SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1997 Commission File Number: 1-9916 Freeport-McMoRan Copper & Gold Inc. Incorporated in Delaware 74-2480931 (IRS Employer Identification No.) 1615 Poydras Street, New Orleans, Louisiana 70112 Registrant's telephone number, including area code: (504) 582-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No On September 30, 1997, there were issued and outstanding 78,124,644 shares of the registrant's Class A Common Stock, par value $0.10 per share, and 115,278,093 shares of its Class B Common Stock, par value $0.10 per share. 1 FREEPORT-McMoRan COPPER & GOLD INC. TABLE OF CONTENTS Page Part I. Financial Information Financial Statements: Condensed Balance Sheets 3 Statements of Income 4 Statements of Cash Flow 5 Notes to Financial Statements 6 Remarks 6 Report of Independent Public Accountants 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information 15 Signature 16 Exhibit Index E-1 2 FREEPORT-McMoRan COPPER & GOLD INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. FREEPORT-McMoRan COPPER & GOLD INC. CONDENSED BALANCE SHEETS (Unaudited) September 30, December 31, 1997 1996 ---------- ---------- (In Thousands) ASSETS Current assets: Cash and short-term investments $ 11,765 $ 37,118 Accounts receivable 204,843 236,750 Inventories 342,473 375,712 Prepaid expenses and other 12,482 11,636 ---------- ---------- Total current assets 571,563 661,216 Property, plant and equipment, net 3,397,170 3,088,644 Other assets 171,013 115,674 ---------- ---------- Total assets $4,139,746 $3,865,534 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 395,079 $ 358,255 Current portion of long-term debt and short-term borrowings 116,108 136,617 Accrued income taxes 60,924 103,003 ---------- ---------- Total current liabilities 572,111 597,875 Long-term debt, less current portion 1,998,334 1,426,299 Accrued postretirement benefits and other liabilities 139,128 200,646 Deferred income taxes 392,972 359,684 Minority interests 74,258 105,644 Mandatory redeemable preferred stock 500,007 500,007 Stockholders' equity 462,936 675,379 ---------- ---------- Total liabilities and stockholders' equity $4,139,746 $3,865,534 ========== ========== The accompanying notes are an integral part of these financial statements. 3 FREEPORT-McMoRan COPPER & GOLD INC. STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1997 1996 1997 1996 ---------- ---------- ---------- ---------- (In Thousands, Except Per Share Amounts) Revenues $ 489,522 $ 474,664 $1,580,252 $1,287,404 Cost of sales: Production and delivery 262,296 230,646 774,700 674,374 Depreciation and amortization 58,775 45,228 160,640 123,804 ---------- ---------- ---------- ---------- Total cost of sales 321,071 275,874 935,340 798,178 Exploration expenses 5,085 - 14,047 - General and administrative expenses 26,949 28,468 83,139 101,734 ---------- ---------- ---------- ---------- Total costs and expenses 353,105 304,342 1,032,526 899,912 ---------- ---------- ---------- ---------- Operating income 136,417 170,322 547,726 387,492 Interest expense, net (38,632) (28,566) (112,256) (81,641) Other income (expense), net 1,366 (1,894) 2,841 1,978 ---------- ---------- ---------- ---------- Income before income taxes and minority interests 99,151 139,862 438,311 307,829 Provision for income taxes (45,140) (65,297) (202,030) (140,651) Minority interests in net income of consolidated subsidiaries (8,394) (14,926) (39,786) (28,732) ---------- ---------- ---------- ---------- Net income 45,617 59,639 196,495 138,446 Preferred dividends (9,040) (13,513) (27,615) (40,825) ---------- ---------- ---------- ---------- Net income applicable to common stock $ 36,577 $ 46,126 $ 168,880 $ 97,621 ========== ========== ========== ========== Net income per primary and fully diluted share of common stock $.19 $.24 $.84 $.50 ========== ========== ========== ========== Average common shares outstanding 196,924 195,611 200,211 197,050 ========== ========== ========== ========== Dividends paid per common share $.225 $.225 $.675 $.675 ========== ========== ========== ========== The accompanying notes are an integral part of these financial statements. 4 FREEPORT-McMoRan COPPER & GOLD INC. STATEMENTS OF CASH FLOW (Unaudited) Nine Months Ended September 30, ------------------------- 1997 1996 ---------- ---------- (In Thousands) Cash flow from operating activities: Net income $ 196,495 $ 138,446 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 160,640 123,804 Deferred income taxes 47,219 29,781 Recognition of unearned income (76,595) (30,011) Deferral of unearned income 30,102 97,173 Minority interests' share of net income 39,786 28,732 Other (28,557) (18,490) (Increase) decrease in working capital: Accounts receivable 12,631 9,329 Inventories 22,122 (35,826) Prepaid expenses and other (2,730) (2,485) Accounts payable and accrued liabilities 23,698 9,643 Accrued income taxes (39,158) (25,143) ---------- ---------- (Increase) decrease in working capital 16,563 (44,482) ---------- ---------- Net cash provided by operating activities 385,653 324,953 ---------- ---------- Cash flow from investing activities: Capital expenditures: PT-FI (412,345) (235,675) Atlantic Copper (9,719) (49,014) Investment in Gresik smelter (24,620) (28,490) Other 170 (250) ---------- ---------- Net cash used in investing activities (446,514) (313,429) ---------- ---------- Cash flow from financing activities: Proceeds from debt 801,550 581,816 Repayment of debt (346,640) (149,849) Net proceeds from infrastructure financing 27,344 - Purchase of FCX common shares (250,939) (220,997) Cash dividends paid: Common stock (134,827) (132,284) Preferred stock (30,668) (38,147) Minority interests (25,442) (32,722) Other (4,870) 2,807 ---------- ---------- Net cash provided by financing activities 35,508 10,624 ---------- ---------- Net increase (decrease) in cash and short-term investments (25,353) 22,148 Cash and short-term investments at beginning of year 37,118 26,883 ---------- ------------ Cash and short-term investments at end of period $ 11,765 $ 49,031 ========== =========== The accompanying notes are an integral part of these financial statements. 5 FREEPORT-McMoRan COPPER & GOLD INC. NOTES TO FINANCIAL STATEMENTS 1. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share," which simplifies the computation of earnings per share (EPS). SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement for all prior period EPS data presented. Adoption of SFAS 128 will not have a material impact on FCX's previously reported earnings per share. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS 130 establishes standards for reporting and display of comprehensive income in the financial statements. Comprehensive income is the total of net income and all other nonowner changes in equity. SFAS 131 requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. SFAS 130 and 131 are effective for 1998. Adoption of these standards is not expected to have an effect on FCX's financial position or results of operations. 2. FINANCIAL CONTRACTS FCX has entered into financial contracts to manage certain risks resulting from fluctuations in commodity prices (primarily copper and gold), foreign exchange rates and interest rates by creating offsetting exposures. Costs or premiums and gains or losses on the contracts, including closed contracts, are recognized with the hedged transaction. Also, gains or losses are recognized 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 because its contracts are with a diversified group of financially strong counterparties. At September 30, 1997, FCX had redeemable preferred stock indexed to commodities, deferred premiums on copper call option contracts, deferred costs on foreign exchange option contracts, open foreign exchange forward contracts and interest rate swap contracts. Redeemable preferred stock indexed to commodities is treated as a hedge of future production and is carried at its original issue value. As principal payments occur, differences between the carrying value and the payment will be recorded as an adjustment to revenues. Premiums received on the sale of copper call option contracts are recorded as unearned income until the option contracts mature when the premium is recorded as income. FCX hedges its anticipated Spanish peseta cash flows with foreign exchange option contracts and foreign exchange forward contracts. Gains and losses, including costs, on option contracts that qualify as hedges are recognized in income when the underlying hedged transaction is recognized or when a previously anticipated transaction is no longer expected to occur. Changes in market value of forward exchange contracts which protect anticipated transactions are recognized in the period incurred. FCX has interest rate swap contracts to limit the effect of increases in the interest rates on floating rate debt. The costs associated with these contracts are amortized to interest expense over the terms of the agreements. 3. INTEREST COST Interest expense excludes capitalized interest of $7.5 million in the third quarter of 1997, $6.9 million in the third quarter of 1996, $14.3 million in the first nine months of 1997 and $22.1 million in the first nine months of 1996. 4. RATIO OF EARNINGS TO FIXED CHARGES The ratio of earnings to fixed charges for the first nine months of 1997 and 1996 was 4.3 to 1 and 3.7 to 1, respectively. For this calculation, earnings consist of income from continuing operations before income taxes, minority interests and fixed charges. Fixed charges include interest and that portion of rent deemed representative of interest. ---------------------- Remarks The information furnished herein should be read in conjunction with FCX's financial statements contained in its 1996 Annual Report to stockholders and incorporated by reference in its Annual Report on Form 10-K. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods. All such adjustments are, in the opinion of management, of a normal recurring nature. 6 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders of Freeport-McMoRan Copper & Gold Inc.: We have reviewed the accompanying condensed balance sheet of Freeport-McMoRan Copper & Gold Inc. (a Delaware corporation) as of September 30, 1997, the related statements of income for the three and nine-month periods ended September 30, 1997 and 1996, and the statements of cash flow for the nine month periods ended September 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to the financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Freeport-McMoRan Copper & Gold Inc. as of December 31, 1996, and the related statements of income, shareholders' equity and cash flows for the year then ended (not presented herein), and in our report dated January 21, 1997, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1996, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP New Orleans, Louisiana October 21, 1997 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW Freeport-McMoRan Copper & Gold Inc. (FCX) operates through its majority-owned subsidiaries, P.T. Freeport Indonesia Company (PT-FI) and P.T. IRJA Eastern Minerals Corporation (Eastern Mining), and through Atlantic Copper Holding, S.A. (Atlantic), a wholly owned subsidiary. PT-FI's operations involve mineral exploration and development, mining and milling of ore containing copper, gold and silver in Irian Jaya, Indonesia and the worldwide marketing of concentrates containing those metals. PT-FI also has a 25 percent interest in a joint venture to construct and operate a copper smelter and refinery in Indonesia. Eastern Mining conducts mineral exploration activities in Irian Jaya. Atlantic is engaged in the smelting and refining of copper concentrates in Spain and the marketing of refined copper products. Summary comparative results for the third-quarter and nine-month periods follow (in millions, except per share amounts): Third Quarter Nine Months ---------------------- --------------------- 1997 1996 1997 1996 ---------- ---------- ----------- -------- Revenues $ 489.5 $ 474.7 $ 1,580.3 $1,287.4 Operating income 136.4 170.3 547.7 387.5a Net income applicable to common stock 36.6 46.1 168.9 97.6a Net income per common share 0.19 0.24 0.84 0.50a Operating income (loss) by subsidiary: PT-FI $ 152.8 $ 175.1 $ 552.7 $393.2 Atlantic 9.4 2.4 19.0 2.7 Eastern Mining (2.2) - (7.7) - Intercompany eliminations and other b (23.6) (7.2) (16.3) (8.4) ---------- ---------- ----------- -------- $ 136.4 $ 170.3 $ 547.7 $387.5 ========== ========== =========== ======== a. Includes charges totaling $17.4 million ($8.0 million to net income or $0.04 per share) consisting of $12.7 million for stock appreciation rights costs caused by the increase in FCX's common stock price during the period, $3.0 million for costs related to a civil disturbance during the period and $1.7 million ($1.2 million to production cost and $0.5 million to general and administrative expenses) for an early retirement program. b. Profit on PT-FI sales to Atlantic is not reflected in FCX's consolidated results until completion of the smelting and refining process. The eliminations totaled $(20.1) million in the third quarter of 1997, $(2.7) million in the third quarter of 1996, $(3.4) million in the first nine months of 1997 and $3.5 million in the first nine months of 1996. Concentrate sales to Atlantic may cause fluctuations in FCX's consolidated quarterly earnings depending on the timing of the shipments and prices. FCX's revenues are derived primarily from PT-FI's sale of copper concentrates, which also contain significant amounts of gold, and the sale of copper cathodes and wire rod by Atlantic. FCX's revenues and net income can vary significantly with fluctuations in the market prices of copper and gold. At various times, in response to market conditions, FCX has entered into or liquidated copper and gold price protection contracts for some portion of its expected future mine production to mitigate the risk of adverse price fluctuations (see "PT-FI Outlook and Price Protection Program"). Based on projected 1997 annual sales volumes, a $0.01 per pound change in the average price realized on copper sales would have an approximate $10 million impact on revenues and an approximate $5 million impact on net income. A $10 per ounce change in the average price realized on annual gold sales would have an approximate $18 million impact on revenues and an approximate $9 million impact on net income. Higher third-quarter and nine-month 1997 revenues primarily reflect higher PT-FI and Atlantic sales volumes partially offset by lower gold realizations and higher intercompany sales compared with the 1996 periods. Third-quarter 1997 revenues benefited from forward gold sales contracts but were also impacted adversely from re- pricing prior period "open" concentrate sales. Nine-month 1997 revenues benefited from the sale of copper put option contracts and the impact of forward copper and gold sales contracts, which collectively provided $7.7 million to third-quarter revenues ($3.8 million to net income or $0.02 per share) and $80.2 million to nine- month revenues ($39.1 million to net income or $0.20 per share). Cost of sales for 1997 increased because of the higher sales volumes and an increase in the PT-FI depreciation rate. FCX reported exploration expense in the 1997 periods primarily for exploration costs incurred in the Eastern Mining and PT-FI Block B areas not reimbursed by Rio Tinto plc (Rio Tinto). As discussed below, Rio Tinto funded all of FCX's 1996 exploration costs. General and administrative expenses in the 1997 nine-month period were lower primarily because of charges in 1996 8 for stock appreciation rights. Net interest expense primarily reflects higher average debt levels. The provision for income taxes and minority interests charges in 1997 compared with the 1996 periods primarily reflect net income levels at PT-FI. Preferred dividends in the 1997 periods were lower when compared to the 1996 periods because in December 1996 the depositary shares representing Convertible Exchangeable Preferred Stock were all converted to FCX common stock or redeemed for cash. RESULTS OF OPERATIONS PT-FI Revenues A reconciliation of PT-FI revenues between the periods follows (in millions): Third Nine Quarter Months ---------- ---------- Revenues -1996 $ 376.0 $ 991.2 Increases (decreases): Sales volumes: Copper 45.9 110.6 Gold 41.6 67.5 Price realizations: Copper (6.6) 95.1 Gold (32.9) (36.1) Adjustments to prior period open sales (20.8) 59.0 Treatment charges, royalties and other (20.7) (53.5) ---------- ---------- Revenues -1997 $ 382.5 $ 1,233.8 ========== ========== PT-FI's third-quarter and nine-month 1997 revenues benefited from higher sales volumes partially offset by lower gold prices compared with the 1996 periods. Revenues also included net additions totaling $7.7 million in the 1997 third quarter, $28.6 million in the 1996 third quarter, $80.2 million in the 1997 nine-month period and $26.9 million in the 1996 nine-month period recognized from PT- FI's copper and gold hedging activities. PT-FI's 1997 revenues included net downward adjustments of $20.9 million in the third quarter and upward adjustments of $54.9 million in the nine-month period on prior period open concentrate sales. PT-FI's 1996 revenues included net downward adjustments of $0.1 million in the third quarter and $4.1 million in the nine-month period on prior period open concentrate sales. Treatment charges increased because of higher sales volumes and tighter market conditions. Treatment rates for a significant portion of PT-FI's 1998 projected sales will be negotiated in the fourth quarter of 1997 based on current market conditions. Additionally, royalties and a portion of treatment charges vary with the price of copper. PT-FI Outlook and Price Protection Program. PT-FI has commitments from various parties, including Atlantic, to purchase virtually all of its expected fourth-quarter 1997 production and 1998 production at market prices. Sales for the fourth quarter of 1997 are projected to approximate 285 million pounds of copper and 500,000 ounces of gold. Copper and gold sales for 1997 reflect production at greater than mine-life grades during the year. The significant decline in gold prices in early 1997 increased the value of PT-FI's forward gold sales contracts covering 876,000 ounces of gold at an average price of $376.08 per ounce from February 1997 through August 1997. In February 1997, PT-FI closed these contracts and received $30.1 million cash. As a result, PT-FI reported gold revenues through August 1997 at a higher price than realized under its contract terms with customers, but PT-FI no longer has forward gold sales positions. PT-FI recognized $6.0 million of gold revenues from forward sales contracts during the third quarter of 1997 and $37.6 million during the first nine months of 1997. PT-FI has suspended its program of selling gold forward on a six-month basis but may reinstate the program in the future. Future gold sales will be priced at current market prices as long as the forward sales program is suspended. The closing London Bullion Market Association spot gold price was $323.90 per ounce on October 20, 1997. The significant decline in copper prices during 1996 increased the value of put option contracts that PT-FI purchased under its price protection program to provide a floor price of $0.90 per pound for essentially all copper sales through the second quarter of 1997 at an average cost of approximately $0.02 per pound. During the third quarter of 1996, PT-FI sold all of its put option contracts covering approximately 1.2 billion pounds of copper for $97.2 million cash. As a result, PT-FI reported copper revenues through June 30, 1997 at a higher price than realized under its copper concentrate sales contracts, but PT-FI no longer has any price protection on its future copper sales. As conditions warrant, PT-FI may enter into new contracts for its future copper sales. PT-FI recognized $46.1 million of additional copper revenues in the first half of 1997 from the sale of its put option contracts. The original 9 acquisition cost of the contracts totaled $10.5 million. As of June 30, 1997, PT-FI had recognized the full $97.2 million from the 1996 sale of its copper put option contracts. PT-FI's concentrate sales agreements, with regard to copper, provide for provisional billings at the time of shipment with final settlement generally based on the average London Metal Exchange (LME) price for a specified future month. Copper revenues on provisionally priced open pounds are adjusted monthly based on then current prices. At September 30, 1997, FCX had consolidated copper sales totaling 335.4 million pounds recorded at an average price of $0.95 per pound remaining to be finally priced. Approximately 60 percent of these open pounds (average price of $0.95 per pound) are expected to be finally priced during the fourth quarter of 1997 with most of the remaining pounds (average price of $0.95 per pound) to be priced during the first quarter of 1998. A one cent movement in the average price used for these open pounds will have an approximate $1.5 million impact on FCX's 1997 net income. PT-FI Operating Results. Third Quarter Nine Months ------------------ ------------------------ 1997 1996 1997 1996 -------- -------- ---------- ---------- Ore milled (metric tons per day, MTPD) 132,400 127,500 129,100 127,100 Copper grade (%) 1.40 1.37 1.34 1.31 Gold grade (grams per metric ton) 1.56 1.52 1.40 1.45 Recovery rate (%) Copper 86.4 83.3 85.6 83.5 Gold 82.5 77.1 79.6 75.7 Copper Production (000s of recoverable pounds) 312,800 284,700 858,100 812,200 Sales (000s of recoverable pounds) 332,600 285,300 894,600 779,500 Average realized price a $.95 $.97 $1.07 $.96 Gold Production (recoverable ounces) 487,400 427,000 1,224,900 1,181,100 Sales (recoverable ounces) 522,500 418,000 1,327,700 1,155,100 Average realized price b $335.63 $398.60 $364.36 $391.55 Gross profit per pound of copper (cents): Average realized price 95.0 96.9 106.7 96.1 --------- --------- ------- --------- Production costs: Site production and delivery 46.6 49.4 52.7 52.6c Gold and silver credits (53.3) (59.2) (54.4) (58.6) Treatment charges 24.1 21.8 25.1 22.2 Royalty on metals 2.6 1.5 3.1 3.0 --------- --------- ------- ---------- Cash production costs 20.0 13.5 26.5 19.2 Depreciation and amortization 15.0 13.0 15.0 13.0 ---------- --------- ------- --------- Total production costs 35.0 26.5 41.5 32.2 ---------- ---------- ------- --------- Revenue adjustments d (6.6) (1.0) 5.0 (2.4) ---------- ---------- ------- --------- Gross profit per pound of copper 53.4 69.4 70.2 61.5 ========== ========== ======= ========= a. Amounts were $0.88 for the 1996 quarter, $1.01 for the 1997 nine-month period and $0.92 for the 1996 nine-month period before adjustments from copper put option and forward sales contracts. b. Amounts were $324.15 for the 1997 quarter, $382.76 for the 1996 quarter, $335.72 for the 1997 nine-month period and $387.08 for the 1996 nine-month period before adjustments from forward gold sales contracts. c. Includes $4.2 million (0.5 cents per pound) for costs related to a first-quarter civil disturbance and an early retirement program. d. Reflects adjustments to PT-FI revenues for prior period concentrate sales and amortization of the price protection program cost. Unit site production costs in the third quarter of 1997 were 6 percent below last year's third quarter because of strong operating results, including record quarterly mill throughput and record copper production. Higher gold grades and recovery rates offset by lower prices and higher copper sales in the 1997 periods resulted in lower gold credits compared with 1996. As discussed, unit treatment charge rates were higher in the 1997 periods because of market conditions and higher copper prices. PT-FI's copper royalty rate varies from 1.5 percent, at a copper price of $0.90 or less, to 3.5 percent, at a copper price over $1.10, on copper net revenue. The gold and silver royalty rate is 1.0 percent. 10 PT-FI's depreciation rate of 15.0 cents per pound for 1997 reflects an increase over the 1996 rate because of the first phase of the enhanced infrastructure program (EIP) and other 1997 capital additions. The EIP is designed to provide the infrastructure needed for PT-FI's growing operations and for expected future growth, to enhance the living conditions of PT-FI's employees, and to develop and promote the growth of local and third party activities and enterprises in Irian Jaya. The first phase of the EIP was completed in 1996; therefore, the 1996 rate of 13.0 cents per pound did not include the EIP for a full year. Exploration Activities. Delineation drilling continued at the underground Kucing Liar ore body in PT-FI's Block A. The advance of the Kucing Liar/Lembah Tembaga adit to the west and east from the Amole adit is allowing for multiple drill rigs to be in operation. Drilling of the deep Grasberg resulted in drill hole GR43-1 intersecting 337 meters of mineralization with an average grade of 1.83 percent copper equivalent and drill hole GR43-2, which is incomplete, intersecting 296 meters of mineralization with an average grade of 1.70 percent copper equivalent. The bottom 200 meters of the GR43-1 hole and the bottom 150 meters of the GR43-2 hole are below the current Grasberg block cave reserves. Drilling and trenching continues at the Wabu porphyry prospect in Block B. A pre-feasibility study is now under way to determine the potential for commercial operation of this prospect. Geologic activities continued in Eastern Mining's Blocks I, II and III. Geologic mapping and sampling have discovered several new targets along the northern boundary of Block II which are scheduled for drilling in early 1998. Atlantic Results. Third Quarter Nine Months ----------------- ------------------ 1997 1996 1997 1996 ------- ------- -------- -------- Revenues (in millions) $229.5 $200.1 $663.3 $569.1 Concentrate treated (metric tons) 241,600 220,900 683,100 586,400 Anode production (000s of pounds) 169,000 152,400 471,100 397,000 Cathode and wire rod sales (000s of pounds) 133,000 123,200 375,900 341,900 Atlantic reported higher revenues and cost of sales in the 1997 periods because of increases in production from its newly expanded facilities. Atlantic reached its full production capacity of 270,000 metric tons of metal per year in June 1996 and completed a $13.0 million "debottlenecking" project in June 1997 which increased annual production capacity by 20,000 metric tons. Atlantic also is benefiting from higher treatment and refining rates in 1997 ($0.26 per pound in third-quarter 1997 compared with $0.23 per pound in third-quarter 1996). Cathode cash production costs ($0.12 per pound) in the 1997 quarter were 20 percent lower than in the 1996 quarter. Higher treatment charges, which negatively affect PT-FI, benefit Atlantic. The effect of an equivalent change in treatment charges on PT-FI and Atlantic largely offset in FCX's consolidated financial results, after taking into account income taxes and minority interests. In May 1997, Atlantic entered into contracts to hedge a portion of its treatment charges for June 1997 through September 1997 because of the increases in copper prices. Atlantic collected $2.5 million, recognizing $0.6 million in second-quarter 1997 operating income and $1.9 million in the third quarter of 1997. A portion of Atlantic's operating costs and certain Atlantic assets and liabilities are denominated in Spanish pesetas. On an annual basis, a one peseta change in the U.S. dollar and Spanish peseta exchange rate results in an approximate $1.5 million change in FCX's annual net income before any hedging effects. FCX's other income included currency translation gains totaling $2.3 million in the third quarter of 1997, $0.6 million in the third quarter of 1996, $14.4 million in the 1997 nine-month period and $8.2 million in the 1996 nine-month period. Atlantic has a currency hedging program to reduce its exposure to changes in the U.S. dollar and Spanish peseta exchange rate that involves foreign exchange option and forward contracts. These contracts currently hedge approximately 80 percent of Atlantic's projected net peseta cash outflows through October 1998. In addition to the currency translation gains noted above, Atlantic recorded losses to other income related to its foreign currency contracts totaling $0.7 million in the third quarter of 1997 and $6.5 million in the 1997 nine-month period. Other Financial Results. The FCX/Rio Tinto joint ventures incurred $10.0 million of exploration costs in the 1997 third quarter and $35.3 million in the nine-month 1997 period, compared with $9.8 million in the 1996 quarter and $27.1 million in the nine-month 1996 period as they continued to aggressively explore 11 the Contract of Work (COW) areas. FCX reported $5.1 million of exploration expense in the third quarter of 1997 primarily for exploration costs incurred in the Eastern Mining and PT-FI Block B areas. Costs in these areas are now being shared 60 percent by FCX and 40 percent by Rio Tinto. All 1996 exploration costs were reimbursed by Rio Tinto. Approximately $14.1 million in PT-FI's Block A remains to be applied to the Rio Tinto $100 million exploration funding received in 1996. FCX expects fourth-quarter 1997 exploration expenses to total approximately $5 million. FCX's total interest cost (before capitalization) rose to $126.5 million for the nine-month 1997 period from $103.8 million in the 1996 period because of an increase in debt levels associated with the expansions and the FCX share purchase programs. FCX capitalized $14.3 million of interest costs in the first nine months of 1997 primarily for the "fourth concentrator mill expansion" project. Because of the EIP project at PT-FI and the expansion at Atlantic, $22.1 million of interest was capitalized during the first nine months of 1996. Interest expense is expected to be higher throughout 1997 because of the infrastructure transactions with P.T. ALatieF Nusakarya Corporation (ALatieF) discussed below, higher debt levels and reduced capitalized interest. FCX's effective tax rate was 46 percent for the first nine months of 1997 and 1996. PT-FI's COW provides a 35 percent income tax rate and a 10 percent withholding on dividends paid to FCX by PT-FI and on interest for debt incurred after the signing of the COW. The withholding rate declined from 15 percent to 10 percent beginning February 1997 because of an amendment to the United States/Indonesia tax treaty. Included in the 1997 provision for income taxes is $9.5 million representing additional amounts payable pursuant to an Indonesian Presidential Decree. No income taxes are recorded at Atlantic, which is subject to taxation in Spain, because it has not generated taxable income in recent years. CAPITAL RESOURCES AND LIQUIDITY FCX's primary sources of cash are operating cash flows and borrowings, while its primary cash outflows include capital expenditures, dividends and purchases of its common stock. Net cash provided by operating activities was $385.7 million for the first nine months of 1997, compared with $325.0 million for the 1996 period. Net cash used in investing activities of $446.5 million in the 1997 period compared with $313.4 in the 1996 period, primarily reflects increased PT-FI capital expenditures associated with the "fourth concentrator mill expansion," which are being funded with nonrecourse borrowings from Rio Tinto. Net cash provided by financing activities totaled $35.5 million in 1997 compared with $10.6 million in 1996. Operating Activities Higher net income in 1997 and a decrease in working capital were the primary reasons for higher net cash provided by operating activities. PT-FI collected $30.1 million from closed gold forward sales contracts in 1997 and recognized $76.6 million of gains on the closed gold forward sales contracts and copper put options contracts sold in 1996. The decrease in working capital for 1997 primarily reflects a decrease in product inventories. Investing Activities FCX's 1997 capital expenditures have increased compared to the 1996 period primarily because of PT-FI's "fourth concentrator mill expansion." Atlantic completed its expansion to 270,000 metric tons per year in 1996 and its $13.0 million debottlenecking project in June 1997. PT-FI's capital expenditures for the fourth quarter of 1997 are expected to approximate $50 million (excluding the "fourth concentrator mill expansion" discussed below), representing mine and mill sustaining capital and long-term enhancement projects. Funding is expected to be provided by operating cash flow, PT-FI's bank credit facilities ($749.0 million commitment available at October 20, 1997) and other financing sources. FCX and Rio Tinto are continuing construction on the "fourth concentrator mill expansion" of PT-FI's facilities. The optimum rate following this expansion is expected to be at least 190,000-200,000 MTPD, subject to certain approvals. Completion is anticipated in the first quarter of 1998. Costs for the expansion are expected to approximate $960 million, including both working capital and $300 million for a coal-fired power plant and related facilities. The new power plant facilities are expected to be sold in late 1997 to the joint venture that owns the assets which currently provide electricity to PT-FI. Pursuant to the Rio Tinto joint venture, Rio Tinto has a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold, and silver through 2021 from expansion of PT-FI's existing mining and milling capacity financed by Rio Tinto. To finance the expansion, Rio Tinto will provide up to $750 million for defined costs, of which 40 percent will be funded directly and 60 percent will be loaned to PT-FI on a nonrecourse basis. Expansion costs above $750 million will be funded 60 percent by PT-FI and 40 percent by Rio Tinto except for approximately $80 12 million for costs to be funded by PT-FI to enhance the profitability of PT-FI's existing operations. Incremental cash flow attributable to such expansion projects will be shared on the basis of 60 percent to PT-FI and 40 percent Rio Tinto. PT-FI has assigned its interest in such incremental cash flow to Rio Tinto until Rio Tinto has received an amount of funds from such assigned interest equal to the funds loaned to PT-FI plus interest based on Rio Tinto's cost of borrowing. The incremental production from the expansion, as well as production from PT-FI's existing operations will share proportionately in operating and administrative costs. PT-FI 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. Atlantic received $7.5 million from the Spanish government in May 1997, which represented the final installment of $52.8 million in total grants related to Atlantic's expansion of its production capacity to 270,000 metric tons of metal per year. Atlantic completed a $13.0 million "debottlenecking" project in June 1997 that has increased annual production capacity by 20,000 metric tons and improved its profitability. Construction began in 1996 on PT-FI's 25 percent owned, 200,000 metric tons of metal per year copper smelter/refinery complex in Gresik, Indonesia. The estimated aggregate project cost, before working capital requirements, is approximately $625 million. This project is being financed by a $300 million nonrecourse term loan and a $110 million working capital facility from a group of commercial banks. The remaining funding is being provided pro rata by PT-FI (25 percent) and the other owners (75 percent). Upon completion of the Gresik smelter in mid-1998 and the PT-FI "fourth concentrator mill expansion," FCX anticipates that approximately 50 percent of PT-FI's annual concentrate production will be sold to Atlantic and the Gresik smelter at market prices. Financing Activities Net proceeds from debt totaled $454.9 million in the first nine months of 1997, including $315.8 million of nonrecourse borrowings from Rio Tinto, while the 1996 period included $432.0 million of net proceeds from debt. In March 1997, PT-FI completed the final $75 million sale of infrastructure assets to joint ventures owned one-third by PT-FI and two-thirds by ALatieF, an Indonesian investor. The sales to the ALatieF joint ventures totaled $270.0 million during the period from December 1993 to March 1997. PT-FI subsequently sold its one-third interest in the joint ventures to ALatieF and is leasing the infrastructure assets under capital lease arrangements. PT-FI continues to guarantee an approximately $50 million bank loan associated with the purchases. PT-FI no longer consolidates the joint ventures. Because of PT-FI's sale of its interest in the joint ventures and the resulting change in accounting for these transactions as capital leases rather than consolidation, PT-FI's interest expense is higher and minority interest charges are lower. In August 1997 FCX announced a new open market share purchase program for an additional 20 million shares bringing the total shares approved for purchase under the open market share purchase programs to 40 million. During the first nine months of 1997, FCX acquired an aggregate 9.1 million of its Class A and B common shares for $252.7 million (an average of $27.87 per share) under its open market share purchase programs. From inception of these programs through October 20, 1997, FCX has purchased a total of 21.0 million shares for $581.6 million (an average of $27.74 per share). The timing of future purchases is dependent upon many factors, including the price of common shares, the Company's business and financial position, and general economic and market conditions. OTHER MATTERS Beginning in 1995, PT-FI has participated in an independent social/cultural audit of its Irian Jaya operations under a voluntary program monitored by the Indonesian Government. The audit was conducted by LABAT-Anderson, an internationally recognized consulting firm, and their final report was made public in August 1997. All of the recommendations in LABAT-Anderson's report had previously been implemented by PT-FI or are in the process of being implemented. In March 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 P.T. Indocopper Investama Corporation (PT-II). FCX owns 49 percent of the capital stock of PT-II and PT-II owns 9.4 percent of the outstanding PT-FI stock. Nusamba financed $254.0 million of the $315.0 million purchase price with a commercial loan. FCX has agreed that if Nusamba defaults on the loan, FCX will purchase the PT-II 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 shortfalls between the interest payments due on the commercial loan and the dividends received by Nusamba from PT-II. At September 30, 1997, $5.6 million was due from Nusamba because of interest payment shortfalls. 13 CAUTIONARY STATEMENT Management's discussion and analysis of financial condition and results of operations contains forward-looking statements regarding copper and gold sales volumes, exploration activities, capital expenditures, expansion costs, Gresik smelter costs and the availability of financing. Important factors that might cause future results to differ from these projections include unanticipated declines in the average grades of ore mined, unanticipated milling and other processing problems, the speculative nature of mineral exploration, fluctuations in interest rates and other adverse financial market conditions, and other factors described in more detail in FCX's Form 10-K for the year ended December 31, 1996 filed with the Securities and Exchange Commission. -------------------- The results of operations reported and summarized above are not necessarily indicative of future operating results. 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) The exhibits to this report are listed in the Exhibit Index beginning on Page E-1 hereof. (b) During the quarter for which this report is filed, the registrant filed one Current Report on Form 8-K, dated August 6, 1997 reporting information under Item 5. No financial statements were filed in connection with such reports. 15 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FREEPORT-McMoRan COPPER & GOLD INC. By: /s/ Michael A. Weaver ----------------------- Michael A. Weaver Controller-Financial Reporting (authorized signatory and Principal Accounting Officer) Date: November 13, 1997 16 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Sequentially Numbered Number Description Page - ------ ----------- ----------- 2.1 Agreement, dated as of May 2, 1995 by and between FTX and FCX and The RTZ Corporation PLC, RTZ Indonesia Limited, and RTZ America, Inc. (the "RTZ Agreement"). Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of FTX dated as of May 26, 1995. 2.2 Amendment dated May 31, 1995 to the RTZ Agreement. Incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q of FTX for the quarter ended June 30, 1995. 2.3 Distribution Agreement dated as of July 5, 1995 between FTX and FCX. Incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q of FTX for the quarter ended September 30, 1995 (the "FTX 1995 Third Quarter Form 10-Q"). 3.1 Composite copy of the Certificate of Incorporation of FCX. Incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of FCX for the quarter ended June 30, 1995 (the "FCX 1995 Second Quarter Form 10-Q"). 3.2 By-Laws of FCX, as amended. Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K of FCX for the fiscal year ended December 31, 1996 (the "FCX 1996 Form 10-K"). 4.1 Certificate of Designations of the Step-Up Convertible Preferred Stock of FCX. Incorporated by reference to Exhibit 4.2 to the FCX 1995 Second Quarter Form 10-Q. 4.2 Deposit Agreement dated as of July 1, 1993 among FCX, Chase Mellon Shareholder Services, L.L.C., as Depositary, and holders of depositary receipts ("Step-Up Depositary Receipts") evidencing certain Depositary Shares, each of which, in turn, represents 0.05 shares of Step-Up Convertible Preferred Stock. Incorporated by reference to Exhibit 4.5 to the Annual Report on Form 10-K of FCX for the fiscal year ended December 31, 1993 (the "FCX 1993 Form 10-K"). 4.3 Form of Step-Up Depositary Receipt. Incorporated by reference to Exhibit 4.6 to the FCX 1993 Form 10-K. 4.4 Certificate of Designations of the Gold-Denominated Preferred Stock of FCX. Incorporated by reference to Exhibit 4.3 to the FCX 1995 Second Quarter Form 10-Q. 4.5 Deposit Agreement dated as of August 12, 1993 among FCX, Chase Mellon Shareholder Services, L.L.C., as Depositary, and holders of depositary receipts ("Gold-Denominated Depositary Receipts") evidencing certain Depositary Shares, each of which, in turn, represents 0.05 shares of Gold-Denominated Preferred Stock. Incorporated by reference to Exhibit 4.8 to the FCX 1993 Form 10-K. 4.6 Form of Gold-Denominated Depositary Receipt. Incorporated by reference to Exhibit 4.9 to the FCX 1993 Form 10-K. 4.7 Certificate of Designations of the Gold-Denominated Preferred Stock, Series II (the "Gold-Denominated Preferred Stock II") of FCX. Incorporated by reference to Exhibit 4.4 to the FCX 1995 Second Quarter Form 10-Q. 4.8 Deposit Agreement dated as of January 15, 1994, among FCX, Chase Mellon Shareholder Services, L.L.C., as Depositary, and holders of depositary receipts ("Gold-Denominated II Depositary Receipts") evidencing certain Depositary Shares, each of which, in turn, represents 0.05 shares of Gold-Denominated Preferred Stock II. Incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of FCX for the quarter ended March 31, 1994 (the "FCX 1994 First Quarter Form 10-Q"). 4.9 Form of Gold-Denominated II Depositary Receipt. Incorporated by reference to Exhibit 4.3 to the FCX 1994 First Quarter Form 10-Q. 4.10 Certificate of Designations of the Silver-Denominated Preferred Stock of FCX. Incorporated by reference to Exhibit 4.5 to the FCX 1995 Second Quarter Form 10-Q. 4.11 D eposit Agreement dated as of July 25, 1994 among FCX, Chase Mellon Shareholder Services, L.L.C., as Depositary, and holders of depositary receipts ("Silver-Denominated Depositary Receipts") evidencing certain Depositary Shares, each of which, in turn, initially represents 0.025 shares of Silver-Denominated Preferred Stock. Incorporated by reference to Exhibit 4.2 to the July 15, 1994 Form 8-A. 4.12 Form of Silver-Denominated Depositary Receipt. Incorporated by reference to Exhibit 4.1 to the July 15, 1994, Form 8-A. 4.13 $550 million Composite Restated Credit Agreement dated as of July 17, 1995 (the "PT-FI Credit Agreement") among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, Chemical Bank, as administrative agent and FCX collateral agent, and The Chase Manhattan Bank (National Association), as documentary agent. Incorporated by reference to Exhibit 4.16 to the Annual Report of FCX on Form 10-K for the year ended December 31, 1995 (the "FCX 1995 Form 10-K"). 4.14 Amendment dated as of July 15, 1996 to the PT-FI Credit Agreement among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, Chemical Bank, as administrative agent and FCX collateral agent, and The Chase Manhattan Bank (National Association), as documentary agent. Incorporated by reference to Exhibit 4.2 to the Quarterly Report of FCX on Form 10-Q for the quarter ended September 30, 1996 (the "FCX 1996 Third Quarter Form 10-Q"). 4.15 Amendment dated as of October 9, 1996 to the PT-FI Credit Agreement among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, The Chase Manhattan Bank (formerly Chemical Bank), as administrative agent, security agent and JAA security agent, and The Chase Manhattan Bank (as successor to The Chase Manhattan Bank (National Association)), as documentary agent. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of FCX dated and filed November 13, 1996 (the "FCX November 13, 1996 Form 8-K"). 4.16 $200 million Credit Agreement dated as of June 30, 1995 (the "CDF") among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, Chemical Bank, as administrative agent and FCX collateral agent, and The Chase Manhattan Bank (National Association), as documentary agent. Incorporated by reference to Exhibit 4.2 to the FCX 1995 Third Quarter Form 10-Q. 4.17 Amendment dated as of July 15, 1996 to the CDF among PT- FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, Chemical Bank, as administrative agent and FCX collateral agent, and The Chase Manhattan Bank (National Association), as documentary agent. Incorporated by reference to Exhibit 4.1 to the FCX 1996 Third Quarter Form 10-Q. 4.18 Amendment dated as of October 9, 1996 to the CDF among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, The Chase Manhattan Bank (formerly Chemical Bank), as administrative agent, security agent and JAA security agent, and The Chase Manhattan Bank (as successor to The Chase Manhattan Bank (National Association)), as documentary agent. Incorporated by reference to Exhibit 10.1 to the FCX November 13, 1996 Form 8-K. 4.19 Senior Indenture dated as of November 15, 1996 from FCX to The Chase Manhattan Bank, as Trustee. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of FCX dated November 13, 1996 and filed November 15, 1996 (the "FCX November 15, 1996 Form 8-K"). 4.20 First Supplemental Indenture dated as of November 18, 1996 from FCX to The Chase Manhattan Bank, as Trustee, providing for the issuance of the Senior Notes and supplementing the Senior Indenture dated November 15, 1996 from FCX to such Trustee, providing for the issuance of Debt Securities. Incorporated by reference to Exhibit 4.20 to the FCX 1996 Form 10-K. 11.1 Computation of Net Income per Common and Common Equivalent Share. 15.1 Letter dated October 21, 1997 from Arthur Andersen LLP regarding unaudited interim financial statements. 27.1 Financial Data Schedule