EXHIBIT 13.1
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]
<Table>
<Caption>
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
====== ====
</Table>
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-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 incident in May 2000
[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.
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 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)
<Table>
<Caption>
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
</Table>
Fig. #3
Tests on tailings show a non-acid forming potential.
(Graph showing the following data)
<Table>
<Caption>
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(Annual Average Value)
Potential kilograms (35) (24) (36) (22) (34)
of acid per metric
ton of tailings
</Table>
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.
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.
[Photo]
Our overburden reclamation continues to show promising results in a very
challenging high-altitude environment.
Responding 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 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)
<Table>
<Caption>
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
</Table>
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)
<Table>
<Caption>
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
</Table>
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.
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)
<Table>
<Caption>
Species Species
Tested Successful
------- ----------
(Number of plant species)
Tailings 118 108
Overburden 57 33
</Table>
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)
<Table>
<Caption>
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
</Table>
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
[Photo]
Supported by a cooperative program between PT Freeport Indonesia and the local
people, growing chili peppers has shown success as a cash crop.
perished. Contained 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.
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.
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)
<Table>
<Caption>
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
</Table>
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)
<Table>
<Caption>
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
</Table>
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,
[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.
FREEPORT-McMoRan COPPER & GOLD INC. Selected Financial and Operating Data
<Table>
<Caption>
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 492,293(a) 578,316(b) 579,585(c) 659,262(d) 637,309(e)
Net income applicable
to common stock 39,500(a) 100,787(b) 118,317(c) 208,541(d) 174,680(e)
Basic net income
per common share .26(a) .62(b) .67(c) 1.06(d) .90(e)
Diluted net income
per common share .26(a) .61(b) .67(c) 1.06(d) .89(e)
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 $ .94(f) $ 1.02(f)
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 $ 346.14(g) $ 390.96(g)
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
</Table>
FREEPORT-McMoRan COPPER & GOLD INC. Selected Financial and Operating Data
<Table>
<Caption>
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
</Table>
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.
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.
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 costs associated with our larger heavy equipment fleet, including
our mine haul trucks and electric shovels, and higher energy costs associated
with a significant increase in diesel fuel costs during the year 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. Our share of
joint venture and other exploration costs totaled $8.8 million in 2000, $10.6
million in 1999 and $13.0 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.
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):
<Table>
<Caption>
Years Ended December 31, 2000 1999 1998
- ------------------------ -------- -------- --------
Mining and exploration $ 490.0 $ 609.6 $ 566.7
Smelting and refining (1.7) 1.6 44.0
Intercompany eliminations and other 4.0 (32.9) (31.1)
-------- -------- --------
Operating income(a) $ 492.3 $ 578.3 $ 579.6
======== ======== ========
</Table>
(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):
<Table>
<Caption>
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
======== ========
</Table>
Gross Profit Per Pound of Copper (cents)
<Table>
<Caption>
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
====== ====== ======
</Table>
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 costs associated with our larger heavy equipment
fleet, including our mine haul trucks and electric shovels, and higher energy
costs associated with a significant increase in diesel fuel costs during the
year 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, which had not varied significantly.
However, during the fourth quarter of 2000 PT Freeport Indonesia determined that
its future surface mine plans were 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.
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 its affiliates
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
are in suspension due to safety and security issues and uncertainty relating to
a possible conflict between our mining and exploration rights in certain forest
areas covered by our Contracts of Work and an Indonesian law enacted in 1999
prohibiting open-pit mining in forest preservation areas. These suspensions were
granted for one-year periods ending February 26, 2002, for Block B, March 31,
2002, for PT Nabire Bakti Mining and November 15, 2002, for Eastern Minerals. We
are currently seeking a renewal of the Block B suspension and expect to seek
suspension renewals for the other areas in 2002 for additional one-year periods
by written request to the Government of Indonesia.
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.
Treatment charges for smelting and refining copper concentrates represent a
cost to PT Freeport Indonesia and income to Atlantic Copper and PT Smelting.
However, because we have integrated our upstream (mining and milling) and
downstream (smelting and refining) operations, we are able to achieve operating
hedges which substantially offset the effect of changes in treatment charges for
smelting and refining PT Freeport Indonesia's copper concentrates. For example,
while low smelting and refining charges adversely affect the operating results
of Atlantic Copper and PT Smelting, low charges benefit the operating results of
PT Freeport Indonesia's mining operations.
As a result, changes in smelting and refining charges do not have a
significant impact on our consolidated operating results. Taking into account
taxes and minority ownership interests, an equivalent change in the charges PT
Freeport Indonesia pays and the charges Atlantic Copper and PT Smelting receive
would essentially offset in our consolidated operating results.
<Table>
<Caption>
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
</Table>
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.
<Table>
<Caption>
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
======== ======== ========
Equity in PT Smelting losses $ 13.6 $ 10.1 $ 1.6
======== ======== ========
PT Freeport Indonesia profits deferred 2.0 8.0 3.3
======== ======== ========
</Table>
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.
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 syndicate of commercial
banks, including JPMorgan Chase Bank as agent, 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. We guaranteed the Nusamba loan for the purpose of continuing
minority Indonesian ownership of PT Freeport Indonesia. 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.
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.
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):
<Table>
<Caption>
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
====== ====== ===== =====
</Table>
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.
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").
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."
<Table>
<Caption>
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%
</Table>
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 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.
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
FREEPORT-McMoRan COPPER & GOLD INC. Statements of Income
<Table>
<Caption>
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 1,012,962 934,549 799,327
Depreciation and amortization 283,556 293,213 277,407
------------ ------------ ------------
Total cost of sales 1,296,518 1,227,762 1,076,734
Exploration expenses 8,849 10,626 13,033
General and administrative expenses 70,950 70,624 87,780
------------ ------------ ------------
Total costs and expenses 1,376,317 1,309,012 1,177,547
------------ ------------ ------------
Operating income 492,293 578,316 579,585
Equity in PT Smelting losses (13,593) (10,074) (1,638)
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
============ ============ ============
</Table>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
FREEPORT-McMoRan COPPER & GOLD INC. Statements of Cash Flow
<Table>
<Caption>
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 mining costs 28 11,597 7,251
Provision for inventory obsolescence 6,000 1,500 3,000
Other 8,812 18,387 1,867
Equity in PT Smelting losses 13,593 10,074 1,638
(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)
Loans to Nusamba (12,379) (18,263) (17,824)
Other (1,636) 98 867
---------- ---------- ----------
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
========== ========== ==========
</Table>
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.
FREEPORT-McMoRan COPPER & GOLD INC. Balance Sheets
<Table>
<Caption>
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
============ ============
</Table>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
FREEPORT-McMoRan COPPER & GOLD INC. Statements of Stockholders' Equity
<Table>
<Caption>
Years Ended December 31, 2000 1999 1998
- ------------------------ ------------ ------------ ------------
(In Thousands)
Step-up convertible preferred stock:
Representing 13,999,600 shares $ 349,990 $ 349,990 $ 349,990
------------ ------------ ------------
Class A common stock:
Representing 97,071,944 shares 9,707 9,707 9,707
------------ ------------ ------------
Class B common stock:
Balance at beginning of year
representing 121,540,842 shares
in 2000, 121,453,497 shares in
1999 and 121,404,858 shares in 1998 12,154 12,145 12,140
Exercised stock options representing
146,687 shares in 2000, 87,345
shares in 1999 and 48,639 shares
in 1998 15 9 5
------------ ------------ ------------
Balance at end of year representing
121,687,529 shares in 2000,
121,540,842 shares in 1999 and
121,453,497 shares in 1998 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
representing 55,115,819 shares
in 2000, 54,217,541 shares in
1999 and 34,221,720 shares in 1998 (1,128,716) (1,120,030) (860,660)
Shares purchased representing
19,493,300 shares in 2000, 844,200
shares in 1999 and 19,995,821 shares
in 1998 (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 representing
74,718,076 shares in 2000,
55,115,819 shares in 1999 and
54,217,541 shares in 1998 (1,332,319) (1,128,716) (1,120,030)
------------ ------------ ------------
Total stockholders' equity $ 37,931 $ 196,880 $ 103,416
============ ============ ============
</Table>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
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 the accounts of those subsidiaries where FCX
directly or indirectly has more than 50 percent of the voting rights and has the
right to control significant management decisions. FCX consolidates 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). 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
when proved and probable reserves have been established for a given property, in
which case all exploration costs for that property incurred since the beginning
of that year are capitalized. Refer to Note 13 for a definition of proved and
probable reserves. No exploration costs were capitalized during the years
presented. Development costs are capitalized beginning after proved and probable
reserves have been established. Additionally, interest expense allocable to the
cost of developing mining properties and to constructing new facilities is
capitalized until assets are ready for their intended use. 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.
Interest expense allocable to the cost of developing mining properties and
to constructing new facilities is capitalized until assets are ready for their
intended use.
Asset Impairment. FCX reviews and evaluates its long-lived assets for impairment
when events or changes in circumstances indicate that the related carrying
amounts may not be recoverable. An impairment loss is measured as the amount by
which asset carrying value exceeds its fair value. Fair value is generally
determined using valuation techniques such as estimated future cash flows. An
impairment is considered to exist if total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the asset. An impairment
loss is measured and recorded based on discounted estimated future cash flows.
Future cash flows for our mining assets, which are considered one asset group,
include estimates of recoverable pounds and ounces, metal prices (considering
current and historical prices, price trends and related factors), production
rates and costs, capital and reclamation costs as appropriate, all based on
detailed engineering life-of-mine plans. Future cash flows for our smelting
assets include estimates of treatment and refining rates (considering current
and historical prices, price trends and
related factors), production rates and costs, capital and reclamation costs as
appropriate, all based on operating projections. Assumptions underlying future
cash flow estimates are subject to risks and uncertainties. No impairment losses
were recorded during the periods presented.
Deferred Mining Costs. In general, mining costs are charged to operations as
incurred. However, because of the configuration and location of the Grasberg ore
body and the location and extent of surrounding waste rock, the ratio of waste
rock to ore is much higher in the initial mining of the pit than in later years.
As a result, surface mining costs associated with waste rock removal at PT
Freeport Indonesia's open-pit mine that relate to future production are
initially deferred and subsequently charged to operating costs when the ratio of
actual waste rock removed to ore mined falls below the estimated average ratio
of waste rock to ore over the life of the Grasberg open pit. PT Freeport
Indonesia evaluates the recoverability of these deferred mining costs in
conjunction with its evaluation of the recoverability of its mining assets as
described in FCX's "Asset Impairment" accounting policy.
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, and any
changes in estimates are reflected prospectively beginning in the quarter of
change. 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. For 1999 the
estimated average ratio of waste rock to ore was 2.1 to 1 and for 1998 it was
2.0 to 1. The change during the fourth quarter of 2000 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 not
significant.
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. Estimated future reclamation and mine closure costs are based
on management's best estimate of the undiscounted costs expected
to be incurred. Changes in estimates are charged to earnings prospectively over
future periods. Expenditures resulting from the remediation of conditions caused
by past operations are charged to expense.
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 bifurcated from the host contract. The host contract
is the sale of the concentrates at the current spot London Metal Exchange (LME)
price. The embedded derivative, which does not qualify for hedge accounting, is
marked-to-market through earnings each period. 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.
Revenue Recognition. PT Freeport Indonesia's sales of copper concentrates, which
also contain significant amounts of gold, are recognized in revenues when the
title to the concentrates is transferred to the buyer (which coincides with the
transfer of the risk of loss) at the point the concentrates are moved over the
vessel's rail at PT Freeport Indonesia's port facility.
Revenues from PT Freeport Indonesia's concentrate sales are recorded based
on either 100 percent of a provisional sales price or a final sales price
calculated in accordance with the terms specified in the relevant sales
contract. Revenues from
concentrate sales are recorded net of royalties, treatment and all refining
charges (including price participation, if applicable) and the impact of
commodity contracts (Note 11). Moreover, because a portion of the metals
contained in copper concentrates is unrecoverable as a result of the smelting
process, our revenues from concentrate sales are also recorded net of allowances
based on the quantity and value of these unrecoverable metals. These allowances
are a negotiated term of our contracts and vary by customer. Treatment and
refining charges represent payments to smelters and refiners and are either
fixed or in certain cases vary with the price of copper.
PT Freeport Indonesia's concentrate sales agreements, including its sales
to Atlantic Copper and PT Smelting, that provide for provisional billings are
based on world metals prices when shipped, primarily using then-current prices
on the LME. Final settlement on the copper portion is generally based on the
average LME price for a specified future period generally three months after the
month of arrival at the customer's facility. Final delivery to customers in Asia
generally takes up to 18 days and to customers in Europe generally takes up to
60 days.
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. For 2000, 1999 and 1998, the maximum
net price adjustment after initial recognition of revenues was 4 percent for
copper and less than 1 percent for gold.
PT Freeport Indonesia pays royalties under a Contract of Work (see Note
10). 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.
A large part of the mineral royalties under the Government of Indonesia
regulations are designated to the provinces from which the minerals are
extracted. In connection with its fourth concentrator mill expansion, PT
Freeport Indonesia agreed to pay the Government of Indonesia voluntary
additional royalties (royalties not required by the Contract of Work) to provide
further support to the local governments and the people of Papua (formerly Irian
Jaya). The additional royalties are paid 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.
Effective January 1996, Atlantic Copper changed its functional currency
from the peseta to the U.S. dollar. This change resulted from significant
changes in Atlantic Copper's operations related to a large expansion of its
smelting and refining operations financed with U.S. dollar borrowings and the
sale of its mining operations that incurred significant peseta operating costs.
Accumulated Other Comprehensive Income reported in the Statements of
Stockholders' Equity consisted solely of the cumulative foreign currency
translation adjustment at Atlantic Copper prior to changing its functional
currency, for which there is no tax effect. In accordance with SFAS 52, the
currency translation adjustment became fixed upon the change in functional
currency and will only be adjusted in the event of a full or partial sale of
FCX's investment in Atlantic Copper.
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.
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), an Indonesian company and 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 from a syndicate of
commercial banks, including JPMorgan Chase Bank, as agent, 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 guaranteed the Nusamba loan
for the purpose of continuing minority Indonesian ownership of PT Freeport
Indonsia. 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 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):
<Table>
<Caption>
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
======== ========
</Table>
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):
<Table>
<Caption>
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
============ ============
</Table>
Exploration, development and other includes excess costs related to
investments in consolidated subsidiaries. Excess costs consist of $69.5 million
related to FCX's purchase in December 1992 of 49 percent of the capital stock of
PT Indocopper Investama and $34.5 million related to PT Freeport Indonesia's
issuance of its shares to FCX in 1993 and 1994 to settle a convertible loan due
to FCX. These costs are amortized using the unit-of-production method based on
estimated recoverable proved and probable copper reserves. Additionally, excess
costs include $20.8 million related to FCX's acquisition of Atlantic Copper in
1993. These costs are amortized using the straight-line method based on the
estimated life of Atlantic Copper's smelter 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.
NOTE 5. LONG-TERM DEBT
<Table>
<Caption>
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
========== ==========
</Table>
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.
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.
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:
<Table>
<Caption>
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
=========== =========== ===========
</Table>
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:
<Table>
<Caption>
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
========== ==========
</Table>
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):
<Table>
<Caption>
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)
========== ==========
</Table>
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):
<Table>
<Caption>
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
======== ======== ========
</Table>
Differences between income taxes computed at the contractual Indonesian tax
rate and income taxes recorded follow (dollars in thousands):
<Table>
<Caption>
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%
========== ========== ========== ========== ========== ==========
</Table>
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 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):
<Table>
<Caption>
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/A(a) 8.00 11.00 11.00 7.50 8.00
Expected return
on plan assets N/A(a) 9.00 12.00 12.00 -- --
Rate of compensation
increase N/A(a) 4.25 9.00 9.00 -- --
</Table>
(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.
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):
<Table>
<Caption>
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)
======== ======== ======== ======== ======== ========
</Table>
The components of net periodic benefit cost for PT Freeport Indonesia's
plan follow (in thousands):
<Table>
<Caption>
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
======== ======== ========
</Table>
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):
<Table>
<Caption>
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
======== ======== ========
</Table>
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.
Contract of Work. FCX is entitled to mine under the "Contract of Work" between
PT Freeport Indonesia and the Government of Indonesia. The original Contract of
Work was entered into in 1967 and was superceded by a new Contract of Work in
1991. The initial term of the current Contract of Work expires in 2021, but can
be extended by PT Freeport Indonesia for two 10-year periods, subject to
Indonesian government approval, which cannot be withheld or delayed
unreasonably. Given the importance of contracts of work under the Indonesian
legal system and PT Freeport Indonesia's 30 years of working with the Indonesian
government, which included entering into the Contract of Work in 1991 before the
expiration of the 1967 Contract of Work, PT Freeport Indonesia fully expects
that the government will approve the extensions as long as it continues to
comply with the terms of the Contract of Work.
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.
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.
<Table>
<Caption>
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 -- --
</Table>
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 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):
<Table>
<Caption>
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
========== ========== ==========
</Table>
FCX revenues attributable to the products it produces follow (in
thousands):
<Table>
<Caption>
2000 1999 1998
---------- ---------- ----------
Copper in concentrates(a) $ 682,347 $ 618,229 $ 524,042
Gold in concentrates 413,581 504,417 460,239
Silver in concentrates 13,544 14,336 13,188
Refined copper products 599,685 548,365 555,521
Gold and silver in slimes 153,420 196,217 172,232
Other 6,033 5,764 31,910
---------- ---------- ----------
$1,868,610 $1,887,328 $1,757,132
========== ========== ==========
</Table>
(a) Amounts are net of treatment and refining charges totaling $202.0 million
for 2000, $214.1 million for 1999 and $244.0 million for 1998.
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.
FREEPORT-McMoRan COPPER & GOLD INC. Notes to Financial Statements
<Table>
<Caption>
Mining Smelting
and and Eliminations FCX
Exploration Refining and Other Total
----------- ---------- ------------ ----------
2000
Revenues $ 1,413,099(a) $ 768,814 $ (313,303) $1,868,610
Production and delivery 608,107 734,083 (329,228)(b) 1,012,962
Depreciation and
amortization 250,864 27,989 4,703 283,556
Exploration expenses 7,318 -- 1,531 8,849
General and
administrative expenses 56,779 8,426 5,745 70,950
----------- ---------- ------------ ----------
Operating income (loss) $ 490,031 $ (1,684) $ 3,946 $ 492,293
=========== ========== ============ ==========
Interest expense, net $ 133,804 $ 25,411 $ 46,131 $ 205,346
=========== ========== ============ ==========
Provision (benefit)
for income taxes $ 131,442 $ -- $ 28,131 $ 159,573
=========== ========== ============ ==========
Capital expenditures $ 155,187 $ 20,477 $ 1,012 $ 176,676
=========== ========== ============ ==========
Total assets $ 3,290,026 $ 677,851(c) $ (17,136) $3,950,741
=========== ========== ============ ==========
1999
Revenues $ 1,464,811(a) $ 764,466 $ (341,949) $1,887,328
Production and delivery 534,119 723,966 (323,536)(b) 934,549
Depreciation and
amortization 259,372 29,373 4,468 293,213
Exploration expenses 9,330 -- 1,296 10,626
General and
administrative expenses 52,410 9,572 8,642 70,624
----------- ---------- ------------ ----------
Operating income (loss) $ 609,580 $ 1,555 $ (32,819) $ 578,316
=========== ========== ============ ==========
Interest expense, net $ 137,787 $ 27,020 $ 29,262 $ 194,069
=========== ========== ============ ==========
Provision (benefit)
for income taxes $ 175,581 $ -- $ 20,072 $ 195,653
=========== ========== ============ ==========
Capital expenditures $ 150,596 $ 9,807 $ 419 $ 160,822
=========== ========== ============ ==========
Total assets $ 3,432,068 $ 709,432(c) $ (58,584) $4,082,916
=========== ========== ============ ==========
1998
Revenues $ 1,351,123(a) $ 753,957 $ (347,948) $1,757,132
Production and delivery 461,244 667,904 (329,821)(b) 799,327
Depreciation
and amortization 241,312 31,711 4,384 277,407
Exploration expenses 11,542 -- 1,491 13,033
General and
administrative expenses 70,361 10,337 7,082 87,780
----------- ---------- ------------ ----------
Operating income $ 566,664 $ 44,005 $ (31,084) $ 579,585
=========== ========== ============ ==========
Interest expense, net $ 164,734 $ 27,953 $ 12,901 $ 205,588
=========== ========== ============ ==========
Provision (benefit)
for income taxes $ 152,795 $ -- $ 17,771 $ 170,566
=========== ========== ============ ==========
Capital expenditures $ 280,026 $ 11,131 $ 926 $ 292,083
=========== ========== ============ ==========
Total assets $ 3,487,527 $ 722,767(c) $ (17,660) $4,192,634
=========== ========== ============ ==========
</Table>
(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.
NOTE 13. SUPPLEMENTARY MINERAL RESERVE INFORMATION (UNAUDITED)
Proved and probable reserves were determined by the use of mapping, drilling,
sampling, assaying and evaluation methods generally applied in the mining
industry, as more fully discussed below.
The term "reserve," as used in our reserve data presented here, means that
part of a mineral deposit which can be economically and legally extracted or
produced at the time of the reserve determination. The term "proved reserves"
means reserves for which (a) quantity is computed from dimensions revealed in
outcrops, trenches, workings or drill holes; (b) grade and/or quality are
computed from the result of detailed sampling and (c) the sites for inspection,
sampling and measurements are spaced so closely and the geologic character is
sufficiently defined that size, shape, depth and mineral content of reserves are
well established. The term "probable reserves" means reserves for which quantity
and grade are computed from information similar to that used for proved reserves
but the sites for sampling are farther apart or are otherwise less adequately
spaced. The degree of assurance, although lower than that for proved reserves,
is high enough to assume continuity between points of observation.
All of PT Freeport Indonesia's current aggregate proved and probable
reserves, shown below, are located in Block A of PT Freeport Indonesia's
Contract of Work. The initial term of the Contract of Work covering Block A
expires at the end of 2021. PT Freeport Indonesia can extend this term for two
successive 10-year periods, subject to the approval of the Indonesian
government, which cannot be withheld or delayed unreasonably. PT Freeport
Indonesia's reserve amounts reflect its estimates of the reserves that can be
recovered before 2041 (the expiration of the two 10-year extensions). PT
Freeport Indonesia's current mine plan has been developed and its operations are
based on receiving the two 10-year extensions. As a result, PT Freeport
Indonesia does not anticipate the mining of all of its reserves prior to the end
of 2021 based on its current mine plan, and there can be no assurance that the
Indonesian government will approve the extensions. Prior to the end of 2021,
under its current mine plan PT Freeport Indonesia expects to mine approximately
67 percent of aggregate proven and probable ore, representing approximately 75
percent of its share of recoverable copper reserves and approximately 82 percent
of its share of recoverable gold reserves.
<Table>
<Caption>
Average Ore Grade Per Ton Recoverable Reserves
Year ------------------------------------------ -------------------------------
- -End Ore Copper Gold Silver Copper Gold Silver
- ---- ------------ ------ ---------------- ---------------- --------- --------- ---------
(Thousand (Billions (Millions (Millions
Metric Tons) (%) (Grams) (Ounce) (Grams) (Ounce) 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:
Developed and producing:
Grasberg
open pit 1,080,805 0.99 1.20 .038 2.32 .075 19.3 32.0 40.3
Deep Ore
Zone 185,476 1.19 0.82 .026 5.83 .187 4.2 4.0 18.4
Interme-
diate
Ore Zone 15,789 1.09 0.42 .014 7.76 .249 0.3 0.1 2.1
Undeveloped:
Grasberg
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
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
----------- ------ ------- ------- ------- ------- --------- --------- ---------
Total 2,514,532 1.10 1.04 .033 3.40 .109 50.9 63.7 139.6
=========== ====== ======= ======= ======= ======= ========= ========= =========
PT Freeport Indonesia's share 38.9 50.3 108.5
========= ========= =========
FCX's equity share 33.4 43.2 93.2
========= ========= =========
</Table>
Estimated recoverable reserves were assessed using a copper price of $0.90
per pound, a gold price of $300 per ounce and a silver price of $5.00 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:
<Table>
<Caption>
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
</Table>
NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
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 $ 119,410 $ 9,241 $ .06 $ .06
2nd Quarter 397,348 72,090 (18,613) (.12) (.12)
3rd Quarter 473,837 93,727 (9,192) (.06) (.06)
4th Quarter 529,833 207,066 58,064 .40 .40
---------- ---------- -----------------
$1,868,610 $ 492,293(a) $ 39,500(a) .26(a) .26(a)
========== ========== =================
1999
1st Quarter $ 415,836 $ 127,724 $ 17,710 $ .11 $ .11
2nd Quarter 470,335 130,722 18,961 .12 .12
3rd Quarter 473,658 153,939 26,809 .16 .16
4th Quarter(b) 527,499 165,931 37,307 .23 .23
---------- ---------- -----------------
$1,887,328 $ 578,316 $ 100,787 .62 .61
========== ========== =================
</Table>
(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.
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:
<Table>
<Caption>
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
</Table>
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.
<Table>
<Caption>
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
</Table>
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.