6
WORKING TOWARD SUSTAINABLE DEVELOPMENT
2000 ECONOMIC, SOCIAL AND ENVIRONMENTAL REPORT
Introduction
Two years ago, we announced our commitment at Freeport-McMoRan Copper &
Gold Inc. (FCX) to work toward sustainable development and our desire to
become known as an industry leader in sustainable development practices.
This commitment, "Working Toward Sustainable Development," became the new
title for the Economic, Social and Environmental Report presented each
year here in our annual report. This report and its predecessors are
available on our web site (fcx.com).
But changing the title of our report was the least of what we have done.
We have reexamined our environmental and social practices from the ground
up, including seeking the professional opinions of outside experts in
every area, as part of our continuous search for ways to improve in every
aspect of our operations. We have joined a worldwide, collaborative
effort among the mining industry, economic groups and nongovernmental
organizations to define the principles and practices of sustainable
development for our industry. Sustainable development - balancing
economic, social and environmental issues in a way that meets the needs
of the present without compromising the ability of future generations to
meet their own needs - is particularly challenging for the mining
industry.
Most important, we have found and continue to find many ways to improve -
to lessen our environmental impacts, or to mitigate them when they occur;
to improve our relationship with the local people where we operate; and
to make certain that the local people are reaping the benefits of our
success in terms of real improvements in their quality of life. These
positive steps, which measure our progress along the path to sustainable
development during the year 2000, are detailed in this report.
The definition of "sustainability" is unique to every situation and
changes as global and local conditions change. Because of this, our quest
for sustainable development will be unending. We think it is the search
for sustainability itself that keeps us sharp and on the leading edge of
continual improvements in our industry. So we will continue "Working
Toward Sustainable Development" and reporting our progress to you.
(Photo)
This corn project is part of an integrated agriculture, aquaculture and
animal husbandry program taking shape in the Ajkwa Deposition Area.
Fig. #1
Financial benefits of PT Freeport Indonesia's operations to the people
and Government of Indonesia.
(Pie charts showing the following data)
For Years For
1992-2000 2000
--------- ----
(in millions)
Domestic Reinvestments $3,953 $224
Goods & Services Purchased 2,253 226
Dividends, Royalties & Taxes 1,633 165
Wages, Salaries & Benefits 547 54
Charitable Contributions 220 31
------ ----
$8,606 $700
====== ====
7
PT FREEPORT INDONESIA
I. Economic Impacts
PT Freeport Indonesia contributes to the economies of the province of
Irian Jaya (Papua) and the Republic of Indonesia through the payment of
taxes, dividends and royalties; voluntary economic development programs,
such as the Freeport Fund for Irian Jaya Development; infrastructure
development; employment; and the purchase of local and national goods.
PT Freeport Indonesia has frequently been the largest taxpayer in the
Republic of Indonesia. In addition, it pays royalties on all minerals
removed from the ground. Since 1991, these direct benefits to Indonesia
have totaled $1.6 billion. Taxes and royalties are paid to the central
government in Jakarta and then distributed according to government policy
and priorities. Indonesia's central and regional governments are
currently changing the distribution of such revenues so that a greater
portion will benefit the regional government. We support this change.
Since it began development activities more than thirty years ago, PT
Freeport Indonesia has made significant investments in infrastructure
both for the use of the company and for the public in southern Irian Jaya
(Papua).
This includes 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 Irian Jaya (Papua). At the end of
2000, PT Freeport Indonesia directly employed 6,934 people and another
1,953 contract workers were employed by companies that provide services
locally and exclusively to PT Freeport Indonesia. Of this total of 8,887
employees, 2,186, or 25%, were Papuans. In addition, approximately 5,000
persons worked for privatized companies providing services within PT
Freeport Indonesia's operations area. Finally, PT Freeport Indonesia uses
as many locally and nationally produced goods as possible.
Besides the $1.6 billion paid in direct benefits to the Government of
Indonesia under PT Freeport Indonesia's new Contract of Work from 1992-
2000, operations have provided another $7.0 billion in indirect benefits
in the form of wages and benefits paid to workers, purchases of goods and
services, charitable contributions and reinvestments in operations (see
Fig. #1).
II. Social Change and Development
Population Growth and Social Impacts
From the beginning of its operations in Irian Jaya (Papua), PT Freeport
Indonesia has supported programs to benefit the Amungme and Kamoro people
who were the area's traditional inhabitants. When it began operations in
1972, with a local population numbering fewer than 1,000 and a relatively
small mine, the company's initial programs were simple and limited. With
the discovery of the world-class Grasberg deposit in 1988 and the years
of rapid operational expansion that followed, both the needs of the local
communities and the efforts by the Indonesian government and PT Freeport
Indonesia to respond to them with an array of social and economic
programs spiraled in complexity.
The very success of the company and these programs became an attraction -
economic and educational opportunities brought in thousands of Papuans
from outside the company area, hoping for a better life for their
children. Hospitals and specialized medical care programs to treat
malaria, tuberculosis and sexually transmitted diseases drew those with
chronic illnesses from other areas where no treatment is available. The
Indonesian government, pursuing its policy of transmigration, moved
thousands of people into the area from other parts of Indonesia. Other
businesses have located in the area, adding to the local economy and
population. The result of these trends has been to bring together a
complex mixture of Papuan indigenous peoples, which have their own
history of interethnic tensions, with Indonesians from other islands who
have different ethnic and cultural backgrounds. These diverse groups were
all combined in a population that rapidly grew to its present size of
more than 100,000.
This rapid growth and urbanization has had significant social and
environmental impacts. The Amungme and Kamoro peoples, the traditional
inhabitants, find themselves outnumbered by Papuans from other tribes who
have moved in from outside the area, drawn by the magnet of opportunity.
The Papuans as a whole in this area are now outnumbered by Indonesians
from other islands.
During 2000, PT Freeport Indonesia undertook a study of the people living
within the Mimika district in order to better understand the demographics
of the area and what this portends for the company's efforts to work
toward sustainability in its social and environ-
8
mental influences. The
company is working hard to provide a solid planning foundation to help
the residents of the area - Amungme and Kamoro, other Papuans and the non-
Papuans who have settled there - to take the next important steps in
creating a sustainable community in which services and opportunity are
available equally to all residents, human rights and dignity are
respected and the company's operations are a long-term positive force for
sustainable development.
Social and Cultural Commitment
We are committed to building and maintaining positive relationships with
the indigenous peoples living in the areas where we operate and to the
continuous improvement of those relationships. Part of this commitment is
to provide opportunities for social and economic development for the
local people, including special efforts to train and hire people
indigenous to each operational area. Another part is to learn more about
the local people, their histories and their changing circumstances in
order to achieve a greater understanding necessary for building
constructive relationships. Perhaps most important is our commitment to
treat the local people with respect and to consult them on important
operational issues that impact their communities.
(Photo)
In the lowlands near our operations, we support local development like
this fish-raising project.
PT Freeport Indonesia understands the need of the unique peoples of Irian
Jaya (Papua) to preserve their cultures in the face of modernization. For
this reason, the company has long supported the Asmat Art and Cultural
Festival and sponsors the annual Kamoro Art and Cultural Festival. PT
Freeport Indonesia has also sponsored social, cultural, language and
economic studies of the Amungme and Kamoro people - traditional
inhabitants of the land where the company operates - and this work has
resulted in improved communication and understanding as well as better
education and training programs.
Milestone Agreements with the Amungme and Kamoro
In July 2000, a formal memorandum of understanding was signed by PT
Freeport Indonesia and the local community organizations representing the
Amungme and Kamoro peoples. The agreement - which addresses socioeconomic
resources, human rights, land rights and environmental rights was the
result of five years of dialogue. The early discussions were facilitated
by the Indonesian Human Rights Commission. The agreement details the
aspirations of the traditional residents of the company's operations area
and PT Freeport Indonesia to seek harmonious and mutually beneficial
relationships based on equality, honesty and justice. The purpose of the
agreement is to improve the quality of life of the Amungme and Kamoro
communities and to ensure that they fairly benefit from the company's
operations; to improve the appreciation of human rights and respect for
the dignity and understanding of the culture of the Amungme and Kamoro
communities and others in the company's operations area; and to improve
the quality of the environment.
The agreement is intended to be the foundation for mutually beneficial
initiatives and several have already resulted, including the formation of
a company by the local people to perform earth moving and levee
maintenance in the tailings deposition area; the development of an
integrated agriculture, aquaculture and animal husbandry program in the
tailings deposition area; and the building of offices and residences for
local leaders. The agreement also establishes procedures to continue
negotiations between community organizations and the company. A second
memorandum of understanding was signed on December 27, 2000 between PT
Freeport Indonesia and the residents of Banti, a village approximately
two miles from Tembagapura, our mine's residential community. Some
residents of the village felt threatened after an
9
(Photo)
A mother and child visit the Mimika outpatient "Poliklinik," a unit of
the Mimika Community Hospital, funded by the Freeport Fund for Irian Jaya
Development.
incident in May 2000
when an overburden stockpile slipped and a wave of water and material
flowed down the river adjacent to the village. (See "Wanagon Overburden
Stockpile Slippage" on page 15.) No residents of the village were injured
and no long-term environmental effects resulted, but there was minor
property damage and it was determined that some houses in the village
were not safe. Discussions with Banti residents resulted in a plan to
build new homes, using a design of their choosing, for the affected
residents in another location. The agreement also provides for enhanced
local economic opportunities for the community and expanded educational
programs, as well as continued discussions between the company and the
people of Banti about issues of mutual concern.
Freeport Fund for Irian Jaya Development
In April 1996, PT Freeport Indonesia agreed to commit at least one
percent of its revenues for the next ten years to 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 community development programs undertaken by the
company that cost a similar amount of money each year. Through the end of
2000, contributions to the fund have totaled $74.8 million, including
$66.1 million from PT Freeport Indonesia and $8.7 million from the
company's joint venture partner in the Grasberg project, Rio Tinto plc.
In 2000, the fund received a total of $16.9 million, $14.1 million from
PT Freeport Indonesia and $2.8 million from Rio Tinto. The 2000
expenditures supported programs on health care, education and village
development.
The Lembaga Pengembangan Masyarakat-Irian Jaya (LPM), or the People's
Development Foundation-Irian Jaya, oversees disbursement of these funds.
The LPM Board of Directors is made up of the head of the local
government, currently a Kamoro; a leader of the Amungme people; a leader
of the Kamoro people; and leaders of the three local churches.
Human Rights Issues
Because of the activities of a separatist group in Irian Jaya (Papua),
the Government of Indonesia has stationed armed forces there. There have
been a number of clashes between the Indonesian military and the
separatists and there have been allegations of human rights violations in
connection with some of these incidents. Some of these allegations have
been investigated and some individuals in the military who were
determined to be involved have been punished.
We support and uphold the human rights of all people and have publicly
and strongly condemned all human rights violations in Irian Jaya (Papua).
We have applauded the government's arrest, trial, conviction and
incarceration of those responsible for human rights violations in Irian
Jaya (Papua) and also encourage and fully support any legitimate
investigation of remaining allegations of human rights violations. There
have been numerous investigations of human rights violations in Irian
Jaya (Papua), and none found that any PT Freeport Indonesia employee
participated in any violation.
Human Rights Commitment and Initiatives
We have taken a clear position promoting basic human rights and have
communicated that position to our employees through our Social and Human
Rights Policy adopted by our Board of Directors. The policy includes
specific actions to support human rights to be undertaken by the company
and by employees. Over the past two years that policy has been
implemented in steps through training of employees to better understand
the implications of human rights policy in the context of our operations.
The most intensive training has been undertaken in PT Freeport
Indonesia's Security Department. Outside trainers from Indonesian human
rights organizations and from local universities have provided
theoretical and practical training. In the meantime, revisions to our
Social and Human Rights Policy - already considered to be one of the most
proactive in industry - have been recommended and are being adopted
during 2001. These revisions, some proposed by human rights
10
organizations, will further strengthen our policy. We have also
contracted with an expert on corporate policies and codes of conduct to
establish benchmarks during 2001 for evaluating our Social and Human
Rights Policy, so that we may measure and monitor its effectiveness.
As part of enhancing human rights awareness throughout the company, Judge
Gabrielle McDonald was appointed as Special Counsel to the Chairman for
Human Rights. Already a member of our Board of Directors, Judge McDonald
has had a distinguished career as a civil rights lawyer, a federal judge
and as President of the International Criminal Tribunal for the former
Yugoslavia. In 2000, she undertook an extensive tour of Indonesia and
met with many prominent local leaders and human rights advocates in
Jakarta, Jayapura and Timika and reported publicly on her findings.
In December 2000, we endorsed the joint U.S. State Department-British
Foreign Office Voluntary Principles on Human Rights and Security. The
Voluntary Principles were endorsed by several major natural resources
companies and by important human rights organizations. We participated in
drafting the principles and have incorporated the principles in our
Social and Human Rights Policy. In announcing the principles and naming
the companies that had endorsed them, U.S. Secretary of State Madeleine
Albright called the agreement "a landmark for corporate
responsibility ... (that) ... demonstrates that the best-run companies realize
that they must pay attention not only to the particular needs of their
communities, but also to universal standards of human rights, and that in
addressing those needs and standards there is no necessary conflict
between profit and principle."
Although clashes between separatists and Indonesian government forces
resulted in numerous violent incidents in other parts of Irian Jaya
(Papua) during the year 2000, peace prevailed in the area of PT Freeport
Indonesia's operations. This is due in part to the efforts of Thom
Beanal, a member of the PT Freeport Indonesia Board of Commissioners and
the leader of LEMASA, the Amungme tribal organization; and Mama Yosepha
Alomang and her HAMAK Foundation. We have worked hard to gain their trust
and they, in turn, have worked hard with their people to seek peaceful
solutions. Mama Yosepha declared the Mimika district, where we operate, a
"Zone of Peace" during December 2000 and wrote FCX's Chairman of the
Board, J.R. Moffett, expressing appreciation for the human rights seminar
organized by PT Freeport Indonesia's security department and the
Cenderawasih University.
Land Rights
Under the Indonesian Constitution, all unimproved land is legally state-
owned land. Similarly, all minerals belong to the state. PT Freeport
Indonesia's "January Agreement" of 1974 with the Amungme was the first
recognition in Indonesia of hak ulayat, or the right of traditional
people to undeveloped land for hunting and gathering. Subsequent to that
landmark agreement, the Government of Indonesia formally recognized hak
ulayat land rights.
Fig. #2
PT Freeport Indonesia has surpassed its goals for Papuan employees and
Papuan staff since 1996.
(Graphs showing the following data)
Total Papuan Employees Papuan Staff
---------------------- -------------
Target Actual Target Actual
------ ------ ------ ------
3/96 640 640 48 48
12/96 738 759 52 55
12/97 868 1,060 56 89
12/98 998 1,122 61 87
12/99 1,128 1,254 66 103
12/00 1,258 1,523 71 114
Fig. #3
Tests on tailings show a non-acid forming potential.
(Graph showing the following data)
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(Annual Average Value)
Potential kilograms (35) (24) (36) (22) (34)
of acid per metric
ton of tailings
11
Cash compensation is paid only for improvements to land, such as
agriculture and gardens. Because its operations have rarely affected
improved land, PT Freeport Indonesia has only infrequently paid cash
compensation and the amounts have been very minor. Hak ulayat, however,
is a communal property right. Instead of cash, communal benefits called
recognisi are provided for the release of hak ulayat rights following a
negotiation involving both the government and the local people. PT
Freeport Indonesia has agreed to pay recognisi in several instances, as
approved by the government:
* The "January Agreement" of 1974 between the company and the Amungme
recognized the hak ulayat rights of the Amungme to traditional lands used
for company operations and the payment of recognisi was agreed upon and
paid. This agreement released the mining area, Tembagapura, the airport
site, port site and the road/pipeline right of way connecting them.
* A 1993 agreement involving the company and the Kamoro residents of
the village of Iwaka concluded a hak ulayat release for the townsite of
Kuala Kencana and recognisi was paid to the villagers.
* Agreements in 1997 between the company and the Kamoro tribal
communities of Nawaripi and Tipuka concluded hak ulayat releases of
traditional rights to additional lands for the tailings deposition area,
power transmission lines, additional roads and the expansion of the port
and other facilities. This agreement and the payment of recognisi was
facilitated by the Sejati Foundation, an Indonesian nongovernmental
organization that works to protect the rights of indigenous people.
In 1981, 1983 and 1985, the Government of Indonesia concluded three
separate hak ulayat agreements with the Kamoro people for large tracts
for the transmigration program sites, the Timika town site and sites for
additional facilities near the airport. PT Freeport Indonesia was not a
party to these agreements. PT Freeport Indonesia is also currently
negotiating with the Amungme and Kamoro peoples voluntary additional
recognisi as a reflection of the expanded scope and continuing success
of the mining operations.
Education, Training and Employment
In 1996, PT Freeport Indonesia initiated an aggressive program to
increase the number of Papuan employees throughout the workforce and
especially among management. The goal was to double the total number of
Papuan employees by 2001 and the total number of Papuan staff (managerial
and professional) employees by 2006. Both goals have already been
surpassed. At the end of 2000, PT Freeport Indonesia had 1,523 Papuan
employees, compared to 640 in 1996; and 114 Papuan staff employees,
compared to 48 in 1996 (see Fig. #2).
Because there has not been a strong tradition of education in Irian Jaya
(Papua), special educational efforts are necessary to continue to
increase the Papuan share of the company's work force. In addition to the
educational programs that are part of the Freeport Fund for Irian Jaya
Development, PT Freeport Indonesia is also working on establishing a
training institute. This institute will have training for all levels of
mine and support personnel and will include a technical high school and
polytechnic training.
(Photo)
Our operations have directly supported the building of three schools for
local children, provided financial support for 12 other schools and 5,000
scholarships for Papuans.
12
III. Environmental Management
Environmental Commitments
We are fully committed to minimizing the impact of our operations on the
surrounding environment and to reclaiming or revegetating land that is
disturbed. As part of our comprehensive Environmental Policy, we are a
signatory to the International Council on Metals and the Environment
Environmental Charter. Through this policy, we commit to giving our
highest priority to sound environmental management and practices; to
providing adequate resources to fulfill that responsibility; and to
continuous improvement of our environmental performance at every
operational site. We also commit strongly to supporting scientific
research to assist us in finding and applying appropriate environmental
technologies; to comprehensive monitoring to ensure that our practices
are working; and to both internal and external environmental audits to
measure performance.
Auditing
Our Environmental Policy requires the performance of annual internal
environmental audits. The 2000 internal audit concluded that PT Freeport
Indonesia's Irian Jaya (Papua) operations are in material compliance with
Government of Indonesia laws and regulations. In addition, PT Freeport
Indonesia made a commitment to independent external technical
environmental audits by qualified experts every three years, with the
results to be made public. The first such audit was in 1996, when PT
Freeport Indonesia was the first company in Indonesia to undergo an
external environmental audit of its operations under a new voluntary
program of the Government of Indonesia. The independent, internationally
qualified environmental consulting firm Dames & Moore conducted the
technical audit. The results of that audit were made public and its 33
primary recommendations were implemented.
The second external triennial technical environmental audit of PT
Freeport Indonesia was completed in 1999 and its results were also made
public. The audit was conducted by the internationally recognized
environmental consulting and auditing firm of Montgomery Watson. The
auditors found "the Environmental Management System (EMS) developed and
implemented by PT Freeport Indonesia to be exemplary and a showcase for
the mining industry." The auditors concluded that PT Freeport Indonesia "
... incorporates environmental management systems supported by
environmental programs and resources that achieve the standard of
practice for world-scale mines." Montgomery Watson also provided
specific recommendations, including that PT Freeport Indonesia conduct a
comprehensive groundwater study and additional groundwater monitoring,
increase biological monitoring in estuaries, modify the closure plan to
include tailings and port site areas, and continue development of
effective and innovative technology for the treatment of acid rock
drainage.
All of these major recommendations were acted upon during 2000, although
some of the recommendations are long-term and action will be ongoing.
Responding
(Photo)
Our overburden reclamation continues to show promising results in a very
challenging high-altitude environment.
13
to these recommendations, PT Freeport Indonesia has conducted
comprehensive groundwater studies to assist in capturing and monitoring
the impacts of acid rock drainage; increased monitoring of mangrove
invertebrates including mollusk and crustacean species; initiated a
crocodile and turtle survey; initiated the expansion of the site-wide
project closure plan with a renewed focus on end-of-mine-life social
issues; and conducted a comprehensive global review and pilot plant
studies of acid rock drainage treatment technologies, resulting in
selection of a proprietary treatment process. The first stage of the
treatment plant is to be commissioned in the third quarter of 2001.
Early in 2000, following the public release in December 1999 of the
Montgomery Watson audit, the Indonesian State Minister for the
Environment and BAPEDAL (the Indonesian environmental protection agency)
posed questions about the audit. A number of additional meetings were
held with BAPEDAL staff and substantial additional information was
provided. In its validation report on the audit, BAPEDAL and the State
Minister for the Environment made a number of critical comments about the
Montgomery Watson audit. Montgomery Watson responded to these points in
detail and PT Freeport Indonesia continues to work cooperatively with
BAPEDAL to strengthen and enhance the voluntary environmental audit
process.
The 1996 audit report by Dames & Moore and the executive summary of the
1999 audit by Montgomery Watson are available on our Internet web site
"fcx.com." In addition, the full text of the Montgomery Watson audit
report is available upon request.
ISO 14001 Environmental Management System
ISO 14001 is a voluntary international standard that provides a
systematic approach to continual improvement by companies in their
Environmental Management System. PT Freeport Indonesia has committed to
achieve the certification for its operations. In the year 2000, PT
Freeport Indonesia completed the distribution of Environmental Management
System documents and conducted training of personnel in the newly revised
and organized Environmental Management System. An internal audit was
conducted in August 2000 to review the completeness of the Environmental
Management System and, based on its findings, the company then solicited
several ISO certification companies to submit bid proposals for
conducting the formal certification audit in 2001.
(Photo)
Three phases of reclamation in the Ajkwa Deposition Area are shown here:
at top, recent tailings deposition; in the middle, natural succession of
local grasses, shrubs and trees; and at bottom, agricultural tests being
conducted at our reclamation test center.
Tailings Management Plan
Tailings are the finely ground natural rock left over from the processing
of copper ore by physical grinding and flotation methods. Under PT
Freeport Indonesia's Tailings Management Plan, approved by the Government
of Indonesia, the Ajkwa Deposition Area operates as an engineered,
managed system for the deposition and control of tailings. Tailings
reclamation studies show that the Ajkwa Deposition Area, a portion of the
flood plain of the Ajkwa River currently encompassing some 14,000
hectares, can be readily revegetated with native and agricultural plant
species once mining is completed (see "Reclamation and Revegetation"
below).
PT Freeport Indonesia has conducted comprehensive technical evaluations
of alternative tailings disposal options and has selected the most
appropriate management system for the site conditions. Both independent
environmental audits of PT Freeport Indonesia's
14
Environmental Management
Systems - by Dames & Moore in 1996 and Montgomery Watson in 1999 - have
concluded that the company's Tailings Management Plan represents the best
alternative considering the applicable geotechnical, topographic,
climatologic, seismic and water quality conditions.
Tailings have an alkaline pH when released from the mill and data show
that the pH in the Ajkwa River system is alkaline, meaning the tailings
are not producing an acidic condition (see Fig. #3). (The pH is a measure
of acidity or its opposite, alkalinity. Neutral is 7.0, meaning any pH
greater than that is alkaline.) The annual average pH in the Ajkwa River
for 1996 through 2000 ranged from 7.5 to 8.1.
Comprehensive water quality sampling of the tailings management system
shows that the water in the Ajkwa River and Ajkwa Deposition Area meets
not only Indonesian Government water quality limits, but also U.S.
Environmental Protection Agency (EPA) and World Health Organization (WHO)
drinking water standards for metals, including copper (see Fig. #4). In
addition, when the data are compared to U.S. EPA water quality criteria
and other scientific information on copper impacts on aquatic organisms,
the values for dissolved copper in the Ajkwa River system are within the
acceptable range of these values.
Fig. #4
Comprehensive sampling of water in the Ajkwa river shows that copper
concentrations are minimal.
(Graph showing the following data)
Dissolved copper in parts-per-million
1996 1997 1998 1999 2000
----- ----- ----- ----- -----
(Annual Average Concentration)
U.S. EPA water quality
criteria for copper 1.300 1.300 1.300 1.300 1.300
WHO drinking water
standard for copper 1.000 1.000 1.000 1.000 1.000
Ajkwa River 0.050 0.018 0.015 0.011 0.009
Extensive biological sampling shows that comparable numbers of species
and aquatic organisms were collected in the Ajkwa and Minajerwi estuaries
downstream of the Ajkwa Deposition Area (with tailings) as were found in
the Kamora and Otokwa estuaries (without tailings) (see Fig. #5).
Fig. #5
Tailings estuaries (Ajkwa and Minajerwi Rivers) have comparable numbers
of aquatic species and organisms as reference estuaries without tailings
(Kamora and Otokwa Rivers) based on per unit catch by trawl-net sampling.
(Graphs showing the following data)
Number of Number of
species Organisms
--------- ---------
(1996 to 2000 Quarterly Average)
Rivers with tailings
Ajkwa 21 865
Minajerwi 26 1,192
Rivers without tailings
Kamora 27 941
Otokwa 23 626
Reclamation and Revegetation
In fulfillment of its commitment to reclaim or revegetate land disturbed
by its operations, PT Freeport Indonesia has conducted comprehensive
scientific programs for years in both the highlands and the lowlands
areas. In the lowlands, the reclamation programs have demonstrated that
both native and agricultural species grow well on tailings soil. The
purpose of the programs is to provide the necessary knowledge to
transform the Ajkwa Deposition Area into agriculturally productive land
or return it to native vegetation in the future. Plants successfully
tested include grasses for fodder; local trees such as casuarina and
sago; cash-crop trees such as guava, coconut, banana, papaya, orange,
avocado, starfruit, mango, breadfruit and others; other cash-crop plants
such as peanuts, pineapple and sugar cane; vegetables such as green
beans, soy beans, peas, chili peppers, cucumbers and tomatoes; other cash
crops such as coffee, cloves and oil palms; and crops favored by the
local people such as taro and sweet potato (see Fig. #6). PT Freeport
Indonesia's comprehensive sampling program monitors environmental
conditions in the tailings deposition area. Rigorous testing performed on
edible plants and fruits grown on tailings impacted areas continues to
show that the metals consituents remain safely below recommended national
and international standards.
15
Also being successfully tested in the lowlands tailings deposition area
are aquaculture ponds for raising food fish such as barramundi and
tilapia; and goldfish, also favored as a food fish by many Indonesians.
In a new program, featuring a partnership between the local people and a
professional farmer, commercial agriculture is being tested on tailings
soil.
In the highlands, the reclamation studies are perhaps more challenging.
Alpine plant species are more difficult to propagate and grow more slowly
in the colder, higher elevations around the mine site. In many cases, PT
Freeport Indonesia's scientists are conducting original research on
species about which little is known. Because the end of the mine's life
is at least decades into the future, PT Freeport Indonesia should have
sufficient time to complete these studies and programs which will meet
our commitment to revegetate with native species those highland areas
disturbed by mining activities (see Fig. #6).
Fig. #6
Reclamation tests show success for many species on tailings; overburden
testing to date reflects challenges of high-altitude reclamation. (Data
is cumulative 1995 through 2000).
(Graph showing the following data)
Species Species
Tested Successful
------- ----------
(Number of plant species)
Tailings 118 108
Overburden 57 33
Ecological Risk Assessment
PT Freeport Indonesia continues to conduct a formal, protocol-structured
ecological risk assessment of its tailings management plan. The risk
assessment, which includes both environmental and human health
components, consists of three phases. The first phase, the screening
level risk assessments, were completed early in 2000 and investigated
potential risks from the tailings management system to human health and
terrestrial and aquatic ecosystems. Each potential risk was examined and
quantified and those that were found to pose no significant risk were
screened out, or eliminated from further detailed study. The second phase
required implementation of individual scientific studies or data-
gathering projects to provide the risk assessors with information for
further, detailed review of potential risks not screened out. Completion
of the phase two data gathering was accomplished by the end of 2000. The
final phase, the detailed risk assessments, is under way with the
environmental risk assessment final report to be completed in mid-2001.
The results of this comprehensive series of studies will guide PT
Freeport Indonesia's future tailings management decisions. These
assessments are being conducted by a team of Indonesian and international
scientific experts in the field.
The ecological risk assessment includes dozens of scientific studies on a
broad array of topics including water chemistry, human use and dietary
survey, groundwater and hydrogeologic data collection, surveys of metals
in tailings soil and windblown dust, uptake of metals to plants, impact
of tailings sediments on aquatic ecosystems, analysis of fish tissue, and
many others. This PT Freeport Indonesia project is believed to be the
most extensive privately funded ecological risk assessment ever
conducted.
Fig. #7
The comprehensive Long-Term Monitoring Plan encompasses a large number of
samples and analyses every year.
(Graphs showing the following data)
Number of samples Number of analyses
------------------ --------------------
1998 1999 2000 1998 1999 2000
Type of Sample:
Aquatic Biology 474 408 634 1,896 1,224 1,268
Aquatic Tissue 611 850 770 3,932 4,250 9,410
Mine Water 120 258 133 1,743 6,709 4,429
Surface Water 1,095 766 440 8,676 22,984 25,235
Tailings 2,349 2,451 3,954 11,745 12,258 11,162
Wanagon Overburden Stockpile Slippage
On May 4, 2000, a slippage occurred in the overburden waste stockpile at
the Wanagon basin following a period of excessive rainfall, causing a
wave of water and material to overflow from the basin. Four employees of
a contractor to PT Freeport Indonesia were working in the area and
perished. Contained
16
(Photo)
Supported by a cooperative program between PT Freeport Indonesia and the
local people, growing chili peppers has shown success as a cash crop.
within the mud were the treatment solids from the
lime precipitation of acid rock drainage, which then entered the tailings
river system near the village of Banti. Sampling and monitoring were
initiated at a number of stations covering the entire tailings system
between the mine and estuary for a period of several months. A specific
risk analysis was conducted as a result of this event and was based on
the monitoring program. No long-term environmental effects were found
from the direct monitoring nor predicted by the risk assessment. The
slippage caused a flow of sediments containing slightly elevated levels
of precipitated copper. As a result, water quality in the river was
temporarily diminished due to higher levels of total suspended solids.
PT Freeport Indonesia engaged international experts and outside
consultants led by a team from the Institute of Technology of Bandung
(Indonesia) to conduct a comprehensive study of the cause of the slippage
and to recommend a future course of action. Working with the close
cooperation of the Indonesian Department of Energy and Natural Resources
and also BAPEDAL, the company initiated a stockpile stabilization program
and voluntarily agreed to a temporary limitation on ore production from
the Grasberg open pit of 200,000 metric tons per day average.
(Underground production was not affected.)
A safe-zone based on engineering calculations was subsequently identified
along the Wanagon River and within the village of Banti. The residents
within this zone were temporarily moved to Tembagapura and the houses
were removed. These families are being relocated to new housing designed
according to their wishes and located on higher ground in Banti. After
successful completion of the stabilization program and consultation with
the Indonesian government and affected local residents, normal overburden
placement at the Wanagon stockpile resumed and the restriction on
production from the Grasberg open pit was lifted at the end of 2000.
Overburden and Acid Rock Drainage Management
Overburden is the rock with no economic value that has to be moved aside
in accordance with a comprehensive Overburden Management Plan in order to
reach the ore in the mining process. Most metals occur in nature as
minerals called sulphides. If they are mined, and rock containing
sulphides is left exposed to the elements, the action of water, oxygen
and natural bacteria can create sulphuric acid. This acidic water can
dissolve metals contained in rock and, if not collected or treated, the
contaminated water can be harmful to aquatic organisms and plants. This
condition is called acid rock drainage. PT Freeport Indonesia
continuously monitors and manages acid rock drainage.
For a short time following the Wanagon event in May, restrictions were
placed on the usage of the Wanagon basin for storage of overburden by the
Government of Indonesia. This resulted in short-term modifications of the
mining plan and use of the Carstenzwiede and Manado overburden stockpile
areas. Overburden placement resumed in the Wanagon Basin in July with the
commencement of an 8-million-ton overburden stockpile stability program.
In September, this stability program was evaluated and extended to
accommodate an additional 25 million tons. A comprehensive evaluation of
the overburden stockpile program was completed in December and normal
overburden placement at the Wanagon basin resumed, with approval of the
Indonesian Department of Energy and Natural Resources.
17
For several years a liming plant has been used in the Wanagon basin to
neutralize acid rock drainage and to precipitate from it the dissolved
copper. The precipitation solids were contained within the Wanagon basin.
After the Wanagon event, the same system and facilities remained in
operation, except that it was not possible to contain the precipitate
within the basin. Water quality of the Wanagon River below the basin has
been monitored since the Wanagon slippage event. With few exceptions, the
dissolved copper in this water has remained well below water quality
limits for environmental safety.
During 2000, a technical study of copper removal treatment options was
completed which led to further testing of the three most promising
treatment schemes. From this work, which included the operation of a
pilot plant, fluid bed reactor iron cementation technology was determined
to be the most appropriate. Construction will be completed and the plant
will begin operation in 2001.
The fluid bed reactor iron cementation plant will be constructed in the
mill area for the purpose of removing dissolved copper from acid rock
drainage. This facility will be used to treat acid rock drainage
collected from the mining, overburden storage and other areas. The fluid
bed reactor plant will be constructed in modules of approximately 5,000-
gallon-per-minute capacity each, allowing for future expansion as the
need arises. The first plant module is planned to be operational by mid-
2001.
The fluid bed reactor is a modern adaptation of the proven process of
iron reduction. It is planned to be capable of removing dissolved copper
from water in the ranges of approximately 20 milligrams per liter to
1,000 milligrams per liter. The effluent from the fluid bed reactor will
be neutralized with lime solution and added to the tailings thickener
where it can be either reused or released with the tailings. The
recovered copper will become salable product and the net proceeds from
the sales will be used for community support.
Long-Term Environmental Monitoring Plan
PT Freeport Indonesia conducts a Long-term Environmental Monitoring Plan
to evaluate the potential impact of its operations on water quality,
biology, hydrology, sediments and air quality. This comprehensive program
ensures that the company has all of the necessary scientific information
available for all environmental aspects of its operations in order to
minimize, mitigate and properly manage environmental effects. Fig. #7
shows the number of samples and analyses conducted in 2000 as part of
this extensive program.
Waste Management and Recycling
PT Freeport Indonesia has implemented a comprehensive waste management
system utilizing the principles of reuse, recycling and reduction. Waste
minimization programs involving reduction and substitution of
environmentally friendly products are already in place. Bulk containers,
waste oil (see Fig. #8), used paper and tires are all reused locally in
environmentally acceptable manners. Other recyclable materials such as
aluminum, scrap metals and used batteries are collected and stored
pending the issuance of government regulations on resale or trade.
The company conducts waste segregation, including small amounts of
hazardous waste, at the point of origin wherever possible. Medical wastes
are separated from other wastes in special containers for final
destruction in a medical waste incinerator. Collection and packaging of
the small amount of wastes from assay work on ore samples, which is
shipped off-site to a special hazardous waste facility, are strictly
conducted under Indonesian government regulations. The other solid
wastes are disposed of in three specially designated locations at
landfills for inert wastes and a landfill for biodegradable wastes, which
is lined and equipped with a leachate collection and treatment system.
Mimika Environmental Forum
Although PT Freeport Indonesia has comprehensive programs to minimize and
manage all of its environmental impacts, these programs are focused on
the company's operations. Rapid urbanization is taking place surrounding
the company's operations in the local Mimika regency of Irian Jaya
(Papua), Indonesia, and this growth also has environmental impacts. The
population in this area has grown from less than 1,000 to more than
100,000 in three decades. The new regional government is struggling to
cope with issues that even more developed regions of Indonesia, or the
world, would find challenging. Among them are clean water distribution,
waste disposal, drainage and flood control, power generation and
transmission, roads and other infrastructure.
18
PT Freeport Indonesia is lending its expertise to the local government to
help face these challenges in ways that will benefit everyone in the
future. In addition, the company has worked to open an ongoing,
community-wide dialogue to better understand and manage the environmental
issues associated with growth. PT Freeport Indonesia and the local
Mimika government have invited an environmental non-governmental
organization, Eco Bumi Nusantara, to serve as a facilitator for the
Mimika Environmental Forum. The forum, made up of local tribal,
religious, government and business leaders, meets regularly to discuss
ways to minimize the environmental impacts that result from rapid growth
and to manage and mitigate those impacts that do occur. The
organization's goal is to educate and involve the community in striking a
balance between growth and environmental responsibility.
Fig. #8
Waste oil reused as fuel versus new oil consumption.
(Graph showing the following data)
Waste Oil New Oil
Reused as Fuel Consumption
-------------- -----------
(Millions of liters per year)
1996 4.84 7.26
1997 5.91 8.51
1998 8.81 7.94
1999 7.39 7.91
2000 6.69 6.90
Training and Technology
An important element of PT Freeport Indonesia's sustainable development
program is the training of employees and local people in environmental
management issues, programs and procedures at the company's operations.
Included in this training is technology transfer for modern pollution
control equipment, environmental sampling and monitoring methodologies.
Fig. #9 shows the number of personnel involved and worker-hours spent in
environmental training in 1997, 1998, 1999 and 2000.
Fig. #9
Environmental training of PT Freeport Indonesia and contractor personnel.
(Graph showing the following data)
1997 1998 1999 2000
----- ----- ----- ------
Personal Trained 1,918 2,951 7,008 9,708
Worker-hours of
Training 5,171 7,506 9,785 14,478
ATLANTIC COPPER, S.A.
Environmental Programs Update
Atlantic Copper was one of just four companies nominated in May 2000 for
the sixth Prince Felipe Excellence-in-Business Award for Environmental
Industrial Management, a prestigious award given to selected businesses
in Spain for efficiency and excellence in addressing and managing their
environmental issues. The ceremony was held in Madrid in the Ministry of
Industry and Energy in the presence of Prince Felipe and government
ministers.
Atlantic Copper had achieved ISO 14001 certification of all its
facilities in 1999, and had been validated for compliance with the
European Union Regulation on Environmental Eco-Management and Eco-
Auditing. In 2000, these systems were further strengthened by
successfully passing follow-up ISO audits. In addition, the annual
internal environmental audits of all of the Atlantic Copper operations
found that the company had a sound and comprehensive environmental
management system and was in material compliance at all operation sites.
In 2000, Atlantic Copper also further modified systems and made other
improvements to continue to reduce air emissions and water discharges.
Huelva Weak Acid Disposal
As reported a year ago, in proceedings brought by a single individual and
concerning a specific time period,
19
(Photo)
Training and the transfer of technology have resulted in many skilled
Papuans.
a Spanish court ruled against Atlantic
Copper's past practices for the reuse of weak acid and waste refinery
electrolyte from its smelter in a copper recovery/ore leach process. The
court, however, expressly found that there has been no proof of damage to
the environment or human health as a result of the practices. The company
is now building two new plants that will reuse the weak acid to produce
marketable gypsum. This practice will purify and recirculate refinery
electrolyte, thereby eliminating the previous practices.
20
FREEPORT-McMoRan COPPER & GOLD INC. Selected Financial and Operating Data
Years Ended December 31, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------
(Financial Data in Thousands, Except Per Share Amounts)
FCX FINANCIAL DATA
Revenues $1,868,610 $1,887,328 $1,757,132 $2,000,904 $1,905,036
Operating income 478,700a 568,242b 577,947c 657,738d 637,309e
Net income applicable
to common stock 39,500a 100,787b 118,317c 208,541d 174,680e
Basic net income
per common share .26a .62b .67c 1.06d .90e
Diluted net income
per common share .26a .61b .67c 1.06d .89e
Dividends paid
per common share - - .20 .90 .90
Basic average
shares outstanding 153,997 163,613 175,353 196,392 194,910
Diluted average
shares outstanding 154,519 164,567 175,354 197,653 196,682
At December 31:
Property, plant
and equipment, net 3,248,710 3,381,465 3,504,221 3,558,736 3,106,042
Total assets 3,950,741 4,082,916 4,192,634 4,152,209 3,865,534
Long-term debt,
including current
portion and short-
term borrowings 2,190,025 2,148,259 2,456,793 2,388,982 1,562,916
Redeemable preferred
stock 475,005 487,507 500,007 500,007 500,007
Stockholders' equity 37,931 196,880 103,416 278,892 675,379
PT FREEPORT INDONESIA OPERATING DATA,
Net of Rio Tinto's Interest
Copper
Production
(000s of recoverable
pounds) 1,388,100 1,428,100 1,427,300 1,166,500 1,118,800
Sales
(000s of recoverable
pounds) 1,393,700 1,441,000 1,419,500 1,188,600 1,097,000
Average realized
price $.82 $.75 $.73 $.94f $1.02f
Gold
Production
(recoverable ounces)1,899,500 2,379,100 2,227,700 1,798,300 1,695,200
Sales
(recoverable ounces)1,921,400 2,423,900 2,190,300 1,888,100 1,698,900
Average realized
price $276.06 $276.53 $290.57 $346.14g $390.96g
Silver
Production
(recoverable ounces)3,542,400 3,444,500 3,421,200 2,568,700 2,360,600
Sales
(recoverable ounces)3,542,300 3,479,600 3,412,300 2,724,300 2,532,000
Average realized
price $4.98 $5.21 $5.29 $4.68 $4.95
ATLANTIC COPPER OPERATING DATA
Concentrate treated
(metric tons) 916,300 949,400 973,900 929,700 804,500
Anodes (000s of pounds)
Production 639,100 647,100 642,400 639,800 547,900
Sales 80,600 84,300 96,900 133,500 77,300
Cathodes (000s of pounds)
Production 567,900 556,600 544,800 505,600 462,900
Sales
(including wire rod
and wire) 562,300 558,500 544,300 505,300 461,100
Gold sales in anodes
and slimes (ounces) 605,700 792,700 678,700 532,900 421,300
Cash production cost
per pound $.14 $.15 $.14 $.12 $.15
21
FREEPORT-McMoRan COPPER & GOLD INC. Selected Financial and Operating Data
Years Ended December 31, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------
PT SMELTING OPERATING DATA h
Concentrate treated
(metric tons) 582,200 436,000 -
Anodes (000s of pounds)
Production 383,200 279,400 -
Sales 33,100 50,300 -
Cathodes (000s of pounds)
Production 349,200 200,100 -
Sales 349,700 193,800 -
Cathode cash production
cost per pound $.13 $.12 -
PT FREEPORT INDONESIA, 100% OPERATING DATA
Ore milled
(metric tons per day) 223,500 220,700 196,400 128,600 127,400
Average ore grade
Copper (percent) 1.07 1.12 1.30 1.37 1.35
Gold (grams
per metric ton) 1.10 1.37 1.49 1.51 1.52
Gold (ounce
per metric ton) .035 .044 .048 .049 .049
Silver (grams
per metric ton) 2.97 2.78 3.17 3.11 3.10
Silver (ounce
per metric ton) .095 .089 .102 .100 .100
Recovery rates (percent)
Copper 88.2 84.6 86.9 85.4 83.8
Gold 84.3 83.7 85.3 81.4 77.1
Silver 60.0 63.4 71.8 65.6 64.6
Copper (000s of recoverable pounds)
Production 1,636,700 1,630,700 1,721,300 1,166,500 1,118,800
Sales 1,643,500 1,647,800 1,706,700 1,188,600 1,097,000
Gold (recoverable ounces)
Production 2,362,600 2,993,100 2,839,700 1,798,300 1,695,200
Sales 2,387,300 3,047,100 2,774,700 1,888,100 1,698,900
Silver (recoverable ounces)
Production 3,833,200 3,781,300 4,040,600 2,568,700 2,360,600
Sales 3,847,700 3,829,400 4,008,000 2,724,300 2,532,000
Notes
a. Includes net charges totaling $12.4 million ($8.0 million to
net income or $0.05 per share) consisting of $6.0 million for
contribution commitments to support small business development
programs within Irian Jaya (Papua) and $7.9 million for personnel
severance costs, partly offset by a $1.5 million gain for the
reversal of stock appreciation rights and related costs caused by
the decline in FCX's common stock price.
b. Includes charges totaling $8.8 million ($5.7 million to net
income or $0.03 per share) consisting of $3.6 million for an
early retirement program, $1.4 million for costs of stock
appreciation rights caused by the increase in FCX's common stock
price and $3.8 million for certain nonrecurring costs.
c. Includes net charges totaling $9.1 million ($4.4 million to
net income or $0.03 per share) associated with the sale of
corporate aircraft.
d. Includes a $25.3 million gain ($12.3 million to net income
or $0.06 per share) for the reversal of stock appreciation rights
and related costs caused by the decline in FCX's common stock
price.
e. Includes charges totaling $17.4 million ($8.0 million to net
income or $0.04 per share) consisting of $12.7 million for costs
of stock appreciation rights caused by the increase in FCX's
common stock price, $3.0 million for costs related to a civil
disturbance and $1.7 million for an early retirement program.
f. Amounts were $0.90 in 1997 and $0.97 in 1996 before hedging
adjustments.
g. Amounts were $326.08 in 1997 and $382.62 in 1996 before
hedging adjustments.
h. PT Smelting began operations in the fourth quarter of 1998.
Amounts were insignificant for 1998.
22
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
OVERVIEW
Our "Working Toward Sustainable Development" report on pages
6 through 9 is part of Management's Discussion and Analysis and
is incorporated herein by reference. The results of operations
we are reporting do not necessarily represent what our future
results may be. The following discussion should be read together
with our financial statements and the related notes.
We operate through our majority-owned subsidiaries, PT
Freeport Indonesia and PT Irja Eastern Minerals and through
Atlantic Copper, S.A., our wholly owned subsidiary. PT Freeport
Indonesia's operations involve mineral exploration and
development, mining and milling of ore containing copper, gold
and silver in Irian Jaya (Papua), Indonesia, and the worldwide
marketing of concentrates containing those metals. PT Freeport
Indonesia also has a 25 percent interest in PT Smelting, an
Indonesian company which operates a copper smelter and refinery
in Gresik, Indonesia. Eastern Minerals conducts mineral
exploration activities in Irian Jaya (Papua). Atlantic Copper's
operations are located in Spain and involve the smelting and
refining of copper concentrates, and the marketing of refined
copper products and precious metals in slimes.
PT Freeport Indonesia operates under an agreement, called a
Contract of Work, with the Government of Indonesia. The Contract
of Work allows us to conduct exploration, mining and production
activities in a 24,700-acre area called Block A. The Contract of
Work also allows us to explore for minerals in a 0.5 million-acre
area called Block B. All of our proved and probable mineral
reserves and current mining operations are located in Block A.
Eastern Minerals holds an additional Contract of Work originally
covering a 2.5 million-acre area. Under the terms of the Eastern
Minerals Contract of Work, we have already relinquished 1.25
million acres and must relinquish an additional 0.6 million
acres. In addition to the PT Freeport Indonesia and Eastern
Minerals exploration acreage, we have the right to conduct other
mineral exploration activities in Irian Jaya (Papua) pursuant to
a joint venture through PT Nabire Bakti Mining. Field
exploration activities outside of our current mining operations
in Block A have been temporarily suspended pending the resolution
of regulatory and local community issues.
Joint Ventures with Rio Tinto
In 1996, we established joint ventures with Rio Tinto plc. One
joint venture covers PT Freeport Indonesia's mining operations in
Block A and 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 from Block A.
Operating, nonexpansion capital and administrative costs are
shared proportionately between PT Freeport Indonesia and Rio
Tinto based on the ratio of (a) the incremental revenues from
production from our most recent expansion and (b) total revenues
from production from Block A, including production from PT
Freeport Indonesia's previously existing reserves. PT Freeport
Indonesia will continue to receive 100 percent of the cash flow
from specified annual amounts of copper, gold and silver through
2021 calculated by reference to its proved and probable reserves
as of December 31, 1994 and 60 percent of all remaining cash
flow.
Under our joint venture arrangements, Rio Tinto has a 40
percent interest in future development and exploration projects
under PT Freeport Indonesia's Contract of Work and Eastern
Minerals' Contract of Work. Rio Tinto also has the option to
participate in 40 percent of any of our other future exploration
projects in Irian Jaya (Papua). Rio Tinto has elected to
participate in 40 percent of our interest and cost in the PT
Nabire Bakti exploration joint venture covering approximately 1
million acres contiguous to Block B and one of Eastern Minerals'
blocks.
Reserves
During 2000, additions to the aggregate proved and probable
reserves of the Grasberg and other Block A ore bodies totaled
approximately 202 million tons of ore representing 2.7 billion
recoverable pounds of copper and 4.5 million recoverable ounces
of gold (see "Exploration"). Net of Rio Tinto's share, PT
Freeport Indonesia's share of proved and probable recoverable
reserves as of December 31, 2000 was 38.9 billion pounds of
copper, 50.3 million ounces of gold and 108.5 million ounces of
silver (see Note 13 of "Notes to Financial Statements").
Estimated recoverable reserves were assessed using a copper price
of $0.90 per pound and a gold price of $300 per ounce. Using a
gold price of $270 per ounce would not have a significant impact
on our estimated recoverable reserves.
23
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
CONSOLIDATED RESULTS OF OPERATIONS
Our consolidated revenues, which include PT Freeport
Indonesia and Atlantic Copper revenues, have remained relatively
constant over the past three years primarily because of
offsetting variances in PT Freeport Indonesia's copper and gold
sales volumes and price realizations. Revenues in 2000 benefited
from higher copper prices, offset by lower copper and gold sales
volumes when compared with 1999 and 1998. Revenues in 1999
benefited from higher copper and gold sales volumes and
significantly lower treatment charge rates, partly offset by
lower gold prices when compared with 1998.
Higher production and delivery costs in 2000 reflect higher
mine maintenance and energy costs at PT Freeport Indonesia and
the net mark-to-market gains and losses on our foreign currency
contracts ($21.7 million loss in 2000, $11.8 million loss in 1999
and $7.2 million gain in 1998), which are designed to hedge
anticipated future operating costs. Beginning in 2001, new
accounting rules will result in deferring unrealized gains/losses
on our foreign currency contracts that meet new hedging criteria.
Our production and delivery costs increased in 1999 when compared
with 1998 primarily because of higher production rates and a
strengthening of the Indonesian currency, the rupiah.
Our joint ventures with Rio Tinto incurred exploration costs
of $13.3 million in 2000, $17.7 million in 1999 and $29.4 million
in 1998. The reduction in exploration costs reflects a change
beginning in 1999 to focus primarily on those areas with near-
term exploitation opportunities and a reduction in field
activities outside of Block A because of regulatory and local
community issues. All exploration costs in the joint venture
areas with Rio Tinto are now shared 60 percent by us and 40
percent by Rio Tinto. Our exploration expenses in 1998 primarily
were incurred in the Eastern Minerals and PT Freeport Indonesia
Block B areas. All of our Block A exploration costs in 1998 were
reimbursed by $100 million of exploration funding received from
Rio Tinto in 1996. The FCX/Rio Tinto joint ventures' 2001
exploration budgets total approximately $10 million.
We account for our interest in PT Smelting using the equity
method. The losses include our share of PT Smelting's operating
losses plus the impact of deferring PT Freeport Indonesia's
profits on 25 percent of its sales to PT Smelting that are still
in PT Smelting's inventory at year end. Our share of PT
Smelting's operating losses totaled $13.6 million in 2000, $10.1
million in 1999 and $1.6 million in 1998. Charges for deferring
profits on intercompany sales totaled $2.0 million in 2000, $8.0
million in 1999 and $3.3 million in 1998.
General and administrative expenses were basically unchanged
in 2000 when compared with 1999. In 1999 we reduced general and
administrative expenses by $17.2 million compared with 1998. The
reductions in 1999 were primarily because of initiatives to
reduce costs and the effect of sharing these costs with Rio Tinto
pursuant to joint venture agreements. The 2000 amount includes
charges totaling $6.0 million associated with contribution
commitments to support small business development programs within
Irian Jaya (Papua) over a two-year period and $2.6 million for
personnel severance costs, partly offset by a $1.5 million
reversal of costs for stock appreciation rights caused by a
decrease in FCX's common stock price. The 1999 amount includes
charges totaling $5.5 million for costs of stock appreciation
rights caused by the increase in FCX's common stock price and for
certain nonrecurring costs. The 1998 amount includes net charges
totaling $11.1 million associated with the sale of corporate
aircraft. As a percentage of revenues, general and
administrative expenses were less than 4 percent in 2000 and
1999, and approximately 5 percent in 1998.
Our total interest cost (before capitalization) of $212.6
million in 2000 was higher than the 1999 level of $197.9 million
primarily because of higher interest rates. Total interest cost
for 1999 was lower than the $225.2 million reported in 1998
primarily because we reduced debt levels during 1999.
Capitalized interest totaled $7.2 million in 2000, $3.8 million
in 1999 and $19.6 million in 1998. Capitalized interest in 1998
related primarily to our most recent expansion of our mining and
milling processing capacity.
FCX's effective tax rate was 58 percent in 2000, 51 percent in
1999 and 47 percent in 1998 (see Note 8 of "'Notes to Financial
Statements"). PT Freeport Indonesia's Contract of Work provides
a 35 percent corporate income tax rate for PT Freeport Indonesia
and a 10 percent withholding on dividends paid to FCX by PT
Freeport Indonesia. The withholding also applies to interest
paid by PT Freeport Indonesia on debt incurred after the signing
of the Contract of Work in 1991. No income taxes are recorded at
Atlantic Copper, which is subject to taxation in Spain, because
it has not generated significant taxable income in recent years
and has substantial tax loss carryforwards for which no financial
statement benefit has been provided.
24
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
Additionally, we only receive a small U.S. tax benefit on costs
incurred by our parent company because it has no U.S.- sourced
income. As a result, our effective tax rate will vary with the
level of earnings at PT Freeport Indonesia, Atlantic Copper and
the parent company.
The decrease in minority interest charges in 2000 compared
with 1999 and the increase in 1999 compared with 1998 primarily
reflect changes in ownership of certain consolidated PT Freeport
Indonesia infrastructure joint ventures (see "Capital Resources
and Liquidity").
We have two operating segments: "mining and exploration"
and "smelting and refining." Our mining and exploration segment
includes PT Freeport Indonesia's copper and gold mining
operations in Indonesia and our Indonesian exploration
activities. Our smelting and refining segment includes Atlantic
Copper's operations in Spain and PT Freeport Indonesia's 25
percent equity investment in PT Smelting. Summary operating
income (loss) data by segment follows (in millions):
Years Ended December 31, 2000 1999 1998
- ------------------------------------------------------------
Mining and exploration $490.0 $609.6 $566.7
Smelting and refining (17.3) (16.7) 39.0
Intercompany eliminations and other 6.0 (24.7) (27.8)
------ ------ ------
Operating income a $478.7 $568.2 $577.9
====== ====== ======
a. Because we eliminate the profit on PT Freeport Indonesia's
sales to Atlantic Copper and PT Smelting until the copper
concentrate is processed and sold to a third party, operating
income was increased by $18.9 million in 2000 and decreased by
$(17.2) million in 1999 and $(19.1) million in 1998. Our
consolidated earnings fluctuate depending on the timing and
prices of these sales.
MINING AND EXPLORATION OPERATIONS
A summary of changes in PT Freeport Indonesia revenues follows
(in millions):
2000 1999
- ---------------------------------------------------------
Revenues - prior year $1,464.8 $1,351.1
Price realizations:
Copper 96.2 27.4
Gold (0.9) (34.0)
Sales volumes:
Copper (35.3) 15.7
Gold (139.0) 67.9
Adjustments, primarily for
copper pricing on
prior year open sales 7.8 (20.8)
Treatment charges,
royalties and other 19.5 57.5
-------- --------
Revenues - current year $1,413.1 $1,464.8
======== ========
Gross Profit Per Pound of Copper (cents)
Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------
Average realized price 81.6 74.7 72.8
----- ----- -----
Production costs:
Site production and delivery 42.7 36.5 32.2
Gold and silver credits (39.3) (47.8) (46.0)
Treatment charges 18.2 18.9 23.5
Royalty on metals 1.4 1.6 1.3
----- ----- -----
Cash production costs 23.0 9.2 11.0
Depreciation and amortization 18.0 18.0 17.0
----- ----- -----
Total production costs 41.0 27.2 28.0
----- ----- -----
Adjustments, primarily for
copper pricing
on prior year open sales 0.1 (0.5) 1.2
----- ----- -----
Gross profit per pound of copper 40.7 47.0 46.0
===== ===== =====
25
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
PT Freeport Indonesia Operating Results - 2000 Compared with 1999
PT Freeport Indonesia's 2000 revenues benefited from a 9
percent increase in copper price realizations, offset by a 21
percent decline in gold sales volumes and a 3 percent decline in
copper sales volumes compared to 1999. Lower ore grades, partly
offset by improved recovery rates, resulted in lower 2000 sales
volumes. (See "Selected Financial and Operating Data.")
A portion of PT Freeport Indonesia's copper sales are
provisionally priced at the time of shipment and finally priced
in subsequent periods based on prices in effect in those periods.
(See "Disclosures About Market Risks.") PT Freeport Indonesia's
2000 revenues benefited by $7.8 million compared with 1999
revenues because of repricing open copper sales including hedging
contracts. Treatment charges in total were lower in 2000
primarily because of lower treatment rates and copper sales. A
portion of treatment charges varies with the price of copper and
royalties vary with volumes and prices of copper and gold.
Royalties totaled $20.2 million in 2000 and $23.0 million in
1999.
PT Freeport Indonesia's mill throughput averaged 223,500
metric tons of ore per day compared with 220,700 metric tons of
ore per day for 1999. Lower ore grades during 2000, partly
offset by higher recovery rates at the mill, resulted in lower
gold production compared with 1999. In May 2000, PT Freeport
Indonesia, in consultation with the Government of Indonesia,
voluntarily agreed to temporarily limit Grasberg open-pit
production because of an incident at its Wanagon overburden
stockpile. In January 2001, PT Freeport Indonesia resumed normal
mining operations at Grasberg after receiving governmental
approval (see "Wanagon Overburden Stockpile Slippage" in our
"Working Toward Sustainable Development" report). Mill
throughput rates will vary based on the characteristics of the
ore being processed as we manage our operations to optimize metal
production.
At the Deep Ore Zone underground mine, initial production of
ore commenced in September 2000. Production averaged 2,700
metric tons of ore per day during the fourth quarter of 2000 and
is expected to reach 14,000 metric tons of ore per day by the end
of 2001 and full production of 25,000 metric tons of ore per day
by 2004.
Site production and delivery costs in 2000 averaged 42.7
cents per pound of copper, 6.2 cents per pound higher than the
36.5 cents per pound reported in 1999. Higher mine maintenance
and energy costs contributed to the higher unit costs. Gold
credits in 2000 declined to 39.3 cents per pound as compared with
47.8 cents per pound in 1999 because of lower gold sales. Unit
treatment charges were lower in 2000 than in 1999, but are
expected to increase slightly in 2001 because of market
conditions. Unit royalty costs were lower in 2000 compared with
1999 because of lower gold sales.
A portion of PT Freeport Indonesia's surface mining costs
associated with waste rock removal at the Grasberg open-pit mine
are initially deferred and subsequently charged to operating
costs on the basis of the average ratio of waste rock to ore over
the life of the mine. Because of the nature of the Grasberg
deposit, mining costs associated with waste rock removal are
significantly higher in the early years of the mine's life than
in the later years. As a result, waste rock removal costs are
deferred in the early years of the mine's life. Prior to 2000,
ongoing delineation drilling efforts combined with successive
large expansions of PT Freeport Indonesia's mining and milling
capacity caused significant variability in engineering estimates
of the quantity of estimated waste rock required to be removed
over the Grasberg pit's life. As a result, PT Freeport
Indonesia's deferral of waste rock removal costs was determined
using waste-to-ore ratios excluding the years near the end of the
productive life of the Grasberg pit. However, PT Freeport
Indonesia determined that its future surface mine plans are
sufficiently established to substantiate the use of estimated
life-of-mine waste rock tonnage in its 2001 mine plan in the
determination of its deferred waste rock removal costs.
In the fourth quarter of 2000, PT Freeport Indonesia changed
its life-of-mine waste-to-ore ratio to 1.6 to 1 from 2.4 to 1.
The fourth-quarter 2000 impact of the change was a $9.9 million
deferral of mining costs. Total mining costs deferred for the
year 2000 were immaterial. In 1999 PT Freeport Indonesia
amortized $11.6 million of previously deferred mining costs to
production costs. The life-of-mine waste-to-ore ratio and the
remaining life of the surface mine will be reassessed at least
annually by PT Freeport Indonesia, and any changes in estimates
will be reflected prospectively in the determination of deferred
waste rock removal costs. Based on its current mine plan, PT
Freeport Indonesia expects to defer approximately $46 million of
waste rock removal costs during 2001.
PT Freeport Indonesia's depreciation rate of 18.0 cents per
pound for 2000 remained unchanged from 1999 and is expected to
remain the same for 2001.
26
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
PT Freeport Indonesia Operating Results - 1999 Compared with 1998
PT Freeport Indonesia's 1999 revenues benefited from record
annual sales volumes with a 2 percent increase in copper sales
volumes and an 11 percent increase in gold sales volumes plus
slightly higher copper realizations, partly offset by a 5 percent
decline in gold realizations. As a result of repricing prior
year open sales, 1999 revenues were $20.8 million lower compared
with 1998 revenues. Treatment charges in total were lower in
1999 because of a significant loosening of the concentrate market
throughout 1998.
PT Freeport Indonesia's average mill throughput rate was
220,700 metric tons of ore per day for 1999 compared with 196,400
metric tons of ore per day for 1998. Higher throughput, partially
offset by lower ore grades and recovery rates, resulted in record
copper and gold production to PT Freeport Indonesia, net of Rio
Tinto's interest, in 1999.
Site production and delivery costs averaged 36.5 cents per
pound of copper in 1999. The 1999 average costs were higher than
the 32.2 cents per pound reported in 1998 primarily because PT
Freeport Indonesia mined lower grade ore and because of a
stronger Indonesian rupiah. (See "Disclosures about Market
Risks.") An 11 percent increase in gold sales volumes partly
offset by lower gold realizations helped to improve gold credits
to 47.8 cents per pound in 1999, compared with 46.0 cents per
pound in 1998. The significant loosening of the concentrate
market resulted in an average treatment charge rate of 18.9 cents
per pound in 1999, compared with 23.5 cents per pound in 1998.
In 1999, PT Freeport Indonesia agreed to pay voluntary additional
royalties to provide further support to the local governments and
the people of Irian Jaya (Papua). (See Note 1 of "Notes to
Financial Statements.")
PT Freeport Indonesia's depreciation rate of 18.0 cents per
pound for 1999 represents an increase over the 1998 rate to
reflect a full year of depreciation on the assets from the fourth
concentrator mill expansion and other capital additions.
PT Freeport Indonesia Sales Outlook
PT Freeport Indonesia's copper concentrates are sold
primarily under long-term sales agreements that are denominated
in U.S. dollars, mostly to companies in Asia and Europe and to
international trading companies. PT Freeport Indonesia has
commitments from various parties, including Atlantic Copper and
PT Smelting, to purchase virtually all of its estimated 2001
production at market prices. Net of Rio Tinto's interest, PT
Freeport Indonesia's share of sales for 2001 is expected to
approximate 1.4 billion pounds of copper and 2.4 million ounces
of gold. Projected 2001 copper and gold sales reflect the
expectation of higher average mill throughput rates than in 2000
and higher gold ore grades.
PT Freeport Indonesia has a long-term contract to provide
approximately 60 percent of Atlantic Copper's copper concentrate
requirements at market prices. PT Freeport Indonesia is providing
nearly all of PT Smelting's copper concentrate requirements. For
the first 15 years of PT Smelting's operations, the treatment and
refining charges on the majority of the concentrate PT Freeport
Indonesia provides will not fall below a specified minimum rate,
currently $0.23 per pound, the rate for 2000 and the expected
rate for 2001. We anticipate that PT Freeport Indonesia will
sell approximately 50 percent of its concentrate production
annually to Atlantic Copper and PT Smelting.
Exploration
Our exploration activities are primarily focused on prospects
in Irian Jaya (Papua), Indonesia. Rio Tinto shares in 40 percent
of our exploration costs in Irian Jaya (Papua) and has a 40
percent interest in future development and exploration projects.
Exploration drilling within PT Freeport Indonesia's Block A area
is ongoing on the Kucing Liar underground ore body, the Grasberg
underground ore body, the underground Ertsberg Stockwork Zone and a
newly defined surface target called Guru Ridge. Our exploration
and mining efforts resulted in the addition of approximately 202
million tons of ore to our December 31, 2000 reserves (see Note 13
of "Notes to Financial Statements"). Approximately one-half of the
2000 reserve additions are in the Ertsberg Stockwork Zone, an underground
deposit contiguous to our existing Deep Ore Zone ore body, with the
remainder of the reserve additions being in the Grasberg open pit
and underground ore bodies. Additional drilling is continuing at
the newly defined Guru Ridge target located at the surface between the
Dom and previously mined Ertsberg East ore bodies. Depending on
results of additional drilling, this geological resource could be
classified as a mineable reserve in the near future and considering
its proximity to existing mine and mill infrastructure, it could
possibly be brought into production in a relatively short timeframe.
Field exploration activities outside of our current mining
operations area have been temporarily suspended pending the
resolution of a number of regulatory and local community issues.
27
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
SMELTING AND REFINING OPERATIONS
Our investment in smelters serves an important role in our
concentrate marketing strategy. Approximately one-half of PT
Freeport Indonesia's concentrate production is sold to its
affiliated smelters, Atlantic Copper and PT Smelting, and the
remainder is sold to other customers. Through downstream
integration, we are able to achieve operating hedges for changes
in treatment charges for smelting and refining PT Freeport
Indonesia's copper concentrates. While low smelter treatment and
refining charges adversely affect the operating results of our
smelter operations, they benefit the operating results of our
mining operations of PT Freeport Indonesia. Taking into account
taxes and minority ownership interests, an equivalent change in
the rates PT Freeport Indonesia pays and the rates Atlantic
Copper and PT Smelting receive would essentially offset in our
consolidated operating results.
Atlantic Copper Operating Results
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------
Cash margin before hedging (in millions) $52.6 $57.5 $81.2
Operating income (loss) (in millions) $(1.7) $1.6 $44.0
Concentrate treated (metric tons) 916,300 949,400 973,900
Anode production (000s of pounds) 639,100 647,100 642,400
Cathode, wire rod and wire sales
(000s of pounds) 562,300 558,500 544,300
Gold sales in anodes and slimes (ounces) 605,700 792,700 678,700
Atlantic Copper Operating Results - 2000 Compared with 1999
Atlantic Copper's cash margin before hedging, which is
revenues less production costs, decreased from $57.5 million in
1999 to $52.6 million in 2000 primarily because of lower
treatment rates, partly offset by lower costs resulting from a
weaker Spanish peseta/euro. Treatment rates averaged $0.17 per
pound of copper in 2000 and $0.20 per pound in 1999. Lower
treatment charges, which negatively affect Atlantic Copper,
benefit PT Freeport Indonesia. Atlantic Copper's unit cash
production costs improved to $0.14 per pound of copper in 2000
compared with $0.15 per pound in 1999 primarily because of the
weaker Spanish peseta/euro. The majority of Atlantic Copper's
operating costs are denominated in Spanish pesetas/euros, and it
uses foreign currency forward contracts to hedge a portion of its
anticipated future costs. As part of its debt refinancing in
June 2000, Atlantic Copper was required to significantly expand
its program to hedge anticipated peseta/euro-denominated
operating costs. Atlantic Copper's operating income (loss)
includes mark-to-market adjustments for changes in the market
value of its Spanish peseta/euro currency hedging contracts (see
"Disclosures About Market Risks") totaling charges of $16.4
million in 2000 and $14.9 million in 1999.
Atlantic Copper Operating Results - 1999 Compared with 1998
Atlantic Copper's cash margin was $57.5 in 1999 compared
with $81.2 million in 1998. The $23.7 million decline in the
cash margin primarily reflects lower treatment rates of $0.20 per
pound in 1999 compared with $0.25 per pound in 1998. Excess
smelter capacity, combined with limited copper concentrate
availability, have caused long-term treatment and refining rates
to decline since early 1998. Operating income included a $14.9
million charge in 1999 and a $3.7 million gain in 1998 for the
mark-to-market effect of Atlantic Copper's peseta/euro currency
contracts.
PT Smelting Operating Results (in millions)
Years Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------
PT Freeport Indonesia sales to PT Smelting $343.3 $252.6 $25.6
====== ====== =====
PT Freeport Indonesia share of net losses $ 13.6 $ 10.1 $ 1.6
PT Freeport Indonesia profits deferred 2.0 8.0 3.3
------ ------ -----
Equity in PT Smelting losses $ 15.6 $ 18.1 $ 4.9
====== ====== =====
28
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
PT Smelting Operating Results - 2000 Compared with 1999
PT Freeport Indonesia accounts for its 25 percent interest in
PT Smelting under the equity method and provides PT Smelting with
nearly all of its concentrate requirements (see Note 9 of "Notes
to Financial Statements"). Our revenues include PT Freeport
Indonesia sales to PT Smelting, but we defer recognizing profits
on 25 percent of PT Freeport Indonesia sales to PT Smelting that
are still in PT Smelting's inventory at year end.
PT Smelting temporarily shut down its smelter, as planned, at
the end of March 2000 for the tie-in of a new third anode furnace
as well as for planned maintenance. The smelter restarted at the
end of April and during the third quarter of 2000 achieved its
goal of reaching full design capacity of 200,000 metric tons of
copper per year. PT Smelting produced 173,800 metric tons of
copper during 2000 compared with 126,700 metric tons of copper in
1999.
PT Smelting Operating Results - 1999 Compared with 1998
PT Smelting operated at an average rate of approximately 94
percent of design capacity during the fourth quarter of 1999. PT
Smelting treated 436,000 metric tons of concentrate and produced
126,700 metric tons of copper in 1999, its first full year of
operations.
CAPITAL RESOURCES AND LIQUIDITY
Our primary sources of cash are operating cash flows and
borrowings, while our primary uses of cash are repayments of
debt, capital expenditures, dividends and purchases of our common
stock. In 2000 our operating cash flows funded our capital
expenditures and allowed us to purchase 19.5 million of our own
shares after servicing our debt and paying dividends on our
preferred stock. In 1999, we generated operating cash to fund
our capital expenditures and reduce total debt by $305.7 million.
We believe that our expected operating cash flows and available
borrowings will provide the necessary liquidity to fund our
anticipated 2001 operating and capital needs and repay scheduled
debt maturities.
Operating Activities
Our 2000 consolidated operating cash flow declined 9 percent
or $52.8 million compared with 1999, mostly because of lower net
income, partly offset by favorable working capital changes.
Operating cash flow increased 19 percent or $90.0 million in 1999
compared with 1998, primarily because of working capital changes.
Working capital, excluding cash, decreased $41.2 million in 2000
primarily because of the timing of payments for accounts payable
and accrued liabilities and Rio Tinto's share of November and
December 2000 joint venture cash flows, partly offset by
increases in product inventory and income taxes paid. Working
capital increased $11.3 million in 1999 primarily because of an
increase in inventories partly offset by a reduction in accounts
receivable, and increased $65.4 million in 1998 primarily because
of increases in accounts receivable. Higher materials and
supplies inventory levels support our expanded operations in
Indonesia, and the reduction in accounts receivable in 1999
reflects collections from our high fourth-quarter 1998 sales.
Investing Activities
PT Freeport Indonesia's capital expenditures for 2000
included approximately $33 million for development of the Deep
Ore Zone underground mine. Development of the Deep Ore Zone
underground mine is expected to continue until 2004 at a total
estimated aggregate cost of $240 million (shared 60 percent by PT
Freeport Indonesia and 40 percent Rio Tinto), and PT Freeport
Indonesia expects to incur approximately $40 million for its
share of development costs in 2001. In early 1998, PT Freeport
Indonesia completed construction of the fourth concentrator mill
expansion. PT Freeport Indonesia's share of the cost of this
expansion was funded almost entirely with nonrecourse borrowings
from Rio Tinto. We expect our capital expenditures, including
development of the Deep Ore Zone underground mine, to total
approximately $215 million in 2001, which we expect to fund with
operating cash flows and availability under our bank credit
facilities ($240.0 million available at December 31, 2000).
Financing Activities
Our net repayments of debt totaled $18.0 million in 2000 and
$318.2 million in 1999, compared with net borrowings of $165.0
million in 1998. Repayments of other debt included payments to
acquire full ownership in the PT ALatieF Nusakarya joint ventures
totaling $25.9 million in 2000, $12.5 million in 1999 and $17.5
million in 1998. Net repayments to Rio Tinto totaled $60.6
million in 2000, $241.1 million in 1999 and $144.8 million in
1998 from PT Freeport Indonesia's share of incremental cash flow
attributable to the fourth concentrator mill expansion. In less
than two and one-half years, PT Freeport Indonesia fully repaid
the $450 million loan from Rio Tinto, which funded PT Freeport
Indonesia's share of the fourth concentrator mill expansion cost.
PT Freeport Indonesia's 60 percent share of incremental cash
flows from the expansion is now available for its general use.
29
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
In 1998, PT Freeport Indonesia reacquired for $30 million an
aggregate one-third interest in certain infrastructure asset
joint ventures owned by PT ALatieF Nusakarya Corporation, an
Indonesian investor. The joint ventures had purchased $270.0
million of infrastructure assets from PT Freeport Indonesia
during the period from December 1993 to March 1997, and PT
Freeport Indonesia had sold its one-third interest in the joint
ventures to PT ALatieF Nasakarya in March 1997. In April 2000,
PT Freeport Indonesia paid $12.5 million to increase its
aggregate ownership interest in the joint ventures to 47 percent.
In August 2000, PT Freeport Indonesia purchased the remaining 53
percent interest in the joint ventures for $13.4 million cash and
the assumption of $34.1 million of bank debt. The cash payments
and assumption of the bank debt in 2000, which totaled $60.0
million, reduced minority interests on our balance sheet. PT
Freeport Indonesia now owns 100 percent of the joint ventures.
PT Freeport Indonesia's increased ownership in the joint ventures
is expected to benefit net income because it will eliminate PT
Freeport Indonesia's obligation to pay a guaranteed 15 percent
after-tax return to the previous owners in the joint ventures.
Our first two annual mandatory partial redemption payments on
our Silver-Denominated Preferred Stock totaled $11.9 million in
August 2000 and $11.9 million in August 1999. Six annual
redemption payments remain and will vary with the price of
silver.
In June 2000, our Board of Directors authorized a 20-million-
share increase in our open market share purchase program,
bringing the total shares approved for purchase under this
program to 80 million. During 2000, we purchased 19.5 million of
our shares for $201.8 million (an average of $10.35 per share),
and from January 1 through March 12, 2001 we purchased 0.2
million of our shares for $1.6 million (an average of $8.35 per
share) under our open market share purchase program. From
inception of this program in July 1995 through March 12, 2001, we
have purchased a total of 70.7 million shares for $1.24 billion
(an average of $17.53 per share) and 9.3 million shares remain
available under the program. The timing of future purchases is
dependent upon many factors, including the price of common
shares, our business and financial position, and general economic
and market conditions. During 1999, we purchased 0.8 million
shares for $7.8 million (an average of $9.20 per share). During
1998, we purchased 20.0 million shares for $259.4 million (an
average of $12.97 per share).
In December 1998, we eliminated our quarterly cash dividend
of $0.05 per share ($0.20 per share annually) on common stock.
Cash dividends paid to minority interests increased by $38.2
million in 2000 compared with1999 primarily because of an
increase in PT Freeport Indonesia dividends.
In response to volatile copper and gold markets, in early
1998 we initiated a concentrated effort to reduce our costs and
enhance our production. Our overall strategy remains focused on
optimizing the performance of our mining and milling facilities
so that we can achieve higher sales levels at low costs. PT
Freeport Indonesia implemented a number of initiatives in 2000
designed to further improve operating processes and reduce costs.
We believe our projected operating cash flows provide us with the
overall financial flexibility to continue to invest in
operations, maintain our exploration program and repay or
refinance scheduled debt maturities. Our credit facility matures
in December 2002. The outstanding balance at December 31, 2000
was $760.0 million, and $162.0 million was available under PT
Freeport Indonesia's $550 million facility and $78.0 million was
available under the FCX/PT Freeport Indonesia $450 million
facility. We have begun discussions with the banks in our credit
facility regarding extending its maturity and revising its terms.
We believe an extension of the maturity would result in scheduled
maturity requirements, higher financing costs and certain
restrictions on our financial management.
We believe we can generate sufficient cash flows from
operations in 2001 to meet our planned capital requirements
without obtaining new capital, barring unforeseen events.
However, because of the economic and political issues affecting
Indonesia, our current ability to obtain capital on terms we
would consider acceptable is limited.
In 1997, we guaranteed a $254.0 million loan from a
commercial bank group to PT Nusamba Mineral Industri, an
Indonesian company. Nusamba used the funds plus $61.0 million of
cash, for a total of $315.0 million, to purchase from a third
party approximately 51 percent of the capital stock of PT
Indocopper Investama Corporation, a company whose only
significant asset is 9.4 percent of PT Freeport Indonesia's
stock. We own the remaining 49 percent of PT Indocopper
Investama. The loan is secured by a pledge of the PT Indocopper
Investama stock owned by Nusamba and is due March 2002. The
purchase price was negotiated based on the market value of FCX's
publicly traded common shares at the time of the transaction. We
also agreed to lend to Nusamba any amounts necessary to cover
shortfalls between the interest payments on the loan and
dividends received by Nusamba on the PT Indocopper Investama
stock. At December 31, 2000, we had loaned $56.1 million to
Nusamba for this purpose. The amount of any future shortfalls
will depend primarily on the level of PT Freeport Indonesia's
dividends to PT Indocopper Investama. Once the total of the
guaranteed loan and the amounts we have subsequently loaned to
Nusamba reach the original purchase price ($315 million), we will
charge any additional amounts we loan to Nusamba to expense.
29
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
The effect of the current economic and political situation
in Indonesia on Indonesian companies, including Nusamba, is
uncertain. Should these uncertainties result in our being
required to honor our guarantee of Nusamba's commercial bank
loan, we would anticipate negotiating satisfaction of the amounts
due either through our available financial resources or through
external financing. In connection with our discussions with the
banks in the FCX/PT Freeport Indonesia bank credit facility (see
above), we are discussing with the banks involved in the Nusamba
loan a plan to finance the payment that might be required as a
result of our guarantee. This plan would be coordinated with the
extension of the maturity of amounts due under the FCX/PT
Freeport Indonesia bank credit facility.
Environmental Matters
We believe that our Indonesian operations are being
conducted pursuant to applicable permits and are in compliance in
all material respects with applicable Indonesian environmental
laws, rules and regulations. An independent environmental audit
completed in 1999 by Montgomery Watson, an internationally
recognized environmental consulting and auditing firm, verified
our compliance. (See the "Working Toward Sustainable Development"
report beginning on page 6.) We cannot currently project with
precision the ultimate amount of reclamation and closure costs we
will incur. Our best estimate at this time is that PT Freeport
Indonesia's total reclamation and closure costs may require as
much as $100 million but are not expected to exceed $150 million.
However, these estimates are subject to revision over time as we
perform more complete studies and formulate more definitive
plans. 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 30 years. Included in other liabilities at December 31, 2000
is $19.2 million accrued on a unit-of-production basis for mine
closure and reclamation costs.
In 1996, we began contributing to a cash fund ($2.5 million
balance at December 31, 2000) 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. An increasing emphasis on
environmental issues and future changes in regulations could
require us to incur additional costs which would be charged
against future operations. Estimates involving environmental
matters are by their nature imprecise and can be expected to be
revised over time because of changes in government regulations,
operations, technology and inflation. See our "Working Toward
Sustainable Development" report beginning on page 6 for
information about our environmental programs.
DISCLOSURES ABOUT MARKET RISKS
Commodity Price Risk
Our revenues include PT Freeport Indonesia's sale of copper
concentrates, which also contain significant amounts of gold, and
Atlantic Copper's sale of copper anodes, cathodes, wire rod, wire
and precious metals in slimes. Our revenues and net income vary
significantly with fluctuations in the market prices of copper
and gold and other factors. A change of $0.01 in the average
price per pound of copper would have an approximate $14 million
impact on our revenues and an approximate $7 million impact on
our net income, assuming approximately 1.4 billion pounds of
annual PT Freeport Indonesia copper sales. A change of $10 in
the average price per ounce of gold would have an approximate $20
million impact on our revenues and an approximate $10 million
impact on our net income, assuming approximately 2 million ounces
of annual PT Freeport Indonesia gold sales.
At times, in response to market conditions, we have entered
into copper and gold price protection contracts for some portion
of our expected future mine production to mitigate the risk of
adverse price fluctuations. We currently have no copper or gold
price protection contracts relating to our mine production other
than our gold-denominated preferred stock discussed below.
PT Freeport Indonesia's concentrate sales agreements, with
regard to copper, provide for provisional billings at the time of
shipment with final pricing settlement generally based on the
average London Metal Exchange price for a specified future
period. Copper revenues on provisionally priced open pounds are
adjusted monthly based on then-current prices. At December 31,
2000, we had consolidated copper sales totaling 237.0 million
pounds recorded at an average price of $0.80 per pound remaining
to be finally priced. Approximately 90 percent of these open
pounds are expected to be finally priced during the first quarter
of 2001. A one-cent movement in the average price used for these
open pounds will have an approximate $1.2 million impact on our
2001 net income.
31
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
In late 1999, PT Freeport Indonesia began a program using
copper forward contracts to fix the prices of a portion of its
quarter-end open pounds when market conditions are favorable. PT
Freeport Indonesia entered into contracts to hedge its open
pounds at the end of the first two quarters of 2000 and the third
and fourth quarters of 1999, and recorded additional revenues of
$1.7 million in 2000 and $0.8 million in 1999 from these forward
sales. PT Freeport Indonesia has not entered into any contracts
for its December 31, 2000 open pounds.
We have outstanding three issues of redeemable preferred
stock indexed to gold and silver prices. We account for these
securities as a hedge of future production and carry them on our
balance sheets at their original issue value less redemptions.
As redemption payments occur, differences between the carrying
value and the redemption payment, which is based on commodity
prices at the time of redemption, are recorded as an adjustment
to revenues (see Notes 1, 6 and 11 of "Notes to Financial
Statements"). Future redemption payments denominated in ounces
and equivalent value in dollars, as well as dollar-equivalent
dividend payments, based on gold and silver prices used to
determine the February 1, 2001 scheduled dividend payments,
follow (dollars in millions):
Gold Silver
- ---------------------------------------------------------------------------
Redemption Carrying Dividend Redemption Carrying Dividend
Ounces Amount Value Amount Ounces Amount Value Amount
- ---------------------------------------------------------------------------
2001 - $ - $ - $9.6 2,380,000 $11.1 $12.5 $2.6
2002 - - - 9.6 2,380,000 11.1 12.5 2.2
2003 600,000 164.3 232.6 8.1 2,380,000 11.1 12.5 1.7
2004 - - - 3.8 2,380,000 11.1 12.5 1.3
2005 - - - 3.8 2,380,000 11.1 12.5 0.8
Thereafter 430,000 117.7 167.4 1.0 2,380,000 11.1 12.5 0.3
------ ------ ----- -----
$282.0 $400.0 $66.6 $75.0
====== ====== ===== =====
The fair values of the redeemable preferred stock based on
December 31, 2000 quoted market prices were $164.4 million for
the preferred stock indexed to gold prices and $37.5 million for
the preferred stock indexed to silver prices.
Atlantic Copper's purchases of copper concentrate are priced
at approximately the same time as its sales of the refined
copper, thereby protecting Atlantic Copper from most copper price
risk. Atlantic Copper enters into futures contracts to hedge its
price risk whenever its physical purchases and sales pricing
periods do not match. At December 31, 2000, Atlantic Copper had
contracts, with a fair value of $0.1 million, to sell 39.1
million pounds at an average price of $0.84 per pound through
February 2001.
Foreign Currency Exchange Risk
The majority of our operations are in Indonesia and Spain,
where our functional currency is the U.S. dollar. All of our
revenues are denominated in U.S. dollars; however, some costs and
certain asset and liability accounts are denominated in
Indonesian rupiahs, Australian dollars or Spanish pesetas/euros.
Generally, our results are positively affected when the U.S.
dollar strengthens against these foreign currencies and adversely
affected when the U.S. dollar weakens against these foreign
currencies.
Since 1997, the Indonesian rupiah/U.S. dollar exchange rate
has been volatile. One U.S. dollar was equivalent to 9,215
rupiahs at December 31, 2000, 6,970 rupiahs at December 31, 1999
and 7,725 rupiahs at December 31, 1998. PT Freeport Indonesia
recorded losses to production costs totaling $0.2 million in
2000, $1.2 million in 1999 and $0.9 million in 1998 related to
its rupiah-denominated net monetary assets. At December 31,
2000, these net assets totaled $15.1 million at an exchange rate
of 9,215 rupiahs to one U.S. dollar.
Operationally PT Freeport Indonesia has benefited from a
weakened Indonesian rupiah, primarily through lower labor costs.
At estimated annual aggregate rupiah payments of 800 billion and
a December 31, 2000 exchange rate of 9,215 rupiahs to one U.S.
dollar, a one-thousand-rupiah increase in the exchange rate would
result in an approximate $8 million decrease in annual operating
costs. A one-thousand-rupiah decrease in the exchange rate would
result in an approximate $11 million increase in annual operating
costs.
32
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
During the first quarter of 1998, PT Freeport Indonesia
began a currency hedging program to reduce its exposure to
changes in the Indonesian rupiah and Australian dollar exchange
rates by entering into foreign currency forward contracts to
hedge a portion of its anticipated payments in these currencies.
The last of these contracts expired in September 1999. We
recorded net gains to production costs totaling $3.1 million in
1999 and $3.5 million in 1998 related to these contracts.
During the second quarter of 2000, PT Freeport Indonesia
entered into foreign currency forward contracts to hedge a
portion of its aggregate anticipated Australian dollar payments
for the remainder of 2000 and for 2001. As of December 31, 2000,
these contracts hedge 96.0 million of Australian dollar payments
through December 2001, or approximately 50 percent of aggregate
projected 2001 Australian dollar payments at an average exchange
rate of $0.58 to one Australian dollar. The exchange rate was
$0.56 to one Australian dollar at December 31, 2000. Each $0.01
change in the U.S. dollar/Australian dollar exchange rate impacts
the market value of these contracts by approximately $1 million.
In July 2000, PT Freeport Indonesia entered into foreign currency
forward contracts to hedge a portion of its aggregate projected
April through July 2001 Indonesian rupiah payments. The
contracts hedge 60 billion of rupiah payments during the period
covered at an exchange rate of 10,000 rupiahs to one U.S. dollar.
PT Freeport Indonesia recorded net losses to production costs
related to the Australian dollar and rupiah contracts totaling
$5.3 million in 2000. Each 1,000-rupiah change in the Indonesian
rupiah/U.S. dollar exchange rate impacts the market value of
these contracts by approximately $0.5 million. Our accounting
treatment for these foreign currency forward contracts changed
effective January 1, 2001 (see "New Accounting Standards").
A portion of Atlantic Copper's operating costs and certain
of its asset and liability accounts are denominated in Spanish
pesetas/euros. On January 1, 1999, a new common currency (the
euro) was introduced to member states of the European Union,
including Spain. A transition period extends until January 1,
2002. Atlantic Copper's current management information systems
are designed to accommodate multiple currencies and will not
require major modifications to process transactions involving the
euro. Any outstanding peseta hedging contracts owned by Atlantic
Copper will be set at a fixed exchange rate to the euro and would
continue to achieve their objectives.
Atlantic Copper had peseta/euro-denominated net monetary
liabilities at December 31, 2000 totaling $65.6 million recorded
at an exchange rate of 178.8 pesetas to one U.S. dollar or $0.93
per euro. The December 31, 1999 exchange rate was 165.6 pesetas
to one U.S. dollar or $1.00 per euro, and the December 31, 1998
exchange rate was 142.7 pesetas to one U.S. dollar or $1.17 per
euro. Adjustments to Atlantic Copper's peseta/euro-denominated
net liabilities to reflect changes in the exchange rate are
recorded in other income (loss) and totaled $4.4 million in 2000,
$10.9 million in 1999 and $(3.8) million in 1998.
At estimated annual peseta/euro payments of 15 billion
pesetas/90 million euros and a December 31, 2000 exchange rate of
178.8 pesetas to one U.S. dollar or $0.93 per euro, a 10-
peseta/$0.06 increase or decrease in the exchange rate would
result in an approximate $5 million change in annual costs,
before any hedging effects.
As part of refinancing its debt in June 2000, Atlantic
Copper was required to significantly expand its program to hedge
anticipated peseta/euro-denominated operating costs. At December
31, 2000, Atlantic Copper had contracts to purchase 30.3 billion
pesetas/182.3 million euros at an average exchange rate of 162.5
pesetas per one U.S. dollar or $1.02 per euro through December
2003. These contracts currently hedge approximately 60 percent
of Atlantic Copper's projected 2001 through 2003 peseta/euro
disbursements. Mark-to-market gains (losses) related to Atlantic
Copper's forward currency contracts are included in production
costs and totaled $(16.4) million in 2000, $(14.9) million in
1999 and $3.7 million in 1998. Each $0.01 change in the US$/euro
exchange rate impacts the market value of these contracts by
approximately $2 million. Our accounting treatment for these
foreign currency forward contracts changed effective January 1,
2001 (see "New Accounting Standards").
33
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
Interest Rate Risk
The table below presents our scheduled maturities of
principal for outstanding debt and notional amounts for interest
rate swaps at December 31, 2000 and fair value at December 31,
2000 (dollars in millions). Atlantic Copper has interest rate
swap contracts to fix interest rates on a portion of its variable-
rate debt through March 2003. The costs associated with these
contracts are amortized to interest expense over the terms of the
agreements. Also see Notes 5 and 11 of "Notes to Financial
Statements."
Fair
2001 2002 2003 2004 2005 Thereafter Value
- -------------------------------------------------------------------------------
Long-term debt:
Fixed rate $127.0 $ - $250.0 $ - $ - $200.0 $ 463.6
Average interest rate 9.7% - 7.2% - - 7.5% 7.9%
Variable rate $75.3 $942.7 $ 77.0 $72.4 $71.5 $374.1 $1,613.1
Average interest rate 10.2% 8.7% 10.4% 10.7% 10.7% 10.7% 9.3%
Interest rate swaps:
Amount $74.4 $ 59.6 $ 51.5 $ - $ - $ - $ 1.0
Average interest rate 6.1% 7.2% 6.0% - - - 6.5%
As discussed above, we are discussing with the banks
participating in the FCX/PT Freeport Indonesia bank credit
facility and the Nusamba loan a plan that provides, among other
things, extending maturities and higher interest rates.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its
fair value. We adopted SFAS 133 effective January 1, 2001. SFAS
133 allows us to report changes in the fair value of financial
instruments that qualify as cash flow hedges, including foreign
currency contracts and interest rate swaps, in other
comprehensive income, a component of stockholders' equity, until
realized. We will continue our current accounting for our
redeemable preferred stock indexed to commodities under the
provisions of SFAS 133 that allow such instruments issued before
January 1, 1998 to be excluded from those instruments required to
be adjusted for changes in their fair values (see Note 1 of
"Notes to Financial Statements").
The most significant impact on our financial statements of
adopting SFAS 133 is on our accounting for rupiah, Australian
dollar and peseta/euro foreign currency contracts. Changes in
the fair values of these open foreign currency contracts that
hedge anticipated future operating costs will be reflected in
other comprehensive income and will not affect earnings until the
contracts mature. Through December 31, 2000, the changes in the
market values of our foreign currency contracts that are intended
to cover anticipated future operating costs were recorded in
earnings. On January 1, 2001 we recorded a $0.8 million gain to
other income for the difference between the recorded values of
our outstanding foreign currency contracts at December 31, 2000
and their fair values as calculated under SFAS 133. We expect
that any hedge ineffectiveness associated with our interest rate
swaps and currency contracts will be immaterial.
DEVELOPMENTS IN INDONESIA
The Indonesian economy grew by an estimated 5 percent in
2000 after remaining flat in 1999 and contracting by 13 percent
in 1998. Indonesia is Asia's second largest exporter of oil and
continues to benefit from higher oil prices. While the economy
has exceeded growth projections, progress on reforming the
nation's failed banking system and raising capital from seized
assets has been slow. As a result, the country remains heavily
reliant on foreign aid to balance its budget and the national
currency, the rupiah, declined approximately 32 percent in value
during 2000.
Despite gradual improvements on the economic front,
Indonesia's recovery remains vulnerable to ongoing political and
social tensions. There have been repeated challenges to the
political leadership of President Abdurrahman Wahid. Incidents
of violence and separatist pressures continue to add to political
instability within the country as the Wahid administration
struggles to address the country's economic and social issues.
Incidents of separatist-related violence have been reported in
34
FREEPORT-McMoRan COPPER & GOLD INC. Management's Discussion and Analysis
Aceh and Irian Jaya (Papua), and the Indonesian government has
taken a strong stance in an effort to halt the violence in these
areas. No incidents of violence were reported in PT Freeport
Indonesia's area of operations, where the local community leaders
continue to support peaceful solutions to the complex issue of
regional autonomy.
While the Indonesian government permitted representatives of
the Papuan people to conduct a meeting of the Papuan congress in
June 2000 to express their aspirations regarding political
autonomy, the president and other Indonesian leaders have made it
clear that Irian Jaya (Papua) must remain part of Indonesia.
Moreover, the U.S. Government, Japan, Australia and the European
Union have stated that they do not support independence for Irian
Jaya (Papua) and support the territorial integrity of Indonesia.
Key Papuan leaders supporting independence have said independence
should be regarded as a long-term goal and that they should
pursue that goal peacefully. However, there have been several
incidences of violence and conflicts between native Papuans and
the local police and military personnel in areas of the province
apart from the location of our operations.
President Wahid and his administration have focused in
recent months on issues involving regional autonomy. The program
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 is one of the government's most
important initiatives. Although new autonomy laws became
effective January 1, 2001, there will be a transition period to
allow the provinces to prepare for the assumption and
administration of these new responsibilities. While the
uncertainties of the autonomy process have created concern among
foreign investors, the Indonesian government has assured
investors that existing contracts of work would be honored.
PT Freeport Indonesia's and Eastern Minerals' operations,
all of which are in Indonesia, are conducted through the PT
Freeport Indonesia and Eastern Minerals Contracts of Work. Both
Contracts of Work have 30-year terms, provide for two 10-year
extensions under certain conditions, and govern PT Freeport
Indonesia's and Eastern Minerals' rights and obligations relating
to taxes, exchange controls, 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. 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.
We have had positive relations with the Government of
Indonesia since we commenced business activities in Indonesia in
1967, and we contribute significantly to the economies of Irian
Jaya (Papua) and Indonesia. We are one of the largest taxpayers
in Indonesia and are a significant employer in a remote and
undeveloped area of the country. We intend to continue to
maintain positive working relationships with the central,
provincial and local branches of the Government of Indonesia.
See our "Working Toward Sustainable Development" report beginning
on page 6.
CAUTIONARY STATEMENT
Our discussion and analysis contains forward-looking
statements in which we discuss factors we believe may affect our
performance in the future. Forward-looking statements are all
statements other than historical facts, such as those regarding
anticipated sales volumes, ore grades, capital expenditures,
future environmental costs, debt repayments and refinancing,
political, economic and social conditions in our areas of
operations, treatment charge rates, depreciation rates,
exploration efforts and results, introduction of the euro and the
availability of financing. We caution you that these statements
are not guarantees of future performance, and our actual results
may differ materially from those projected, anticipated or
assumed in the forward-looking statements. Important factors
that can cause our actual results to differ materially from those
anticipated in the forward-looking statements include
unanticipated declines in the average grades of ore mined,
unanticipated milling and other processing problems, labor
relations, weather conditions, the speculative nature of mineral
exploration, fluctuations in interest rates and other adverse
financial market conditions, Indonesian political risks and other
factors described in more detail under the heading "Cautionary
Statements" in our Form 10-K for the year ended December 31,
2000.
35
FREEPORT-McMoRan COPPER & GOLD INC. Report of Management
Freeport-McMoRan Copper & Gold Inc. (the Company) is
responsible for the preparation of the financial statements and
all other information contained in this Annual Report. The
financial statements have been prepared in conformity with
accounting principles generally accepted in the United States and
include amounts that are based on management's informed judgments
and estimates.
The Company maintains a system of internal accounting
controls designed to provide reasonable assurance at reasonable
costs that assets are safeguarded against loss or unauthorized
use, that transactions are executed in accordance with
management's authorization and that transactions are recorded and
summarized properly. The system is tested and evaluated on a
regular basis by the Company's internal auditors,
PricewaterhouseCoopers LLP. In accordance with auditing standards
generally accepted in the United States, the Company's
independent public accountants, Arthur Andersen LLP, have
developed an overall understanding of our accounting and
financial controls and have conducted other tests as they
consider necessary to support their opinion on the financial
statements.
The Board of Directors, through its Audit Committee composed
solely of non-employee directors, is responsible for overseeing
the integrity and reliability of the Company's accounting and
financial reporting practices and the effectiveness of its system
of internal controls. Arthur Andersen LLP and
PricewaterhouseCoopers LLP meet regularly with, and have access
to, this committee, with and without management present, to
discuss the results of their audit work.
/s/ James R. Moffett /s/ Richard C. Adkerson
James R. Moffett Richard C. Adkerson
Chairman of the Board and President and
Chief Executive Officer Chief Financial Officer
Report of Independent Public Accountants
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
FREEPORT-McMoRan COPPER & GOLD INC.:
We have audited the accompanying balance sheets of Freeport-
McMoRan Copper & Gold Inc. (the Company), a Delaware Corporation,
as of December 31, 2000 and 1999, and the related statements of
income, cash flow and stockholders' equity for each of the three
years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of December 31, 2000 and 1999 and the results
of its operations and its cash flow for each of the three years
in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
New Orleans, Louisiana,
January 18, 2001
36
FREEPORT-McMoRan COPPER & GOLD INC. Statements of Income
Years Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------
(In Thousands, Except Per Share Amounts)
Revenues $1,868,610 $1,887,328 $1,757,132
Cost of sales:
Production and delivery 1,010,922 926,487 796,017
Depreciation and amortization 283,556 293,213 277,407
---------- ---------- ----------
Total cost of sales 1,294,478 1,219,700 1,073,424
Exploration expenses 8,849 10,626 13,033
Equity in PT Smelting losses 15,633 18,136 4,948
General and administrative expenses 70,950 70,624 87,780
---------- ---------- ----------
Total costs and expenses 1,389,910 1,319,086 1,179,185
---------- ---------- ----------
Operating income 478,700 568,242 577,947
Interest expense, net (205,346) (194,069) (205,588)
Other income (expense), net (114) 6,661 (10,933)
Income before income taxes
and minority interests 273,240 380,834 361,426
---------- ---------- ----------
Provision for income taxes (159,573) (195,653) (170,566)
Minority interests in
net income of consolidated
subsidiaries (36,680) (48,714) (37,012)
---------- ---------- ----------
Net income 76,987 136,467 153,848
Preferred dividends (37,487) (35,680) (35,531)
---------- ---------- ----------
Net income applicable to common stock $ 39,500 $ 100,787 $ 118,317
========== ========== ==========
Net income per share of common stock:
Basic $.26 $.62 $.67
==== ==== ====
Diluted $.26 $.61 $.67
==== ==== ====
Average common shares outstanding:
Basic 153,997 163,613 175,353
======= ======= =======
Diluted 154,519 164,567 175,354
======= ======= =======
Dividends paid per common share $ - $ - $.20
==== ==== ====
The accompanying Notes to Financial Statements are an integral
part of these financial statements.
37
FREEPORT-McMoRan COPPER & GOLD INC. Statements of Cash Flow
Years Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------
(In Thousands)
Cash flow from operating activities:
Net income $ 76,987 $ 136,467 $ 153,848
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 283,556 293,213 277,407
Deferred income taxes 49,154 60,104 62,165
Minority interests' share
of net income 36,680 48,714 37,012
Deferred stock appreciation
rights costs, mining
costs and other 12,800 23,422 8,808
Equity in PT Smelting losses 15,633 18,136 4,948
(Increases) decreases in working capital:
Accounts receivable 17,955 42,062 (103,976)
Inventories (39,624) (52,854) 6,323
Prepaid expenses and other 5,407 (6,757) (455)
Accounts payable
and accrued liabilities 57,830 (15,606) 7,408
Rio Tinto share of
joint venture cash flows 34,342 138 9,305
Accrued income taxes (34,700) 21,745 16,034
(Increase) decrease
in working capital 41,210 (11,272) (65,361)
--------- --------- ---------
Net cash provided by operating activities 516,020 568,784 478,827
--------- --------- ---------
Cash flow from investing activities:
Capital expenditures:
PT Freeport Indonesia (156,199) (151,015) (280,952)
Atlantic Copper (14,760) (6,423) (8,422)
Investment in PT Smelting (5,717) (3,384) (2,709)
Other (4,538) 796 4,977
--------- --------- ---------
Net cash used in investing activities (181,214) (160,026) (287,106)
--------- --------- ---------
Cash flow from financing activities:
Net repayments to Rio Tinto (60,564) (241,076) (144,760)
Proceeds from other debt 354,634 513,241 549,230
Repayment of other debt (312,117) (590,377) (239,495)
Partial redemption of preferred stock (11,893) (11,946) -
Purchases of FCX common shares (199,945) (7,921) (259,213)
Cash dividends paid:
Common stock - - (35,382)
Preferred stock (37,713) (38,019) (39,157)
Minority interests (51,923) (13,674) (9,069)
Other (14,015) (18,165) (16,957)
--------- --------- ---------
Net cash used in financing activities (333,536) (407,937) (194,803)
--------- --------- ---------
Net increase (decrease)
in cash and cash equivalents 1,270 821 (3,082)
Cash and cash equivalents
at beginning of year 6,698 5,877 8,959
--------- --------- ---------
Cash and cash equivalents
at end of year $ 7,968 $ 6,698 $ 5,877
========= ========= =========
Interest paid $ 211,352 $ 194,546 $ 251,999
========= ========= =========
Income taxes paid $ 136,984 $ 113,804 $ 91,567
========= ========= =========
The accompanying Notes to Financial Statements, which include
information in Notes 1, 5, 6 and 11 regarding noncash
transactions, are an integral part of these financial statements.
38
FREEPORT-McMoRan COPPER & GOLD INC. Balance Sheets
December 31, 2000 1999
- --------------------------------------------------------------------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 7,968 $ 6,698
Accounts receivable:
Customers 128,198 141,325
Other 20,887 31,437
Inventories:
Product 158,868 134,735
Materials and supplies 241,739 233,390
Prepaid expenses and other 11,462 16,869
----------- -----------
Total current assets 569,122 564,454
Property, plant and equipment, net 3,248,710 3,381,465
Investment in PT Smelting 56,154 66,070
Other assets 76,755 70,927
----------- -----------
Total assets $ 3,950,741 $ 4,082,916
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 313,208 $ 277,365
Current portion of long-term debt
and short-term borrowings 202,294 114,789
Rio Tinto share of joint venture cash flows 78,706 39,974
Unearned customer receipts 28,688 40,235
Accrued income taxes 11,016 42,704
----------- -----------
Total current liabilities 633,912 515,067
Long-term debt, less current portion 1,987,731 2,033,470
Accrued postretirement benefits
and other liabilities 112,831 114,677
Deferred income taxes 599,536 553,394
Minority interests 103,795 181,921
Redeemable preferred stock 475,005 487,507
Stockholders' equity:
Step-up convertible preferred stock 349,990 349,990
Class A common stock, par value $0.10,
97,071,944 shares
issued and outstanding 9,707 9,707
Class B common stock, par value $0.10,
121,687,529 shares
and 121,540,842 shares issued
and outstanding, respectively 12,169 12,154
Capital in excess of par value
of common stock 657,239 652,100
Retained earnings 330,901 291,401
Accumulated other comprehensive income 10,244 10,244
Common stock held in treasury -
74,718,076 shares and
55,115,819 shares, at cost,
respectively (1,332,319) (1,128,716)
----------- -----------
Total stockholders' equity 37,931 196,880
----------- -----------
Total liabilities and stockholders' equity $ 3,950,741 $ 4,082,916
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of these financial statements.
39
FREEPORT-McMoRan COPPER & GOLD INC. Statements of Stockholders' Equity
Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------
(In Thousands)
Step-up convertible preferred stock $ 349,990 $ 349,990 $ 349,990
----------- ----------- -----------
Class A common stock 9,707 9,707 9,707
----------- ----------- -----------
Class B common stock:
Balance at beginning of year 12,154 12,145 12,140
Exercised stock options 15 9 5
----------- ----------- -----------
Balance at end of year 12,169 12,154 12,145
----------- ----------- -----------
Capital in excess of par value of common stock:
Balance at beginning of year 652,100 650,746 649,792
Exercised stock options 2,199 1,354 954
Restricted stock grants 2,940 - -
----------- ----------- -----------
Balance at end of year 657,239 652,100 650,746
----------- ----------- -----------
Retained earnings:
Balance at beginning of year 291,401 190,614 107,679
Net income 76,987 136,467 153,848
Cash dividends on common stock - - (35,382)
Dividends on preferred stock (37,487) (35,680) (35,531)
----------- ----------- -----------
Balance at end of year 330,901 291,401 190,614
----------- ----------- -----------
Accumulated other comprehensive income 10,244 10,244 10,244
----------- ----------- -----------
Common stock held in treasury:
Balance at beginning of year (1,128,716) (1,120,030) (860,660)
Purchase of 19,493,300, 844,200
and 19,995,821 shares,
respectively (201,761) (7,765) (259,370)
Tender of 108,957 shares in 2000
and 54,078 shares in 1999
to FCX to exercise stock options (1,842) (921) -
Balance at end of year (1,332,319) (1,128,716) (1,120,030)
----------- ----------- -----------
Total stockholders' equity $ 37,931 $ 196,880 $ 103,416
=========== =========== ===========
The accompanying Notes to Financial Statements are an integral
part of these financial statements.
40
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements of
Freeport-McMoRan Copper & Gold Inc. (FCX) include its majority-
owned subsidiaries, PT Freeport Indonesia, including certain joint
ventures involving PT Freeport Indonesia (Note 5), and PT Irja
Eastern Minerals, as well as its wholly owned subsidiary, Atlantic
Copper, S.A. FCX's unincorporated joint ventures with Rio Tinto
plc are reflected using the proportionate consolidation method
(Note 2). PT Freeport Indonesia's investment in PT Smelting is
accounted for under the equity method (Note 9), with PT Freeport
Indonesia's share of operating results recorded in operating
income. All significant intercompany transactions have been
eliminated. Certain prior year amounts have been reclassified to
conform to the 2000 presentation.
Use of Estimates. The preparation of FCX's financial statements
in conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in these financial
statements and accompanying notes. The more significant areas
requiring the use of management estimates include the pricing of
open concentrate sales, useful lives for depreciation and
amortization, the estimated average ratio of waste rock to ore
over the life of the open-pit mine, allowances for obsolete
inventory, reclamation and environmental obligations,
postretirement and other employee benefits, deferred taxes and
valuation allowances, future cash flow associated with assets and
proved and probable reserves. Actual results could differ from
those estimates.
Cash Equivalents. Highly liquid investments purchased with
maturities of three months or less are considered cash
equivalents.
Accounts Receivable. Customer accounts receivable include amounts
due from PT Smelting totaling $22.6 million at December 31, 2000
and $27.6 million at December 31, 1999. Other accounts receivable
include refundable value-added taxes, net of the allowance for
estimated uncollectible amounts, totaling $15.2 million at
December 31, 2000 and $19.5 million at December 31, 1999. The
allowance for estimated uncollectible amounts totaled $0.3 million
at December 31, 2000 and $5.5 million at December 31, 1999.
Inventories. Inventories are stated at the lower of cost or
market. PT Freeport Indonesia uses the average cost method and
Atlantic Copper uses the first-in, first-out (FIFO) cost method.
Property, Plant and Equipment. Property, plant and equipment are
carried at cost. Mineral exploration costs are expensed as
incurred, except in the year a property is deemed to contain a
viable mineral deposit, in which case they are capitalized.
Development costs, including interest incurred during the
construction and development period, are capitalized.
Expenditures for replacements and improvements are capitalized.
Costs related to periodic scheduled maintenance (turnarounds) are
expensed as incurred. Depreciation for mining and milling life-of-
mine assets, including future development costs, is determined
using the unit-of-production method based on estimated recoverable
proved and probable copper reserves. Other assets are depreciated
on a straight-line basis over estimated useful lives of 15 to 20
years for buildings and 3 to 25 years for machinery and equipment.
Deferred Mining Costs. Surface mining costs associated with
waste rock removal at PT Freeport Indonesia's open-pit mine are
initially deferred and subsequently charged to operating costs on
the basis of the average ratio of waste rock to ore over the life
of the mine. PT Freeport Indonesia's geologists and engineers
reassess the waste rock to ore ratio and the remaining life of
its open-pit mine at least annually. During the fourth quarter of
2000, PT Freeport Indonesia changed its estimated average ratio
of waste rock to ore over the life of the mine in its deferred
mining costs calculation to 1.6 to 1 from 2.4 to 1. The change
reflects PT Freeport Indonesia's finalization of its overall open-
pit mine plan after reviewing various alternative pit designs
during its previous mining and milling expansions. The fourth-
quarter 2000 impact of the change was a $9.9 million deferral of
mining costs and for the full year the net deferral was
immaterial.
Income Taxes. FCX accounts for income taxes pursuant to Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes." Deferred income taxes are provided to reflect
the future tax consequences of differences between the tax bases
of assets and liabilities and their reported amounts in the
financial statements.
Reclamation and Mine Closure. Estimated future reclamation and
mine closure costs for PT Freeport Indonesia's current mining
operations in Indonesia are accrued and charged to income over the
estimated life of the mine by the unit-of-production method based
on estimated recoverable proved and probable copper reserves.
Expenditures resulting from the remediation of conditions caused
by past operations that do not contribute to future revenue
generation are charged to expense.
41
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
Financial Contracts. At times FCX has entered into financial
contracts to manage certain risks resulting from fluctuations in
commodity prices (primarily copper and gold), foreign currency
exchange rates and interest rates by creating offsetting market
exposures. Under the accounting method for such contracts
specified in promulgated accounting rules through December 31,
2000, costs or premiums and gains or losses on contracts meeting
deferral criteria are recognized with the hedged transaction.
Gains or losses are recognized in the current period if the hedged
transaction is no longer expected to occur or if deferral criteria
are not met. FCX monitors its credit risk on an ongoing basis and
considers this risk to be minimal.
At December 31, 2000, FCX had redeemable preferred stock
indexed to commodities, open foreign currency forward contracts,
open forward copper sales contracts and interest rate swap
contracts (Note 11). Redeemable preferred stock indexed to
commodities is treated as a hedge of future production and is
carried at its original issue value. As redemption payments
occur, differences between the carrying value and the payment are
recorded as an adjustment to revenues.
Atlantic Copper and PT Freeport Indonesia hedge a portion of
their anticipated Spanish peseta/euro, Australian dollar and
Indonesian rupiah cash outflows with foreign currency forward
contracts. Changes in market value of foreign currency forward
contracts which protect anticipated transactions are recognized in
the period incurred. Atlantic Copper enters into contracts to
hedge its copper price risk whenever its physical purchases and
sales pricing periods do not match. Gains and losses on these
contracts are recognized with the hedged transaction. Atlantic
Copper also has interest rate swap contracts to limit the effect
of increases in the interest rates on variable-rate debt. The
costs associated with these swap contracts are amortized to
interest expense over the terms of the agreements.
In June 1998, the Financial Accounting Standards Board issued
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133, as subsequently amended, is effective for
fiscal years beginning after June 15, 2000 and establishes
accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The
accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting
designation.
FCX adopted SFAS 133 effective January 1, 2001. FCX elected
to continue its current accounting for its redeemable preferred
stock indexed to commodities under the provisions of SFAS 133
which allow such instruments issued before January 1, 1998 to be
excluded from those instruments required to be adjusted for
changes in their fair values. Certain of PT Freeport Indonesia's
concentrate sales contracts allow for final pricing in future
periods. Under SFAS 133, these pricing terms cause a portion of
the contracts to be considered embedded derivatives which must be
recorded at fair value. PT Freeport Indonesia's open pricing
positions are recorded at current market values and SFAS 133 will
not have a significant impact on FCX's financial results with
respect to these sales contracts.
Prior to adoption of SFAS 133, Atlantic Copper's and PT
Freeport Indonesia's foreign currency forward contracts did not
qualify for hedge accounting because they are intended to cover
anticipated transactions. The market value of these contracts,
which extend through December 2003, was recorded in the balance
sheet ($9.2 million in accrued liabilities and $5.3 million in
other liabilities at December 31, 2000). Through December 31,
2000, changes in the market value of these contracts were
recognized in earnings as they occurred. Atlantic Copper and PT
Freeport Indonesia recorded gains (losses) to production costs
totaling $(21.7) million in 2000, $(11.8) million in 1999 and
$7.2 million in 1998 related to these contracts. Under SFAS 133,
Atlantic Copper and PT Freeport Indonesia have designated their
foreign currency contracts as cash flow hedges, whereby changes
in fair value will be recognized in other comprehensive income (a
component of stockholders' equity) until realized, when resulting
gains and losses will be recorded in earnings. Upon adoption of
SFAS 133, FCX recorded a $0.8 million gain to other income based
on December 31, 2000 values for a change in accounting principle
to adjust the recorded values of FCX's foreign currency forward
contracts to fair value, as calculated under SFAS 133.
For all other contracts that are not excluded from SFAS 133's
provisions, the impact of the adoption of SFAS 133 is not
material to FCX's financial position or results of operations.
Any hedge ineffectiveness associated with contracts designated as
hedges is also expected to be immaterial.
Concentrate Sales. Revenues from PT Freeport Indonesia's
concentrate sales are recorded net of royalties, treatment costs
and the impact of the price protection program (Note 11). PT
Freeport Indonesia's concentrate sales agreements, including its
sales to Atlantic Copper and PT Smelting, provide for provisional
billings based on world metals prices when shipped, primarily
using then-current prices on the London Metal Exchange (LME).
Actual settlement on the copper portion is generally based
42
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
on the average LME price for a specified future period. Copper revenues
on provisionally priced open pounds are adjusted monthly based on
then-current prices. At December 31, 2000, FCX had consolidated
provisionally priced copper sales totaling 237.0 million pounds
recorded at an average price of $0.80 per pound. Approximately 90
percent of these open pounds are expected to be finally priced
during the first quarter of 2001. A one-cent movement in the
average price used for these open pounds will have an approximate
$1.2 million impact on FCX's 2001 net income. Gold sales are
priced according to individual contract terms, generally the
average London Bullion Market Association price for a specified
month near the month of shipment.
PT Freeport Indonesia pays royalties under a Contract of
Work, with a 30-year term and two 10-year extensions permitted,
entered into in December 1991 with the Government of Indonesia.
The copper royalty rate payable by PT Freeport Indonesia under its
Contract of Work 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.
PT Freeport Indonesia also has agreed to pay voluntary
additional royalties on metal from production 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, PT Freeport
Indonesia's royalty rate on copper net revenues from production
above 200,000 metric tons of ore per day is double the Contract of
Work royalty rate, and the royalty rates on gold and silver sales
from production above 200,000 metric tons of ore per day are
triple the Contract of Work royalty rates. The combined
royalties, including the voluntary additional royalties which
became effective January 1, 1999, totaled $20.2 million in 2000,
$23.0 million in 1999 and $16.2 million in 1998.
Foreign Currencies. Transaction gains and losses associated with
Atlantic Copper's peseta/euro-denominated and PT Freeport
Indonesia's rupiah-denominated monetary assets and liabilities are
included in net income. Atlantic Copper's euro-denominated net
monetary liabilities totaled $65.6 million at December 31, 2000
based on an exchange rate of $0.93 per euro. Excluding hedging
amounts, net Atlantic Copper transaction gains (losses) totaled
$4.4 million in 2000, $10.9 million in 1999 and $(3.8) million in
1998. PT Freeport Indonesia's rupiah-denominated net monetary
assets totaled $15.1 million at December 31, 2000 based on an
exchange rate of 9,215 rupiahs to one U.S. dollar. Excluding
hedging amounts, net PT Freeport Indonesia transaction losses
related to these rupiah-denominated net monetary assets totaled
$0.2 million in 2000, $1.2 million in 1999 and $0.9 million in
1998.
Comprehensive Income. In 1998, FCX adopted SFAS 130, "Reporting
Comprehensive Income," which establishes new rules for the
reporting and display of comprehensive income (net income plus
other comprehensive income, or all other changes in net assets
from nonowner sources) and its components. FCX has no items of
other comprehensive income for the years presented in the
financial statements. Accumulated Other Comprehensive Income
reported in the Statements of Stockholders' Equity consists solely
of the cumulative foreign currency translation adjustment at
Atlantic Copper as of December 31, 1995, for which there is no tax
effect.
Earnings Per Share. Basic net income per share of common stock
was calculated by dividing net income applicable to common stock
by the weighted-average number of common shares outstanding during
the year. Diluted net income per share of common stock was
calculated by dividing net income applicable to common stock by
the weighted-average number of common shares outstanding during
the year plus the net effect of dilutive stock options and
restricted stock. Dilutive stock options represented 0.3 million
shares in 2000, 1.0 million shares in 1999 and one thousand shares
in 1998. Dilutive restricted stock totaled 0.2 million shares in
2000.
Options with exercise prices greater than the average market
price of the common stock during the year were excluded from the
computation of diluted net income per share of common stock. This
amounted to options for 11.4 million shares in 2000, 11.0 million
shares in 1999 and 10.5 million shares in 1998. The average
exercise prices for these options totaled $22 per share in 2000
and 1999, and $23 per share in 1998. The FCX Step-Up Convertible
Preferred Stock outstanding was not included in the computation of
diluted net income per share of common stock because including the
conversion of these shares would have increased net income per
share of common stock. The preferred stock was convertible into
11.7 million shares of common stock and accrued dividends totaled
$24.5 million in 2000, $22.2 million in 1999 and $21.0 million in
1998.
43
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
NOTE 2. OWNERSHIP IN SUBSIDIARIES AND JOINT VENTURES WITH RIO TINTO
FCX's direct ownership in PT Freeport Indonesia totaled 81.3
percent at December 31, 2000 and 1999. FCX also owns 49 percent
of PT Indocopper Investama Corporation (PT Indocopper Investama),
a 9.4 percent owner of PT Freeport Indonesia, bringing FCX's total
ownership in PT Freeport Indonesia to 85.9 percent at December 31,
2000 and 1999. At December 31, 2000, PT Freeport Indonesia's net
assets totaled $826.7 million, including $623.1 million of
retained earnings. FCX has various intercompany loans to PT
Freeport Indonesia totaling $602.3 million at December 31, 2000.
Substantially all of PT Freeport Indonesia's assets are
located in Indonesia. Indonesia continues to face economic and
political uncertainties. Economic conditions in Indonesia
improved somewhat during 2000, but the situation remains uncertain
as the government continues efforts to reform financial systems
and strengthen the Indonesian rupiah. Religious and ethnic
differences among people in the outlying provinces are a source of
tension, leading to violence in certain areas. Pro-independence
movements in certain areas also have become more prominent,
especially in the province of Aceh, and to a lesser extent in
Irian Jaya (Papua). The Government of Indonesia has responded
with new laws providing more political and economic autonomy to
the provincial governments beginning in 2001. PT Freeport
Indonesia's Contract of Work provides that the Government of
Indonesia will not nationalize or expropriate PT Freeport
Indonesia's mining operations.
In 1997, PT Nusamba Mineral Industri (Nusamba), a subsidiary
of PT Nusantara Ampera Bakti, acquired from a third party
approximately 51 percent of the capital stock of PT Indocopper
Investama. Nusamba paid $61.0 million in cash and financed $254.0
million of the $315.0 million purchase price with a variable-rate
commercial loan maturing in March 2002. The purchase price was
negotiated based on the market value of FCX's publicly traded
common shares at the time of the transaction. FCX has agreed that
if Nusamba defaults on the loan, FCX will purchase the PT
Indocopper Investama stock or the lenders' interest in the
commercial loan for the amount then due by Nusamba under the loan.
FCX also agreed to lend to Nusamba any amounts to cover any
shortfalls between the interest payments due on the commercial
loan and dividends received by Nusamba from PT Indocopper
Investama. In other assets at December 31, 2000 is $56.1 million
due in March 2002 from Nusamba because of interest payment
shortfalls. The amount of any future shortfalls will depend
primarily on the level of PT Freeport Indonesia's dividends to PT
Indocopper Investama. Once the total of the guaranteed loan and
the amounts FCX has subsequently loaned to Nusamba reach the
original purchase price ($315 million), FCX will charge any
additional amounts loaned to Nusamba to expense.
FCX's direct ownership in Eastern Minerals totaled 90 percent
at December 31, 2000 and 1999. PT Indocopper Investama owns the
remaining 10 percent of Eastern Minerals, bringing FCX's total
ownership in Eastern Minerals to 94.9 percent.
FCX owns 100 percent of the outstanding Atlantic Copper
stock. At December 31, 2000, Atlantic Copper's net assets totaled
$100.0 million and FCX had no outstanding advances to Atlantic
Copper. Atlantic Copper is not expected to pay dividends in the
near future. Under the terms of its concentrate sales agreements
with Atlantic Copper, PT Freeport Indonesia had outstanding trade
receivables from Atlantic Copper totaling $119.3 million at
December 31, 2000. FCX made cash contributions to Atlantic Copper
totaling $32.4 million in 2000 and $40.0 million in 1999. In
addition to the contributions, FCX forgave $24.2 million of
outstanding advances in 1999. These transactions had no impact on
FCX's consolidated financial statements.
Joint Ventures With Rio Tinto. Rio Tinto owns 23.9 million shares
of FCX Class A common stock (approximately 16.6 percent of the
December 31, 2000 outstanding common stock of FCX). In addition,
FCX and Rio Tinto have established joint ventures. Under the
joint venture arrangements, Rio Tinto has a 40 percent interest in
future development and exploration projects under PT Freeport
Indonesia's Contract of Work and Eastern Minerals' Contract of
Work, and the option to participate in 40 percent of any other
future exploration projects in Irian Jaya (Papua). Under the
arrangements, Rio Tinto funded $100 million in 1996 for approved
exploration costs in the areas covered by the PT Freeport
Indonesia and Eastern Minerals Contracts of Work. All exploration
costs in the joint venture areas are now being shared 60 percent
by FCX and 40 percent by Rio Tinto.
PT Freeport Indonesia completed the "fourth concentrator mill
expansion" of its facilities in early 1998. Pursuant to the joint
venture agreement, Rio Tinto has a 40 percent interest in certain
assets and future production exceeding specified annual amounts of
copper, gold and silver through 2021 in Block A of PT Freeport
Indonesia's Contract of Work, and, after 2021, a 40 percent
interest in all production from Block A. Operating, nonexpansion
capital and administrative costs are shared proportionately
between PT Freeport Indonesia and Rio Tinto based on the ratio of
(a) the incremental revenues from production from the expansion
and (b) total revenues from production from Block A, including
production from PT Freeport Indonesia's
44
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
previously existing reserves. PT Freeport Indonesia will continue to
receive 100 percent of the cash flow from specified annual amounts of
copper, gold and silver through 2021 calculated by reference to its proved
and probable reserves as of December 31, 1994 and 60 percent of
all remaining cash flow.
In addition to funding its 40 percent share of all expansion
capital, including the fourth concentrator mill expansion, Rio
Tinto provided a $450 million nonrecourse loan to PT Freeport
Indonesia for PT Freeport Indonesia's share of the cost of the
expansion. PT Freeport Indonesia and Rio Tinto began sharing
incremental cash flow attributable to the expansion effective
January 1, 1998 on the basis of 60 percent to PT Freeport
Indonesia and 40 percent to Rio Tinto. PT Freeport Indonesia paid
its share of incremental cash flow to Rio Tinto until Rio Tinto
received an amount equal to the funds loaned to PT Freeport
Indonesia, plus interest based on Rio Tinto's cost of borrowing.
PT Freeport Indonesia's share of incremental cash flow through the
final payment in May 2000 totaled $502.6 million, of which $61.7
million was paid to RioTinto in 2000, $252.3 million in 1999 and
$188.6 million in 1998.
NOTE 3. INVENTORIES
The components of product inventories follow (in thousands):
December 31, 2000 1999
- ---------------------------------------------------------------------
PT Freeport Indonesia:Concentrates - Average Cost $ 7,779 $ 13,424
Atlantic Copper: Concentrates - FIFO 110,591 69,590
Work in process - FIFO 33,938 50,173
Finished goods - FIFO 6,560 1,548
-------- --------
Total product inventories $158,868 $134,735
======== ========
The average cost method was used to determine the cost of
essentially all materials and supplies inventory. Materials and
supplies inventory is net of obsolescence reserves totaling $16.8
million at December 31, 2000 and $18.8 million at December 31,
1999.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT, NET
The components of net property, plant and equipment follow (in
thousands):
December 31, 2000 1999
- -----------------------------------------------------------------
Exploration, development and other $1,051,403 $1,019,164
Buildings and infrastructure 1,206,404 1,148,027
Machinery and equipment 1,669,552 1,658,116
Mobile equipment 508,788 494,583
Infrastructure assets 572,884 615,412
Construction in progress 100,426 33,809
---------- ----------
Property, plant and equipment 5,109,457 4,969,111
Accumulated depreciation and amortization (1,878,893) (1,605,820)
Deferred mining costs 18,146 18,174
---------- ----------
Property, plant and equipment, net $3,248,710 $3,381,465
========== ==========
Exploration, development and other includes $124.8 million of
excess costs related to investments in consolidated subsidiaries,
which are being amortized over the lives of the related assets.
Property, plant and equipment are net of grants from the Spanish
government totaling $52.8 million. The grants are contingent on
Atlantic Copper meeting specified conditions through December
2001.
45
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
NOTE 5. LONG-TERM DEBT
December 31, 2000 1999
- --------------------------------------------------------------------
(In Thousands)
Notes payable:
FCX and PT Freeport Indonesia
credit facilities, average rate
8.2% in 2000 and 7.1% in 1999 $ 760,000 $ 648,000
Atlantic Copper facility, average
rate 8.3% in 2000 and 7.5% in
1999 194,824 204,529
Atlantic Copper working capital
revolver, average rate 7.2% in
2000 and 6.3% in 1999 38,900 39,593
Atlantic Copper deferral loan,
average rate 9.0% in 2000 25,000 -
Equipment loans 65,656 76,840
Rio Tinto loan, average rate
6.2% in 2000 and 5.2% in 1999 (Note 2) - 60,563
Other notes payable 24,637 24,818
9 3/4% Senior Notes due 2001 120,000 120,000
7.50% Senior Notes due 2006 200,000 200,000
7.20% Senior Notes due 2026 250,000 250,000
Infrastructure asset financings,
average rate 12.1% in 2000 and
11.2% in 1999 511,008 523,916
---------- ----------
2,190,025 2,148,259
Less current portion and
short-term borrowings 202,294 114,789
---------- ----------
$1,987,731 $2,033,470
========== ==========
Notes Payable. The FCX and PT Freeport Indonesia credit
facilities provide total availability of $1.0 billion. PT Freeport
Indonesia has a $550 million facility ($162.0 million of
additional borrowings available at December 31, 2000), and FCX and
PT Freeport Indonesia have a separate $450 million facility ($78.0
million of additional borrowings available at December 31, 2000).
These credit facilities are also subject to a borrowing base,
redetermined annually during the second quarter by the banks, out
of which approximately $665 million was available at December 31,
2000. These variable-rate revolving facilities are available until
December 2002 and contain provisions for minimum working capital
requirements, specified cash flow to interest coverage and
restrictions on other borrowings. PT Freeport Indonesia assigned
its existing and future sales contracts and pledged its rights
under the Contract of Work and most of its assets as security for
its borrowings.
In June 2000, Atlantic Copper refinanced its variable-rate
project loan (the Atlantic Copper Facility). As of December 31,
2000, the variable-rate project loan, nonrecourse to FCX,
consisted of a $130.0 million term loan being repaid with
variable quarterly installments through December 2007 ($3.0
million a quarter in 2001) and a $65.0 million working capital
revolver that matures December 2007. The Atlantic Copper
Facility requires certain hedging arrangements, restricts other
borrowings and specifies certain minimum coverage ratios.
Borrowings under the Atlantic Copper Facility are secured by 100
percent of Atlantic Copper's capital stock, the smelter and
refinery assets, and certain receivables and inventory.
Atlantic Copper has a variable-rate $40 million working
capital revolver ($38.9 million outstanding at December 31, 2000)
that is secured by certain shipments of copper concentrate, and
has access to additional lines of credit, which are generally
unsecured, with various financial institutions. The revolver
matures December 2002.
Atlantic Copper has a variable-rate $30.0 million deferral
loan available for use primarily in support of its cash
requirements. Amounts drawn on this facility must be matched
with additional FCX support payments to Atlantic Copper.
Atlantic Copper had $25.0 million outstanding under this facility
as of December 31, 2000. The loan matures January 2008.
FCX and PT Freeport Indonesia each have an equipment loan
secured by certain PT Freeport Indonesia assets with a vendor.
The FCX loan had a $28.0 million balance at December 31, 2000.
Interest accrues at 8.1 percent until December 2001 and then the
rate is variable. Principal payments total $7.0 million annually.
In November 1999, PT Freeport Indonesia entered into a $41.8
million variable-rate equipment loan with the same vendor ($37.7
million outstanding at December 31, 2000). The average interest
rate was 9.0 percent for 2000 and 8.6 percent for the period the
loan was outstanding in 1999. Principal payments total $4.2
million annually with a final payment of $12.5 million in December
2006.
46
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
Senior Notes. The 9 3/4% Senior Notes are due April 15, 2001. Each
holder of the 7.20% Senior Notes may elect early repayment in
November 2003. The 7.50% and 7.20% Senior Notes are redeemable at
the option of FCX at the greater of (a) their principal amount or
(b) the remaining scheduled payments of principal and interest
discounted to the date of redemption on a semiannual basis at the
applicable treasury rate plus 30 basis points, together with, in
either case, accrued interest to the date of redemption.
Infrastructure Asset Financings. Through 1997 PT Freeport
Indonesia sold assets for $458.2 million to a power joint venture,
in which it previously had a 30 percent interest, and is
purchasing power under infrastructure asset financing
arrangements. The infrastructure asset financing obligations
pursuant to the power sales agreement totaled $387.0 million at
December 31, 2000 and $412.2 million at December 31, 1999.
In 1995, PT Freeport Indonesia sold certain of its port,
marine, logistics and construction equipment assets and facilities
for $100.0 million to an unrelated joint venture and sold $48.0
million of its aviation assets to a joint venture, 25 percent
owned by PT Freeport Indonesia. PT Freeport Indonesia guarantees a
bank loan totaling $34.9 million at December 31, 2000 associated
with these sales. PT Freeport Indonesia is leasing these assets
under infrastructure asset financing arrangements. The
obligations under these infrastructure asset financings totaled
$56.2 million at December 31, 2000 and $72.4 million at December
31, 1999.
From December 1993 to March 1997, PT Freeport Indonesia sold
$270.0 million of infrastructure assets to joint ventures owned
one-third by PT Freeport Indonesia and two-thirds by PT ALatieF
Nusakarya Corporation (ALatieF), an Indonesian investor. Funding
for the purchases consisted of $90.0 million in equity
contributions by the joint venture partners, a $60.0 million bank
loan and FCX's 9 3/4% Senior Notes. PT Freeport Indonesia
subsequently sold its one-third interest in the joint ventures to
ALatieF in March 1997. In September 1998, PT Freeport Indonesia
reacquired for $30 million an aggregate one-third interest in the
joint ventures. During 2000, PT Freeport Indonesia purchased the
remaining interest in the joint ventures for $25.9 million cash
and the assumption of $34.1 million of bank debt. The cash
payments and assumption of debt in 2000, which totaled $60.0
million, reduced minority interests on FCX's balance sheet. The
balance of the original $60.0 million bank loan totaled $35.1
million at December 31, 2000 and $39.3 million at December 31,
1999, and the balance of the bank debt assumed during 2000 totaled
$32.7 million at December 31, 2000.
Maturities and Capitalized Interest. Maturities of debt
instruments and infrastructure asset financings based on the
amounts and terms outstanding at December 31, 2000 totaled $202.3
million in 2001, $942.7 million in 2002, $327.0 million in 2003,
$72.4 million in 2004, $71.5 million in 2005 and $574.1 million
thereafter. Capitalized interest totaled $7.2 million in 2000,
$3.8 million in 1999 and $19.6 million in 1998.
NOTE 6. REDEEMABLE PREFERRED STOCK
FCX has outstanding 6.0 million depositary shares
representing 300,000 shares of its Gold-Denominated Preferred
Stock totaling $232.6 million. Each depositary share has a
cumulative quarterly cash dividend equal to the value of 0.000875
ounce of gold and is mandatorily redeemable in August 2003 for the
cash value of 0.1 ounce of gold.
FCX has outstanding 4.3 million depositary shares
representing 215,279 shares of its Gold-Denominated Preferred
Stock, Series II totaling $167.4 million. Each depositary share
has a cumulative quarterly cash dividend equal to the value of
0.0008125 ounce of gold and is mandatorily redeemable in February
2006 for the cash value of 0.1 ounce of gold.
FCX has outstanding 4.8 million depositary shares
representing 89,250 shares of its Silver-Denominated Preferred
Stock totaling $75.0 million at December 31, 2000 and 104,125
shares totaling $87.5 million at December 31, 1999. As of
December 31, 2000, each depositary share has a cumulative
quarterly cash dividend equal to the value of 0.0309375 ounce of
silver, which declines after each redemption payment. FCX made
annual mandatory partial redemption payments on the underlying
Silver-Denominated Preferred Stock in August 2000 and August 1999.
For each of the two partial redemptions, the $0.6 million
difference between FCX's carrying amount of $12.5 million and the
actual redemption payments of $11.9 million was credited to
revenues. Six annual redemption payments remain and will vary
with the price of silver.
47
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
NOTE 7. STOCKHOLDERS' EQUITY
Common Stock. FCX has 473.6 million authorized shares of capital
stock consisting of 423.6 million shares of common stock and 50.0
million shares of preferred stock. FCX has two classes of common
stock, which differ only as to their voting rights for the
directors of FCX. Holders of Class B common stock elect 80
percent of the FCX directors while holders of Class A common stock
and preferred stock elect 20 percent.
Preferred Stock. FCX has outstanding 14.0 million depositary
shares representing 700,000 shares of its Step-Up Convertible
Preferred Stock. Each depositary share has a cumulative $1.75
annual cash dividend (payable quarterly) and a $25 liquidation
preference, and is convertible at the option of the holder into
0.835 shares of FCX Class A common stock. FCX may redeem these
depositary shares at $25 per share (payable in FCX Class A common
stock, cash or a combination of both, at FCX's option) plus
accrued and unpaid dividends.
Stock Award Plans. FCX's Adjusted Stock Award Plan provided for
the issuance of certain stock awards to employees, officers and
directors of Freeport-McMoRan Inc. (FTX), the former parent of
FCX, in connection with FTX's distribution of FCX shares in 1995.
Under this plan, FCX made a one-time grant of awards to purchase
up to 10.7 million Class B common shares, including stock
appreciation rights (SARs), at prices equivalent to the original
FTX price at date of grant as adjusted for the proportionate
market value of FCX shares at the time of the distribution. All
options granted under this plan expire 10 years from the original
FTX date of grant.
FCX's 1995 Stock Option Plan (the 1995 Plan) provides for the
issuance of stock options and other stock-based awards (including
SARs) for up to 10 million Class B common shares at no less than
market value at the time of grant. During 1998, FCX converted 1.3
million SARs to stock options when FCX's stock price was below the
SARs' exercise prices. FCX's 1995 Stock Option Plan for Non-
Employee Directors (the Director Plan) authorizes FCX to grant
options to purchase up to 2 million shares. Options granted under
the Director Plan are exercisable in 25 percent annual increments
beginning one year from the date of grant. For options granted
under the Director Plan, FCX will pay cash to the option holder
equal to an amount based on the maximum individual federal income
tax rate in effect at the time of exercise.
FCX's 1999 Stock Incentive Plan (the 1999 Plan) provides for
the issuance of stock options, restricted stock and other stock-
based awards. The 1999 Plan allows FCX to grant awards for up to
8 million common shares (3.2 million Class A common shares and 4.8
million Class B common shares) to eligible participants. FCX
granted 0.2 million shares of restricted stock in 2000 that vest
ratably over three years.
Awards granted under all of the plans generally expire 10
years after the date of grant. Awards for 5.9 million shares
under the 1999 Plan, 1.4 million shares under the Director Plan
and no shares under the 1995 Plan were available for new grants as
of December 31, 2000. A summary of stock options outstanding,
including 0.5 million SARs, follows:
2000 1999 1998
- -------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number Option Number Option Number Option
of Options Price of Options Price of Options Price
- -------------------------------------------------------------------------------
Balance at January 1 14,060,224 $19.23 11,430,582 $21.98 8,065,837 $23.84
Granted 1,967,054 17.57 3,965,500 11.48 3,691,200 17.77
Exercised (146,687) 14.78 (87,345) 15.28 (51,749) 14.74
Expired/Forfeited (813,889) 17.69 (1,248,513) 20.08 (274,706) 21.29
---------- ---------- ----------
Balance at December 31 15,066,702 19.14 14,060,224 19.23 11,430,582 21.98
========== ========== ==========
48
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
In 1998, two FCX executive officers were granted stock
options under the 1995 Plan to purchase 2.6 million shares of FCX
stock at $19.03 per share. The options may be exercised at any
time through March 2006 and were granted in return for a five-year
cap on their cash incentive compensation. Summary information of
stock options outstanding at December 31, 2000, excluding SARs,
follows:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Option Number Option
Range of Exercise Prices of Options Life Price of Options Price
- ---------------------------------------------------------------------------
$9.09 to $10.31 3,066,750 8 years $ 9.90 933,375 $ 9.94
$14.63 to $21.27 9,082,536 7 years 18.58 7,229,961 19.01
$22.63 to $32.81 990,069 6 years 29.58 881,219 29.63
$35.50 1,380,000 5 years 35.50 1,104,000 35.50
---------- ----------
14,519,355 10,148,555
========== ==========
FCX has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and continues to
apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its
stock-based compensation plans. FCX recognized a $1.5 million gain
in 2000 and a $1.4 million charge in 1999 for its outstanding SARs
and grants under the Director Plan, which have the same accounting
treatment as SARs, because of fluctuations in FCX's common stock
price. Had compensation cost for FCX's stock option grants,
excluding SARs, been determined based on the value at the grant
dates for awards under those plans pursuant to the requirements of
SFAS 123, FCX's net income would have been reduced by $7.3 million
to $32.2 million ($0.21 per share) in 2000, by $6.0 million to
$94.7 million ($0.58 per share) in 1999 and by $16.7 million to
$101.6 million ($0.58 per share) in 1998.
For the pro forma computations, the values of the option
grants were calculated on the dates of grant using the Black-
Scholes option-pricing model. The weighted average fair value for
stock option grants was $9.44 per option in 2000, $5.96 per option
in 1999 and $6.75 per option in 1998 (including the 1.3 million
SARs converted to stock options). The weighted average
assumptions used include a risk-free interest rate of 6.7 percent
in 2000, 5.1 percent in 1999 and 5.8 percent in 1998; expected
volatility of 44 percent in 2000, 41 percent in 1999 and 34
percent in 1998; no annual dividend in 2000 or 1999 and $0.20 per
share in 1998; and expected lives of 7 years in 2000, 7 years in
1999 and 8 years in 1998. The pro forma effects on net income are
not representative of future years because of the potential
changes in the factors used in calculating the Black-Scholes
valuation and the number and timing of option grants. No other
discounts or restrictions related to vesting or the likelihood of
vesting of stock options were applied.
NOTE 8. INCOME TAXES
The components of FCX's deferred taxes follow (in thousands):
December 31, 2000 1999
- --------------------------------------------------------------
Deferred tax asset:
Foreign tax credits $ 255,500 $ 245,787
U.S. alternative minimum tax credits 65,294 62,559
Atlantic Copper net operating
loss carryforwards 72,702 82,789
Intercompany profit elimination 15,644 21,555
Valuation allowance (393,496) (391,135)
--------- ---------
Total deferred tax asset 15,644 21,555
--------- ---------
Deferred tax liability:
Property, plant and equipment (552,869) (509,611)
Undistributed earnings
in PT Freeport Indonesia (35,375) (44,808)
Other (26,936) (20,530)
--------- ---------
Total deferred tax liability (615,180) (574,949)
--------- ---------
Net deferred tax liability $(599,536) $(553,394)
========= =========
49
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
FCX has provided a valuation allowance equal to its tax
credit carryforwards ($320.8 million at December 31, 2000 and
$308.3 million at December 31, 1999) as these would only be used
should FCX be required to pay regular U.S. tax, which is
considered unlikely for the foreseeable future. Atlantic Copper
is subject to taxation in Spain and has not generated significant
taxable income in recent years. FCX has provided a valuation
allowance equal to the future tax benefits resulting from Atlantic
Copper net operating losses totaling $207.7 million at December
31, 2000 and $236.5 million at December 31, 1999, which expire
through the year 2009.
PT Freeport Indonesia's Indonesian income tax returns have been
audited through 1994 and the 1997 return is currently under
examination. FCX's provision for income taxes consists of the
following (in thousands):
2000 1999 1998
- -----------------------------------------------------------
Current income taxes:
Indonesian $106,587 $127,828 $100,336
United States and other 3,832 7,721 8,065
-------- -------- --------
110,419 135,549 108,401
Deferred Indonesian taxes 49,154 60,104 62,165
-------- -------- --------
$159,573 $195,653 $170,566
======== ======== ========
Differences between income taxes computed at the contractual
Indonesian tax rate and income taxes recorded follow (dollars in
thousands):
2000 1999 1998
- --------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- --------------------------------------------------------------------------------
Income taxes computed at the
contractual Indonesian tax rate $ 95,634 35% $133,292 35% $126,499 35%
Indonesian withholding tax on:
Earnings/dividends 18,095 6 23,878 6 21,490 6
Interest 2,776 1 2,829 - 3,765 1
Increase (decrease) attributable to:
Intercompany interest expense (7,168) (3) (11,444) (3) (15,103) (4)
Parent company costs 28,981 11 37,568 10 26,504 7
U.S. alternative minimum tax 4,600 2 7,400 2 7,500 2
Atlantic Copper net loss (income) 10,467 4 (1,836) - (1,733) -
Other, net 6,188 2 3,966 1 1,644 -
-------- -- -------- -- -------- --
Provision for income taxes $159,573 58% $195,653 51% $170,566 47%
======== == ======== == ======== ==
NOTE 9. TRANSACTIONS WITH AFFILIATES AND EMPLOYEE BENEFITS
Management Services Agreement. FM Services Company, owned 45
percent by FCX, provides certain administrative, financial and
other services on a cost-reimbursement basis under a management
services agreement. These costs, which include related overhead,
totaled $27.6 million in 2000, $25.8 million in 1999 and $40.3
million in 1998. Management believes these costs do not differ
materially from the costs that would have been incurred had the
relevant personnel providing these services been employed directly
by FCX.
PT Smelting. PT Smelting, an Indonesian company, operates a
200,000 metric tons of copper metal per year smelter/refinery in
Gresik, Indonesia. PT Freeport Indonesia, Mitsubishi Materials
Corporation (Mitsubishi Materials), Mitsubishi Corporation
(Mitsubishi) and Nippon Mining & Metals Co., Ltd. (Nippon) own 25
percent, 60.5 percent, 9.5 percent and 5 percent, respectively, of
the outstanding PT Smelting common stock. PT Freeport Indonesia is
providing nearly all of PT Smelting's copper concentrate
requirements. For the first 15 years of PT Smelting's operations,
the treatment and refining charges on the majority of the
concentrate PT Freeport Indonesia supplies will not fall below a
specified minimum rate, currently $0.23 per
50
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
pound, the rate for 2000 and the expected rate for 2001. PT Freeport
Indonesia has also agreed to assign its earnings in PT Smelting to
support a 13 percent cumulative annual return to Mitsubishi Materials,
Mitsubishi and Nippon for the first 20 years of commercial operations.
Pension Plans and Other Benefits. During 2000, FCX decided to
terminate its defined benefit pension plan covering substantially
all U.S. and certain overseas employees and replace this plan with
a defined contribution plan for its employees, as further
discussed below. All participants' account balances in the plan
were fully vested on June 30, 2000 and interest credits will
continue to accrue under the plan until the assets are finally
liquidated. The final distribution will occur once approved by
the Internal Revenue Service and the Pension Benefit Guaranty
Corporation, which is expected in 2001. FCX also provides certain
health care and life insurance benefits (Other Benefits) for
retired employees. FCX has the right to modify or terminate these
benefits.
PT Freeport Indonesia has a defined benefit pension plan
denominated in Indonesian rupiahs covering substantially all of
its Indonesian national employees. PT Freeport Indonesia funds the
plan in accordance with Indonesian pension guidelines. The pension
obligation was valued at an exchange rate of 9,215 rupiahs to one
U.S. dollar on December 31, 2000 and 6,970 rupiahs to one U.S.
dollar on December 31, 1999. Information on the FCX and PT
Freeport Indonesia plans follows (dollars in thousands):
Pension Benefits Other Benefits
- ------------------------------------------------------------------------------
PT Freeport
FCX Plan Indonesia Plan FCX
- ------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at
beginning of year $(13,581) $(13,622) $(14,056) $ (8,065) $ (860) $ (763)
Service cost (301) (852) (1,056) (1,061) (15) (42)
Interest cost (896) (905) (1,070) (2,688) (30) (60)
Plan amendments - - - - - (92)
Curtailment loss (1,000)a - - - - -
Actuarial gains (losses) (37) 876 (1,078) (1,159) 7 83
Foreign exchange
gain (loss) - - 3,640 (1,354) - -
Benefits paid 1,039 922 900 271 56 14
-------- -------- -------- -------- ------- -------
Benefit obligation at
end of year (14,776) (13,581) (12,720) (14,056) (842) (860)
-------- -------- -------- -------- ------- -------
Change in plan assets:
Fair value of plan assets
at beginning of year 10,704 8,381 6,920 2,992 - -
Actual return on
plan assets 524 1,167 673 1,185 - -
Employer contributions - 2,078 2,491 2,351 56 14
Foreign exchange
gain (loss) - - (1,905) 663 - -
Benefits paid (1,039) (922) (900) (271) (56) (14)
-------- -------- -------- -------- ------- -------
Fair value of plan
assets at end of year 10,189 10,704 7,279 6,920 - -
-------- -------- -------- -------- ------- -------
Funded status (4,587) (2,877) (5,441) (7,136) (842) (860)
Unrecognized net
actuarial (gain) loss (2,685) (2,794) 2,080 1,295 (1,239) (1,248)
Unrecognized transition
asset (257) (286) - - - -
Unrecognized prior
service cost - (633) 1,937 2,908 (291) (333)
-------- -------- -------- -------- ------- -------
Accrued benefit cost $ (7,529) $ (6,590) $ (1,424) $ (2,933) $(2,372) $(2,441)
======== ======== ======== ======== ======= =======
Weighted-average
assumptions (percent):
Discount rate N/Aa 8.00 11.00 11.00 7.50 8.00
Expected return
on plan assets N/Aa 9.00 12.00 12.00 - -
Rate of compensation
increase N/Aa 4.25 9.00 9.00 - -
a. As discussed above, FCX has elected to terminate its defined
benefit pension plan, resulting in a $1.0 million curtailment
loss, and ceased accruing benefits on June 30, 2000.
51
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
The initial health care cost trend rate used for the other
benefits was 6.5 percent for 2000, decreasing ratably each year
until reaching 4.75 percent in 2004. A one-percentage-point
increase or decrease in assumed health care cost trend rates
would not have a significant impact on total service or interest
cost. The components of net periodic benefit cost for FCX's
plans follow (in thousands):
Pension Benefits Other Benefits
- --------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------
Service cost $ 301 $ 852 $1,089 $ 15 $ 42 $ 42
Interest cost 896 905 926 30 60 50
Curtailment loss 1,000 - - - - -
Expected return
on plan assets (884) (672) (652) - - -
Amortization of
prior service cost (633) (147) (147) (42) (47) (52)
Amortization of
net actuarial gain (109) (227) (135) (15) (147) (93)
Amortization of
transition asset (29) (58) (58) - - -
------ ----- ------ ---- ----- ----
Net periodic benefit cost$ 542 $ 653 $1,023 $(12) $ (92) $(53)
====== ===== ====== ==== ===== ====
The components of net periodic benefit cost for PT Freeport
Indonesia's plan follow (in thousands):
2000 1999 1998
- --------------------------------------------------------
Service cost $1,056 $1,061 $ 704
Interest cost 1,070 2,688 728
Expected return on plan assets (810) (1,199) (285)
Amortization of prior service cost 291 315 217
Amortization of net actuarial loss - - 280
Curtailment gain - - (781)
Special termination benefits - - 5,873
------ ------ ------
Net periodic benefit cost $1,607 $2,865 $6,736
====== ====== ======
During 1998, PT Freeport Indonesia offered special
termination benefits to certain employees as part of a
restructuring program following the completion of its latest
expansion. The special termination benefits included separation
and service allowances based on years of service, a lump sum
pension payment and other cash incentives. PT Freeport Indonesia
recognized a curtailment gain in accordance with SFAS 88 because
the program significantly reduced the expected years of future
service of employees. The PT Freeport Indonesia plan was also
amended in 1998 to reflect changes in Indonesian laws eliminating
the limits on pensionable pay.
Atlantic Copper has an unfunded contractual obligation
denominated in Spanish pesetas to supplement amounts paid to
retired employees. The accrued liability was based on
corresponding exchange rates of 178.8 pesetas to one U.S. dollar
at December 31, 2000 and 165.6 pesetas to one U.S. dollar at
December 31, 1999. Amended Spanish legislation requires that
Atlantic Copper begin funding this obligation in November 2002,
instead of the previously anticipated initial funding date of
January 2001. The actuarial valuation of this obligation was
$73.1 million at December 31, 2000, based on a discount rate of 6
percent, and $80.9 million at December 31, 1999, based on a
discount rate of 5 percent. Other information on the Atlantic
Copper plan follows (in thousands):
2000 1999 1998
- ----------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at
beginning of year $63,788 $72,300 $69,373
Interest cost 6,883 7,102 6,658
Foreign exchange (gain) loss (4,104) (8,840) 3,429
Benefits paid (5,968) (6,774) (7,160)
------- ------- -------
Benefit obligation at end of year $60,599 $63,788 $72,300
======= ======= =======
52
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
FCX has an employee savings plan under Section 401(k) of the
Internal Revenue Code that allows eligible employees to contribute
up to 20 percent of their pre-tax compensation. FCX matches 100
percent of the first 5 percent of the employees' contribution with
such matching amounts vesting after 5 years. As a result of FCX's
decision to terminate its defined benefit pension plan effective
July 1, 2000, FCX fully vested all active Section 401(k) plan
participates on June 30, 2000. Subsequently, all new plan
participants will vest in FCX's matching contributions upon three
years of service with FCX. Additionally, FCX established a
defined contribution plan for substantially all its employees.
Under this plan, FCX contributes amounts to individual accounts
totaling either 4 percent or 10 percent of each employee's pay,
depending on a combination of each employee's age and years of
service with FCX. The costs charged to operations for FCX's
employee savings plan and defined contribution plan totaled $0.8
million in 2000, $0.7 million in 1999 and $0.8 million in 1998.
FCX has other employee benefit plans, certain of which are related
to FCX's performance, which costs are recognized currently in
general and administrative expense.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Environmental, Reclamation and Mine Closure. FCX has an
environmental policy committing it not only to compliance with
federal, state and local environmental statutes and regulations,
but also to continuous improvement of its environmental
performance at every operational site. FCX believes that its
operations are being conducted pursuant to applicable permits and
are in compliance in all material respects with applicable
environmental laws, rules and regulations. FCX incurs significant
costs for environmental programs and projects.
The ultimate amount of reclamation and closure costs to be
incurred at PT Freeport Indonesia's operations cannot currently
be projected with precision. PT Freeport Indonesia's best
estimate at this time is that ultimate reclamation and closure
costs may require as much as $100 million but are not expected to
exceed $150 million. However, these estimates are subject to
revision over time as more complete studies are performed and
more definitive plans are formulated. 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 30 years.
Included in other liabilities at December 31, 2000, PT
Freeport Indonesia had $19.2 million accrued on a unit-of-
production basis for mine closure and reclamation costs. In 1996,
PT Freeport Indonesia began contributing to a cash fund ($2.5
million balance at December 31, 2000) designed to accumulate at
least $100 million by the end of its Indonesian mining
activities. PT Freeport Indonesia plans to use this fund,
including accrued interest, to pay for costs incurred for mine
closure and reclamation. An increasing emphasis on environmental
issues and future changes in regulations could require FCX to
incur additional costs that would be charged against future
operations. Estimates involving environmental matters are by
their nature imprecise and can be expected to be revised over
time because of changes in government regulations, operations,
technology and inflation.
Social and Economic Development Programs. FCX has a social and
human rights policy to ensure that its operations are conducted in
a manner respecting basic human rights, the laws and regulations
of the host country, and the culture of the people who are
indigenous to the areas in which FCX operates. In 1996, PT
Freeport Indonesia established the Freeport Fund for Irian Jaya
Development (FFIJD), through which PT Freeport Indonesia has made
available funding and expertise to support the economic and social
development of the area. PT Freeport Indonesia has committed to
provide one percent of its annual revenue for ten years beginning
in mid-1996 for the development of the local people through the
FFIJD. PT Freeport Indonesia charged $14.1 million in 2000,
$14.7 million in 1999 and $13.5 million in 1998 to production
costs for this commitment.
Long-Term Contracts. Atlantic Copper has commitments with parties
other than PT Freeport Indonesia to purchase concentrate totaling
337,000 metric tons in 2001, 424,000 metric tons in 2002, 350,000
metric tons in 2003, 220,000 metric tons in 2004 and 100,000
metric tons in 2005, at market prices.
Share Purchase Program. In June 2000, FCX's Board of Directors
authorized a 20-million-share increase in FCX's open market share
purchase program, bringing the total shares approved for purchase
under this program to 80 million. From inception of this program
in July 1995 through December 31, 2000, FCX has purchased a total
of 70.5 million shares for $1.24 billion (an average of $17.55
per share) and 9.5 million shares remained available under the
program.
53
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
NOTE 11. FINANCIAL INSTRUMENTS
Summarized below are financial instruments whose carrying amounts
are not equal to their fair value and foreign exchange contracts
at December 31, 2000 and 1999 (in thousands). Fair values are
based on quoted market prices and other available market
information. Upon adoption of SFAS 133 on January 1, 2001, the
fair values for foreign exchange contracts will be adjusted to
conform to the new accounting rules.
2000 1999
- --------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------
Price protection program:
Open contracts in
liability position $ - $ - $ - $ (1,093)
Open contracts in
asset position - 85 - 308
Redeemable preferred
stock (Note 6) (475,005) (201,910) (487,507) (245,570)
Debt:
Long-term debt (Note 5) (2,190,025) (2,076,672) (2,148,259) (2,074,722)
Interest rate swaps - (982) - 1,387
Foreign exchange contracts:
$U.S./Spanish peseta/euro (11,514) (11,514) (8,138) (8,138)
$U.S./Australian dollar (2,244) (2,244) - -
$U.S./Indonesian rupiah 27 27 - -
50
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
Price Protection Program. From time to time, PT Freeport
Indonesia enters into forward and option contracts to hedge the
market risk associated with fluctuations in the prices of
commodities it sells. As of December 31, 2000, FCX had no price
protection contracts relating to its mine production other than
its gold and silver-denominated redeemable preferred stock. FCX's
revenues include net additions totaling $1.7 million in 2000 and
$0.8 million in 1999 related to PT Freeport Indonesia's copper
price protection program. Revenues also include net additions
totaling $0.6 million in 2000 and 1999 from the annual redemptions
of FCX's Silver-Denominated Preferred Stock.
At December 31, 2000, Atlantic Copper had open contracts to
sell 39.1 million pounds at an average price of $0.84 per pound
through February 2001.
Debt. FCX, PT Freeport Indonesia and Atlantic Copper entered into
interest rate swaps to manage exposure to interest rate changes on
a portion of their variable-rate debt. PT Freeport Indonesia's
contracts matured in December 1999 and FCX's contracts matured in
January 2000. Under the terms of its swaps, Atlantic Copper pays
an average of 6.5 percent on $74.4 million of financing at
December 31, 2000, reducing quarterly through March 2003.
Atlantic Copper will pay an average of 6.1 percent on an average
of $68.6 million of financing in 2001, 7.2 percent on an average
of $56.4 million in 2002 and 6.0 percent on $51.5 million in the
first quarter of 2003. Interest on comparable floating rate debt
averaged 6.5 percent in 2000, 5.4 percent in 1999 and 5.7 percent
in 1998, resulting in a reduction in interest costs totaling $0.9
million in 2000 and additional interest costs of $1.1 million in
1999 and 1998.
Atlantic Copper is a party to letters of credit totaling $9.6
million at December 31, 2000. Fair value of these letters of
credit is not material at December 31, 2000.
Foreign Exchange Contracts. Atlantic Copper has a currency
hedging program to reduce its exposure to changes in the U.S.
dollar and Spanish peseta/euro exchange rate. As of December 31,
2000, Atlantic Copper has foreign exchange currency contracts
through December 2003 totaling $186.7 million on 30.3 billion
Spanish pesetas/182.3 million euros at an average exchange rate of
162.5 pesetas per 1 U.S. dollar or $1.02 per euro. Atlantic Copper
recorded gains (losses) to production costs related to its forward
currency contracts, totaling $(16.4) million in 2000, $(14.9)
million in 1999 and $3.7 million in 1998.
PT Freeport Indonesia entered into a currency hedging program
in 2000 for the Indonesian rupiah and Australian dollar. As of
December 31, 2000, PT Freeport Indonesia has foreign exchange
currency contracts through December 2001 totaling $55.7 million on
96.0 million Australian dollars and contracts from April 2001
through July 2001 totaling $6.0 million on 60.0
54
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
billion Indonesian rupiahs. PT Freeport Indonesia's previous currency
hedging program for the Indonesian rupiah and Australian dollar expired in
September 1999. PT Freeport Indonesia recorded net gains (losses)
to production costs totaling $(5.3) million in 2000, $3.1 million
in 1999 and $3.5 million in 1998 related to these contracts.
NOTE 12. SEGMENT INFORMATION
FCX markets its products worldwide primarily pursuant to the terms
of long-term contracts. As a percentage of consolidated revenues,
revenues under long-term contracts totaled 94 percent in 2000, 89
percent in 1999 and 91 percent in 1998. The only customers under
long-term contracts with over ten percent of revenues in at least
one of the past three years are a group of Japanese companies with
11 percent in 2000 and 1999 and 12 percent in 1998, and PT
Smelting with 19 percent in 2000, 13 percent in 1999 and 1 percent
in 1998. Beginning in 2001 PT Freeport Indonesia will market its
product into Japan through separate agreements with the various
Japanese smelting companies rather than through the former pool
method. None of these agreements when taken separately is
expected to account for over ten percent of FCX's projected
consolidated revenues. There are several other long-term
agreements in place, each representing less than ten percent of
FCX consolidated sales. Certain terms of these long-term
contracts are negotiated annually.
FCX revenues attributable to various countries based on the
location of the customer follow (in thousands):
2000 1999 1998
- ---------------------------------------------------------
Spain $ 371,665 $ 328,720 $ 324,202
Indonesia (PT Smelting) 358,138 252,586 25,610
Japan 302,040 358,556 382,721
Switzerland 199,419 219,250 269,355
United States 92,411 187,731 250,922
Others 544,937 540,485 504,322
---------- ---------- ----------
Total $1,868,610 $1,887,328 $1,757,132
========== ========== ==========
FCX follows SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information" which requires that companies
disclose segment data based on how management makes decisions
about allocating resources to segments and measuring their
performance. FCX has two operating segments: "mining and
exploration" and "smelting and refining." The mining and
exploration segment includes PT Freeport Indonesia's copper and
gold mining operations in Indonesia and FCX's Indonesian
exploration activities. The smelting and refining segment
includes Atlantic Copper's operations in Spain and PT Freeport
Indonesia's equity investment in PT Smelting in Gresik, Indonesia.
The segment data presented below (in thousands) were prepared on
the same basis as the consolidated FCX financial statements.
55
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
Mining Smelting
and and Eliminations FCX
Exploration Refining and Other Total
- ----------------------------------------------------------------------
2000
Revenues $1,413,099a $768,814 $(313,303) $1,868,610
Production and delivery 608,107 734,083 (331,268) 1,010,922
Depreciation and
amortization 250,864 27,989 4,703 283,556
Exploration expenses 7,318 - 1,531 8,849
Equity in PT Smelting
losses - 15,633b - 15,633
General and
administrative expenses 56,779 8,426 5,745 70,950
---------- -------- --------- ----------
Operating income (loss) $ 490,031 $(17,317) $ 5,986 $ 478,700
========== ======== ========= ==========
Interest expense, net $ 133,804 $ 25,411 $ 46,131 $ 205,346
========== ======== ========= ==========
Provision (benefit)
for income taxes $ 131,442 $ (755) $ 28,886 $ 159,573
========== ======== ========= ==========
Capital expenditures $ 155,187 $ 20,477 $ 1,012 $ 176,676
========== ======== ========= ==========
Total assets $3,290,026 $677,851c $ (17,136) $3,950,741
========== ======== ========= ==========
1999
Revenues $1,464,811a $764,466 $(341,949) $1,887,328
Production and delivery 534,119 723,966 (331,598) 926,487
Depreciation and
amortization 259,372 29,373 4,468 293,213
Exploration expenses 9,330 - 1,296 10,626
Equity in PT Smelting
losses - 18,136b - 18,136
General and
administrative expenses 52,410 9,572 8,642 70,624
Operating income (loss) $ 609,580 $(16,581) $ (24,757) $ 568,242
========== ======== ========= ==========
Interest expense, net $ 137,787 $ 27,020 $ 29,262 $ 194,069
========== ======== ========= ==========
Provision (benefit)
for income taxes $ 175,581 $ (2,983) $ 23,055 $ 195,653
========== ======== ========= ==========
Capital expenditures $ 150,596 $ 9,807 $ 419 $ 160,822
========== ======== ========= ==========
Total assets $3,432,068 $709,432c $ (58,584) $4,082,916
========== ======== ========= ==========
1998
Revenues $1,351,123a $753,957 $(347,948) $1,757,132
Production and delivery 461,244 667,904 (333,131) 796,017
Depreciation
and amortization 241,312 31,711 4,384 277,407
Exploration expenses 11,542 - 1,491 13,033
Equity in PT Smelting
losses - 4,948b - 4,948
General and
administrative expenses 70,361 10,337 7,082 87,780
Operating income $ 566,664 $ 39,057 $ (27,774) $ 577,947
========== ======== ========= ==========
Interest expense, net $ 164,734 $ 27,953 $ 12,901 $ 205,588
========== ======== ========= ==========
Provision (benefit)
for income taxes $ 152,795 $ (1,225) $ 18,996 $ 170,566
========== ======== ========= ==========
Capital expenditures $ 280,026 $ 11,131 $ 926 $ 292,083
========== ======== ========= ==========
Total assets $3,487,527 $722,767c $ (17,660) $4,192,634
========== ======== ========= ==========
a. Includes PT Freeport Indonesia sales to PT Smelting totaling
$343.3 million in 2000, $252.6 million in 1999 and $25.6 million
in 1998.
b. Includes deferrals of intercompany profits on 25 percent of
PT Freeport Indonesia's sales to PT Smelting, for which the final
sale has not occurred, totaling $2.0 million in 2000, $8.0
million in 1999 and $3.3 million in 1998.
c. Includes PT Freeport Indonesia's equity investment in PT
Smelting totaling $56.2 million at December 31, 2000, $66.1
million at December 31, 1999 and $80.8 million at December 31,
1998.
56
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
NOTE 13. SUPPLEMENTARY MINERAL RESERVE INFORMATION (UNAUDITED)
Total estimated proved and probable mineral reserves at the
Grasberg and other Block A ore bodies in Indonesia follow:
Average Ore Grade Per Ton Recoverable Reserves
Year ------------------------------- ----------------------------
- -End Ore Copper Gold Silver Copper Gold Silver
- --------------------------------------------------------------------------------
(Thousand (%)(Grams)(Ounce)(Grams)(Ounce)(Billions (Millions(Millions
Metric Tons) of Lbs.) of Ozs.) of Ozs.)
1996 2,008,285 1.19 1.18 .038 3.80 .122 43.2 55.3 118.7
1997 2,166,212 1.20 1.20 .039 3.95 .127 47.1 62.7 138.4
1998 2,475,478 1.13 1.05 .034 3.83 .123 51.3 64.2 153.1
1999 2,395,175 1.13 1.05 .034 3.85 .124 49.9 61.6 148.8
2000 2,514,532 1.10 1.04 .033 3.40 .109 50.9 63.7 139.6
By Deposit at December 31, 2000:
Grasberg:
Open pit 1,080,805 0.99 1.20 .038 2.32 .075 19.3 32.0 40.3
Under-
ground 743,033 1.09 0.79 .025 2.77 .089 15.1 14.1 35.5
Kucing
Liar 320,457 1.41 1.41 .045 5.30 .170 8.2 10.3 25.5
Deep Ore
Zone 185,476 1.19 0.82 .026 5.83 .187 4.2 4.0 18.4
Big Gossan 37,349 2.69 1.02 .033 16.42 .528 1.8 0.9 9.9
Ertsberg
Stockwork
Zone 100,731 0.55 0.80 .026 1.75 .056 1.1 2.0 3.2
Dom 30,892 1.67 0.42 .014 9.63 .310 0.9 0.3 4.7
Interme-
diate
Ore Zone 15,789 1.09 0.42 .014 7.76 .249 0.3 0.1 2.1
--------- ---- ---- ---- ---- ---- ---- ---- -----
Total 2,514,532 1.10 1.04 .033 3.40 .109 50.9 63.7 139.6
========= ==== ==== ==== ==== ==== ==== ==== =====
Estimated recoverable reserves were assessed using a copper
price of $0.90 per pound and a gold price of $300 per ounce.
Using a gold price of $270 per ounce would not have a significant
impact on our estimated recoverable reserves.
Incremental cash flow attributable to the fourth concentrator
mill expansion is shared 60 percent PT Freeport Indonesia and 40
percent Rio Tinto (Note 2). Incremental cash flow consists of
amounts generated from production in excess of specified annual
amounts based on the December 31, 1994 reserves and mine plan. The
incremental revenues from production from the expansion and total
revenues from production from Block A, including production from
PT Freeport Indonesia's previously existing operations, share
proportionately in operating, nonexpansion capital and
administrative costs. PT Freeport Indonesia receives 100 percent
of cash flow from its existing pre-expansion production facilities
as specified by the contractual arrangements. PT Freeport
Indonesia's estimated net share of recoverable reserves follows:
Year-End Copper Gold Silver
--------------------------------------
(Billions (Millions (Millions
of Lbs.) of Ozs.) of Ozs.)
1996 35.9 47.4 100.4
1997 37.8 51.3 111.3
1998 40.0 51.6 119.1
1999 38.7 49.5 115.3
2000 38.9 50.3 108.5
57
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Net Income
Net Income (Loss)(Loss) Per Share
Operating Applicable to ----------------
Revenues Income Common Stock Basic Diluted
- -----------------------------------------------------------------------
(In Thousands, Except Per Share Amounts)
2000
1st Quarter $ 467,592 $117,693 $ 9,241 $ .06 $ .06
2nd Quarter 397,348 65,499 (18,613) (.12) (.12)
3rd Quarter 473,837 90,099 (9,192) (.06) (.06)
4th Quarter 529,833 205,409 58,064 .40 .40
---------- -------- --------
$1,868,610 $478,700a $ 39,500a .26a .26a
========== ======== ========
1999
1st Quarter $ 415,836 $122,546 $ 17,710 $.11 $.11
2nd Quarter 470,335 127,681 18,961 .12 .12
3rd Quarter 473,658 154,319 26,809 .16 .16
4th Quarter b 527,499 163,696 37,307 .23 .23
---------- -------- --------
$1,887,328 $568,242 $100,787 .62 .61
========== ======== ========
a. Includes net charges totaling $12.4 million ($8.0 million to
net income or $0.05 per share) consisting of $6.0 million for
contribution commitments to support small business development
programs within Irian Jaya (Papua) and $7.9 million for personnel
severance costs, partly offset by a $1.5 million reversal of
costs for stock appreciation rights.
b. Includes charges to operating income totaling $8.8 million
($5.7 million to net income or $0.03 per share) consisting of
$3.6 million for an early retirement program, $1.4 million for
costs of stock appreciation rights and $3.8 million for certain
nonrecurring costs.
Inside Back Cover
FCX Class A Common Shares
Our Class A common shares trade on the New York Stock Exchange
(NYSE) under the symbol "FCX.A." The FCX.A share price is
reported daily in the financial press under "FMCGA" in most
listings of NYSE securities. At year-end 2000, the number of
holders of record of our Class A common shares was 6,433.
NYSE composite tape Class A common share price ranges during 2000
and 1999:
2000 1999
High Low High Low
- ---------------------------------------------------------
First Quarter $18.625 $11.000 $11.875 $ 9.000
Second Quarter 11.750 8.438 16.938 9.375
Third Quarter 9.875 8.000 17.438 12.750
Fourth Quarter 8.813 6.750 18.750 13.375
FCX Class B Common Shares
Our Class B common shares trade on the 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 2000, the number of holders of record of our Class B common
shares was 10,681.
2000 1999
High Low High Low
- ---------------------------------------------------------
First Quarter $21.438 $12.063 $12.750 $ 9.125
Second Quarter 12.750 8.813 18.000 10.063
Third Quarter 10.625 8.188 18.688 14.000
Fourth Quarter 9.375 6.750 21.375 15.563
Common Share Dividends
In December 1998, in response to low commodity market prices for
copper and gold, FCX's Board of Directors authorized elimination
of the regular quarterly cash dividend on common stocks as part
of FCX's cash flow enhancement efforts.
There were no cash dividends paid on common stock during 1999 and
2000.