費利浦·麥克莫蘭銅金 (FCX) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Freeport-McMoRan Copper and Gold Second Quarter Earnings Conference Call.

During the presentation all participants will be in a listen only mode.

Afterwards, we will conduct a question and answer session.

At that time, if you have a question, please press the one followed by the four on your telephone.

I would now like to turn the conference over to Mr. Richard Adkerson, President and Chief Financial Officer.

Please go ahead, sir.

Good morning, everyone.

We appreciate your joining us and we're very pleased to issue our earnings release for the second quarter of 2003.

Our earnings announcement was released this morning and it's available on our Web site at fcx.com.

As usual, our conference call is being broadcast live on the Internet.

We'll be using several slides to supplement our comments this morning.

And we'll be referring to those.

Those slides are available using the Webcast link on our fcx.com Web site.

In addition to investors and analysts, the financial press has been invited to listen to today's call.

Replay will be available on the Web site later today.

As we do with each release, we need to remind everyone that today's release and that certain of our comments today include forward-looking statements relating to volumes, cost, cash flow estimates, debt reduction, commodity price changes, capital expenditures, reserves and development activity.

There are a number of factors that might cause these results to differ from projections.

These are described in our annual report on Form 10K as filed by the FTC.

Joining us today on the call and on the line is Jim Bob Moffett, our Chairman and Chief Executive.

After questions--after a brief presentation and a review of the slides, we will open the line for questions.

Today we reported second quarter net income outlook at our common stock at 57.4 million, 37 cents a share.

That compares with the 2002 second quarter net income of $5.6 million or four cents a share.

It's important to note that our net income for the second quarter of 2003 was reduced by a higher inner company profit deferral than we had expected going into the quarter.

It was 17.4 million or nine cents a share.

This, of course, as we discussed before, will be recognized in future periods as Atlantic Copper and a PT smelting process to concentrate that PTI sells to then and sells into third customers.

The reason it's higher this quarter is because of our higher level of production and as production grows, the deferral grows and this is income that is deferred this quarter.

It'll be recognized in the future.

We also had costs associated with retiring debt as we applied some of the cash we raised in our financings earlier this year to reduce debt.

That was 4.8 million or three cents a share and we had non-cash euro currency translation losses at Atlantic Copper of $3.8 million or two cents a share as a result of the dollar weakening and the euro strengthening.

For the six months, FCX had net income of $106.6 million or 69 cents a share including the gain for the accounting change that we had in the first quarter of 9.1 million or five cents a share.

If we will turn to the slides, we will briefly review operations.

This was an excellent quarter for our operations in Indonesia reflecting the ability of the Grasberg ore body to generate volumes at low cost and substantial cash flows and also the good work that our operating team has achieved as it's continually worked to improve our operations.

And as we do on a continuous basis, we take advantage of the opportunity that that ore body gives us to move volumes forward.

For the past year now, we've been in the section of the ore body that has very strong gold grades, as you've noticed in recent quarters.

And we took advantage of the opportunity this quarter to move volumes forward and produced a record volume of gold at 858,000 ounces.

As a result of this high volume, our continued low cost structure and the gold price that we realized during the quarter, we had a record net unit cash production cost on a per unit basis.

Our revenues from selling gold more than offset our total cost of operations and we had net credit of 16 cents a pound versus a cost of 18 cents a pound in the second quarter of '02.

And this is obviously remarkable in an industry where the average cost is 45 to 50 cents a pound.

That resulted in strong earnings.

We had very strong operating cash flows--$230 million.

Remind everyone that this is after cash taxes and after cash interest, we generated $230 million.

This allowed us to reduce our net debt by almost $200 million during the quarter.

We completed tender offers for our two issues of senior notes that we issued in 1996 and successfully retired significant amounts of those debt securities.

We continue to look for ways of applying cash to reduce debt and improve our liquidity on an ongoing basis.

Because of our improved financial situation, our Board authorized a new dividend policy and we paid our first quarterly dividend on common stock.

It was nine cents a share, 36 cents per share annually.

Based on current shares outstanding, that's just over $50 million of use of our cash flow, which was a small percentage of our total cash flow.

We ended the quarter with $740 million of unrestricted cash, which reflects the financings we did earlier this year and the uses that we've made to date in reducing debt.

The second slide, we have the financial highlights.

You can see that copper prices realization were at 75 cents where they were last year and roughly where they've been for some time.

Gold realizations rose from $309 to $348.

Our revenues on a quarter to quarter basis were up 50 percent.

Our operating income doubled and net income increased substantially.

Our unit production costs are detailed on slide five.

Our first quarter site production and delivery costs on a unit basis was 40 cents a pound.

This reflects the additional cost that we had.

This was the same that we had in the first quarter--reflects the affect of currency changes, somewhat higher diesel costs that we've had and this was more than offset by our gold and silver credits resulting in the 16 cent credit.

If we go forward for the remainder of the year and we expect to continue our cost structure, we expect to sell 2.6 million ounces of gold for the year.

We'll work to continue to roll both volumes forward.

But if gold prices average $350 for the remainder, $350 an ounce for the remainder of the year, there will be a credit of four cents a pound, so we'd end up with the year with a record credit of four cents a pound.

Page six is our update of our chart that we present to show the affects of varying gold prices and with our cost and our volumes for this year, if gold averages anywhere over $300 an ounce for the remainder of the year, we would be in a credit position.

Our quarterly sales volumes are presented on page seven.

This quarter, obviously, we significantly exceeded the sales outlook that we gave you going into the quarter.

We had given guidance of 360 million pounds.

We had 395 million pounds of copper, 700,000 ounces of gold, 849,000 ounces of--we are leaving our annual projections for the remainder of the year at 2.6 million ounces of gold and 1.4 billion pounds of copper.

On page eight we show what our company has been able--has been doing in terms of generating operating cash flows since we completed our major expansion in 1997.

Even though commodity prices have been low, we've had a very consistent record of generating operating cash flows, again net of cash interest and cash taxes at the 500 million level and above.

And for 2003, given our expectations on volumes, we expect operating cash flows to be at the $600 million level with 70 cent copper and 350 gold.

On page--on slide nine, we give information about our liquidity situation in terms of using the cash that we raised, the over $1 billion of cash we raised in our note financings earlier this year to repay debt during the year, to pay our dividends on our preferred and common shares.

We would fully fund our obligations and end the year with $515 million of unrestricted cash, net debt at $2 billion and included in that $2 billion is just over $600 million of the 8-1/4 percent convertible preferred, which has a conversion price of $14.30, well under today's stock price.

This issue is callable beginning in July of 2004.

Our company obviously is generating very substantial amounts of free cash flow, as illustrated on the slide on page 10.

If we look at annual average operating cash flows based on our recent experience and looking at a variation of copper prices over a range of 75 cents to $1.05 and gold from 3 to $400 an ounce, looking at our ongoing capital expenditures, the Grasberg open pit operations are essentially fully developed now for the life of the Grasberg pit going forward.

We have very low levels of debt maturities and you can see that with cash flows of 4 to $700 million on average and the level of debt maturities and capital expenditures, we generate very substantial amounts of free cash flow.

And as we go forward, our Board will be reviewing our financial policy in terms of providing returns to shareholders as we continue to maintain our financial liquidity and improve our financial position of the company.

Page 11, we want to end the presentation by again making the point that on the basis of comparative measures of market valuations of copper and gold reserves, either in the equity marketplace or in the merger acquisition marketplace, our company continues to be significantly undervalued.

With copper valued at ten cents in the ground and gold at $100 an ounce, which reflects comparative values of our business, our stock price would be at those comparative values in the mid $30 range.

And I will point out, as we have in the past, about the quality of our ore body.

Our reserves are long life, low cost, fully developed and on a comparable basis are arguably of a higher quality than other companies' comparable reserves.

So, we're going to continue to work to generate cash flows, add to our reserves, maintain our low cost position, manage our financial obligations and work to establish the value of our assets to reflect the quality--the value of our stock to reflect the quality of our assets.

With that, operator, we would like to turn the call over to questions.

Thank you.

Ladies and gentlemen, if you would like to register for a question, please press the one followed by the four on your telephone.

You will hear a three tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, please press the one followed by the three.

If you are using a speakerphone, please lift up your handset before entering your request.

One moment please for the first question.

Our first question comes from the line of Alberto Aries with Goldman Sachs.

Please go ahead.

Yes.

Good morning, gentlemen.

A couple of questions--if you could please elaborate on the projected price on your production.

You have not changed your full year guidance.

What did you do with your mining plan that allowed you to bring forward that production?

Should we assume that perhaps that your full year estimates on production are conservative now that you've produced so much in the second quarter?

Was it driven by the higher gold price?

Well, Alberto, it was just as we were--you know, our mine planning process is always driven by looking at the opportunities that we have with the ore body to bring volumes forward.

And as you know, if you look back historically, we've been able to achieve a track record of meeting our estimates and in many cases, exceeding them.

And this quarter, because we were in a very favorable part of the ore body and with the nature of the operations working so effectively, it gave our operating team the advantage to mine effectively a higher grade material now, some of which was planned to be mined in the second quarter.

At this stage--and it was driven more by operational issues as opposed to being--reflecting the positive gold price.

It's the same sorts of situations we've had in the past.

As we go into the second quarter, we're already looking at potential opportunities--as we go into the third quarter, we're already looking at opportunities to do that, as we always do.

At this point, we're not prepared to adjust our estimates.

But as we've said in the past, we're very comfortable with confidence in the estimates that we present to you and we will work hard to continue to exceed them.

Okay, just maybe a follow up on--in your press release you talk about the ongoing evaluation of additional low cost expansion options for the DOZ underground operation.

If you could, elaborate a little bit more about, you know, what the timeframe for those studies and the investment and size of expansions on an operating basis.

Well obviously, the DOZ is performing very well.

This started as a project that was targeting 25,000 tons a day.

As we've proceeded with the development, we were able to increase the nameplate production to 35,000 tons a day with very little capital.

And as we've mentioned in the past, we continue to study the potential for further development activities to increase the nameplate production.

And those studies are ongoing.

What our team's been able to do is optimize the existing facilities to where now we feel where we've been operating at 40,000 tons a day--in fact, we set a record this past week at 47,000 tons a day--and that's more in the nature of an optimization of the current development structure and operating plans.

At the same time, the DOZ mine, which is depleting, continues to add to our production and in total we had over 50,000 tons a day.

The IOZ mine, which is depleting and the DOZ mine's replacement for it, has continued to produce.

Our total underground production was at 50,000 tons a day and we'll continue to take whatever metal is available from the IOZ as we go forward and it looks like there'll be in affect some bonus metal for us as we go forward.

The studies to increase the nameplate capacity of the DOZ will be continuing.

They're in progress now and we'll be reporting on those later in 2003.

But underground operations--and this is a significant underground operation at 50,000 tons a day--have been performing admirably.

All right.

Thank you.

Our next question comes from the line of John Hill with Smith Barney.

Please go ahead with your question.

Good morning, gentlemen, and congratulations on a great quarter.

I was wondering--just elaborating on the last question, obviously, we had some acceleration and reshuffling of ore blocks and I was wondering if you could provide some commentary on grade reconciliations within the ore blocks that were mined?

Well, our grades--the grades have been consistent with our models that we've had.

We've had good actual performance compared with our models that we developed, as you know, John, with the thousands of drill holes that we've developed to develop the model.

So, the model is holding up very well.

Our recoveries have been very strong.

We're taking some steps with the concentrator to further improve the recoveries.

So the combination of the improved recoveries, meeting the grades that we have and being able to find ways of accessing the higher grade material earlier is what's translated into this performance.

Very good.

The second question, if I may--you show basically you had debt reductions, maturities, et cetera, and redemptions of 960 million for the year.

You've given us a fair bit of detail in the past on the components of that.

I was just wondering if you could walk us through the remaining steps to get us to that total for the rest of the year and if there's any changes to your thinking there?

Well, we are--you know, we're dealing--we have taken steps to call the gold preferred, the first issue of our gold preferred--I mean our gold index preferred stock, which is up for redemption in August of 2003.

That has a book value of $232 million.

There's a 20 day calculation of the gold price that will be the basis for the cash payment that will be made at $350 gold, which is currently slightly above what the average is running here in July.

That would require $210 million of cash and we would end up with an earnings credit in the third quarter when that's repaid.

We have senior notes that we're repaying this year, both through the put obligation in November and through the tender offers that we've already done for those and also for the 06's.

That will be $383 million.

We have regular maturities on our infrastructure and equipment loans.

That's just over $60 million.

Atlantic Copper has regular maturities on its non-recourse financings of $14 million and when you add in the ongoing silver index preferred redemptions as well as the August gold redemptions, that's $221 million.

So that adds up to the $960 million of debt and preferred repayments that we'll be doing this year.

It's all consistent with what we've been presenting in the past.

We're continuing to look for ways of using our available cash to reduce debts to reduce the carrying cost of the cash in our balance sheet.

Very good.

Thank you.

Our next question comes from the line of Leon Cooperman with Omega Advisors.

Please go ahead with your question.

Thank you very much.

Basically, you've given most of the numbers in your release, but you mentioned at the end of the year you expect to have about $2 billion of net debt, net of the 515 million of unrestricted cash.

And of that net debt, there's about 600 million in the convertible of 14.30 so it's way in the money and I guess you'll call that a, you know, the earliest time you can.

So you're really talking about straight debt of 1.4 billion, but I actually think that overstates it because I believe there was $575 million of a senior convertible note sold, which is a convertible of 31.

What I'm getting to is you're generating a substantial amount of cash relative to the net debt of the company.

And in all your slides and your presentations show your private market value in the 30s.

And I'm just curious the attitude of management in their recommendation to the Board and the attitude of the Board of the tradeoff between, you know, a rising dividend stream versus stock repurchase.

And I'm just curious, kind of looking out over the next 12 to 18 months, assuming no change in the operating index for the company, what are we likely to see--a significant change in dividend policy or a significant repurchase activity?

Well, Leon, that is--those are obviously very active discussions that we have with our Board, as you well know.

We will have a much improved financial capability of doing that with the conversion of the 8-1/4 percent convertible notes, which we will call at the first opportunity that we have.

And that would increase the amount that's available for stock buybacks and dividends under the basket that was created by the 10-1/8 percent notes, which at the end of the second quarter we had just over $170 million in the basket.

That'll increase by half of our net income going forward.

And then with the conversion of those notes, that would increase to 600, which gives the Board a great deal of flexibility in looking at how to proceed this.

Historically, our organization has had a combination of a dividend policy as well as stock buybacks.

We're having those discussions right now with our Board and I think at this point, the best thing to look at is the historical orientation of the Board and this company and its management team towards returns to shareholders.

We obviously have the flexibility to consider those with the much improved debt situation, which you just outlined.

Congratulations.

You guys are doing a good job.

Thank you.

Thanks, Leon.

We appreciate your comments.

Leon, I might--this is Jim Bob--I just might add that historically, if you looked at what we have done when we were in a position to buy the stock and/or pay a dividend, we split it about 50/50.

Now, whether the Board will continue to look at the idea of obviously the new change in a tax law that will apply for the next few years would make the dividend even more attractive because it would in essence put more tax free cash in the hands of the directors--excuse me, of the shareholders that are tax paying shareholders.

So our past policy--future is always determined a little bit by the past in terms of us trying to balance that.

We know out there that are people who would like to see us pay more dividend and other people who'd like to see us buy more stock buyback.

So we usually try to make sure we make everybody happy when we have the ability to do either of those options.

Good luck and I'm sure you'll make the right decision.

Thank you, Lee.

Our next question comes from the line of George Nutter with RBC Capital Markets.

Please go ahead with your question.

Thank you.

Yeah, good quarter, guys.

You certainly hit the ball out of the park on this one.

Just a little bit of a, I guess a bookkeeping and production cost question and I realize there's lots of ways to slice the loaf of bread here--but looking at your production cost per pound of copper, you're looking at 40 cents with a little over 400 million pounds of production.

And in the past when you've been over 400, you've kind of been in the mid 30s to I guess high 30s.

And I guess my question, as Richard mentioned, currency translation and also diesel cost up a bit on the quarter--is this really partly though a reflection of a little bit more material being mined from the DOZ and should we be tweaking our per time mining cost up a bit I guess just to reflect a little greater portion of underground material?

And do you have a per ton cost that we might want to look at?

Yeah, that's exactly right, Ernie.

That's a very good question.

It was about a two cents a pound addition this quarter for the DOZ and as you shift from a development stage to a production and operation setting, some of the same cost gets reclassified from development cost to operating cost and so that was about two cents a pound.

We're also spending some additional money in dealing with our heavy equipment maintenance activities to improve the efficiency of those operations.

So that has been, you know, an additional cost that had about 1.4 cents affect during the quarter.

We are planning to significantly increase our mining rate to improve our waste movement volumes, which if we do that, it gives us the opportunity to take the steps, as we did this quarter, in accessing the high rated material and moving volumes forward.

So, you're exactly right and the number that you asked about is about two cents a pound.

Okay.

And just really quickly then on that, I would assume that the higher grade from the DOZ is going to probably more than offset the slight increase in cost.

Is that kind of the way as a net net thing?

Yeah, and it's a very high return project.

You know, it adds volumes and the return on our invested capital there is very strong.

So it's really a great project and, you know, obviously, going from a 25,000 ton a day target to 40,000 tons a day is really a significant achievement and one of the very positive things about this is that it points to the time in the future when we will be developing our major undeveloped underground reserves, which are now 60 plus percent of our total reserves.

The very positive experience that we're having with the DOZ is a--is really very positive in terms of the future outlook for this operation and the long term of what we can do with underground mining.

Thank you very much.

Thanks, Ernie.

Our next question comes from the line of Dan Rolling with Merrill Lynch.

Please go ahead with your question.

Thank you.

Yes, good quarter and clearly, the operations are running very well.

So that brings me to my favorite question is what are you going to do for me tomorrow?

What's the exploration outlook and when do you expect to become more aggressive in looking outside of Block A?

I'll take that.

This is Jim Bob.

Our exploration outlook for block A, first of all, Dan, continues to be very positive.

We've had some very positive results connecting the Kucing Liar and the Grasberg underground and we've done some major additions to our drilling.

And we just about linked up that Kucing Liar and the Grasberg underground on the southern part and we'll be adding significant tonnage to our reserves this year, real good high grade hits that we sort of had one or two holes in the resource category that indicated that there was a high grade connection, probably because of the close proximity of the big Kucing Liar lateral deposit that's basically controlled by a fault as it goes east west along the southern extremity of the underground Grasberg.

There is a bridge, we're calling it, that we've been able to confirm that appears to be solid all the way back to the Grasberg.

So we'll be adding some significant tonnage there to our reserves in Block A. We continue to add reserves on the perimeter of the DOZ by just adding to our drilling and in essence, underpinning the feeling that that ore body continues to grow in an east west fashion.

We've also, Dan, had some pretty interesting hits drilling below the current level of the bottom of the DOZ, which confirms that the IOZ DOZ Ertsberg ore body goes deeper into the subsurface, which is below our current metal level add and that opens up the ability for us to lower the ore body that is now known as a DOZ and would be known as the deep, deep ore zone.

We've had some really spectacular hits below that that confirms that it goes on below the bottom of the DOZ, which would be some sublevel caving to bring it up to the middle level at it.

So, that will also add some tons to our reserves in Block A.

As far as Block B is concerned, we continually look almost on a monthly basis on when to move back to particularly [Comopa], where, as you'll recall, to the northwest and west northwest, we had a number of hits in the [Comopa] ore body that is a magnetic anomaly that really is almost the size of the Grasberg and I think we drilled probably 130 core holes, either we or the former company that was in there that we took out from.

And we want to get back to that.

We're hoping that everybody will be comfortable with us moving back into that major [Comopa] ore body.

And once again, as we keep mentioning, we're taking a hard look at [Wabu], which is about 40 kilometers just to the north northwest of our ore body in Block B, which is already delineated somewhere in excess of five million ounces of gold.

It's probably going to be an ore body that's somewhere between 5 and 10 million ounces of gold when we get it fully delineated at a surface operation and, as you remember, we can basically fly the gold out of there.

We don't need an infrastructure to get it to the, to any kind of a pipeline to the sea as we do with our current ore that we take out of, concentrate that we take out of the Grasberg.

So to answer your question, as you know, we never take our eye off exploration and we hope that we'll be able to release the geologists to get out in Block B and get busy with our exploration rigs again.

Thank you.

Our next question comes from the line of Mark Cohen with Mark Cohen Company.

Please go ahead with your question.

Hello, gentlemen.

Hello, Mark.

Great quarter.

I want to admit that I've now been following, to give my age, this company through a direct long to covered by the [Opeck] for 30 years now. 7,000 tons a day goes a long way--go to the size you are now.

You've done a fantastic job, Richard and Jim Bob.

But here's the question I wanted to be absolutely sure I got right.

In your earlier question you were asked about the site production and delivery.

It looks like you're running now at about 40 cents.

I assume that's roughly with all the varying, you know, plusses and minuses, that that's where you're going to hold at.

Are you trying to indicate, Richard, that you have the potential to bring that number down?

Well, Mark, at the margin that number is going to be affected by things such as currency cost.

About a third of our cost are Australian dollar repeat based.

About 60 percent of our energy costs are still diesel.

We still have a very low cost of energy on a unit basis because of the investment we made in the full concentrator expansion in our coal electrical generating facilities.

We're at seven cents a pound roughly for energy cost, which is, you know, which is a very good relative cost.

So at the margin, there are some factors that affect us.

We had strong copper volumes this quarter and obviously, that resulted in the unit cost that our cost structure resulted in at 40 cents.

So if we stayed with exactly the same cost structure and with the slightly lower units that we're projecting for the second half, the unit cost would go up slightly.

But as we go forward, the factors that affect us at the margin could result in a change for that and, you know, the efficiency that we keep striving at will have a factor on it.

We run this business with an objective of producing metal.

We look at how much copper and gold we can produce and if that involves spending some additional money on things like maintenance, we'll spend it to maximize the metal because that's what turns into cash flows and allows us to ultimately provide returns to our shareholders.

Okay, second question--you talked about a--if one looks at the end of the year with certain parameters for copper and certain parameters for gold, it does leave you with a very wonderful position to be in with a lot of "excess cash."

If one were to project out, how many years--again, using like let's say 80 cent copper and 350 gold--a little boost in copper prices because that's where they're running about now--how long is it going to take for you to bring down--you are allowed to payback--how long will it take that net $2 billion or take you to get it down to a much lower figure like say 500 million.

Well, you start out by saying, you know, if we're at two billion at the end of this year, we have $600 million as referenced a couple of times earlier in the 8-1/4 percent converts that are well in the money.

So then we're down to 1.4 billion.

We also had $575 million of convertible securities that are not due until 2011, which have a conversion price of just over $30 a share.

You know, we're not predicting copper prices--I mean, share prices, but I personally believe that will ultimately end up in equity.

So, you know, we're at that point talking about $900 million of debt. $500 million of that is the 8-1/4 percent that doesn't mature until 2010.

And what you see is maturities on the other debt, which has very low interest cost, very favorable maturity requirements and so we have a long period of time until 2010 when the 10-1/8 mature of debt maturities that are very manageable and, you know, average something like $100 million a year.

So we are, you know, we're very comfortable with the debt.

We think we, you know, we took advantage of the marketplace in late January, early February to raise this fund.

People have been talking for a number of years about the concerns about our ability to refinance our debt.

I think we've met that challenge.

We took a company where previously people had those concerns and now we have a company with excess liquidity and we believe, as you just said, that's a good place to be in today's world.

Now, then that raises a question, which I'm going to turn to the two of you.

That means, Jim Bob, you've got to answer.

As you progress forward, we're looking at a company, which is listed in the United States, FCX.

Does the company have any intention whatsoever--and I'm talking FCX--of altering its mining claims--and I mean by making an acquisition here or there or a joint venture with somebody else there--because without--unless I've done my math wrong all these years--without a sizeable investment of cash, you have reached about the size of the milling capacity to go underground larger than the DOZ if again, a large investment of capital?

There's no reason to make the thing bigger than it is now.

It just goes to a richer grade at a higher cost.

So why not just take some of your excess money you'll throw off in the future and make an acquisition?

Mark, I'll let--Richard can chime in.

If we have cash--just coming off this ore body, we've said before we're not going to turn a silk purse into a [salzere].

We'd rather give the money back to the shareholders if that is the best use of the money and not put it into ore bodies that are a lesser grade since we're talking 30 to 40 year ore body here and adding reserves every year.

As you've know, we've been at 30 to 40 years for the last six years because we keep replacing our reserves, principally just in Block A. But to answer your question, we continue to look at opportunities.

We get--we probably have evaluated one submittal a month of things that we look at from our team around the world.

Once again, we just are--we're blessed with this ore body that has these unusual chemistry of gold, copper and silver.

And unless we find something that has that potential, we're not going to take the money and put it into an acquisition just to be spending it.

We'd rather see the ore body throw off cash and it go back to shareholders in the form of dividends or stock buybacks because obviously, if we're going to be buying more ore, the best ore body to own is the Grasberg, which is what a stock buyback does.

And if we have cash that can, that's being thrown off as excess cash, rather than putting it into the ore body that's not as good as this, we'd rather give it to the shareholders.

But we'll look at all three options, as we have in the last ten year.

Well, again, let me congratulate you, Jim Bob, and Richard and your entire team on a great quarter and what looks like unless metal prices crack down, a fantastic future.

Thank you, Mark.

Our next question comes from the line of Terrence Ortslan with TSO and Associates.

Please go ahead with your question.

Thank you.

Good morning.

Richard, question on the taxes--obviously, with the operating income as it is and taxes, two things--two questions.

Number one, will there be an adjustment in the tax rate in the second half the way it's going because you've taken about 55 percent overall?

And two is your deferred taxes have actually shrunk as a portion of the overall taxes--an explanation on that?

Okay, I will take a few minutes, Terry.

And thank you for the question.

We have added to our information that we distribute in the earnings release some more details on taxes.

First, I want to make the point that our tax rate in terms of the cash taxes that we pay to Indonesia from PTFI does not change.

It is fixed for the life of the contract.

It is been the same tax rate that we paid consistently.

It's 35 percent of taxable income.

There is an additional 10 percent tax on any dividends in interest that PTFI transfers to FCX.

But the actual cash tax payment is fixed in terms of the rate.

Now the amount of cash taxes that we pay will vary each year, both production and commodity prices and so forth.

The reason that the book tax rate that you see in our financial statements is higher than that is that we have tax lawsuits that are generated at the parent company, principally by interest and some G&A cost and by the after tax--after interest loss at Atlantic Copper.

Neither of those gives any substantial tax benefit.

And so our effective tax rate for book purposes is higher than the 35 percent tax rate that we pay and if you will maybe spend some time looking at the details that we show in our footnotes, hopefully that'll explain it and we can address any specific questions that you have.

The tax rate will drop as PTFI as the income increases or as the income at Atlantic Copper increases.

I looked at it, Richard.

The $37 million deferred tax then is represented by the tax losses at the parent level and not the copper level?

No, no.

That's--the deferred tax results from our ability to deduct depreciation and certain other costs quicker for Indonesian tax calculations than using the methods that we follow in our books--accelerated depreciation.

That's a common thing that you have in the US and internationally with other companies.

It's just a difference in the book calculation of depreciation and the tax calculation of depreciation.

Okay.

Second question is the ongoing issues in Europe about smelter rationalizations and you seem to be party to it.

Could you kind of illustrate, if that happens, how would you benefit in terms of Atlantic Copper?

Well, the--Atlantic Copper, as other smelters are facing, is looking to take steps to deal with the low PC and RC environment and the affect of the higher euro on its operations.

And we take, we're looking at taking steps operationally to be as efficient as we can be and then from time to time, opportunities arise that we consider, but we don't comment on any kinds of activities related to business accommodations or corporate restructuring or things of that nature.

The only comment I'm going to make, Richard, is that your cost at Atlantic is not much different than the party soon to be mentioned.

So I'm missing--except the volume that may be more rationalized or swapped, I don't see what the cost benefits really are at the end of the day.

So, if you want to leave it at that or make a comment, that's fine.

No, we really have no comment on that.

Thank you.

Our next question comes from the line of Wayne Atwell with Morgan Stanley.

Please go ahead with your question.

Thank you.

And once again, good quarter.

Jim Bob, can you give us any kind of a handicapping of how much you might be able to add to reserves based on the drilling activity you have so far this year?

Oh, Wayne, what I'd say at this point is that we hope to at least replace this year's production.

Obviously, as much gold as we're producing, that's going to be a challenge.

But that's been our goal every year.

Since we've just been limited to Block A in the last three years, it's a real challenge.

But because of the significant adjacent ore that we found at the Ertsberg and I just mentioned the DOZ, the sub-DOZ hits that we've had, this bridge that we're filling in between the Kucing Liar and the underground Grasberg, we've got a chance to replace this year's reserves and we're going to be making an effort to do that.

Right.

So bottom line, you're not going to see a huge step up in reserves there, a meaningful step up?

You're probably going to come in more or less flat with replacing what you've mined for the year?

That's our goal---again, because of the significant volumes that we produce.

Right.

And in the past I've asked you about this and my guess is you probably aren't inclined to expand.

But I think you have some excess capacity in your milling stage.

So if you were able to step up your reserves, presumably you could step up your volume.

But my guess is you'll probably stay pretty much constant in terms of your throughput to the mill.

Is that right?

Wayne, what happens there, depending on copper prices, you get to a point of no return because we do have the ability to step up.

But as we step up, because we lose some grinding, we start to slip in our recovery factor.

And you can fine tune this thing all the way up to 300,000 tons, but it because cost sensitive and price sensitive as far as the price of copper and price of gold.

So depending on the factors and the market of how the prices go, you would have a much more--you'd be much more stimulated to try to go up in volume, which we could feed more ore into the mill and could make the effort to do that.

But basically the ore you'd be adding would be lower grade ore.

And as I say, the more you push the mill toward the 300,000 tons, you start to lose grinding and as your grinding becomes less efficient, your recoveries go down.

In high copper prices and high gold prices you can afford to do that.

And we've run models and have models that would allow us to turn to that and we'll be very sensitive to our ability to do that.

Good.

Thank you very much.

Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four.

Our next question comes from the line of Dan Rolling with a follow up question.

Please go ahead.

Thank you.

Richard, back to the tax issue--and just help me here--is there any advantage or disadvantage of not having operations in the United States as it relates to taxes?

Is there a good tax treaty with Spain and Indonesia or is this, as your income grows significantly, will that create an opportunity or an issue surrounding the portfolio of your assets or the incorporation of the company as it relates to taxes?

Dan, the taxes are calculated independently.

In other words, the taxes in Indonesia are based strictly on the PTFI operations and its contract of work and what taxable income we generate there.

In Spain, because of the way that we financed the acquisition of this operation and the expansions and improvements we've done over the year, we generate tax losses there and it has a significant tax loss carry forward.

So there's no taxes on the horizon to be paid in Spain for a very long period of time regardless of the operations.

And in the US with the way foreign tax credits work, your tax is calculated on worldwide income and because we have more income in Indonesia, we don't have a US tax other than a two percent alternative minimum tax.

So there's not really any ways of reshuffling the operations so long as we stay as a US company.

And we believe those advantages or important to our shareholders.

So there'd be no advantage of having a US operation to shelter any of that foreign income?

Well, we do have--if we were to have a taxable US operation, we could shelter that income with the losses that we generate.

Oh, so you have to have a loss making operation?

Well, we do have losses from interest and administrative costs.

So, to answer your question specifically, there would be an opportunity to use those if we had an operation in the US that was generating income.

Okay.

Many--but I'll just say this--many national resource companies in the US and around the world have situations where they, as you know, don't generate a lot of taxable income because of the tax laws allowing accelerated depreciation and financing and the ability to deduct interest cost.

Right.

Thank you.

Okay.

At this time I am showing there are no further questions.

Please proceed with the presentation.

Well, we thank everyone for their attention today.

We--obviously, it's a great call to be able to talk about operations and results like this.

If you have any questions about the release or the information we've presented today, please call us.

The contact information is on the earnings release and on our Web site.

We look forward to talking to you as we proceed in 2003.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.