant investments in infrastructure both for its use and for use
by
the Papuan public. These infrastructure improvements include medical facilities,
roads, an airport and heliports, schools, housing, community buildings and
places of worship.
PT
Freeport Indonesia is also one of the largest private employers in Indonesia
and
by far the largest in Papua. As of December 31, 2006, PT Freeport Indonesia
directly employed 8,957 people, and 6,141 contract workers provided services
to
PT Freeport Indonesia. In addition, 4,579 persons worked for privatized
companies providing services within PT Freeport Indonesia’s
operations area.
Besides
the estimated $5.1 billion in direct benefits from taxes, royalties, dividends
and fees paid to the Indonesian government under the Contract of Work from
1992
through 2006, PT Freeport Indonesia’s operations have provided an additional
estimated $11.1 billion during this period in indirect benefits to Papua and
the
Republic of Indonesia in the form of wages and benefits paid to workers,
purchases of goods and services, charitable contributions and reinvestments
in
operations. For 2006, direct benefits paid to the Indonesian government totaled
approximately $1.6 billion and indirect benefits totaled approximately $1.1
billion. In addition, approximately $0.2 billion of direct benefits
attributable to 2006 operations is being paid during the first quarter of
2007 in accordance with the terms of the Contract of Work.
Ore
Reserves
During
2006, PT Freeport Indonesia added 41.8 million metric tons of ore averaging
0.66
percent copper and 0.70 grams per metric ton (g/t) of gold associated with
positive drilling results at the Mill Level Zone and Deep Mill Level Zone
deposits, a 387-million-metric-ton complex with average grades of 1.02 percent
copper and 0.81 g/t of gold. PT Freeport Indonesia’s reserve estimates also
reflect revisions resulting from changes to its long-range mine
plans.
During
the fourth quarter of 2006, PT Freeport Indonesia completed an analysis of
its
longer-range mine plans to assess the optimal design of the Grasberg open pit
and the timing of development of the Grasberg underground block cave ore body.
The analysis incorporated the latest geological and geotechnical studies, costs
and other economic factors in developing the optimal timing for transitioning
from the open pit to underground. The revised long-range plan includes changes
to the expected final Grasberg open-pit design which will result in a section
of
high-grade ore previously expected to be mined in the open pit to be mined
in
the Grasberg underground block cave mine. Approximately 100 million metric
tons
of high-grade ore in the southwest corner (located in the "8 South" pushback)
of
the open pit, with aggregate recoverable metal approximating 4 billion pounds
of
copper and 5 million ounces of gold, is expected to be mined through PT Freeport
Indonesia's large scale block caving operations rather than from open-pit
mining. The revised mine plan reflects a transition from the Grasberg open
pit
to the Grasberg underground block cave ore body currently estimated to occur
in
mid-2015.
The
mine
plan revisions alter the timing of metal production in the period of 2015 and
beyond but do not have a significant effect on ultimate recoverable reserves.
The success of PT Freeport Indonesia's underground operations and the
significant progress to establish underground infrastructure provides confidence
in developing the high-grade, large-scale underground ore bodies in the Grasberg
minerals district. PT Freeport Indonesia will continue to assess opportunities
to optimize the long-range mine plans and net present values of the Grasberg
minerals district.
Year-end
aggregate proven and probable recoverable reserves, net of 2006 production,
were
2.8 billion metric tons of ore averaging 1.04 percent copper, 0.90 g/t of gold
and 4.16 g/t of silver representing 54.8 billion pounds of copper, 54.3 million
ounces of gold and 184.5 million ounces of silver. Our aggregate exploration
budget for 2007, including Rio Tinto’s
share,
is expected to total approximately $31 million ($25 million for our share).
PT
Freeport Indonesia’s exploration efforts in 2007 within Block A will continue to
test extensions of the Deep Grasberg and Kucing Liar mine complex. Engineering
studies are under way to incorporate positive drilling results from 2006
activities at Deep Grasberg and Kucing Liar. PT Freeport Indonesia also expects
to test the open-pit potential of the Wanagon gold prospect and the Ertsberg
open-pit resource, and will begin testing for extensions of the Deep Mill Level
Zone deposit and other targets in the space between the Ertsberg and Grasberg
mineral systems from the new Common Infrastructure tunnels (see “Mining
Operations - Mines in Development”) located at the 2,500 meter
level.
10
Pursuant
to joint venture arrangements between PT Freeport Indonesia and Rio Tinto,
Rio
Tinto has a 40 percent interest in production from reserves above those reported
at December 31, 1994. Net of Rio Tinto’s
share,
PT Freeport Indonesia’s
share of
proven and probable recoverable reserves as of December 31, 2006, was 38.8
billion pounds of copper, 41.1 million ounces of gold and 128.0 million ounces
of silver. FCX’s
equity
interest in proven and probable recoverable reserves as of December 31, 2006,
was 35.2 billion pounds of copper, 37.2 million ounces of gold and 116.0 million
ounces of silver. We estimated recoverable reserves using a copper price of
$1.00 per pound and a gold price of $400 per ounce. If metal prices were
adjusted to the approximate average London spot prices for the past three years,
i.e., copper prices adjusted from $1.00 per pound to $2.01 per pound and gold
prices adjusted from $400 per ounce to $486 per ounce, the resulting additional
proven and probable reserves would not be material to our reported
reserves.
All
of
our proven and probable recoverable reserves lie within Block A. Aggregate
Grasberg open pit and underground proven and probable recoverable ore reserves
as of December 31, 2006, are shown below along with those of our other deposits.
Reserve calculations were prepared by our employees under the supervision of
George D. MacDonald, our Vice President of Exploration, and were reviewed and
verified by Independent Mining Consultants, Inc., experts in mining, geology
and
reserve determination. See “Risk Factors.” We developed our current mine plan
based on completing the mining of all of our currently designated recoverable
reserves before the end of 2041, which would be the expiration of our Contract
of Work including the two 10-year extensions discussed above. Prior to the
expiration of the initial term of our Contract of Work in December 2021, under
our current mine plan we expect to mine approximately 39 percent of aggregate
proven and probable ore, representing approximately 45 percent of PT Freeport
Indonesia’s
share of
recoverable copper reserves and approximately 59 percent of PT Freeport
Indonesia’s
share of
recoverable gold reserves.
|
Proven
|
Probable
|
Total
|
|||||||
|
Metric
Tons of Ore (000s)a
|
Average
Ore Grade
|
Metric
Tons of Ore (000s)a
|
Average
Ore Grade
|
Metric
Tons
|
|||||
|
Copper
|
Gold
|
Silver
|
Copper
|
Gold
|
Silver
|
of
Ore (000s)a
|
|||
|
(%)
|
(g/t)
|
(g/t)
|
(%)
|
(g/t)
|
(g/t)
|
||||
|
Developed
and producing:
|
|||||||||
|
Grasberg
open pit
|
158,828
|
0.93
|
1.20
|
2.22
|
313,696
|
0.85
|
0.90
|
2.13
|
472,524
|
|
Deep
Ore Zone
|
68,803
|
0.86
|
0.59
|
4.66
|
79,588
|
0.82
|
0.54
|
4.67
|
148,391
|
|
Undeveloped:
|
|||||||||
|
Grasberg
block cave
|
289,455
|
1.14
|
1.10
|
3.58
|
695,837
|
1.01
|
0.77
|
3.12
|
985,292
|
|
Kucing
Liar
|
161,755
|
1.24
|
1.11
|
6.45
|
415,956
|
1.18
|
1.04
|
5.57
|
577,711
|
|
Deep
Mill Level Zone
|
26,866
|
1.18
|
0.91
|
6.09
|
252,046
|
1.07
|
0.85
|
5.35
|
278,912
|
|
Ertsberg
Stockwork Zone
|
44,811
|
0.51
|
0.84
|
1.76
|
98,815
|
0.49
|
0.82
|
1.66
|
143,626
|
|
Mill
Level Zone
|
36,699
|
1.05
|
0.79
|
4.52
|
71,527
|
0.76
|
0.69
|
3.35
|
108,226
|
|
Big
Gossan
|
9,040
|
2.48
|
1.14
|
13.40
|
43,696
|
2.28
|
1.09
|
15.03
|
52,736
|
|
Dom
open pit
|
5,753
|
2.07
|
0.43
|
12.78
|
17,897
|
2.01
|
0.43
|
11.93
|
23,650
|
|
Dom
block cave
|
7,201
|
1.43
|
0.36
|
9.31
|
14,820
|
1.34
|
0.36
|
8.58
|
22,021
|
|
Total
|
809,211
|
1.08
|
1.03
|
4.23
|
2,003,878
|
1.02
|
0.85
|
4.13
|
2,813,089
|
11
|
Mill
Recoveries (%)
|
Proven
and Probable
Recoverable
Reservesb
|
|||||||
|
Copper
|
Gold
|
Silver
|
Copper
|
Gold
|
Silver
|
|||
|
(Billions
of Lbs.)
|
(Millions
of Ozs.)
|
(Millions
of Ozs.)
|
||||||
|
Developed
and producing:
|
||||||||
|
Grasberg
open pit
|
88.2
|
85.7
|
57.1
|
|
7.8
|
12.6
|
14.4
|
|
|
Deep
Ore Zone
|
86.1
|
76.8
|
65.5
|
|
2.3
|
2.0
|
11.2
|
|
|
Undeveloped:
|
||||||||
|
Grasberg
block cave
|
88.4
|
69.4
|
68.2
|
|
19.4
|
18.4
|
54.0
|
|
|
Kucing
Liar
|
89.1
|
48.7
|
49.0
|
|
13.1
|
9.3
|
40.7
|
|
|
Deep
Mill Level Zone
|
85.2
|
76.1
|
78.7
|
|
5.5
|
5.6
|
29.4
|
|
|
Ertsberg
Stockwork Zone
|
88.5
|
78.8
|
85.3
|
|
1.4
|
2.9
|
5.1
|
|
|
Mill
Level Zone
|
89.2
|
78.1
|
83.7
|
|
1.8
|
1.9
|
8.4
|
|
|
Big
Gossan
|
93.1
|
68.7
|
81.6
|
|
2.4
|
1.2
|
15.7
|
|
|
Dom
open pit
|
62.5
|
64.0
|
47.0
|
|
0.6
|
0.2
|
3.4
|
|
|
Dom
block cave
|
82.9
|
61.6
|
44.6
|
|
0.5
|
0.2
|
2.2
|
|
|
Total
|
87.8
|
68.9
|
63.8
|
|
54.8
|
54.3
|
184.5
|
|
|
PT
Freeport Indonesia’s
share
|
38.8
|
41.1
|
128.0
|
|||||
|
FCX’s
equity share
|
35.2
|
37.2
|
116.0
|
|||||
| a. |
Ore
reserve tonnage estimates are after application of applicable mining
recovery factors.
|
| b. |
Proven
and probable recoverable reserves represent estimated metal quantities
from which we expect to be paid after application of estimated mill
recovery rates and smelter recovery rates of 96.5 percent for copper,
97.0
percent for gold and 76.9 percent for silver. The term “recoverable
reserve” means that part of a mineral deposit which we estimate can be
economically and legally extracted or produced at the time of the
reserve
determination.
|
In
defining its open-pit reserves, PT Freeport Indonesia applies an “economic
cutoff grade” strategy. The objective of this strategy is to maximize the net
present value of its operations. PT Freeport Indonesia uses a break-even cutoff
grade to define the insitu reserves for its underground ore bodies. The
break-even cutoff grade is defined for a metric ton of ore as that equivalent
copper grade, once produced and sold, that generates sufficient revenue to
cover
all operating and administrative costs associated with its
production.
Our
reserve estimates are based on the latest available geological and geotechnical
studies. We conduct ongoing studies of our ore bodies to optimize economic
values and to manage risk. We revise our mine plans and estimates of proven
and
probable mineral reserves as required in accordance with the latest available
studies.
PT
Freeport Indonesia’s ores contain three commercially recoverable metals: copper,
gold and silver. We value all three metals in terms of a copper equivalent
percentage to determine a single break-even cutoff grade. Copper equivalent
percentage is used to express the relative value of multi-metal ores in terms
of
one metal. The calculation expresses the relative value of the ore using
estimates of contained metal quantities, metals prices as used for reserve
determination, recovery rates, treatment charges and royalties. The table below
shows the break-even cutoff grade, expressed as a copper equivalent percentage,
for each of our existing ore bodies as of December 31, 2006.
12
|
Ore
Body
|
Copper
Equivalent
Cutoff
Grade
|
|
Grasberg
open pit
|
0.65%
|
|
Deep
Ore Zone
|
0.71%
|
|
Grasberg
block cave
|
0.71%
|
|
Kucing
Liar
|
0.90%
|
|
Mill
Level Zone
|
0.76%
|
|
Deep
Mill Level Zone
|
0.79%
|
|
Ertsberg
Stockwork Zone
|
0.77%
|
|
Dom
block cave
|
0.80%
|
|
Big
Gossan
|
1.49%
|
|
Dom
open pit
|
1.01%
|
|
Average
|
0.77%
|
The
following table sets forth the average drill hole spacing for each of our ore
bodies. Drill hole spacing data are used by mining professionals, such as mining
engineers, in determining the suitability of data coverage (on a relative basis)
in a given deposit type and mining method scenario so as to achieve a given
level of confidence in the resource estimate. Drill hole spacing is only one
of
several criteria necessary to establish resource classification. Drilling
programs are typically designed to achieve an optimum sample spacing to support
the level of confidence in results that apply to a particular stage of
development of a mineral deposit. We calculate the average drill hole spacing
within each ore body using the distance from the center of each block in the
resource model to the nearest drill hole composite. We then calculate the
averages of these values within the volume of each ore body and reported them
under the column entitled “Average Distance: To Nearest Sample.” This value
represents at least one-half of the average drill hole spacing within each
deposit. We calculate the value under the column entitled “Average Distance:
Between Drill Holes” by multiplying the average minimum distance value by two,
and this value represents the maximum average drill hole spacing.
|
Spacing
(in
meters)
|
Average
Distance
(in
meters)
|
|||||
|
Deposit
|
Mining
Unit
|
Surface
Drilling
Grids
|
Underground
(&
Surface)
Drill
Fans
|
Drilling
Method
|
To
Nearest
Sample
|
Between
Drill
Holes
(less
than)
|
|
Grasberg
|
Open
Pit
|
83
|
73
|
Core
|
38
|
76
|
|
Deep
Ore Zone
|
Block
Cave
|
-
|
50
|
Core
|
18
|
35
|
|
Grasberg
|
Block
Cave
|
-
|
94
|
Core
|
39
|
79
|
|
Kucing
Liar
|
Block
Cave
|
-
|
81
|
Core
|
39
|
78
|
|
Mill
Level Zone
|
Block
Cave
|
-
|
50
|
Core
|
24
|
47
|
|
Deep
Mill Level Zone
|
Block
Cave
|
-
|
91
|
Core
|
45
|
89
|
|
Ertsberg
Stockwork Zone
|
Block
Cave
|
100
|
55
|
Core
|
21
|
41
|
|
Dom
|
Block
Cave
|
-
|
50
|
Core
|
35
|
71
|
|
Big
Gossan
|
Open
Stope
|
100
|
62
|
Core
|
20
|
39
|
|
Dom
|
Open
Pit
|
-
|
50
|
Core
|
43
|
86
|
Mining
Operations - Mines in Production
We
and
our predecessors have conducted exploration and mining operations in Block
A
since 1967 and have been the only operator of these operations. We currently
have two mines in operation: the Grasberg open pit and the Deep Ore Zone block
cave.
Grasberg
Open Pit. We
began
open-pit mining of the Grasberg ore body in 1990. Open-pit operations are
expected to continue until mid-2015 at which time the Grasberg underground
mining operations are scheduled to begin. Production is currently at the 3,340-
to 4,285-meter elevation level and totaled 63.7 million metric tons of ore
in
13
2006
and
60.3 million metric tons of ore in 2005, which provided 80 percent of our 2006
mill feed and 81 percent of our 2005 mill feed. Our open-pit mining rate,
including ore and overburden, totaled 677,200 metric tons per day in 2006 and
691,600 metric tons per day in 2005. Approximate annual production rates are
expected to range between 650,000 metric tons per day and 750,000 metric tons
per day through 2010 and then decline through 2015. We are studying potential
capital outlays for additional haul trucks, which would be above the expected
maintenance capital costs that will be incurred during the pit’s remaining
life.
The
current Grasberg equipment fleet consists of over 675 units. As of December
31,
2006, the larger mining equipment directly associated with production includes
168 haul trucks with payloads ranging from approximately 70 metric tons to
330
metric tons, 18 shovels with bucket sizes ranging from 29 cubic meters to 42
cubic meters and 65 bulldozers and graders. Besides the potential purchases
of
haul trucks discussed above, we believe our current equipment level is adequate
to meet our projected production levels over the remaining life of the
pit.
Grasberg
crushing and conveying systems are integral to the mine and provide the capacity
to transport up to 225,000 metric tons per day of Grasberg ore to the mill
and
135,000 metric tons per day of overburden to the overburden
stockpiles.
Mining
costs are charged to operations as incurred. However, because of the
configuration and location of the Grasberg open-pit ore body and the location
and extent of the related surrounding overburden, the ratio of overburden to
ore
is much higher in the initial mining of the open pit than in later years. In
2005 and years prior, surface mining costs associated with overburden removal
at
PT Freeport Indonesia’s Grasberg open-pit mine that were estimated to relate to
future production were initially deferred when the ratio of actual overburden
removed to ore mined exceeded the estimated average ratio of overburden removed
to ore mined over the life of the Grasberg open-pit mine, as projected in our
most recent mine plan. Those deferred costs were to be charged subsequently
to
operating costs when the ratio of actual overburden removed to ore mined fell
below the estimated average ratio of overburden to ore over the life of the
Grasberg open-pit mine. The reserve quantities used to develop the life of
mine
ratio are the proven and probable ore quantities for the Grasberg open pit
shown
above.
In
the
mining industry, the costs of removing overburden and waste material to access
mineral deposits are referred to as “stripping costs.” Through December 31,
2005, we applied the deferred mining cost method in accounting for our
post-production stripping costs. The deferred mining cost method was used by
some companies in the metals mining industry; however, industry practice varied.
The deferred mining cost method matches the cost of production with the sale
of
the related metal from the open pit by assigning each metric ton of ore removed
an equivalent amount of overburden tonnage, thereby averaging overburden removal
costs over the life of the mine. The mining cost capitalized in inventory and
the amounts charged to cost of goods sold do not represent the actual costs
incurred to mine the ore in any given period. The application of the deferred
mining cost method resulted in an asset on FCX’s balance sheet (“Deferred Mining
Costs”) totaling $285.4 million at December 31, 2005 (see Note 1).
On
January 1, 2006, we adopted Emerging Issues Task Force Issue No. 04-6,
“Accounting for Stripping Costs Incurred during Production in the Mining
Industry” (EITF 04-6), which requires that stripping costs incurred during
production be considered costs of the extracted minerals and included as a
component of inventory to be recognized in cost of sales in the same period
as
the revenue from the sale of that inventory (see Note 1). Upon adoption of
EITF
04-6, we recorded our deferred mining costs asset ($285.4 million) at December
31, 2005, net of taxes, minority interest share and inventory effects ($135.9
million), as a cumulative effect adjustment to reduce our retained earnings
on
January 1, 2006. In addition, stripping costs incurred in 2006 and later periods
are now charged to cost of sales as prescribed by EITF 04-6. As a result of
adopting EITF 04-6 on January 1, 2006, our income before income taxes and
minority interests for the year ended December 31, 2006, was $35.4 million
lower
and net income was $18.8 million ($0.10 per basic share and $0.08 per diluted
share) lower than if we had not adopted EITF 04-6 and continued to defer
stripping costs. Stripping costs are now charged to cost of sales as prescribed
by EITF 04-6. Adoption of the new guidance has no impact on our cash flows.
The
pro forma impact of applying EITF 04-6 would be to reduce net income by $35.3
million or $0.16 per diluted share for the year ended December 31, 2005, and
$39.4 million or $0.21 per diluted share for the year ended December 31,
2004.
Deep
Ore Zone. The
Deep
Ore Zone ore body lies vertically below the now depleted Intermediate Ore Zone
ore body. We began production from the Deep Ore Zone ore body in 1989 using
open
stope mining methods, but we suspended production in 1991 in favor of production
from the Grasberg deposit. Production resumed in September 2000 using the
block-cave method. Production is at the 3,110-meter elevation level and totaled
16.5 million metric tons of ore in 2006 and 15.3 million metric tons of ore
in
2005. The Deep Ore Zone continues to perform above
14
design
capacity of 35,000 metric tons of ore per day. Production from the Deep Ore
Zone
averaged 45,200 metric tons of ore per day in 2006 and 42,000 metric tons of
ore
per day in 2005.
During
2006 at the Deep Ore Zone mine, we completed over 12,000 meters of development
drifting in support of the block-cave mining method and the ongoing expansion
to
50,000 metric tons of ore per day. The expansion to a sustained rate of 50,000
metric tons of ore per day is expected to be completed in mid-2007. The
cumulative aggregate development costs for the Deep Ore Zone expansion through
December 31, 2006, totaled approximately $56 million (approximately $34 million
for PT Freeport Indonesia’s share) and the aggregate development costs for 2007
are expected to total approximately $4 million (approximately $2 million for
PT
Freeport Indonesia’s share). We anticipate a further expansion of the Deep Ore
Zone operation to 80,000 metric tons of ore per day, with budgeted capital
of
approximately $18 million (approximately $11 million for PT Freeport Indonesia’s
share) in 2007. The success of the development of the Deep Ore Zone mine, one
of
the world’s largest underground mines, provides confidence in the future
development of PT Freeport Indonesia’s large-scale undeveloped ore
bodies.
The
Deep
Ore Zone mine fleet consists of over 160 pieces of mobile heavy equipment.
The
primary mining equipment directly associated with production and development
includes 45 load-haul-dump (LHD) units and 16 haul trucks. Our production LHD
units typically carry approximately 11 metric tons of ore. Using ore passes
and
chutes, the LHD units transfer ore into 55-ton capacity haul trucks. The trucks
dump into a gyratory crusher and ore is then conveyed to the surface
stockpiles.
Our
development costs include costs incurred resulting from mine pre-production
activities undertaken to gain access to proven and probable reserves including
adits, drifts, ramps, permanent excavations, infrastructure and removal of
overburden. Depreciation for mining and milling life-of-mine assets is
determined using the unit-of-production method based on estimated recoverable
proven and probable copper reserves. Development costs that relate to a specific
ore body are depreciated using the unit-of-production method based on estimated
recoverable proven and probable copper reserves for the ore body benefited.
PT
Freeport Indonesia’s total development costs at December 31, 2006, for the Deep
Ore Zone mine, currently our only operating underground mine, totaled
approximately $224 million, which are being depreciated on a unit-of-production
basis over the life of the Deep Ore Zone proven and probable reserves (see
Note
1).
The
majority of maintenance activities are performed on site by a combination of
PT
Freeport Indonesia employees and contract workers. As of December 31, 2006,
we
had approximately 7,000 employees and contract workers directly involved in
Grasberg open-pit and Deep Ore Zone underground mining, milling and ore flow
operations.
Our
principal source of power for all our operations is a coal-fired power plant
that we built in conjunction with our fourth concentrator mill expansion (see
“Infrastructure”). Diesel generators supply peaking and backup electrical power
generating capacity. A combination of naturally occurring mountain streams
and
water derived from our underground operations provides water for our operations.
The average annual rainfall in the project area is 185 inches.
Mining
Operations - Mines in Development
Seven
other ore bodies (the underground Grasberg, Kucing Liar, Mill Level Zone, Deep
Mill Level Zone, Ertsberg Stockwork Zone, Big Gossan and the Dom) are located
in
Block A. These ore bodies are at various stages of development, and are included
in our proven and probable recoverable reserves. We continually review our
operation’s development opportunities to maximize the value of the reserves. We
incurred $61.4 million for mine development, expansion and infrastructure
capital expenditures related to these ore bodies and $49.5 million for common
underground infrastructure development during the three years ended December
31,
2006. See “Risk Factors.”
The
underground Grasberg reserves will be mined using the block-cave method at
the
end of open-pit mining, which is expected to continue until approximately
mid-2015. The Kucing Liar ore body lies on the southern flank of and underneath
the southern portion of the Grasberg open pit at the 2,605- to 3,115-meter
elevation level. We expect to mine the Kucing Liar ore body using the block-cave
method.
The
Mill
Level Zone ore body lies directly below the Deep Ore Zone mine at the
2,890-meter elevation. The Deep Mill Level Zone ore body lies beneath the Mill
Level Zone ore body at the 2,590-meter elevation. This ore represents the
downward continuation of mineralization in the Ertsberg East Skarn system and
neighboring Ertsberg porphyry. Drilling efforts continue to determine the extent
of these ore bodies. We expect to mine the Mill Level
15
Zone
ore
body using a block-cave method near completion of mining at the Deep Ore Zone
ore body. Near the end of mining the Mill Level Zone ore body, we expect to
mine
the Deep Mill Level Zone ore body also using a block-cave method.
The
Ertsberg Stockwork Zone ore body extends off the southwest side of the Deep
Ore
Zone ore body at the 3,126- to 3,626-meter elevation level. Drilling efforts
continue to determine the extent of this ore body, which we expect to mine
using
a block-cave method starting in about 2008.
The
Big
Gossan ore body is located approximately 1,000 meters southwest of the original
Ertsberg open-pit deposit. We began the initial underground development of
the
ore body in 1993 when we drove tunnels from the mill area into the ore zone
at
the 3,000-meter elevation level. A stope and fill mining method will be used
on
the Big Gossan deposit. In 2005, we completed a feasibility study and an update
to the site-wide development plan to determine the timing of initial production,
currently projected to be 2008.
The
Dom
ore body lies approximately 1,500 meters southeast of the depleted Ertsberg
open-pit deposit. Production at the open-pit and underground portions of the
ore
body will begin after completion of open-pit mining at Grasberg.
In
2004,
PT Freeport Indonesia commenced its “Common Infrastructure” project, which will
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 PT Freeport Indonesia is proceeding with development of
the
lower Big Gossan infrastructure. PT Freeport Indonesia has also advanced
development of the Grasberg spur and as of December 31, 2006, has completed
67
percent of the tunneling required to reach the Grasberg underground ore body.
PT
Freeport Indonesia expects the Grasberg spur to reach the Grasberg underground
ore body and to initiate multi-year mine development activities in the second
half of 2007.
The
projected aggregate capital expenditures required to reach full production
capacity for each of our undeveloped ore bodies based on our latest mine plans
and our proven and probable recoverable reserves as of December 31, 2006, are
shown below in millions of U.S. dollars. Actual costs could differ materially
from these estimates as we will not incur most of the expenditures for several
years and we will incur them over a period of several years. In addition to
the
mine development costs below, our current mine development plans include
approximately $1 billion of capital expenditures at our processing facilities
to
optimize the handling of underground ore types once Grasberg open-pit operations
cease. We continue to review our processing plans to maximize the value of
our
reserves. Based on our current estimates, we expect aggregate expenditures
will
range between approximately $100 million and $320 million annually, during
the
next 15 years. In addition, these costs will be shared with Rio Tinto in
accordance with our joint venture agreement.
|
Grasberg
block cave
|
$
|
1,170
|
|
Kucing
Liar
|
740
|
|
|
Deep
Mill Level Zone
|
320
|
|
|
Mill
Level Zone
|
260
|
|
|
Big
Gossan
|
185
|
|
|
Ertsberg
Stockwork Zone
|
170
|
|
|
Dom
block cave
|
130
|
|
|
Dom
open pit
|
80
|
|
|
Total
|
$
|
3,055
|
16
Description
of Ore Bodies. Our
ore
bodies are located within and around two main igneous intrusions, the Grasberg
monzodiorite and the Ertsberg diorite. The host rocks of these ore bodies
include both carbonate and clastic rocks that form the ridge crests and upper
flanks of the Sudirman Range, and the igneous rocks of monzonitic to dioritic
composition that intrude them. The igneous-hosted ore bodies (the Grasberg
open
pit and block cave, and the Ertsberg Stockwork Zone block cave) occur as vein
stockworks and disseminations of copper sulphides, dominated by chalcopyrite
and, to a much lesser extent, bornite. The sedimentary-rock hosted ore bodies
occur as “magnetite-rich, calcium/magnesian skarn” replacements, whose location
and orientation are strongly influenced by major faults and by the chemistry
of
the carbonate rocks along the margins of the intrusions.
The
copper mineralization in these skarn deposits is also dominated by chalcopyrite,
but higher bornite concentrations are common. Moreover, gold occurs in
significant concentrations in all of the district’s
ore
bodies, though rarely visible to the naked eye. These gold concentrations
usually occur as inclusions within the copper sulphide minerals, though, in
some
deposits, these concentrations can also be strongly associated with
pyrite.
17
The
following diagram indicates the relative elevations (in meters) of our reported
reserve ore bodies.
18
The
following map, which encompasses an area of approximately 42 square kilometers
(approximately 16 square miles), indicates the relative positions and sizes
of
our reported reserve ore bodies and their locations.
19
The
following chart illustrates our current plans for sequencing and producing
each
of our ore bodies and the years in which we currently expect that production
of
each ore body will begin and end. Production volumes are typically lower in
the
first few years of each ore body as development activities are ongoing and
as
the mine ramps up to full production. Currently, the Grasberg open pit and
Deep
Ore Zone are our only producing mines. The ultimate timing of the start of
production from our undeveloped mines is dependent upon a number of factors,
including the results of our exploration and development efforts, and may vary
from the dates shown below. In addition, we develop our mine plans for the
Grasberg open pit and underground mines based on maximizing the net present
value from the ore bodies.
During
2006, we mined an average of 722,400 metric tons of material per day, including
ore and overburden. We do not require any additional approvals for higher mining
rates. During 2005, we mined an average of 733,600 metric tons of material
per
day. The following chart illustrates our current aggregate mill capacity; our
aggregate permitted mill capacity and our projected milling rates. Mill capacity
will vary with the ore type being processed. The decline in milling rates in
2015 reflects the expected completion date of open-pit mining at the Grasberg
ore body. We are continuing to develop mine plans to optimize production
levels.
20
Milling
and Production
The
ore
from our mines moves by a conveyor system to a series of shafts through which
it
drops to our milling and concentrating complex located approximately 2,900
meters above sea level. At the mill, the ore is crushed and ground and mixed
in
tanks with water and small amounts of flotation reagents where it is
continuously agitated with air. During this physical separation process,
copper-, gold- and silver-bearing particles rise to the top of the tanks and
are
collected and thickened into a concentrate. The concentrate leaves the mill
complex as a slurry, consisting of approximately 65 percent solids by weight,
and is pumped through three parallel 115-kilometer pipelines to our coastal
port
site facility at Amamapare where it is filtered, dried and stored for shipping.
Ships are loaded at dock facilities at the port until they draw their maximum
dock-side water, and they then move to deeper water, where loading is completed
from shuttling barges.
Our
production results for the last three years are as follows:
|
Years
Ended December 31,
|
Percentage
Change
|
||||
|
2006
|
2005
|
2004
|
2005
to 2006
|
2004
to 2005
|
|
|
Mill
throughput (metric tons of ore
|
|||||
|
per
day)
|
229,400
|
216,200
|
185,100
|
6%
|
17%
|
|
Copper
production, net to PT
|
|||||
|
Freeport
Indonesia (000 pounds)
|
1,201,200
|
1,455,900
|
996,500
|
(17)%
|
46%
|
|
Gold
production, net to PT Freeport
|
|||||
|
Indonesia
(ounces)
|
1,731,800
|
2,789,400
|
1,456,200
|
(38)%
|
92%
|
|
Average
unit net cash costs
|
|||||
|
per
pound of coppera
|
$0.60
|
$0.07
|
$0.40
|
757%
|
(83)%
|
_________________
|
a.
|
Includes
site production and delivery costs, smelting and refining costs,
and
royalties, less credits for gold and silver sales. See our 2006 Annual
Report incorporated herein by reference for a reconciliation of average
unit net cash costs per pound to production and delivery costs applicable
to sales reported in our consolidated financial
statements.
|
21
Although
average mill throughput increased by six percent to 229,400 metric tons of
ore
per day from 216,200 metric tons per day in 2005, we mined lower grade ore
and
reported lower production in 2006, compared with 2005. Copper production for
2006 totaled 1.2 billion pounds, 254.7 million pounds lower than 2005
production. Gold production for 2006 totaled 1.7 million ounces, 1.1 million
ounces lower than 2005 production. Average unit net cash costs for 2006
increased to $0.60 per pound from $0.07 per pound for 2005, as a result of
higher unit production costs (resulting from lower volumes, higher input costs
and the impact of changes in accounting for stripping costs) and higher
treatment charges and royalties attributable to increased copper
prices.
Mill
throughput and production improved significantly in 2005 compared to 2004,
which
was negatively affected by PT Freeport Indonesia’s
efforts
to accelerate removal of overburden material and restore safe access to
higher-grade areas in the pit (see below). Mill throughput averaged 216,200
metric tons of ore per day in 2005, a 17 percent increase from the 185,100
metric tons average in 2004. Copper and gold production was higher in 2005
compared with 2004 reflecting the higher mill throughput and higher average
ore
grades. Copper production for 2005 totaled 1.46 billion pounds, 459.4 million
pounds higher than 2004 production. Gold production for 2005 totaled 2.79
million ounces, 1.3 million ounces higher than 2004 production. The higher
sales
volumes and the primarily fixed nature of a large portion of PT Freeport
Indonesia’s
cost
structure resulted in average unit net cash costs for 2005 decreasing to $0.07
per pound compared with $0.40 per pound for 2004.
In
October 2003, a slippage of material occurred in a section of the Grasberg
open
pit and in December 2003, a smaller debris flow occurred in the same section.
The area affected by the slippage events included two active mining areas which
were scheduled to be mined in the fourth quarter of 2003 (see “Grasberg Open-Pit
Slippage”). Mill throughput and production in 2004 was negatively affected by PT
Freeport Indonesia’s
efforts
to accelerate removal of overburden material and restore safe access to
higher-grade areas in the pit.
Because
of the fixed nature of a large portion of our costs, unit costs vary
significantly from period to period depending on volumes of copper and gold
sold
during the period. In addition, we have experienced significant increases in
our
production costs in recent years primarily as a result of higher energy costs
and costs of other consumables, higher mining costs and milling rates, labor
costs and other factors. Once we complete our open-pit mining operations at
the
Grasberg mine in approximately mid-2015 and transition to underground, we expect
our share of annual copper and gold production to be lower than current levels,
and all other factors being equal, our average unit net cash costs to increase.
For more information regarding our operating and financial results, see our
2006
Annual Report incorporated herein by reference.
We
estimate our share of sales for 2007 to approximate 1.1 billion pounds of copper
and 1.8 million ounces of gold. Average annual sales volumes over the five-year
period from 2007 through 2011 are expected to approximate 1.24 billion pounds
of
copper and 1.8 million ounces of gold. The achievement of PT Freeport
Indonesia’s sales estimates will be dependent, among other factors, on the
achievement of targeted mining rates, the successful operation of PT Freeport
Indonesia production facilities, the impact of weather conditions at the end
of
fiscal periods on concentrate loading activities and other factors. See “Risk
Factors.”
Geotechnical
Programs
Our
geotechnical programs support several phases of the operations, including our
open-pit mine (pit slope and overburden stockpile stability), our underground
mine, our infrastructure and our tailings management program. For information
regarding our tailings management program, see “Environmental
Matters.”
A
group
of our senior level employees has the responsibility, authority and oversight
for our overall geotechnical programs. Our multi-disciplinary approach combines
in-house personnel with backgrounds in civil, geotechnical, mining engineering,
geology and hydrology to form a technical services group that reports to our
senior managers. Our technical services group develops information that our
mine
engineering group uses to develop mine and stockpile designs, production
schedules and related plans. Our technical services group also monitors slope
stability and other geotechnical and hydrological developments.
Our
technical services group is composed of expatriates and Indonesian nationals,
who are university educated. International consulting experts in each of the
applicable technical fields also provide additional support to this group.
In-house training provided by consultants as well as off-site seminars and
industry conferences supports the training of our staff. Our joint venture
partner has also provided geotechnical and engineering support to our
operations. Consultants and our joint venture partner provide input into program
development and assess performance of these critical roles.
22
Our
technical services group uses information from geological drilling for the
development and updating of our geological, geotechnical and hydrologic models.
We develop computer-based geologic models for mine design and dewatering
programs. We provide continuous ground and slope monitoring in our mines and
on
overburden stockpiles using various computerized and automated systems. We
also
daily inspect all open-pit working areas, with any items of concern being
reported to our senior managers. Our hydrology function measures and tracks
water flow patterns to determine the effectiveness and need for de-watering
and
depressurization programs. We drain all surface flows away from the open pit
and
pump any in-pit surface water to dedicated drain holes connected to our
underground de-watering drift system. We also continuously monitor rainfall
at
our operations so that we may adjust for operational impacts and safety
considerations.
Grasberg
Open-Pit Slippage
On
October 9, 2003, a slippage of material occurred in a section of the Grasberg
open pit. Eight workers perished and five workers were injured in the incident.
The area affected by the slippage, comprising approximately five percent of
the
surface area of the massive Grasberg pit, included two active mining areas
that
were scheduled to be mined in 2003 and 2004. On December 12, 2003, a debris
flow
involving a relatively small amount of loose material occurred in the same
area
of the Grasberg open pit resulting in only minor property damage. Following
these two events, PT Freeport Indonesia redirected its open-pit operations
to
accelerate removal of waste material from the south wall to restore safe access
to the higher-grade ore areas in the pit. These activities resulted in reduced
production levels. In April 2004, PT Freeport Indonesia established safe access
and initiated mining in higher-grade ore areas while continuing waste removal
activities. PT Freeport Indonesia resumed normal milling rates in June
2004.
PT
Freeport Indonesia maintains property damage and business interruption insurance
related to its operations. In December 2004, we entered into an insurance
settlement agreement and settled all claims that arose from the fourth-quarter
2003 slippage and debris flow events in the Grasberg open-pit mine. PT Freeport
Indonesia’s
insurers
agreed to pay an aggregate of $125.0 million in connection with its claims.
After considering our joint venture partner’s
interest
in the proceeds, PT Freeport Indonesia’s
share of
proceeds totaled $95.0 million.
Exploration
As
a
result of our joint venture arrangements, Rio Tinto generally pays for 40
percent of our joint venture exploration and exploratory drilling costs in
Papua. The joint ventures incurred total exploration costs of $16.7 million
in
2006 and $13.3 million in 2005. The joint ventures’ exploration budget for 2007,
including Rio Tinto’s share, is expected to total approximately $31 million ($25
million for our share). PT Freeport Indonesia’s exploration efforts in 2007
within Block A will continue to test extensions of the Deep Grasberg and Kucing
Liar mine complex. Engineering studies are under way to incorporate positive
drilling results from 2006 activities at Deep Grasberg and Kucing Liar. PT
Freeport Indonesia also expects to test the open-pit potential of the Wanagon
gold prospect and the Ertsberg open-pit resource, and will begin testing for
extensions of the Deep Mill Level Zone deposit and other targets in the space
between the Ertsberg and Grasberg mineral systems from the new Common
Infrastructure tunnels located at the 2,500 meter level. During 2007, we plan
to
resume exploration activities, which had been suspended in recent years, in
certain prospective areas outside Block A.
In
June
1998, we entered into a joint venture agreement to conduct exploration
activities in PT Nabire Bakti Mining’s
Contract
of Work area, which currently covers approximately 500,000 acres in several
blocks contiguous to PT Freeport Indonesia’s
Block B
and one of Eastern Minerals’ blocks in Papua. Rio Tinto shares in 40 percent of
our interest and costs in this exploration joint venture. We and Rio Tinto
can
earn up to a 62 percent interest in the PT Nabire Bakti Mining Contract of
Work
by spending up to $21 million on exploration and other activities in the joint
venture areas. We have spent $18.0 million through December 31,
2006.
With
the
subsequent approval of the Indonesian government, in 2000 we suspended our
field
exploration activities in Block B, which includes the Wabu Ridge gold prospect,
as well as in the other Contract of Work areas of Eastern Minerals and PT Nabire
Bakti Mining. The suspensions were because of safety and security issues and
regulatory uncertainty relating to a possible conflict between our mining and
exploration rights in certain forest areas and an Indonesian Forestry law
enacted in 1999 prohibiting open-pit mining in forest preservation areas. Recent
Indonesian legislation permits open-pit mining in PT Freeport Indonesia’s Block
B area, subject to certain requirements. Following an assessment of these
requirements and a review of security issues, we plan to resume exploration
activities in certain prospective Contract of Work areas outside of Block A
in
2007.
23
Infrastructure
The
location of our mining operations in a remote area requires that our operations
be virtually self-sufficient. In addition to the mining facilities described
above, in the course of the development of our project we have constructed
ourselves or participated with others in the construction of an airport, a
port,
a 119 kilometer road, an aerial tramway, two hospitals and related medical
facilities, and two town sites with housing, schools and other facilities
sufficient to support more than 17,000 persons.
In
1996,
we completed a significant infrastructure program, which includes various
residential, community and commercial facilities. We designed the program to
provide the infrastructure needed for our operations, to enhance the living
conditions of our employees, and to develop and promote the growth of local
and
other third party activities and enterprises in Papua. We have developed the
facilities through joint ventures or direct ownership involving local Indonesian
interests and other investors.
In
July
2003, we acquired the 85.7 percent ownership interest in Puncakjaya Power owned
by affiliates of Duke Energy Corporation for $68.1 million cash, net of $9.9
million of cash acquired. Puncakjaya Power is the owner of assets supplying
power to PT Freeport Indonesia’s operations, including the 3x65 megawatt
coal-fired power facilities. PT Freeport Indonesia purchases power from
Puncakjaya Power under infrastructure asset financing arrangements. In March
2005, we prepaid $187.0 million of bank debt associated with Puncakjaya Power’s
operations. At December 31, 2006, we had a $105.2 million loan outstanding
to
Puncakjaya Power, PT Freeport Indonesia had infrastructure asset financing
obligations payable to Puncakjaya Power totaling $192.4 million and Puncakjaya
Power had a receivable from PT Freeport Indonesia for $247.3 million, including
Rio Tinto’s share. We consolidate PT Freeport Indonesia and Puncakjaya Power and
our consolidated balance sheet only reflects a $54.6 million receivable ($8.6
million in other accounts receivable and $46.0 million in long-term assets)
for
Rio Tinto’s share of Puncakjaya Power’s receivable as provided for in our joint
venture agreement with Rio Tinto.
Marketing
PT
Freeport Indonesia sells its copper concentrates, which contain significant
quantities of gold and silver, under U.S. dollar-denominated sales agreements,
mostly to companies in Asia and Europe and to international trading companies.
We sell substantially all of our budgeted production of copper concentrates
under long-term contracts with selling prices based on world metals prices
(generally the London Metal Exchange settlement prices for Grade A copper).
Under these contracts, initial billing occurs at the time of shipment and final
settlement on the copper portion is generally based on average prices for a
specified future period. Gold generally is sold at the average London Bullion
Market Association price for a specified month near the month of
shipment.
Revenues
from concentrate sales are recorded net of royalties (see “Contracts of Work”),
treatment and refining charges (including price participation charges, if
applicable, based on the market prices of metals), and the impact of derivative
financial instruments, if any, used to hedge against risks from metals price
fluctuations. Moreover, because a portion of the metals contained in copper
concentrates is unrecoverable as a result of the smelting process, our revenues
from concentrate sales are also recorded net of allowances based on the quantity
and value of these unrecoverable metals. These allowances are a negotiated
term
of our contracts and vary by customer. Treatment and refining charges represent
payments to smelters and refiners and are either fixed or in certain cases
vary
with the price of copper. We sell a small amount of copper concentrates in
the
spot market. See “Risk Factors.”
We
have
commitments, including commitments from Atlantic Copper and PT Smelting, for
essentially all of PT Freeport Indonesia’s estimated 2007 production. PT
Freeport Indonesia has a long-term contract through December 2007 to provide
Atlantic Copper with a quantity of copper concentrates at market prices which
currently approximates 60 percent of Atlantic Copper’s
annual
copper concentrate requirements. PT Freeport Indonesia’s
agreement with PT Smelting provides, for the life of PT Freeport
Indonesia’s
mines,
for the supply of 100 percent of the copper concentrate requirements necessary
to produce 205,000 metric tons of copper (essentially the Gresik
smelter’s
original
design capacity) on a priority basis. In 2004, PT Smelting increased its stated
production capacity to 250,000 metric tons of copper per year. During 2006,
PT
Smelting completed an expansion of its production capacity from 250,000 metric
tons of copper per year to 275,000 metric tons. For the first 15 years of PT
Smelting’s
commercial operations beginning December 1998, PT Freeport Indonesia agreed
that
the treatment and refining charges on specified quantities of the concentrate
PT
Freeport Indonesia supplies will not fall below specified minimum rates, subject
to renegotiation in 2008. The rate was $0.23 per pound, during the period from
the commencement of PT Smelting’s
operations in 1998 until April 3, 2004 when it declined to a minimum of $0.21
per
24
pound.
PT
Smelting’s rates for 2007 are expected to exceed the minimum $0.21 per pound.
Current rates are higher than the minimum rate. We anticipate that PT Freeport
Indonesia will sell approximately 50 to 60 percent of its annual concentrate
production to Atlantic Copper and PT Smelting. A summary of PT Freeport
Indonesia’s
aggregate percentage concentrate sales to its affiliates and to other parties
for the last three years follows:
|
2006
|
2005
|
2004
|
||||
|
PT
Smelting
|
27%
|
29%
|
40%
|
|||
|
Atlantic
Copper
|
23%
|
25%
|
19%
|
|||
|
Other
parties
|
50%
|
46%
|
41%
|
|||
|
100%
|
100%
|
100%
|
||||
Investment
in Smelters
Our
investment in smelters (Atlantic Copper and PT Smelting) serves an important
role in our concentrate marketing strategy. As discussed above, 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 prior to 2005 adversely affected the operating results
of
Atlantic Copper and benefited the operating results of PT Freeport
Indonesia’s
mining
operations. Smelting and refining charges consist of a base rate and in certain
contracts, price participation and price sharing based on copper prices. Market
rates for treatment and refining charges have increased significantly since
late
2004 as worldwide smelter availability was insufficient to accommodate increased
mine production and because of higher copper prices. However, more recently,
we
have begun to see these market rates decline. 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 PT Freeport Indonesia’s and Atlantic Copper’s smelting and
refining charge rates essentially offsets in our consolidated operating
results.
Atlantic
Copper, S.A.
We own
100 percent of Atlantic Copper. Atlantic Copper completed the last expansion
of
its production capacity in 1997 and the design capacity of its smelter and
its
refinery are 290,000 metric tons of copper per year and its refinery currently
has a nominal capacity of 260,000 metric tons of copper per year, respectively.
We have no present plans to expand Atlantic Copper’s
production capacity. During 2006, Atlantic Copper treated 953,700 metric tons
of
concentrate and scrap and produced 263,700 metric tons of new copper anodes.
During 2005, Atlantic Copper treated 975,400 metric tons of concentrate and
scrap and produced 284,200 metric tons of new copper anodes. Atlantic Copper’s
positive financial results in 2006 compared with 2005 primarily reflect higher
treatment charges, partially offset by higher unit costs. The next maintenance
activity at Atlantic Copper is a 23-day maintenance turnaround currently
scheduled for the second quarter of 2007, which is expected to adversely affect
costs and volumes resulting in an approximate $25 million impact on 2007
operating results. Major maintenance turnarounds typically occur approximately
every nine years for Atlantic Copper, with significantly shorter term
maintenance turnarounds occurring in the interim. Atlantic Copper purchased
approximately 42 percent of its 2006 concentrate requirements from PT Freeport
Indonesia at market prices. Atlantic Copper has experienced no material
operating problems, and we are not aware of any potential material environmental
liabilities at Atlantic Copper.
We
made
no capital contributions to Atlantic Copper in 2005 and 2006; however, we
contributed $202.0 million to Atlantic Copper in 2004. In addition, we loaned
$189.5 million to Atlantic Copper in 2004. The funds were used to improve
Atlantic Copper’s
financial structure during its major maintenance turnaround and during a period
of extremely low treatment and refining charge rates, which negatively affected
Atlantic Copper’s
results.
Our net investment in Atlantic Copper through December 31, 2006, was
approximately $170 million.
PT
Smelting.
PT
Freeport Indonesia’s
Contract
of Work required us to construct or cause to be constructed a smelter in
Indonesia if we and the Indonesian government determined that such a project
would be economically viable. In 1995, following the completion of a feasibility
study, we entered into agreements relating to the formation of PT Smelting
and
the construction of the copper smelter in Gresik, Indonesia.
PT
Smelting is a joint venture among PT Freeport Indonesia, Mitsubishi Materials
Corporation, Mitsubishi Corporation and Nippon Mining & Metals Co., Ltd.,
which own 25 percent, 60.5 percent, 9.5 percent and 5 percent, respectively,
of
the outstanding PT Smelting common stock. In accordance with the joint venture
agreements, PT
25
Freeport
Indonesia provides the majority of PT Smelting’s
copper
concentrate requirements. In December 2003, PT Smelting’s
shareholder agreement was amended to eliminate PT Freeport Indonesia’s
assignment of its earnings in PT Smelting to support a 13 percent cumulative
annual return to the other owners for the first 20 years of operations. No
amounts were paid under this assignment. PT Freeport Indonesia’s
total
investment in PT Smelting through December 31, 2006, was $100.6
million.
During
2006, PT Smelting treated 737,500 metric tons of concentrate and produced
201,200 metric tons of new copper anodes. During 2005, PT Smelting treated
908,900 metric tons of concentrate and produced 275,000 metric tons of new
copper anodes. The lower volumes in 2006 primarily reflect a 22-day maintenance
turnaround in the second quarter and PT Smelting’s temporary suspension of
operations beginning in October 2006 and ending in mid-December 2006 following
an equipment failure at the oxygen plant supplying the smelter. Major
maintenance turnarounds typically occur approximately every four years for
PT
Smelting, with significantly shorter term maintenance turnarounds in the
interim. The next major maintenance turnaround is scheduled for 2008. In 2004,
PT Smelting completed a refinery expansion during its maintenance turnaround,
increasing its production capacity to approximately 250,000 metric tons of
copper per year. During 2006, PT Smelting completed an expansion of its
production capacity from 250,000 metric tons of copper per year to 275,000
metric tons. We are not aware of any potential material environmental
liabilities at PT Smelting.
Competition
We
compete with other mining companies in the sale of our mineral concentrates
and
the recruitment and retention of qualified personnel. Some competing companies
possess financial resources greater than ours and possess multiple mining assets
less geographically concentrated in a single area than ours. We believe,
however, that we are one of the lowest cost copper producers in the world,
after
taking into account credits for related gold and silver production, which gives
us a significant competitive advantage.
Social
Development, Employment and Human Rights
We
have a
social, employment and human rights policy designed to result in our operating
in compliance with the laws in the areas of our operations, and in a manner
that
respects basic human rights and the culture of the people who are indigenous
to
the area. We continue to make significant expenditures on social and cultural
activities, primarily in Papua. These activities include:
| · |
comprehensive
job training programs;
|
| · |
basic
education programs;
|
| · |
several
public health programs, including extensive malaria
control;
|
| · |
agricultural
assistance programs;
|
| · |
a
business incubator program to encourage the local people to establish
their own small scale businesses;
|
| · |
cultural
preservation programs; and
|
| · |
charitable
donations.
|
In
1996,
PT Freeport Indonesia agreed to commit at least one percent of its revenues
to
the Freeport Partnership Fund for Community Development (formerly the Freeport
Fund for Irian Jaya Development) to support village-based health, education,
economic and social development programs in its area of operations. This
commitment replaced our community development programs in which we spent a
similar amount of money each year. Our share of contributions to the Freeport
Partnership Fund for Community Development totaled $43.9 million in 2006, $35.7
million in 2005 and $17.5 million in 2004. Our joint venture partner, Rio Tinto,
also contributes to this fund and including their share the contributions
totaled $47.6 million in 2006, $42.3 million in 2005 and $19.0 million in
2004.
Lembaga
Pembangunan Masyarakat Amungme Kamoro (LPMAK) oversees disbursement of the
amounts we contribute to the fund. LPMAK’s
board of
commissioners is made up of a leader of the Amungme people, a leader of the
Kamoro people, leaders of the three local churches, a representative of the
local government and a representative of PT Freeport Indonesia. The Amungme
and
Kamoro people are original inhabitants of the land in our area of
operations.
We
believe that our social and economic development programs are responsive to
the
issues raised by the local villages and people and should help us to avoid
disruptions of mining operations. Nevertheless, social and political instability
in the area may adversely impact our mining operations. See “Risk
Factors.”
26
In
December 2000, we endorsed the joint U.S. State Department-British Foreign
Office Voluntary Principles on Human Rights and Security. Several major natural
resources companies and international human rights organizations participated
in
developing the Voluntary Principles and have endorsed them. We participated
in
developing these principles and incorporated them into our social and human
rights policy.
Security
Matters
Consistent
with our Contract of Work and the requirement to protect our employees and
property, we have taken appropriate steps to provide a safe and secure working
environment. As part of its security program, PT Freeport Indonesia maintains
its own internal security department, which performs functions such as
protecting company facilities, monitoring the shipment of company goods through
the airport and terminal, assisting in traffic control and aiding rescue
operations. PT Freeport Indonesia’s
civilian
security employees (numbering about 675) are unarmed and perform duties
consistent with their internal security role. PT Freeport Indonesia’s
share of
costs for its internal civilian security department totaled $14.2 million for
2006, $11.3 million for 2005 and $12.3 million for 2004. The security department
has received human rights training and each member is required to certify his
or
her compliance with our human rights policy.
PT
Freeport Indonesia, and all businesses and residents of Indonesia, relies on
the
Government of Indonesia for the provision of public order, upholding the rule
of
law and the protection of personnel and property. The Grasberg mine has been
designated by the Government of Indonesia as one of Indonesia’s
vital
national assets. This designation results in the military’s
playing
a significant role in protecting the area of our operations. The Government
of
Indonesia is responsible for employing police and military personnel and
directing their operations.
From
the
outset of PT Freeport Indonesia’s
operations, the government has looked to PT Freeport Indonesia to provide
logistical and infrastructure support and assistance for these necessary
services because of the limited resources of the Indonesian government and
the
remote location of and lack of development in Papua. PT Freeport
Indonesia’s
financial support for the Indonesian government security institutions assigned
to the operations area represents a prudent response to its requirements to
protect its workforce and property, better ensuring that personnel are properly
fed and lodged, and have the logistical resources to patrol PT Freeport
Indonesia’s
roads
and secure its operating area. In addition, provision of such support and
oversight is consistent with PT Freeport Indonesia’s
obligations under the Contract of Work, reflects our philosophy of responsible
corporate citizenship, and is in keeping with our commitment to pursue practices
that will promote human rights, which include our endorsement of the joint
U.S.
State Department-British Foreign Office Voluntary Principles on Human Rights
and
Security.
PT
Freeport Indonesia’s
share of
support costs for the government-provided security, involving over 2,625
Indonesian government security personnel currently located in the general area
of our operations, was $8.5 million for 2006, $6.2 million for 2005 and $6.9
million for 2004. This supplemental support consists of various infrastructure
and other costs, such as food, housing, fuel, travel, vehicle repairs,
allowances to cover incidental and administrative costs, and community
assistance programs conducted by the military/police. PT Freeport
Indonesia’s
capital
costs for associated infrastructure was $0.1 million for 2006, $0.1 million
for
2005 and $0.2 million for 2004.
As
reported in January 2006, we are responding to requests from governmental
authorities in United States and Indonesia for information about PT Freeport
Indonesia primarily relating to PT Freeport Indonesia’s support of Indonesian
security institutions. As discussed above, we provide support to assist security
institutions deployed and directed by the Government of Indonesia with
infrastructure, logistics and the hardship elements of posting in Papua and
our
practices adhere to the joint U.S. State Department-British Foreign Office
Voluntary Principles on Security and Human Rights. We
are
cooperating with these requests.
Environmental
Matters
We
have a
board-approved environmental policy that commits us not only to compliance
with
applicable federal, state and local environmental statutes and regulations,
but
also to continuous improvement of our environmental performance at every
operational site. We believe that we conduct our Indonesian operations pursuant
to all necessary permits and are in compliance in all material respects with
applicable Indonesian environmental laws, rules and regulations. Additionally,
the environmental management systems for our PT Freeport Indonesia mining and
milling operations and our Atlantic Copper smelting operations are ISO
(International Standardization Organization) 14001 certified.
27
Mining
operations on the scale of our operations in Papua involve significant
environmental challenges, primarily related to the disposition of tailings,
which are the crushed and ground rock material resulting from the physical
separation of commercially valuable minerals from the ore. We have
comprehensive, ongoing environmental management and monitoring plans for the
disposal of tailings resulting from our milling operations, which the Government
of Indonesia has approved. Pursuant to these plans, we manage and monitor the
impact of our tailings disposal on the surrounding area of the Ajkwa River
and
adjoining water bodies and the surrounding coastal areas. In 1997, we completed
an engineered levee system to minimize the impact of the tailings through a
controlled deposition area located on a portion of the flood plain on the Ajkwa
River.
In
furtherance of our commitments to the Indonesian government pursuant to our
tailings management plan, we monitor the acid-neutralizing capacity of tailings
on a daily basis to ensure the discharge of non-acid generating tailings into
our tailings deposition area. The net acid-neutralizing capacity of our tailings
discharge is maintained through a managed program of blending underground ore
with ore from the open pit, the addition of supplemental limestone (or lime)
to
the ore blend, and the addition of lime for control of the pH levels in the
flotation system. Daily samples are collected and tested and this data is
communicated to our mill operations so that appropriate adjustments in ore
blending and lime/limestone addition can be made.
With
respect to overburden, control and treatment of acid rock drainage is our
primary environmental issue. Our approaches to this issue include the prevention
of acid rock drainage generation, the control of acid rock drainage migration,
and the capture and treatment of acid rock drainage emanating from the
overburden stockpile. In addition, tests have shown the feasibility of
revegetating the overburden stockpile and, as a result, we have engaged in
stockpile reclamation as an additional means of mitigating acid rock
drainage.
We
have
made significant capital expenditures with respect to the capture and treatment
of acid rock drainage. We continue to evaluate various technologies for the
treatment of captured acid rock drainage. Currently, acid rock drainage
collected by boreholes at the base of the overburden stockpile is treated using
conventional lime neutralization.
We
have
also committed to the Indonesian government to have independent external
environmental audits of our Papuan operations performed by qualified experts
every three years, with results available for public review. We have had four
independent environmental audits conducted by internationally recognized
consulting and auditing firms. Audits were completed in 1996 by Dames &
Moore; in 1999 by Montgomery Watson; in 2002 by SGS International Certification
Services Indonesia, a member of the Société Générale de Surveillance group; and
in 2005 by Montgomery Watson Harza. Montgomery Watson Harza concluded that
PT
Freeport Indonesia’s mining operations “are among the largest and most
environmentally challenging and complex in the world” and that the company’s
“environmental management practices continue to be based on (and in some cases
represent) best management practices for the international copper and gold
mining industry.” The audit also concluded, as have previous independent audits,
that PT Freeport Indonesia’s tailings management program “remains the tailings
management option best suited to the unique topographical and climatological
conditions of the site, with a far lower level of environmental impact and
risk”
than those posed by alternatives. The Montgomery Watson Harza auditors also
made
a number of specific recommendations for improvements in PT Freeport Indonesia’s
environmental management practices and these are being implemented. We also
conduct annual internal audits to ensure that our environmental management
and
monitoring programs remain sound and our operations will continue to comply
in
all material respects with applicable regulations.
In
addition to these audits, PT Freeport Indonesia agreed to participate in the
Government of Indonesia’s PROPER program in 2005. In March 2006, the Indonesian
Ministry of Environment announced the preliminary results of its PROPER
environmental management audit, acknowledging the effectiveness of PT Freeport
Indonesia’s environmental management practices in some areas while making
several suggestions for improvement in others. We are working with the Ministry
of Environment to address the issues raised as we complete the audit
process.
In
connection with obtaining our environmental approvals from the Indonesian
government, we committed to performing a one-time environmental risk assessment
on the impacts of our tailings management plan. We completed this extensive
environmental risk assessment with more than 90 scientific studies conducted
over four years and submitted it to the Indonesian government in December 2002.
We developed the risk assessment exercise with input from an independent review
panel, which included representatives from the Indonesian government, academia,
and non-governmental organizations. The risks that we identified during this
process were in line with our impact projections of the tailings management
program contained in our environmental approval documents.
28
We
have
environmental approvals from the Government of Indonesia to expand our milling
rate up to a maximum of 300,000 metric tons of ore per day. In 2006, we averaged
229,400 metric tons of ore per day and in 2005 we averaged 216,200 metric tons
of ore per day.
The
cost
of complying with environmental laws is a fundamental cost of our business.
We
incurred aggregate environmental capital expenditures and other environmental
costs totaling $62.7 million in 2006, $44.0 million in 2005 and $65.1 million
in
2004, including tailings management levee maintenance and mine reclamation.
In
2007, we expect to incur approximately $43 million of aggregate environmental
capital expenditures and $55 million of other environmental costs.
We
are
currently revegetating portions of the tailings deposition area. Upon the
completion of our mining operations, we will fulfill the commitments included
in
our approved environmental management plans. Our plans for revegetation of
affected areas of the deposition area include natural revegetation, forage
crops
and grasses, fruits, grains and vegetables, and other traditional food and
medicinal crops. Decisions on these plans are made in consultation with local
and regional government, local residents and other stakeholders. In addition
to
the revegetation and reclamation of the deposition area, we will continue to
operate treatment systems as long as necessary. We also monitor and test the
water discharged from our mine and the pH, sulfate and electrical conductivity
levels of ground water in the deposition area. The stability of our levees
will
be ensured through comprehensive visual inspection, maintenance and improvement
programs directed by an experienced engineering group dedicated to levee
management and revegetation of the levee embankments. Moreover, we will submit
an annual written report to the Indonesian government regarding our reclamation
activities.
Our
ultimate reclamation and closure activities will be determined after
consultation with the Indonesian government, local residents and other parties.
Our estimate as of December 31, 2006 of PT Freeport Indonesia’s
total
aggregate reclamation and closure obligations total approximately $157 million.
Estimates of reclamation and closure costs involve complex issues requiring
integrated assessments over a period of many years, and we may revise them
as we
perform more complete studies. Some reclamation costs will be incurred during
mining activities, while most closure costs and the remaining reclamation costs
will be incurred at the end of mining activities, which are currently estimated
to continue for more than 34 years.
Moreover,
we cannot predict with any certainty the ultimate future uses of the tailings
deposition area once our mining operations are completed. In addition to forage
crop and grass planting and food and medicinal crop production, possible future
uses of the tailings deposition area include rainforest regrowth, production
of
timber, fuel woods, fruits and nuts and other economic forestry, and the
cultivation of fish, shellfish and other aquaculture. The ultimate future uses
will be determined in consultation with local and regional government, local
residents and other stakeholders.
In
1996,
we began contributing to a cash fund ($8.5 million balance at December 31,
2006)
designed to accumulate at least $100 million by the end of our Indonesian mining
activities. We plan to use this fund, including accrued interest, to pay for
mine closure and reclamation costs. Any incremental costs in excess of this
$100
million fund are expected to be incurred throughout the life of the mine and
would be funded by operational cash flow or other sources. Future environmental
considerations and future changes in regulations could require us to incur
additional costs that would be charged against future operations. Estimates
involving environmental matters are by their nature imprecise and changes in
government regulations, operations, technology and inflation can be expected
to
require us to revise them over time.
We
believe that Atlantic Copper’s
facilities and operations are in compliance in all material respects with all
currently applicable Spanish environmental laws, rules and regulations. In
July
2002, the Integrated Pollution Prevention and Control guidelines were adopted
under Spanish law with a phase in for compliance by 2009. Atlantic Copper,
working with local environmental authorities, is continually assessing the
impact of these new guidelines on its operations, and has budgeted approximately
$27 million as its estimate of the remaining required capital expenditures
from
2007 through 2010 to comply. In April 2006, the Environmental Management Systems
at Atlantic Copper’s operations in Huelva were audited by the Spanish
Association for Standardization and Certification (AENOR), in accordance with
the ISO 14001:96 international certification standards and the European Union
Environmental, Eco-Management and Eco-Auditing (EMAS) Regulation No. 761/2001.
AENOR is a Spanish not-for-profit entity that has been accredited by the Spanish
government to inspect, audit and certify environmental management systems.
Atlantic Copper received positive results from the audits, which are required
annually to retain the ISO 14001 certification that Atlantic Copper achieved
in
prior years.
29
The
Indonesian and Spanish governments may periodically revise their environmental
laws and regulations or adopt new ones, and we cannot predict the effects on
our
operations of new or revised regulations. We have expended significant
resources, both financial and managerial, to comply with environmental
regulations and permitting and approval requirements, and we anticipate that
we
will continue to do so in the future. There can be no assurance that we will
not
incur additional significant costs and liabilities to comply with such current
and future regulations or that such regulations will not materially affect
our
operations (see “Risk Factors”).
Employees
and Relationship with FM Services Company
As
of
December 31, 2006, PT Freeport Indonesia had 8,957 employees (approximately
98
percent Indonesian) and 6,141 contract workers, the vast majority of whom were
Indonesian. Approximately 74 percent of PT Freeport Indonesia’s
employees are represented by the All Indonesia Workers’ Union, which operates
under Government of Indonesia supervision. PT Freeport Indonesia has a labor
agreement covering its hourly paid Indonesian employees, the key provisions
of
which are renegotiated biannually. In June 2005, PT Freeport Indonesia and
its
workers agreed to terms for a new labor agreement that expires in September
2007. PT Freeport Indonesia’s relations with the workers’ union have generally
been satisfactory. In addition, 4,579 persons worked for privatized companies
providing services within PT Freeport Indonesia’s
operations area.
As
of
December 31, 2006, Atlantic Copper had 550 employees, of which approximately
74
percent are represented by union contracts. Atlantic Copper’s labor contract
covering its smelter/refinery workforce in Huelva, Spain expired on December
31,
2005, and was renewed for a three-year period with no material changes in terms.
Atlantic Copper experienced a four-day labor strike in October 2004 at its
smelter facility in Huelva because of a workforce reduction plan. The union’s
issues with the workforce reduction plan were resolved and the plan was approved
by Spanish authorities and implemented in December 2004.
FM
Services Company (FM Services) furnishes executive, administrative, financial,
accounting, legal, tax and similar services to us. FM Services became our wholly
owned subsidiary in October 2002, when we purchased the remaining 50 percent
ownership in FM Services from McMoRan Exploration Co. (McMoRan) for $1.3
million. As of December 31, 2006, FCX had 9 employees and FM Services had 145
employees. FM Services employees continue to also provide services to McMoRan,
a
publicly traded company engaged in the exploration, development and production
of oil and gas, and Stratus Properties Inc., a publicly traded company engaged
in the development of real estate.
This
report contains “forward-looking statements” within the meaning of the federal
securities laws. Forward-looking statements are all statements other than
statements of historical facts, such as statements regarding anticipated
production volumes, unit net cash costs, sales volumes, ore grades, commodity
prices, development and capital expenditures, mine production and development
plans, environmental reclamation and closure cost and plans, reserve estimates,
political, economic and social conditions in our areas of operations,
exploration efforts and results, and the proposed acquisition of Phelps Dodge.
Except for our ongoing obligations under the federal securities laws, we do
not
intend, and we undertake no obligation, to update or revise any forward-looking
statements. Readers are cautioned that forward-looking statements are not
guarantees of future performance and actual results may differ materially from
those projected, anticipated or assumed in the forward-looking statements.
Important factors that could cause our actual results to differ materially
from
those anticipated in the forward-looking statements include the
following:
Because
our primary operating assets are located in the Republic of Indonesia, our
business may be adversely affected by Indonesian political, economic and social
uncertainties, in addition to the usual risks associated with conducting
business in a foreign country.
Indonesia
has faced political, economic and social uncertainties, including separatist
movements and civil and religious strife in a number of provinces. In
particular, several separatist groups are opposing Indonesian rule over the
province of Papua, where our mining operations are located, and have sought
political independence for the province. In response to demands for political
independence, new Indonesian regional autonomy laws became effective January
1,
2001. However, the manner in which the new laws are being implemented and the
degree of political and economic autonomy that they may bring to individual
provinces, including Papua, are uncertain and are ongoing issues in Indonesian
politics. Moreover, in Papua there have been sporadic attacks on civilians
by
30
separatists
and sporadic but highly publicized conflicts between separatists and the
Indonesian military. Social, economic and political instability in Papua could
materially and adversely affect us if this instability results in damage to
our
property or interruption of our activities.
Maintaining
a good working relationship with the Indonesian government is important to
us
because all of our mining operations are located in Indonesia and are conducted
pursuant to Contracts of Work with the Indonesian government. Accordingly,
we
are also subject to the usual risks associated with conducting business in
and
with a foreign country, including the risk of forced modification of existing
contracts, changes in the country’s
laws and
policies, including those relating to taxation, royalties, divestment, imports,
exports and currency, and the risk of having to submit to the jurisdiction
of a
foreign court or arbitration panel or having to enforce the judgment of a
foreign court or arbitration panel against a sovereign nation within its own
territory. In addition, we are subject to the risk of expropriation, and our
insurance does not cover losses caused by expropriation.
In
February 2006, a group of illegal gold panners engaged in conflict with
Indonesian police and PT Freeport Indonesia security personnel when they were
requested to leave an area near our milling facilities. Following the incident,
the illegal panners blocked the road leading to the Grasberg mine and mill
in
protest and we temporarily suspended mining and milling operations as a
precautionary measure. The panners also vandalized some of our light vehicles
and offices near this area, causing approximately $2 million in damages. Our
port facilities continued to operate during the disruption and concentrate
shipments were not affected. The panners, mostly Papuans from outside our area
of operations, presented a list of aspirations, primarily relating to their
desire to share in the benefits of our existing initiatives and programs
provided for the Papuans who are the traditional residents of our operations
area. Mining and milling operations resumed after an approximate four-day
outage. During the incident at our mine and mill, protestors in Jakarta
vandalized the entrance floor of the office building housing our Indonesian
headquarters and staged a three-day rally outside the building. The Indonesian
police handled this matter, which did not disrupt our administrative functions
or damage any of our facilities.
We
cannot
predict if there will be additional incidents similar to the February 2006
protests or other incidents that could disrupt our operations. If there were
additional protests at our mine and mill facilities, it could materially and
adversely affect our business and profitability in ways that we cannot predict
at this time.
In
addition to the usual risks encountered in the mining industry, we face
additional risks because our operations are located on difficult terrain in
a
very remote area.
Our
mining operations are located in steeply mountainous terrain in a very remote
area in Indonesia. Because of these conditions, we have had to overcome special
engineering difficulties and develop extensive infrastructure facilities. In
addition, the area receives considerable rainfall, which has led to periodic
floods and mudslides. The mine site is also in an active seismic area and has
experienced earth tremors from time to time. In addition to these special risks,
we are also subject to the usual risks associated with the mining industry,
such
as the risk of encountering unexpected geological conditions that may result
in
cave-ins and flooding of mine areas. Our insurance may not sufficiently cover
an
unexpected natural or operating disaster.
On
October 9, 2003, a slippage of material occurred in a section of the Grasberg
open pit, resulting in eight fatalities. On December 12, 2003, a debris flow
involving a relatively small amount of loose material occurred in the same
section of the open pit resulting in only minor property damage. All material
involved in the affected mining areas was removed. The events caused us to
alter
our short-term mine sequencing plans, which adversely affected our 2003 and
2004
production. While we resumed normal production activities in the second quarter
of 2004, no assurance can be given that similar events will not occur in the
future.
On
March
23, 2006, a mud/topsoil slide involving approximately 75,000 metric tons of
material occurred from a mountain ridge above service facilities supporting
PT
Freeport Indonesia’s mining facilities. Regrettably, three contract workers were
fatally injured in the event. The material damaged a mess hall and an adjacent
area. As a result of investigations by PT Freeport Indonesia and the Indonesian
Department of Energy and Mineral Resources, we conducted geotechnical studies
to
identify any potential hazards to facilities from slides. The existing early
warning system for potential slides, based upon rainfall and other factors,
has
also been expanded. PT Freeport Indonesia recorded a charge of $1.9 million
($1.0 million to net income or less than $0.01 per diluted share) in the first
quarter of 2006 for damages related to this event. The event did not directly
involve operations within the Grasberg open-pit mine or PT Freeport Indonesia’s
milling operations.
31
The
terrorist attacks in the United States on September 11, 2001, subsequent attacks
in Indonesia and the potential for additional future terrorist acts and other
recent events have created economic and political uncertainties that could
materially and adversely affect our business and the prices of our
securities.
On
August
31, 2002, three people were killed and 11 others were wounded in an ambush
by a
group of assailants. The assailants shot at several vehicles transporting
international contract teachers from our school in Tembagapura, their family
members, and other contractors to PT Freeport Indonesia on the road near
Tembagapura, the mining town where the majority of PT Freeport
Indonesia’s
personnel reside. We, along with the U.S. government, the central Indonesian
government, the Papuan provincial and local governments, and leaders of the
local people residing in the area of our operations condemned the attack.
Indonesian authorities and the U.S. FBI investigated the incident, which
resulted in the U.S. indictment of an alleged operational commander of the
Free
Papua Movement/National Freedom Force. In January 2006, Indonesian Police,
accompanied by FBI agents, arrested the alleged operational commander in the
Free Papua Movement/National Freedom Force and 11 other Papuans. In November
2006, verdicts and sentencing were announced for seven of the accused in the
August 2002 shooting, including a life sentence for the confessed leader of
the
attack.
On
October 12, 2002, a bombing killed 202 people in the Indonesian province of
Bali, which is 1,500 miles west of our mining and milling operations. Indonesian
authorities arrested 35 people in connection with this bombing and 29 of those
arrested have been tried and convicted. On August 5, 2003, 12 people were killed
and over 100 others were injured by a car bomb detonated outside of the JW
Marriott Hotel in Jakarta, Indonesia. On September 9, 2004, 11 people were
killed and over 200 others injured by a car bomb detonated in front of the
Australian embassy in Jakarta. On October 1, 2005, three suicide bombers killed
19 people and wounded over 100 others in Bali. The same international terrorist
organizations are suspected in each of these incidents. In November 2005,
Indonesian Police raided a house in East Java that resulted in the death of
other accused terrorists linked to the bombings discussed above. Our mining
and
milling operations were not interrupted by these incidents but our corporate
office in Jakarta had to relocate for several months following the bombing
in
front of the Australian embassy.
We
cannot
predict whether there will be additional incidents similar to the recent
shooting or bombings. If there were to be additional separatist, terrorist
or
other violence in Indonesia, it could materially and adversely affect our
business and profitability in ways that we cannot predict at this
time.
Terrorist
attacks and other events have caused uncertainty in the world’s
financial and insurance markets and may significantly increase global political,
economic and social instability, including in Indonesia. In addition to the
Bali, JW Marriott Hotel and Australian embassy bombings, there have been
anti-American demonstrations in certain sections of Indonesia reportedly led
by
radical Islamic activists. Radical activists have also threatened to attack
foreign interests and have called for the expulsion of U.S. and British citizens
and companies from Indonesia.
It
is
possible that further acts of terrorism may be directed against the U.S.
domestically or abroad, and such acts could be directed against properties
and
personnel of companies such as ours. The attacks and the resulting economic
and
political uncertainties, including the potential for further terrorist acts,
have negatively impacted insurance markets. Moreover, while our property and
business interruption insurance covers damages to insured property directly
caused by terrorism, this insurance does not cover damages and losses caused
by
war. Terrorism and war developments may materially and adversely affect our
business and profitability and the prices of our securities in ways that we
cannot predict at this time.
Our
profitability can vary significantly with fluctuations in the market prices
of
copper and gold.
Our
revenues are derived primarily from the sale of copper concentrates, which
also
contain significant quantities of gold and silver, and from the sale of copper
cathodes and anodes. Although we sell most of our copper concentrates under
long-term contracts, the selling price is based on world metal prices at or
near
the time of shipment and delivery.
During
2006, the daily closing prices on the London spot market ranged from $2.06
to
$3.99 per pound for copper and $521 to $726 per ounce for gold. During 2005,
the
daily closing prices on the London spot market ranged from $1.39 to $2.11 per
pound for copper and $411 to $538 per ounce for gold.
World
copper prices have historically fluctuated widely and are affected by numerous
factors beyond our control, including:
32
| · |
the
strength of the U.S. economy and the economies of other industrialized
and
developing nations, including China, which has become the largest
consumer
of refined copper in the world;
|
| · |
available
supplies of copper from mine production and
inventories;
|
| · |
sales
by holders and producers of copper;
|
| · |
demand
for industrial products containing
copper;
|
| · |
investment
activity, including speculation, in copper as a
commodity;
|
| · |
the
availability and cost of substitute materials;
and
|
| · |
currency
exchange fluctuations, including the relative strength of the U.S.
dollar.
|
World
gold prices also have historically fluctuated widely and are affected by
numerous factors beyond our control, including:
| · |
the
strength of the U.S. economy and the economies of other industrialized
and
developing nations, including
China;
|
| · |
global
or regional political or economic
crises;
|
| · |
the
relative strength of the U.S. dollar and other
currencies;
|
| · |
expectations
with respect to the rate of
inflation;
|
| · |
interest
rates;
|
| · |
purchases
and sales of gold by central banks and other
holders;
|
| · |
demand
for jewelry containing gold; and
|
| · |
investment
activity, including speculation, in gold as a
commodity.
|
Any
material decrease in market prices of copper or gold would materially and
adversely affect our results of operations and financial condition. See our
2006
Annual Report incorporated herein by reference for an analysis of the effect
on
our revenues and net income of changes in copper and gold prices.
Our
Contracts of Work are subject to termination if we do not comply with our
contractual obligations, and if a dispute arises, we may have to submit to
the
jurisdiction of a foreign court or arbitration panel.
PT
Freeport Indonesia’s
Contracts of Work and other Contracts of Work in which we have an interest
were
entered into under Indonesia’s
1967
Foreign Capital Investment Law, which provides guarantees of remittance rights
and protection against nationalization. Our Contracts of Work can be terminated
by the Government of Indonesia if we do not satisfy our contractual obligations,
which include the payment of royalties and taxes to the government and the
satisfaction of certain mining, environmental, safety and health
requirements.
At
times,
certain government officials and others in Indonesia have questioned the
validity of contracts entered into by the Government of Indonesia prior to
May
1998 (i.e., during the Suharto regime which lasted over 30 years), including
PT
Freeport Indonesia’s Contract of Work, which was signed in December 1991. We
cannot assure you that the validity of, or their compliance with, the Contracts
of Work will not be challenged for political or other reasons. PT Freeport
Indonesia’s Contract of Work and our other Contracts of Work require that
disputes with the Indonesian government be submitted to international
arbitration. Notwithstanding that provision, if a dispute arises under the
Contracts of Work, we face the risk of having to submit to the jurisdiction
of a
foreign court or arbitration panel, and if we prevail in such a dispute, we
will
face the additional risk of having to enforce the judgment of a foreign court
or
arbitration panel against Indonesia within its own territory.
33
Indonesian
government officials have periodically undertaken reviews regarding our
compliance with Indonesian environmental laws and regulations and the terms
of
the Contracts of Work. In 2006, the Government of Indonesia created a joint
team
for “Periodic Evaluation on Implementation of the PT-FI Contract of Work (COW)”
to conduct a periodic evaluation every five years. The team consists of five
working groups, whose members are from relevant ministries or agencies, covering
production, state revenues, community development, environmental issues and
security issues. We have conducted numerous working meetings with these groups.
While we believe that we comply with the Contract of Work in all material
respects, we cannot assure you that the report will conclude that we are
complying with all of the provisions of PT Freeport Indonesia’s Contract of
Work. Separately, the Indonesian House of Representatives created a working
committee on PT Freeport Indonesia. Members of this group have also visited
our
operations and held a number of hearings in Jakarta. We will continue to work
with these groups to respond to their questions about our operations and our
compliance with PT Freeport Indonesia’s Contract of Work.
Any
suspension of required activities under our Contracts of Work requires the
consent of the Indonesian government.
Our
Contracts of Work permit us to suspend certain contractually required
activities, including exploration, for a period of one year by making a written
request to the Indonesian government. These requests are subject to the approval
of the Indonesian government and are renewable annually. If we do not request
a
suspension or are denied a suspension, then we are required to continue our
activities under the Contract of Work or potentially be declared in default.
Moreover, if a suspension continues for more than one year for reasons other
than force majeure and the Indonesian government has not approved such
continuation, then the government would be entitled to declare a default under
the Contract of Work.
We
suspended our field exploration activities outside of Block A in recent years
because of safety and security issues and regulatory uncertainty relating to
a
possible conflict between our mining and exploration rights in certain forest
areas and an Indonesian Forestry law enacted in 1999 prohibiting open-pit mining
in forest preservation areas. In 2001, we requested and received from the
Government of Indonesia, formal temporary suspensions of our obligations under
the Contracts of Work in all areas outside of Block A. Recent Indonesian
legislation permits open-pit mining in PT Freeport Indonesia’s
Block B
area, subject to certain requirements. Following an assessment of these
requirements and a review of security issues, we plan to resume exploration
activities in certain prospective Contract of Work areas outside of Block A
in
2007.
Our
mining operations create difficult and costly environmental challenges, and
future changes in environmental laws, or unanticipated environmental impacts
from our operations, could require us to incur increased
costs.
Mining
operations on the scale of our operations in Papua involve significant
environmental risks and challenges. Our primary challenge is to dispose of
the
large amount of crushed and ground rock material, called tailings, that results
from the process by which we physically separate the copper-, gold- and
silver-bearing materials from the ore that we mine. Our tailings management
plan
uses the river system near our mine to transport the tailings to the lowlands
where the tailings and natural sediments are deposited in a controlled area
contained within a levee system that will be revegetated. We incurred aggregate
costs relating to tailings management of $12.8 million in 2006, $8.7 million
in
2005 and $11.8 million in 2004.
Another
major environmental challenge is managing overburden, which is the rock that
must be moved aside in the mining process in order to reach the ore. In the
presence of air, water and naturally occurring bacteria, some overburden can
cause acid rock drainage, or acidic water containing dissolved metals which,
if
not properly managed, can have a negative impact on the
environment.
Certain
Indonesian governmental officials have from time to time raised issues with
respect to our tailings and overburden management plans, including a suggestion
that we implement a pipeline system rather than our river deposition system
for
tailings disposal. Because our mining operations are remotely located in steep
mountainous terrain and in an active seismic area, a pipeline system would
be
costly, difficult to construct and maintain, more prone to catastrophic failure
and involve significant potentially adverse environmental issues. An external
panel of qualified experts, as directed in our 300K ANDAL (the Environmental
Impact Assessment document submitted to the Indonesian government and approved
in 1997), conducted detailed reviews and analyses of a number of technical
studies. They concluded that all significant impacts identified were in line
with the 300K ANDAL
34
predictions,
and that the current system of riverine tailings management was appropriate
considering all site-specific factors. For these reasons, we do not believe
that
a pipeline system is necessary or practical.
In
March
2006, the Indonesian Ministry of Environment announced the preliminary results
of its PROPER environmental management audit, acknowledging the effectiveness
of
PT Freeport Indonesia’s environmental management practices in some areas while
making several suggestions for improvement in others. We are working with the
Ministry of Environment to address the issues raised as it completes the audit
process.
We
anticipate that we will continue to spend significant financial and managerial
resources on environmental compliance. In addition, changes in Indonesian
environmental laws or unanticipated environmental impacts from our operations
could require us to incur significant unanticipated costs.
The
volume and grade of the reserves we recover and our rates of production may
be
more or less than we anticipate.
Our
reserve amounts are determined in accordance with established mining industry
practices and standards, but are estimates of the mineral deposits that can
be
recovered economically and legally based on currently available data. Our ore
bodies may not conform to standard geological expectations, and estimates may
change as new data become available. Because ore bodies do not contain uniform
grades of minerals, our metal recovery rates will vary from time to time, which
will result in variations in the volumes of minerals that we can sell from
period to period. Some of our reserves may become unprofitable to develop if
there are unfavorable long-term market price fluctuations in copper and gold,
or
if there are significant increases in our operating or capital costs. In
addition, our exploration programs may not result in the discovery of additional
mineral deposits that we can mine profitably.
We
do not expect to mine all of our reserves before the initial term of our
Contract of Work expires.
All
of
our current proven and probable reserves, including the Grasberg deposit, are
located in Block A. The initial term of our Contract of Work covering these
reserves expires at the end of 2021. We can extend this term for two successive
10-year periods, subject to the approval of the Indonesian government, which
under our Contract of Work cannot be withheld or delayed unreasonably. Our
reserves reflect estimates of minerals that can be recovered through the end
of
2041 (i.e.,
through the expiration of the two 10-year extensions) and our current mine
plan
has been developed, and our operations are based on the assumption that we
will
receive the two 10-year extensions. As a result, we will not mine all of our
reserves during the current term of our Contract of Work, and there can be
no
assurance that the Indonesian government will approve the extensions. Prior
to
the end of 2021, we expect to mine approximately 39 percent of aggregate proven
and probable recoverable ore at December 31, 2006, representing approximately
45
percent of PT Freeport Indonesia’s
share of
recoverable copper reserves and approximately 59 percent of its share of
recoverable gold reserves.
Increased
energy and other production costs could reduce our profitability and cash
flow.
We
have
experienced significant increases in our production costs in recent years
primarily as a result of higher energy costs and costs of other consumables,
higher mining costs and milling rates and higher labor costs. Aggregate energy
costs, which approximated 22 percent of our 2006 production costs, primarily
include purchases of diesel fuel and coal. Diesel prices have nearly tripled
since 2002 and our coal costs are approximately 40 percent higher. The costs
of
other consumables, including steel and reagents, also have increased. Continued
increases in the cost of diesel, coal and other commodities that we consume
or
use in our operations could adversely affect our profits and cash
flow.
Our
business is subject to operational risks.
Mines
by
their nature are subject to many operational risks and factors that are
generally outside of our control and could impact its business, operating
results and cash flows. These operational risks and factors include, but are
not
limited to:
| · |
unanticipated
ground and water conditions and adverse claims to water
rights;
|
| · |
geological
problems, including earthquakes and other natural
disasters;
|
35
| · |
metallurgical
and other processing problems;
|
| · |
the
occurrence of unusual weather or operating conditions and other force
majeure events;
|
| · |
lower
than expected ore grades or recovery
rates;
|
| · |
accidents;
|
| · |
delays
in the receipt of or failure to receive necessary government
permits;
|
| · |
the
results of litigation, including appeals of agency
decisions;
|
| · |
uncertainty
of exploration and development;
|
| · |
delays
in transportation;
|
| · |
labor
disputes;
|
| · |
inability
to obtain satisfactory insurance
coverage;
|
| · |
unavailability
of materials and equipment; and
|
| · |
the
failure of equipment or processes to operate in accordance with
specifications or expectations.
|
Movements
in foreign currency exchange rates or interest rates could negatively affect
our
operating results.
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. As a result,
we
are generally less profitable when the U.S. dollar weakens in relation to these
foreign currencies.
The
rupiah/U.S. dollar daily closing exchange rate ranged from 8,613 to 9,881 rupiah
per U.S. dollar during 2006, and on December 29, 2006, the closing exchange
rate
was 8,989 rupiah per U.S. dollar compared with 9,825 rupiah per U.S. dollar
on
December 30, 2005. During 2006, the Australian dollar/U.S. dollar daily closing
exchange rate ranged from $0.70 to $0.79 per Australian dollar and the euro/U.S.
dollar daily closing exchange rate ranged from $1.18 to $1.34 per euro. On
December 29, 2006, the closing exchange rates were $0.79 per Australian dollar
and $1.32 per euro, compared with the December 30, 2005 closing exchange rates
of $0.73 per Australian dollar and $1.18 per euro.
From
time
to time, we have in the past and may in the future implement currency hedges
intended to reduce our exposure to changes in foreign currency exchange rates.
However, our hedging strategies may not be successful, and any of our unhedged
foreign exchange payment requirements will continue to be subject to market
fluctuations. In addition, our bank credit facilities are based on fluctuating
interest rates. Accordingly, an increase in interest rates could adversely
affect our results of operations and financial condition.
Because
we are a holding company, our ability to pay our debts depends upon the ability
of our subsidiaries to pay us dividends and to advance us funds. In addition,
our ability to participate in any distribution of our subsidiaries’ assets is
generally subject to the prior claims of the subsidiaries’
creditors.
Because
we conduct business primarily through PT Freeport Indonesia, our major
subsidiary, and other subsidiaries, our ability to pay our debts depends upon
the earnings and cash flow of PT Freeport Indonesia and our other subsidiaries
and their ability to pay us dividends and to advance us funds. Contractual
and
legal restrictions applicable to our subsidiaries could also limit our ability
to obtain cash from them. Our rights to participate in any distribution of
our
subsidiaries’ assets upon their liquidation, reorganization or insolvency would
generally be subject to the prior claims of the subsidiaries’ creditors,
including any trade creditors and preferred shareholders.
36
Risk
Factors Associated with the Proposed Acquisition of Phelps
Dodge.
Shareholders
cannot be sure of the market value of our shares that will be issued in the
transaction.
Upon
the
completion of the transaction, each Phelps Dodge common share outstanding
immediately prior to the transaction will be converted into the right to receive
a combination of 0.67 of a share of our common stock and $88.00 in cash, without
interest. Because the exchange ratio for the stock consideration is fixed in
the
merger agreement, the market value of our common stock issued in the transaction
will depend upon the market price of a share of our common stock upon the
completion of the transaction. This market value will fluctuate prior to the
completion of the transaction and therefore may be different at the time the
transaction is completed from what it was at the time the merger agreement
was
signed, the date of this document or at the time of the shareholder meetings.
Accordingly, shareholders cannot be sure of the market value of our common
stock
that will be issued in the transaction or the market value of our common stock
at any time after the transaction.
We
may not be able to obtain the financing needed for the transaction on favorable
terms.
We
have
received commitments from certain lenders to provide financing of up to $17.5
billion in the aggregate for the transaction. However, if the proceeds of this
financing are unavailable for any reason, we will be forced to obtain an
alternate source of financing, which may be more expensive for us, may have
an
adverse impact on the combined company’s capital structure or may be
unavailable.
The
combined company will be highly leveraged, and its high level of debt may limit
its financial and operating flexibility.
We
will
be incurring significant debt to consummate the transaction and to refinance
existing debt. It is expected that we will utilize much of the financing to
be
made available pursuant to the financing commitments discussed above to fund
a
portion of the cash consideration payable to the Phelps Dodge shareholders
in
the transaction. The combined company, on a pro forma basis, will have
approximately $10.0 billion of debt under its new senior secured term credit
facilities, and either $6.0 billion in aggregate principal amount of new
unsecured senior notes or a $6.0 billion bridge loan (or some combination of
the
two). In addition, approximately $1.6 billion of existing debt of the combined
companies will remain outstanding following the transaction. The combined
company is also expected to have a new $1.5 billion senior secured revolving
credit facility with at least $1.0 billion of availability.
This
debt
could limit the combined company’s financial and operating flexibility,
including by requiring the combined company to dedicate a substantial portion
of
its cash flows from operations and the proceeds of equity issuances to the
repayment of its debt and making the combined company more vulnerable to
economic downturns. Additionally, the combined company’s ability to satisfy
financial tests or utilize third-party guarantees for financial assurance with
respect to reclamation obligations may be adversely impacted as a result of
the
increase in debt.
Upon
consummation of the transaction, we and all of our restricted subsidiaries
must
comply with various covenants contained in our credit agreement. These covenants
will, among other things, limit the ability of the respective restricted
entities to:
| · |
incur
additional debt or liens or enter into sale/leaseback
transactions;
|
| · |
make
payments in respect of, or redeem or acquire, debt or equity issued
by us,
including the payment of dividends on common
stock;
|
| · |
sell
assets or enter into mergers or
acquisitions;
|
| · |
make
loans or investments; or
|
| · |
enter
into certain hedging transactions.
|
In
addition, the combined company will be subject to financial
covenants.
37
Declines
in the market prices of copper, gold and molybdenum could adversely affect
the
combined company’s earnings and cash flows, and therefore its ability to repay
its debt.
The
earnings and cash flows of the combined company will be affected significantly
by the market prices of copper and, to a lesser extent, gold and molybdenum.
The
world market prices of these commodities have fluctuated historically and will
be affected by numerous factors beyond the control of the combined company.
Many
financial analysts who follow the metals markets are predicting that copper
prices will decline significantly from their current, historically high, levels
over the next few years. A decline in the world market price of one or more
of
these commodities could adversely affect the combined company’s earnings and
cash flows and therefore could adversely affect its ability to repay its debt
and depress its stock price.
The
combined company will operate on a broader geographical scope than either we
or
Phelps Dodge has operated individually, and will be exposed to a broader range
of political, social and geographic risks than either company has been exposed
to on an individual basis.
Phelps
Dodge conducts mining operations in the United States, Chile and Peru and has
a
significant development project in the Democratic Republic of the Congo (which
is expected to begin production by 2009). Accordingly, the business of the
combined company may be adversely affected by political, economic and social
uncertainties in these countries, in addition to the usual risks associated
with
conducting business in a foreign country. Because we have no significant
operations in any of these countries, these risks are different from and in
addition to those to which our business has historically been
exposed.
In
addition, all of the combined company’s revenues and a significant portion of
its costs will be denominated in U.S. dollars; however, some of its costs,
and
certain of its asset and liability accounts, will be denominated in Indonesian
rupiah, Chilean pesos, Peruvian nuevos soles and other foreign currencies.
As a
result, the combined company will be generally less profitable when the U.S.
dollar weakens in relation to these foreign currencies. From time to time,
the
combined company may implement currency hedges intended to reduce its exposure
to changes in foreign currency exchange rates. However, its hedging strategies
may not be successful, and any of its unhedged foreign exchange payments will
continue to be subject to market fluctuations.
The
impact of purchase accounting could adversely affect the combined company’s
earnings.
Purchase
accounting will require the combined company to allocate the price being paid
in
the transaction to Phelps Dodge’s assets on the basis of their fair values at
the time of the closing of the transaction. Those adjustments are expected
to
result in significant increases in the carrying values of certain acquired
assets, including, based on preliminary estimates, increases of $4.0 billion
in
metal inventories and stockpiles and $11.9 billion in property, plant, equipment
and development costs, as reflected in the unaudited pro forma condensed
combined balance sheet contained in Amendment No. 2 to our Form S-4 filed with
the Securities and Exchange Commission on February 12, 2007. The increased
value
of property, plant, equipment and development costs will increase the combined
company’s depreciation expense, which will reduce reported earnings but have no
effect on cash flows.
A
decline
in the market price of commodities produced by the combined company could result
in a write down of metal inventories and stockpiles to recoverable values and
the recognition of impairment charges to property, plant, equipment and
development costs. In addition, the increased value of metal inventories and
stockpiles would cause the combined company’s cost of goods sold to increase in
the year the metal in those inventories and stockpiles are recognized as sold.
If the combined company changes the historical method of accounting for Phelps
Dodge’s metal inventories and stockpiles from the current method of last-in,
first-out, this increase in the combined company’s cost of goods would occur in
the near term. These factors would have the effect of reducing reported
earnings, although they would have no effect on cash flows.
In
addition, the preliminary estimate of goodwill associated with the transaction
is approximately $8.5 billion, as reflected in the unaudited pro forma condensed
combined balance sheet contained in Amendment No. 2 to our Form S-4 filed with
the Securities and Exchange Commission on February 12, 2007. The combined
company will annually assess this amount for impairment. If the combined company
concludes that the goodwill associated with the transaction is impaired, the
amount of the impairment would reduce the combined company’s reported earnings
but would have no effect on cash flows.
We
may
experience difficulties in integrating our business with Phelps Dodge’s
business, which could cause the combined company to fail to realize many of
the
anticipated potential benefits of the transaction.
38
We
have
entered into the merger agreement because we believe that the transaction will
be beneficial to our company, Phelps Dodge and our respective shareholders.
Achieving the anticipated benefits of the transaction will depend in part upon
whether our two companies integrate our businesses in an efficient and effective
manner. We may not be able to accomplish this integration process smoothly
or
successfully. The difficulties of combining the two companies’ businesses
potentially will include, among other things:
| · |
the
necessity of coordinating geographically separated organizations
and
addressing possible differences in corporate cultures and management
philosophies, and the integration of certain operations following
the
transaction will require the dedication of significant management
resources, which may temporarily distract management’s attention from the
day-to-day business of the combined
company;
|
| · |
any
inability of our management to integrate successfully the operations
of
our two companies or to adapt to the addition of lines of business
in
which we have not historically engaged;
and
|
| · |
any
inability of our management to cause best practices to be applied
to the
combined company’s businesses.
|
An
inability to realize the full extent of the anticipated benefits of the
transaction, as well as any delays encountered in the transition process, could
have an adverse effect upon the revenues, level of expenses and operating
results of the combined company, which may affect the value of our common stock
after the closing of the transaction.
The
combined company will depend on its senior management team and other key
employees, and the loss of any of these employees could adversely affect the
combined company’s business.
The
success of the combined company after the transaction will depend in part upon
our ability to retain senior management and other key employees of both
companies. Competition for qualified personnel can be very intense. In addition,
senior management and key employees may depart because of issues relating to
the
uncertainty or difficulty associated with the integration of the companies
or a
desire not to remain with the combined company. Accordingly, no assurance can
be
given that we will be able to retain senior management and key employees to
the
same extent that they have been able to do so in the past.
Resales
of shares of our common stock following the transaction and future issuances
of
equity or equity-linked securities by us may cause the market price of shares
of
our common stock to fall.
As
of
February 12, 2007, we had approximately 197 million shares of common stock
outstanding, approximately 23 million shares authorized for issuance upon
conversion of preferred stock and convertible notes, and approximately six
million shares authorized for issuance upon the exercise of outstanding options
or the vesting of restricted stock units. We expect to issue approximately
137
million shares of our common stock in connection with the transaction. The
issuance of these new shares and the sale of additional shares that may become
eligible for sale in the public market from time to time upon the exercise
of
options (including options that will replace existing Phelps Dodge options)
could have the effect of depressing the market price for shares of our common
stock. Also, because many Phelps Dodge shareholders are also our shareholders,
some may decide to sell rather than hold the additional shares of our common
stock they will receive in the transaction. The sale of those shares could
also
have the effect of depressing the market price for shares of our common
stock.
Subject
to market conditions, we intend to consider opportunities to reduce debt of
the
combined company shortly following the closing of the transaction through
issuances of equity and equity-linked securities. The issuance of those
securities could also have the effect of depressing the market price for the
shares of our common stock.
The
trading price of shares of our common stock following the transaction may be
affected by factors different from those affecting the trading price of Phelps
Dodge common shares and shares of our common stock prior to the
transaction.
Following
completion of the transaction, the results of operations of the combined
company, as well as the trading price of our common stock, may be affected
by
factors different from those currently affecting Phelps Dodge’s results of
operations and the trading price of Phelps Dodge common shares.
39
In
addition, the trading price of shares of our common stock following the
transaction may be affected by factors different from those affecting the
trading price of shares of our common stock prior to the transaction. Following
the transaction, we will have significantly greater indebtedness and will derive
a significantly smaller proportion of our revenues from gold. Current
shareholders may decide to sell their shares as a result of those changes,
which
could have the effect of depressing the market price of shares of our common
stock.
Not
applicable.
We
are
involved from time to time in various legal proceedings of a character normally
incident to the ordinary course of our business. We believe that potential
liability in such proceedings would not have a material adverse effect on our
financial condition or results of operations. We maintain liability insurance
to
cover some, but not all, potential liabilities normally incident to the ordinary
course of our business as well as other insurance coverage customary in our
business, with coverage limits that we deem prudent.
As
reported in January 2006, we are responding to requests from governmental
authorities in the United States and Indonesia for information about PT Freeport
Indonesia, primarily relating to PT Freeport Indonesia’s support of Indonesian
security institutions. As described elsewhere in this Form 10-K under the
heading “Security Matters,” we provide support to assist security institutions
deployed and directed by the Government of Indonesia with infrastructure,
logistics and the hardship elements of posting in Papua and our practices adhere
to the joint U.S. State Department-British Foreign Office Voluntary Principles
on Security and Human Rights. We are cooperating with these
requests.
The
company has been named as a defendant in one of three actions brought on behalf
of a purported class of all of the shareholders of Phelps Dodge Corporation.
We
have been named as a defendant in Knisley
v. Phelps Dodge Corp. et al., (No. CV2006-053422) filed
in
the Superior Court of the state of Arizona, county of Maricopa. In all three
class actions, the plaintiffs allege breaches of fiduciary duties by the Phelps
Dodge board of directors in connection with the merger transaction. The
complaints allege, among other things, that the named defendants engaged in
self-dealing, obtained personal benefits for themselves not shared equally
by
Phelps Dodge shareholders and failed to disclose all material information
concerning the transaction to Phelps Dodge shareholders. In Knisley,
the
plaintiffs also allege that we aided and abetted such alleged violations of
fiduciary duties. The plaintiffs seek, among other things, injunctive relief
barring consummation of the transaction and directing that the defendants obtain
a transaction which is in the best interests of Phelps Dodge shareholders.
We,
as well as Phelps Dodge and the other named defendants, believe the allegations
are without merit and intend to vigorously defend the actions.
Not
applicable.
Executive
Officers of the Registrant.
Certain
information as of February 12, 2007, about our executive officers, including
their position or office with FCX, PT Freeport Indonesia and Atlantic Copper,
is
set forth in the following table and accompanying text:
|
Name
|
Age
|
Position
or Office
|
||
|
James
R. Moffett
|
68
|
Chairman
of the Board of FCX. President Commissioner of
|
||
|
PT
Freeport Indonesia.
|
||||
|
Richard
C. Adkerson
|
60
|
Director,
President and Chief Executive Officer of FCX.
|
||
|
Director
and Executive Vice President of PT Freeport
|
||||
|
Indonesia.
Chairman of the Board of Directors of
|
||||
|
Atlantic
Copper.
|
40
|
Name
|
Age
|
Position
or Office
|
||
|
Michael
J. Arnold
|
54
|
Chief
Administrative Officer of FCX. Director,
|
||
|
Executive
Vice President and Chief Financial Officer of
|
||||
|
PT
Freeport Indonesia.
|
||||
|
Mark
J. Johnson
|
47
|
Senior
Vice President and Chief Operating Officer of FCX.
|
||
|
Armando
Mahler
|
51
|
President
Director and General Manager of
|
||
|
PT
Freeport Indonesia.
|
||||
|
Kathleen
L. Quirk
|
43
|
Senior
Vice President, Chief Financial Officer and
|
||
|
Treasurer
of FCX. Commissioner of PT Freeport Indonesia.
|
||||
|
Director
of Atlantic Copper.
|
James
R. Moffett
has
served as Chairman of the Board of FCX since 1992. Mr. Moffett previously served
as the Chief Executive Officer of FCX from July 1995 until December 2003. He
is
also President Commissioner of PT Freeport Indonesia and Co-Chairman of the
Board of McMoRan Exploration Co. (McMoRan).
Richard
C. Adkerson
has
served as FCX’s
President since April 1997, Chief Executive Officer since December 2003, and
a
director since October 2006. Mr. Adkerson previously served as FCX’s
Chief
Financial Officer from October 2000 to December 2003. Mr. Adkerson is also
a
director and Executive Vice President of PT Freeport Indonesia, Chairman of
the
Board of Directors of Atlantic Copper, and Co-Chairman of the Board of McMoRan.
From November 1998 to February 2004, he also served as President and Chief
Executive Officer of McMoRan.
Michael
J. Arnold has
served as the Chief
Administrative Officer of FCX since December 2003. He also served as a director
and Executive Vice President of PT Freeport Indonesia since May
1998.
Mark
J. Johnson
has
served as the Senior Vice President and Chief Operating Officer of FCX since
December 2003 and as Vice President of PT Freeport Indonesia since February
2002. He previously served as
Vice
President of FCX from July 2001 to December 2003.
Armando
Mahler
has
served as President Director and General Manager of PT Freeport Indonesia since
June 2006. He previously served as Executive Vice President of PT Freeport
Indonesia from September 2004 to June 2006 and as Vice President of PT Freeport
Indonesia from February 2002 to September 2004.
Kathleen
L. Quirk
has
served as FCX’s Senior Vice President, Chief Financial Officer and Treasurer
since December 2003. She previously served as the Vice President and Treasurer
of FCX from February 2000 to December 2003, and as Vice President from February
1999 to February 2000. Ms. Quirk has also served as a Commissioner of PT
Freeport Indonesia since April 2000, as the Senior Vice President and Treasurer
of McMoRan since April 2002 and as Vice President and Treasurer of McMoRan
from
January 2000 to April 2002.
Unregistered
Sales of Equity Securities
None.
Class
B Common Shares
Our
Class
B common shares trade on the New York Stock Exchange (NYSE) under the symbol
“FCX.” The FCX share price is reported daily in the financial press under “FMCG”
in most listings of NYSE securities. At year-end 2006, the number of holders
of
record of our Class B common shares was 8,105. NYSE composite tape Class B
common share price ranges during 2006 and 2005 follow:
41
|
2006
|
2005
|
|||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||
|
First
Quarter
|
$
|
65.00
|
$
|
47.11
|
$
|
43.90
|
$
|
35.12
|
||||
|
Second
Quarter
|
72.20
|
43.10
|
40.31
|
31.52
|
||||||||
|
Third
Quarter
|
62.29
|
47.58
|
49.48
|
37.12
|
||||||||
|
Fourth
Quarter
|
63.70
|
47.60
|
56.35
|
43.41
|
||||||||
As
of
February 12, 2007, there were approximately 8,065 holders of record of our
Class
B common stock.
Common
Share Dividends
In
February 2003, the Board of Directors initiated a cash dividend for FCX’s common
stock of $0.09 per share quarterly beginning May 1, 2003. In October 2003,
the
Board authorized an increase in the cash dividend to an annual rate of $0.80
per
share and increased the dividend again in October 2004 to an annual rate of
$1.00 per share. In December 2004, the Board authorized a supplemental common
stock dividend of $0.25 per share, and during 2005, the Board authorized three
supplemental dividends of $0.50 per share. In November 2005, the Board
authorized an increase in our annual common stock dividend to $1.25 per share
(from $1.00 per share) payable quarterly ($0.3125 per share). In 2006, the
Board
authorized four supplemental dividends totaling $3.50 per share.
Below
is
a summary of the common stock cash dividends declared and paid during 2006
and
2005:
|
2006
|
2005
|
||||||||||
|
Amount
Per
Share
|
Record
Date
|
Payment
Date
|
Amount
Per
Share
|
Record
Date
|
Payment
Date
|
||||||
|
First
Quarter
|
$0.3125
|
Jan.
17, 2006
|
Feb.
1, 2006
|
$0.25
|
Jan.
14, 2005
|
Feb.
1, 2005
|
|||||
|
Supplemental
dividend
|
0.50
|
Mar.
15, 2006
|
Mar.
31, 2006
|
0.50
|
Mar.
15, 2005
|
Mar.
31, 2005
|
|||||
|
Second
Quarter
|
0.3125
|
Apr.
17, 2006
|
May
1, 2006
|
0.25
|
Apr.
15, 2005
|
May
1, 2005
|
|||||
|
Supplemental
dividend
|
0.75
|
June
15, 2006
|
June
30, 2006
|
N/A
|
N/A
|
N/A
|
|||||
|
Third
Quarter
|
0.3125
|
July
17, 2006
|
Aug.
1, 2006
|
0.25
|
July
15, 2005
|
Aug.
1, 2005
|
|||||
|
Supplemental
dividend
|
0.75
|
Sept.
14, 2006
|
Sept.
29, 2006
|
0.50
|
Sept.
15, 2005
|
Sept.
30, 2005
|
|||||
|
Fourth
Quarter
|
0.3125
|
Oct.
16, 2006
|
Nov.
1, 2006
|
0.25
|
Oct.
14, 2005
|
Nov.
1, 2005
|
|||||
|
Supplemental
dividend
|
1.50
|
Dec.
14, 2006
|
Dec.
29, 2006
|
0.50
|
Dec.
15, 2005
|
Dec.
30, 2005
|
|||||
The
declaration and payment of dividends is at the discretion of our Board and
will
depend on our financial results, cash requirements, future prospects, the
outcome of our proposed acquisition of Phelps Dodge and other factors deemed
relevant by the Board. In addition, payment of dividends on our common stock
and
purchases of common stock are subject to limitations under our 10⅛% Senior Notes
and 6⅞% Senior Notes and, in certain circumstances, our credit
facility.
Issuer
Purchases of Equity Securities
In
October 2003, our Board of Directors approved a new open market share purchase
program for up to 20 million shares, which replaced our previous program. The
program does not have an expiration date. No shares were purchased during the
three-month period ended December 31, 2006, and 12.2 million shares remain
available for purchase.
The
information set forth under the caption “Selected Financial and Operating Data”
of our 2006 Annual Report is incorporated herein by reference.
Our
ratio
of earnings to fixed charges was as follows for the years
presented.
|
Years
Ended December 31,
|
|||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
Ratio
of earnings to fixed charges
|
32.8x
|
15.7x
|
4.7x
|
3.9x
|
3.4x
|
|
Ratio
of earnings to fixed charges
|
|||||
|
and
preferred stock dividends
|
14.2x
|
8.1x
|
2.8x
|
3.0x
|
2.5x
|
42
For
the
ratio of earnings to fixed charges calculation, earnings consist of pre-tax
income from continuing operations before minority interests in consolidated
subsidiaries, income or loss from equity investees and fixed charges. Fixed
charges include interest and that portion of rent deemed representative of
interest. For the ratio of earnings to fixed charges and preferred stock
dividends calculation, we assumed that our preferred stock dividend requirements
were equal to the pre-tax earnings that would be required to cover those
dividend requirements. We computed those pre-tax earnings using actual tax
rates
for each year.
The
information set fourth under the caption “Management’s Discussion and Analysis”
of our 2006 Annual Report is incorporated herein by reference.
Our
financial statements and the notes thereto, the report thereon of Ernst &
Young LLP, each as set forth in our 2006 Annual Report, are incorporated
herein by reference.
Not
applicable.
(a) Evaluation
of disclosure controls and procedures.
Our
chief executive officer and chief financial officer, with the participation
of
management, have evaluated the effectiveness of our “disclosure controls and
procedures” (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of the end of the period covered by this annual report
on Form 10-K. Based on their evaluation, they have concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to FCX (including our consolidated subsidiaries) required
to be disclosed in our periodic SEC filings.
(b) Changes
in internal controls.
There
has been no change in our internal control over financial reporting that
occurred during the fourth quarter that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
(c) Management’s
annual
report on internal control over financial reporting and the report thereon
of
Ernst & Young LLP are incorporated herein by reference to our 2006 Annual
Report.
Not
applicable.
The
information set forth under the captions “Information About Director Nominees”
and “Section 16(a) Beneficial Ownership Reporting Compliance” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2007 Annual Meeting,
is incorporated herein by reference. The information required by Item 10
regarding our executive officers appears in a separately captioned heading
after
Item 4 in Part I of this report.
The
information set forth under the captions “Director Compensation” and “Executive
Officer Compensation” of our definitive Proxy Statement to be filed with the
SEC, relating to our 2007 Annual Meeting, is incorporated herein by
reference.
43
The
information set forth under the captions “Stock Ownership of Directors and
Executive Officers” and “Stock Ownership of Certain Beneficial Owners” of our
definitive Proxy Statement to be filed with the SEC, relating to our 2007 Annual
Meeting, is incorporated herein by reference.
The
information set forth under the caption “Certain Transactions” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2007 Annual Meeting,
is incorporated herein by reference.
The
information set forth under the caption “Independent Auditors” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2007 Annual Meeting,
is incorporated herein by reference.
(a)(1). Financial
Statements.
Reference
is made to Item 8 and the Index to Financial Statements appearing on page F-1
hereof.
(a)(2). Financial
Statement Schedules.
Reference
is made to the Index to Financial Statements appearing on page F-1
hereof.
(a)(3). Exhibits.
Reference
is made to the Exhibit Index beginning on page E-1 hereof.
44
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 28, 2007.
Freeport-McMoRan
Copper & Gold Inc.
By:
/s/
Richard C. Adkerson
Richard
C. Adkerson
President,
Chief Executive Officer
and
Director
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed by the following persons on behalf of the registrant in the capacities
indicated on February 28, 2007.
|
*
|
Chairman
of the Board
|
|
James
R. Moffett
|
|
|
*
|
Vice
Chairman of the Board
|
|
B.
M. Rankin, Jr.
|
|
|
/s/
Richard C. Adkerson
|
President,
Chief Executive Officer and Director
|
|
Richard
C. Adkerson
|
(Principal
Executive Officer)
|
|
/s/
Kathleen L. Quirk
|
Senior
Vice President, Chief Financial Officer and
|
|
Kathleen
L. Quirk
|
Treasurer
|
|
(Principal
Financial Officer)
|
|
|
*
|
Vice
President and Controller - Financial Reporting
|
|
C.
Donald Whitmire, Jr.
|
(Principal
Accounting Officer)
|
|
*
|
Director
|
|
Robert
J. Allison, Jr.
|
|
|
*
|
Director
|
|
Robert
A. Day
|
|
|
*
|
Director
|
|
Gerald
J. Ford
|
|
|
*
|
Director
|
|
H.
Devon Graham, Jr.
|
|
|
*
|
Director
|
|
J.
Bennett Johnston
|
|
S-1
|
*
|
Director
|
|
Bobby
Lee Lackey
|
|
|
*
|
Director
|
|
Gabrielle
K. McDonald
|
|
|
*
|
Director
|
|
J.
Stapleton Roy
|
|
|
*
|
Director
|
|
Stephen
H. Siegele
|
|
|
*
|
Director
|
|
J.
Taylor Wharton
|
|
|
By:
/s/ Richard C. Adkerson
|
|
|
Richard
C. Adkerson
|
|
|
Attorney-in-Fact
|
S-2
FREEPORT-McMoRan
COPPER & GOLD INC.
Our
financial statements and the notes thereto, and the report of Ernst & Young
LLP included in our 2006 Annual Report are incorporated herein by reference.
The
financial statements in schedule I listed below should be read in conjunction
with our financial statements included in our 2006 Annual Report incorporated
herein by reference.
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Schedule
I-Condensed Financial Information of Registrant
|
F-2
|
|
Schedule
II-Valuation and Qualifying Accounts
|
F-5
|
Schedules
other than the ones listed above have been omitted since they are either not
required, not applicable or the required information is included in the
financial statements or notes thereto.
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan
COPPER & GOLD INC.
We
have
audited the consolidated financial statements of Freeport-McMoRan Copper &
Gold Inc. (the Company) as of December 31, 2006 and 2005 and for each of the
three years in the period ended December 31, 2006, and have issued our report
thereon dated February 26, 2007. Our audits also included the schedules listed
in the index above for this Form 10-K. The schedules listed in the index above
are the responsibility of the Company’s
management. Our responsibility is to express an opinion based on our
audits.
In
our
opinion, the schedules referred to above, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in
all
material respects the information set forth therein.
Ernst
& Young LLP
New
Orleans, Louisiana
February
26, 2007
F-1
FREEPORT-McMoRan
COPPER & GOLD INC.
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE
SHEETS
|
December
31,
|
||||||
|
2006
|
2005
|
|||||
|
Assets:
|
(In
Thousands)
|
|||||
|
Cash
|
$
|
390,271
|
$
|
145,215
|
||
|
Interest
receivable
|
39
|
1,344
|
||||
|
Due
from affiliates
|
76,861
|
37,099
|
||||
|
Notes
receivable from PT Freeport Indonesia
|
-
|
179,880
|
||||
|
Note
receivable from Atlantic Copper
|
189,500
|
189,500
|
||||
|
Note
receivable from PT Puncakjaya Power
|
105,242
|
135,426
|
||||
|
Investments
in PT Freeport Indonesia and PT Indocopper Investama
|
2,219,084
|
2,355,273
|
||||
|
Investment
in Atlantic Copper
|
185,538
|
122,908
|
||||
|
Investment
in PT Puncakjaya Power
|
85,725
|
82,537
|
||||
|
Other
assets
|
119,141
|
94,622
|
||||
|
Total
assets
|
$
|
3,371,401
|
$
|
3,343,804
|
||
|
Liabilities
and Stockholders’ Equity:
|
||||||
|
Accounts
payable and accrued liabilities
|
$
|
40,954
|
$
|
40,693
|
||
|
Accrued
interest payable
|
21,239
|
31,112
|
||||
|
Long-term
debt, including current portion
|
625,156
|
1,188,391
|
||||
|
Other
long-term liabilities
|
56,629
|
51,595
|
||||
|
Deferred
income taxes
|
182,322
|
189,019
|
||||
|
Stockholders'
equity
|
2,445,101
|
1,842,994
|
||||
|
Total
liabilities and stockholders’ equity
|
$
|
3,371,401
|
$
|
3,343,804
|
||
The
footnotes to the consolidated financial statements of FCX contained in
FCX’s
2006
Annual Report to stockholders incorporated by reference are an integral part
of
these statements.
F-2
FREEPORT-McMoRan
COPPER & GOLD INC.
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS
OF INCOME
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Income
from investments in PT Freeport Indonesia and
|
|||||||||
|
PT
Indocopper Investama, net of tax provisions
|
$
|
1,560,760
|
$
|
1,270,269
|
$
|
380,418
|
|||
|
Net
income (loss) from investment in Atlantic Copper
|
71,899
|
17,842
|
(103,388
|
)
|
|||||
|
Income
from investment in PT Puncakjaya Power
|
14,092
|
15,642
|
15,712
|
||||||
|
Intercompany
charges and eliminationsa
|
113,521
|
8,368
|
88,678
|
||||||
|
General
and administrative expenses
|
(25,908
|
)
|
(19,431
|
)
|
(18,059
|
)
|
|||
|
Depreciation
and amortization
|
(12,706
|
)
|
(14,693
|
)
|
(11,324
|
)
|
|||
|
Interest
expense, net
|
(52,086
|
)
|
(115,641
|
)
|
(125,674
|
)
|
|||
|
Interest
income on notes receivable:
|
|||||||||
|
Promissory
notes
|
23,180
|
17,570
|
5,246
|
||||||
|
Gold
and silver production payment loans
|
1,316
|
b
|
9,054
|
9,037
|
|||||
|
Other
income, net
|
9,285
|
5,392
|
2,897
|
||||||
|
Gains
on sales of assets
|
945
|
6,631
|
21,281
|
||||||
|
Losses
on early extinguishment and conversion of debt
|
(31,138
|
)
|
(30,778
|
)
|
(10,176
|
)
|
|||
|
Provision
for income taxes
|
(216,651
|
)
|
(175,098
|
)
|
(52,381
|
)
|
|||
|
Net
income
|
1,456,509
|
995,127
|
202,267
|
||||||
|
Preferred
dividends
|
(60,500
|
)
|
(60,500
|
)
|
(45,491
|
)
|
|||
|
Net
income applicable to common stock
|
$
|
1,396,009
|
$
|
934,627
|
$
|
156,776
|
|||
|
a.
|
Includes
reimbursements from PT Freeport Indonesia and Rio Tinto, FCX’s
joint venture partner, totaling $94.8 million in 2006, $73.7 million
in
2005 and $94.3 million in 2004 for certain FCX stock option
exercises.
|
|
b.
|
Amount
reflects the repayment of the gold production payment loan on February
1,
2006, and the final repayment on the silver production payment loan
on
August 1, 2006.
|
The
footnotes to the consolidated financial statements of FCX contained in
FCX’s
2006
Annual Report to stockholders incorporated by reference are an integral part
of
these statements.
F-3
FREEPORT-McMoRan
COPPER & GOLD INC.
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS
OF CASH FLOWS
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Cash
flow from operating activities:
|
|||||||||
|
Net
income
|
$
|
1,456,509
|
$
|
995,127
|
$
|
202,267
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating
|
|||||||||
|
activities:
|
|||||||||
|
Income
from investments in PT Freeport Indonesia and
|
|||||||||
|
PT
Indocopper Investama
|
(1,560,760
|
)
|
(1,270,269
|
)
|
(380,418
|
)
|
|||
|
Deferred
income taxes
|
17,448
|
20,852
|
37,277
|
||||||
|
Net
(income) loss from investment in Atlantic Copper
|
(71,899
|
)
|
(17,842
|
)
|
103,388
|
||||
|
Income
from investment in PT Puncakjaya Power
|
(14,092
|
)
|
(15,642
|
)
|
(15,712
|
)
|
|||
|
(Recognition)
elimination of intercompany profit
|
(18,709
|
)
|
65,335
|
5,594
|
|||||
|
Dividends
received from PT Freeport Indonesia and
|
|||||||||
|
PT
Indocopper Investama
|
1,542,301
|
1,179,201
|
96,981
|
||||||
|
Dividends received from PT Puncakjaya Power
|
10,971
|
16,928
|
8,571
|
||||||
|
Depreciation
and amortization
|
12,706
|
14,693
|
11,324
|
||||||
|
Noncash
stock-based compensation
|
4,780
|
5,364
|
4,156
|
||||||
|
Amortization
of deferred financing costs
|
2,624
|
4,528
|
4,818
|
||||||
|
Gains
on sales of assets
|
(945
|
)
|
(6,631
|
)
|
(21,281
|
)
|
|||
|
Losses
on early extinguishment and conversion of debt
|
31,138
|
30,778
|
10,176
|
||||||
|
(Increase)
decrease in interest receivable and due from affiliates
|
(4,158
|
)
|
(1,374
|
)
|
9,435
|
||||
|
Decrease
in accounts payable and accrued liabilities
|
(6,822
|
)
|
(10,109
|
)
|
(1,571
|
)
|
|||
|
(Decrease)
increase in accrued income taxes
|
(10,854
|
)
|
16,973
|
2,467
|
|||||
|
Increase
in long-term compensation benefits
|
10,336
|
9,212
|
9,015
|
||||||
|
Other
|
(555
|
)
|
(2,263
|
)
|
2,007
|
||||
|
Net cash provided by operating activities
|
1,400,019
|
1,034,861
|
88,494
|
||||||
|
Cash
flow from investing activities:
|
|||||||||
|
Sale
of assets
|
3,035
|
6,631
|
21,634
|
||||||
|
Capital
expenditures and other
|
(21,582
|
)
|
(9,090
|
)
|
(3,446
|
)
|
|||
|
Collections
on notes receivable
|
210,064
|
12,501
|
42,501
|
||||||
|
Phelps
Dodge acquisition costs
|
(4,576
|
)
|
-
|
-
|
|||||
|
Sale
of restricted investments
|
-
|
-
|
21,804
|
||||||
|
Investment
in Atlantic Copper
|
-
|
-
|
(202,000
|
)
|
|||||
|
Net
cash provided by (used in) investing activities
|
186,941
|
10,042
|
(119,507
|
)
|
|||||
|
Cash
flow from financing activities:
|
|||||||||
|
Cash
dividends paid:
|
|||||||||
|
Common
stock
|
(915,775
|
)
|
(452,510
|
)
|
(198,782
|
)
|
|||
|
Convertible
perpetual preferred stock
|
(60,500
|
)
|
(60,500
|
)
|
(35,460
|
)
|
|||
|
Step-up
convertible preferred stock
|
-
|
(1
|
)
|
(10
|
)
|
||||
|
Net
proceeds from sale of senior notes
|
-
|
-
|
344,354
|
||||||
|
Net
proceeds from sale of convertible perpetual preferred
stock
|
-
|
-
|
1,067,000
|
||||||
|
Proceeds
from other debt
|
39,887
|
-
|
-
|
||||||
|
Repayment
of debt
|
(317,629
|
)
|
(409,419
|
)
|
(272,800
|
)
|
|||
|
Redemption
of step-up convertible preferred stock
|
-
|
(215
|
)
|
(1,172
|
)
|
||||
|
Purchase
of FCX common shares from Rio Tinto
|
-
|
-
|
(881,868
|
)
|
|||||
|
Purchases
of other FCX common shares
|
(99,783
|
)
|
(80,227
|
)
|
(99,477
|
)
|
|||
|
Net
proceeds from exercised stock options
|
15,280
|
5,081
|
3,196
|
||||||
|
Other
|
(3,384
|
)
|
(22
|
)
|
(1,547
|
)
|
|||
|
Net
cash used in financing activities
|
(1,341,904
|
)
|
(997,813
|
)
|
(76,566
|
)
|
|||
|
Net
increase (decrease) in cash and cash equivalents
|
245,056
|
47,090
|
(107,579
|
)
|
|||||
|
Cash
at beginning of year
|
145,215
|
98,125
|
205,704
|
||||||
|
Cash
at end of year
|
$
|
390,271
|
$
|
145,215
|
$
|
98,125
|
|||
|
Interest
paid
|
$
|
59,336
|
$
|
126,945
|
$
|
124,903
|
|||
|
Taxes
paid
|
$
|
181,321
|
$
|
117,044
|
$
|
12,681
|
|||
The
footnotes to the consolidated financial statements of FCX contained in
FCX’s
2006
Annual Report to stockholders incorporated by reference are an integral part
of
these statements.
F-4
FREEPORT-McMoRan
COPPER & GOLD INC.
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
|
Col.
A
|
Col
B
|
Col.
C
|
Col.
D
|
Col.
E
|
||||||||||||
|
Additions
|
||||||||||||||||
|
Balance
at
Beginning
of
Period
|
Charged
to
Costs
and Expense
|
Charged
to Other Accounts
|
Other
Add
(Deduct)
|
Balance
at
End
of
Period
|
||||||||||||
|
Reserves
and allowances deducted
|
||||||||||||||||
|
from
asset accounts:
|
||||||||||||||||
|
2006
|
||||||||||||||||
|
Materials
and supplies allowances:
|
||||||||||||||||
|
PT
Freeport Indonesia
|
$
|
16,578
|
$
|
6,000
|
$
|
-
|
$
|
(6,212
|
)a
|
$
|
16,366
|
|||||
|
2005
|
||||||||||||||||
|
Materials
and supplies allowances:
|
||||||||||||||||
|
PT
Freeport Indonesia
|
16,994
|
6,000
|
-
|
(6,416
|
)a
|
16,578
|
||||||||||
|
Atlantic
Copper
|
139
|
-
|
-
|
(139
|
)a
|
-
|
||||||||||
|
2004
|
||||||||||||||||
|
Materials
and supplies allowances:
|
||||||||||||||||
|
PT
Freeport Indonesia
|
16,110
|
3,525
|
-
|
(2,641
|
)a
|
16,994
|
||||||||||
|
Atlantic
Copper
|
1,498
|
1,391
|
-
|
(2,750
|
)a
|
139
|
||||||||||
|
Reclamation
and mine
|
||||||||||||||||
|
shutdown
reserves:
|
||||||||||||||||
|
2006
|
||||||||||||||||
|
PT
Freeport Indonesia
|
26,463
|
3,135
|
428
|
b
|
-
|
30,026
|
||||||||||
|
Atlantic
Copper
|
153
|
44
|
-
|
20
|
217
|
|||||||||||
|
2005
|
||||||||||||||||
|
PT
Freeport Indonesia
|
22,010
|
2,709
|
1,744
|
b
|
-
|
26,463
|
||||||||||
|
Atlantic
Copper
|
838
|
113
|
-
|
(798
|
)c
|
153
|
||||||||||
|
2004
|
||||||||||||||||
|
PT
Freeport Indonesia
|
25,696
|
2,848
|
-
|
(6,534
|
)c
|
22,010
|
||||||||||
|
Atlantic
Copper
|
790
|
212
|
-
|
(164
|
)
|
838
|
||||||||||
|
Reserves
for non-income taxes:
|
||||||||||||||||
|
2006
|
||||||||||||||||
|
PT
Freeport Indonesia
|
18,154
|
6,668
|
-
|
(3,533
|
)d
|
21,289
|
||||||||||
|
Atlantic
Copper
|
949
|
-
|
-
|
110
|
1,059
|
|||||||||||
|
2005
|
||||||||||||||||
|
PT
Freeport Indonesia
|
17,815
|
4,500
|
-
|
(4,161
|
)d
|
18,154
|
||||||||||
|
Atlantic
Copper
|
1,095
|
-
|
-
|
(146
|
)
|
949
|
||||||||||
|
2004
|
||||||||||||||||
|
PT
Freeport Indonesia
|
17,978
|
3,856
|
-
|
(4,019
|
)d
|
17,815
|
||||||||||
|
Atlantic
Copper
|
1,022
|
-
|
-
|
73
|
1,095
|
|||||||||||
| a. |
Primarily
represents write-offs of obsolete materials and supplies
inventories.
|
| b. |
Represents
additional liabilities incurred.
|
| c. |
Represents
impact of changes in reclamation and closure
estimates.
|
| d. |
Represents
amounts paid or adjustments to reserves based on revised
estimates.
|
F-5
Freeport-McMoRan
Copper & Gold Inc.
Exhibit
Number
Description
|
3.1
|
Amended
and Restated Certificate of Incorporation of Freeport-McMoRan Copper
&
Gold Inc. (FCX). Incorporated by reference to Exhibit 3.1 to the
Quarterly
Report on Form 10-Q of FCX for the quarter ended March 31, 2002 (the
FCX
2002 First Quarter Form 10-Q).
|
|
|
3.2
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation
of FCX.
Incorporated by reference to Exhibit 3.1 to the Quarterly Report
on Form
10-Q of FCX for the quarter ended March 31, 2003 (the FCX 2003 First
Quarter Form 10-Q).
|
|
|
3.3
|
Amended
and Restated By-Laws of FCX as amended, effective January 31, 2006.
Incorporated by reference to Exhibit 3.3 to the Current Report on
Form 8-K
of FCX dated January 31, 2006.
|
|
|
4.1
|
Certificate
of Designations of 5½% Convertible Perpetual Preferred Stock of FCX.
Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K
of FCX dated March 30, 2004 and filed March 31, 2004.
|
|
|
4.2
|
Amended
and Restated Credit Agreement dated as of July 25, 2006, by and among
FCX,
PT Freeport Indonesia, JPMorgan Chase Bank, N.A. as Administrative
Agent,
Issuing Bank, Security Agent, JAA Security Agent and Syndication
Agent,
Citibank, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
The Bank of Nova Scotia, as Co-Documentation Agents, U.S. Bank National
Association, as FI Trustee, J.P. Morgan Securities Inc., as Sole
Lead
Arranger and Sole Bookrunner, and the several financial institutions
that
are parties thereto. Incorporated by reference to Exhibit 10.1 to
the
Current Report on Form 8-K of FCX dated July 25, 2006 and filed July
26,
2006.
|
|
|
4.3
|
Senior
Indenture dated as of November 15, 1996, from FCX to The Chase Manhattan
Bank, as Trustee. Incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-3 of FCX filed November 5, 2001
(the FCX
November 5, 2001 Form S-3).
|
|
|
4.4
|
First
Supplemental Indenture dated as of November 18, 1996, from FCX to
The
Chase Manhattan Bank, as Trustee, providing for the issuance of the
Senior
Notes and supplementing the Senior Indenture dated November 15, 1996,
from
FCX to such Trustee, providing for the issuance of the 7.50% Senior
Notes
due 2006 and the 7.20% Senior Notes due 2026. Incorporated by reference
to
Exhibit 4.5 to the FCX November 5, 2001 Form S-3.
|
|
|
4.5
|
Indenture
dated as of January 29, 2003, from FCX to The Bank of New York, as
Trustee, with respect to the 10⅛% Senior Notes due 2010. Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K of FCX
dated
February 6, 2003.
|
|
4.6
|
Indenture
dated as of February 11, 2003, from FCX to The Bank of New York,
as
Trustee, with respect to the 7% Convertible Senior Notes due 2011.
Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K
of FCX dated February 11, 2003 and filed February 25,
2003.
|
|
|
4.7
|
Indenture
dated as of February 3, 2004, from FCX to The Bank of New York, as
Trustee, with respect to the 6⅞% Senior Notes due 2014. Incorporated by
reference to Exhibit 4.12 to the Annual Report on Form 10-K of FCX
for the
fiscal year ended December 31, 2003 (the FCX 2003 Form
10-K).
|
|
|
4.8
|
Rights
Agreement dated as of May 3, 2000, between FCX and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent. Incorporated by reference to Exhibit
4.26 to the Quarterly Report on Form 10-Q of FCX for the quarter
ended
March 31, 2000.
|
|
|
4.9
|
Amendment
No. 1 to Rights Agreement dated as of February 26, 2002, between
FCX and
Mellon Investor Services. Incorporated by reference to Exhibit 4.16
to the
FCX 2002 First Quarter Form 10-Q.
|
|
E-1
|
10.1
|
Contract
of Work dated December 30, 1991, between the Government of the Republic
of
Indonesia and PT Freeport Indonesia. Incorporated by reference to
Exhibit
10.1 to the FCX November 5, 2001 Form S-3.
|
|
|
10.2
|
Contract
of Work dated August 15, 1994, between the Government of the Republic
of
Indonesia and PT Irja Eastern Minerals Corporation. Incorporated
by
reference to Exhibit 10.2 to the FCX November 5, 2001 Form
S-3.
|
|
|
10.3
|
Participation
Agreement dated as of October 11, 1996, between PT Freeport Indonesia
and
P.T. RTZ-CRA Indonesia with respect to a certain contract of work.
Incorporated by reference to Exhibit 10.4 to the FCX November 5,
2001 Form
S-3.
|
|
|
10.4
|
Agreement
dated as of October 11, 1996, to Amend and Restate Trust Agreement
among
PT Freeport Indonesia, FCX, the RTZ Corporation PLC, P.T. RTZ-CRA
Indonesia, RTZ Indonesian Finance Limited and First Trust of New
York,
National Association, and The Chase Manhattan Bank, as Administrative
Agent, JAA Security Agent and Security Agent. Incorporated by reference
to
Exhibit 10.3 to the Current Report on Form 8-K of FCX dated November
13,
1996 and filed November 15, 1996.
|
|
|
10.5
|
Concentrate
Purchase and Sales Agreement dated effective December 11, 1996, between
PT
Freeport Indonesia and PT Smelting. Incorporated by reference to
Exhibit
10.3 to the FCX November 5, 2001 Form S-3.
|
|
|
10.6
|
Second
Amended and Restated Joint Venture and Shareholders’ Agreement dated as of
December 11, 1996, among Mitsubishi Materials Corporation, Nippon
Mining
and Metals Company, Limited and PT Freeport Indonesia. Incorporated
by
reference to Exhibit 10.5 to the FCX November 5, 2001 Form
S-3.
|
|
|
10.7
|
Settlement
Agreement dated December 17, 2004, between Underwriters Subscribing
to
Certain Policies Reinsuring the Original Policy, Freeport-McMoRan
Insurance Company Limited, FM Services Company (FMS) and FCX. Incorporated
by reference to Exhibit 10.7 to the Annual Report on Form 10-K of
FCX for
the fiscal year ended December 31, 2004 (the FCX 2004 Form
10-K).
|
|
|
Executive
Compensation Plans and Arrangements (Exhibits 10.8 through
10.58)
|
||
|
10.8
|
Annual
Incentive Plan of FCX as amended effective February 2, 1999. Incorporated
by reference to Exhibit 10.11 to the Annual Report on Form 10-K of
FCX for
the fiscal year ended December 31, 1998 (the FCX 1998 Form
10-K).
|
|
|
10.9
|
FCX
Performance Incentive Awards Program as amended effective February
2,
1999. Incorporated by reference to Exhibit 10.13 to the FCX 1998
Form
10-K.
|
|
|
10.10
|
FCX
President’s
Award Program. Incorporated by reference to Exhibit 10.7 to the FCX
November 5, 2001 Form S-3.
|
|
|
10.11
|
FCX
1995 Stock Option Plan, as amended and restated. Incorporated by
reference
to Exhibit 10.3 to the Current Report on Form 8-K of FCX dated May
2, 2006
(the FCX May 2, 2006 Form 8-K).
|
|
|
10.12
|
FCX
Amended and Restated 1999 Stock Incentive Plan, as amended and restated.
Incorporated by reference to Exhibit 10.2 to the FCX May 2, 2006
Form
8-K.
|
|
|
10.13
|
Form
of Notice of Grant of Nonqualified Stock Options under the 1999 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.14 to the
FCX 2005
Second Quarter Form 10-Q.
|
E-2
|
10.14
|
Form
of Restricted Stock Unit Agreement under the 1999 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.15 to the FCX 2005 Second
Quarter
Form 10-Q.
|
|
|
10.15
|
Form
of Performance-Based Restricted Stock Unit Agreement under the 1999
Stock
Incentive Plan. Incorporated by reference to Exhibit 10.16 to the
FCX 2005
Second Quarter Form 10-Q.
|
|
|
10.16
|
FCX
1999 Long-Term Performance Incentive Plan. Incorporated by reference
to
Exhibit 10.19 to the Annual Report of FCX on Form 10-K for the year
ended
December 31, 1999 (the FCX 1999 Form 10-K).
|
|
|
10.17
|
FCX
Stock Appreciation Rights Plan dated May 2, 2000. Incorporated by
reference to Exhibit 10.20 to the Quarterly Report on Form 10-Q of
FCX for
the quarter ended June 30, 2001 (the FCX 2001 Second Quarter Form
10-Q).
|
|
|
10.18
|
FCX
2003 Stock Incentive Plan, as amended and restated. Incorporated
by
reference to Exhibit 10.1 to the FCX May 2, 2006 Form
8-K.
|
|
|
10.19
|
Form
of Notice of Grant of Nonqualified Stock Options under the 2003 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.20 to the
FCX 2005
Second Quarter Form 10-Q.
|
|
|
10.20
|
Form
of Restricted Stock Unit Agreement under the 2003 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.21 to the FCX 2005 Second
Quarter
Form 10-Q.
|
|
|
10.21
|
Form
of Performance-Based Restricted Stock Unit Agreement under the 2003
Stock
Incentive Plan. Incorporated by reference to Exhibit 10.22 to the
FCX 2005
Second Quarter Form 10-Q.
|
|
|
10.22
|
FCX
1995 Stock Option Plan for Non-Employee Directors. Incorporated by
reference to Exhibit 10.23 to the FCX 2005 Second Quarter Form
10-Q.
|
|
|
10.23
|
FCX
2004 Director Compensation Plan. Incorporated by reference to Exhibit
10.24 to the FCX 2005 Second Quarter Form 10-Q.
|
|
|
10.24
|
Form
of Amendment No. 1 to Notice of Grant of Nonqualified Stock Options
and
Stock Appreciation Rights under the 2004 Director Compensation Plan.
Incorporated by reference to Exhibit 10.4 to the FCX May 2, 2006
Form
8-K.
|
|
|
10.25
|
FCX
2006 Stock Incentive Plan. Incorporated by reference to Exhibit 10.6
to
the FCX May 2, 2006 Form 8-K.
|
|
|
10.26
|
Form
of Notice of Grant of Nonqualified Stock Options under the 2006 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.7 to the
FCX May
2, 2006 Form 8-K.
|
|
|
10.27
|
Form
of Restricted Stock Unit Agreement under the 2006 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.8 to the FCX May 2, 2006
Form
8-K.
|
|
|
10.28
|
Form
of Performance-Based Restricted Stock Unit Agreement under the 2006
Stock
Incentive Plan. Incorporated by reference to Exhibit 10.9 to the
FCX May
2, 2006 Form 8-K.
|
|
|
10.29
|
FCX
Director Compensation. Incorporated by reference to Exhibit 10.25
to the
FCX 2004 Form 10-K.
|
|
|
10.30
|
FCX
Supplemental Executive Retirement Plan dated February 26, 2004.
Incorporated by reference to Exhibit 10.26 to the FCX 2004 Form
10-K.
|
E-3
|
10.31
|
Amendment
No. 1 to FCX Supplemental Executive Retirement Plan. Incorporated
by
reference to Exhibit 10.1 to the Current Report on Form 8-K of FCX
dated
May 3, 2005.
|
|
|
10.32
|
FCX
2005 Annual Incentive Plan. Incorporated by reference to Exhibit
10.1 to
the Current Report on Form 8-K of FCX dated May 5,
2005.
|
|
|
10.33
|
FCX
Executive Services Program. Incorporated by reference to Exhibit
10.5 to
the FCX May 2, 2006 Form 8-K.
|
|
|
10.34
|
FM
Services Company Performance Incentive Awards Program as amended
effective
February 2, 1999. Incorporated by reference to Exhibit 10.19 to the
FCX
1998 Form 10-K.
|
|
|
10.35
|
Consulting
Agreement dated as of December 22, 1988, with Kissinger Associates,
Inc.
(Kissinger Associates). Incorporated by reference to Exhibit 10.21
to the
Annual Report on Form 10-K of FCX for the fiscal year ended December
31,
1997 (the FCX 1997 Form 10-K).
|
|
|
10.36
|
Letter
Agreement dated May 1, 1989, with Kent Associates, Inc. (Kent Associates,
predecessor in interest to Kissinger Associates). Incorporated by
reference to Exhibit 10.22 to the FCX 1997 Form 10-K.
|
|
|
10.37
|
Letter
Agreement dated January 27, 1997, among Kissinger Associates, Kent
Associates, FCX, Freeport-McMoRan Inc., and FMS. Incorporated by
reference
to Exhibit 10.26 to the Annual Report on Form 10-K of FCX for the
fiscal
year ended December 31, 2001 (the FCX 2001 Form 10-K).
|
|
|
10.38
|
Supplemental
Consulting Agreement with Kissinger Associates and Kent Associates,
effective as of January 1, 2007. Incorporated by reference to Exhibit
10.38 to the Quarterly Report on Form 10-Q of FCX for the quarter
ended
September 30, 2006 (the FCX 2006 Third Quarter Form
10-Q).
|
|
|
10.39
|
Agreement
for Consulting Services between FTX and B. M. Rankin, Jr. effective
as of
January 1, 1990 (assigned to FMS as of January 1, 1996). Incorporated
by
reference to Exhibit 10.24 to the FCX 1997 Form 10-K.
|
|
|
10.40
|
Supplemental
Agreement between FMS and B. M. Rankin, Jr. dated December 15, 1997.
Incorporated by reference to Exhibit 10.25 to the FCX 1997 Form
10-K.
|
|
|
Supplemental
Letter Agreement between FMS and B. M. Rankin, Jr., effective as
of
January 1, 2007.
|
||
|
10.42
|
Letter
Agreement effective as of January 7, 1997, between Senator J. Bennett
Johnston, Jr. and FMS. Incorporated by reference to Exhibit 10.31
to the
FCX 2001 Form 10-K.
|
|
|
10.43
|
Supplemental
Letter Agreement dated July 14, 2003, between J. Bennett Johnston,
Jr. and
FMS. Incorporated by reference to Exhibit 10.28 to the Quarterly
Report on
Form 10-Q of FCX for the quarter ended June 30, 2003.
|
|
|
10.44
|
Supplemental
Letter Agreement between FMS and J. Bennett Johnston, Jr., dated
January
18, 2005. Incorporated by reference to Exhibit 10.40 to the FCX 2004
Form
10-K.
|
|
|
10.45
|
Supplemental
Consulting Agreement between FMS and J. Bennett Johnston, Jr., effective
as of January 1, 2007. Incorporated by reference to Exhibit 10.45
to the
FCX 2006 Third Quarter Form 10-Q.
|
|
|
10.46
|
Letter
Agreement dated November 1, 1999, between FMS and Gabrielle K. McDonald.
Incorporated by reference to Exhibit 10.33 to the FCX 1999 Form
10-K.
|
E-4
|
10.47
|
Supplemental
Letter Agreement, between FMS and Gabrielle K. McDonald, effective
as of
January 1, 2007. Incorporated by reference to Exhibit 10.47 to the
FCX
2006 Third Quarter Form 10-Q.
|
|
|
10.48
|
Executive
Employment Agreement dated April 30, 2001, between FCX and James
R.
Moffett. Incorporated by reference to Exhibit 10.35 to the FCX 2001
Second
Quarter Form 10-Q.
|
|
|
10.49
|
Executive
Employment Agreement dated April 30, 2001, between FCX and Richard
C.
Adkerson. Incorporated by reference to Exhibit 10.36 to the FCX 2001
Second Quarter Form 10-Q.
|
|
|
10.50
|
Change
of Control Agreement dated April 30, 2001, between FCX and James
R.
Moffett. Incorporated by reference to Exhibit 10.37 to the FCX 2001
Second
Quarter Form 10-Q.
|
|
|
10.51
|
Change
of Control Agreement dated April 30, 2001, between FCX and Richard
C.
Adkerson. Incorporated by reference to Exhibit 10.38 to the FCX 2001
Second Quarter Form 10-Q.
|
|
|
10.52
|
First
Amendment to Executive Employment Agreement dated December 10, 2003,
between FCX and James R. Moffett. Incorporated by reference to Exhibit
10.36 to the FCX 2003 Form 10-K.
|
|
|
10.53
|
First
Amendment to Executive Employment Agreement dated December 10, 2003,
between FCX and Richard C. Adkerson. Incorporated by reference to
Exhibit
10.37 to the FCX 2003 Form 10-K.
|
|
|
10.54
|
First
Amendment to Change of Control Agreement dated December 10, 2003,
between
FCX and James R. Moffett. Incorporated by reference to Exhibit 10.38
to
the FCX 2003 Form 10-K.
|
|
|
10.55
|
First
Amendment to Change of Control Agreement dated December 10, 2003,
between
FCX and Richard C. Adkerson. Incorporated by reference to Exhibit
10.39 to
the FCX 2003 Form 10-K.
|
|
|
10.56
|
Change
of Control Agreement dated February 3, 2004, between FCX and Michael
J.
Arnold. Incorporated by reference to Exhibit 10.40 to the FCX 2003
Form
10-K.
|
|
|
10.57
|
Change
of Control Agreement dated February 3, 2004, between FCX and Mark
J.
Johnson. Incorporated by reference to Exhibit 10.41 to the FCX 2003
Form
10-K.
|
|
|
10.58
|
Change
of Control Agreement dated February 3, 2004, between FCX and Kathleen
L.
Quirk. Incorporated by reference to Exhibit 10.42 to the FCX 2003
Form
10-K.
|
|
|
FCX
Computation of Ratio of Earnings to Fixed Charges.
|
||
|
Those
portions of the 2006 Annual Report to stockholders of FCX that are
incorporated herein by reference.
|
||
|
14.1
|
Ethics
and Business Conduct Policy. Incorporated by reference to Exhibit
14.1 to
the FCX 2003 Form 10-K.
|
|
|
Subsidiaries
of FCX.
|
||
|
Consent
of Ernst & Young LLP.
|
||
|
Consent
of Independent Mining Consultants, Inc.
|
||
|
Certified
resolution of the Board of Directors of FCX authorizing this report
to be
signed on behalf of any officer or director pursuant to a Power of
Attorney.
|
E-5
|
Powers
of Attorney pursuant to which this report has been signed on behalf
of
certain officers and directors of FCX.
|
||
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d -
14(a).
|
||
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d -
14(a).
|
||
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.
|
||
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C Section
1350.
|
E-6