費利浦·麥克莫蘭銅金 (FCX) 2004 Q2 法說會逐字稿

Welcome to the Freeport-McMoRan Copper & Gold second quarter 2004 earnings conference call.

During the presentation, all participants will be in a listen-only mode. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Ms. Kathleen Quirk, Chief Financial Officer.

Thank you, Don.

Good morning, everyone, and welcome to the Freeport-McMoRan Copper & Gold second quarter 2004 earnings conference call.

The FCX earnings announcement was released earlier this morning and a copy of the press release is available on our website at FCX.com.

Today's conference call is also being broadcast live on the Internet.

We have several slides to supplement our comments this morning, and we will refer to the slides during the call.

You can access the slides using the webcast link on our FCX.com website homepage.

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

A replay of this call will be available by accessing the webcast link on our Internet homepage later today.

Before we begin today's comments, I would like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements.

Our cautionary language is included in our press release and in our slide presentation, and we will refer to this as well as our risk factors described in our SEC filing.

Also on the call today are Jim Bob Moffett, Chairman of the Board, Richard Adkerson, President and Chief Executive Officer of FCX, and Mark Johnson, Chief Operating Officer.

I will start by briefly summarizing our results and then turn the call over to Jim Bob who will discuss our operations and exploration activities.

Richard will then review our financial outlook, and we will then open the call for any questions.

Today FCX reported a second-quarter 2004 net loss applicable to common stock of 53.3 million, 30 cents per share, compared with second-quarter 2003 net income of 57.4 million, 37 cents per share.

The second-quarter results include an approximate 35 million reduction to net income, 20 cents per share, associated with the major maintenance turnaround completed during the quarter at our Atlantic Copper smelter.

During second quarter, PT-FI completed its efforts to restore safe access to the higher-grade ore area in its Grasberg open-pit mine following the fourth-quarter 2003 slippage debris flow event, and normal milling operations were resumed in June.

Our second-quarter sales totaled 205 million pounds of Copper and 351,000 ounces of gold, and we remain on track for our second half metal production to increase substantially from the first half levels.

I would now like to turn the call over to Jim Bob, who will refer to the slide material that has been included in our website -- on our website.

Good morning, everybody.

Thank you, Kathleen.

The website pictures I'm going to refer to by name, so that you can look at them and catch up.

The first picture that I thought I would show you is the Grasberg pit that shows the high-grade ore areas.

These are important, of course, because this is 5 South on the upper right hand, the bottom of the pit, and 6 South, the south side of the pit.

These are the two areas that were cut off when we had the October event.

And as you can see, they have been cleaned up and are in full production.

So if you then turn to the next page, four, which we just call the Grasberg pit (indiscernible) -- we thought we would update you on a view of the south wall which we talked about, and Richard has talked to many of you about, about what we did during our stripping period since the event.

And what you see here if you look on the left side was the October 9 slippage event and the pictures taken immediately afterwards.

And you can see where the debris flow went.

If you look at the picture today, there's two important aspects.

First, you can see that we have removed all of that highwall waste that was sitting above the 6 South and 5 South access and ore bodies, and that is the equivalent of a 55-story building that would be about 2.5 football fields wide.

So you can see there's been about 30 million tons of that material that we just eliminated as opposed to taking any chance that any of the rest of it would become unstable.

The area that was involved in slip, as you can see comparing the left to the right, is that there's barely a remnant of any of the event that took place in October.

To give you a better picture of that, if you will go to page 5 -- which is the Grasberg pit south highwall, looking south, you can see a close-up.

And that area right in the middle of that picture is a close-up of the benches and the material that we moved so that we could get the access.

You can see the trucks that are what we're now calling 6 South, which is 30 meters-plus below the old 6 South; the old 6 South is being used as a bench.

And we have behind that several big benches -- one is 30 feet wide -- and those benches are there just to give additional protection for any kind of rubble that comes down.

But as you can see, with that 55-story building gone and the wall laid back for deep benches, we have neutralized the south wall and that's why we're back at full production.

One last close-up of that -- if you would like to turn to page 6, you can see very clearly the benches that we have got in on the very zoom-in of that same picture.

So I hope that gives all of you the comfort that it should.

We, also, during the stripping since the event, have looked at every area of the pit.

And we'll talk about the complete study we made, get back to the sequencing that we're going to discuss.

But we thought you might all like to see that even in the areas that weren't affected by the slip, we've taken the data that we've gotten from the liquification, and we made sure by going in and putting additional benches in any parts of the pit where we feel that there's any material that will be there for any period of time, that we have similar methology (ph).

And of course, we have made certain that we paid attention to the de-watering.

There really is no comparable type of methology, but anything that has any kind of a fine material we paid special attention to.

But as you can see, all the benches in the entire pit have been -- during this stripping have been reinforced and have been widened to give us the kind of safe operation that we said we're going to continue to have.

That leads us into our comments on the overview of the mine plan that you're going to be looking at today.

The top priority continues to be safety, as it always has in our operations.

But after the October event, the slippage and losing eight of our brothers, we've gone back and redoubled and tripled our effort to make sure that we make it a top priority.

The ongoing technical studies that we have incorporated into the long-range mine plans as a result of the work we've done since the slip are the reasons that we have made the various restructuring and re-delineation of the pit.

We will continue to optimize our mine plan, and the whole idea here is that we have always given you a five-year mining plan to give you some guidance.

And as you know, we will continue to optimize any of the plans we give you.

Modifications to the timing of the (indiscernible) 208 reflects some of the changes that we've made just to get at the complete quality of mining that we want, as well as getting the most ore to the pit in the next five years.

Frankly, there's no significant changes in the total metal that we're going to produce in 2004 to 2008, but there will be some sequence changes which you'll, at least based on our current thinking, will give an idea when Richard makes his comments during the financials.

But the design allows the mining of certain high-grade underground reserves through the open-pit, which is the other highlight, because we've added one year to the life of the pit.

And in the last year that pit, as you know, will have -- about the last year and a half we have a one-to-one (indiscernible) ratio.

And we're estimating some big gold and copper numbers.

I think the gold is over (indiscernible) million ounces of gold and 15, and there's over 2 billion pounds of copper.

So we'll have a big year as a result of being able to (indiscernible) this pit and restructure this pit.

We've (indiscernible) added about 80 million tons of stripping, which is about $80 million, but we've also added $1 billion worth of ore that we're going to accelerate coming out of that last year in the pit versus open -- versus in the cave, and that has a net present value at today's prices of about $24 million.

So we've not only been able to get better access to the pit, guarantee safety, but we've been able to get some more value added to the open-pit by doing this work since we've had an opportunity to restudy the final 10 years, 10, 11 years in the pit.

Frankly, the adjustments -- there's no significant change 5 South, 6 South, our current areas.

We accelerate in 6 North, which you can see is on the northeast side of 6 South, 5 South.

We have additional stripping on 7 South, just to continue to (indiscernible); we'll talk about that in a minute.

We've modified our sequences in 8 North to accelerate the development of the northeast section in limestone.

Once again, all of this is based on trying to make sure that what few areas in the pit need to be unloaded, we focus on unloading those and giving ourselves the maximum access to ore.

And then we just pushed back the entire southwest corner of the pit.

On slide 10, we thought we would sort of use some slides that we showed you right after the event to remind you that we've been in this pit for 15 years, mining mostly in volcanics and altered intrusives.

That's the yellow code.

And this is where we were at the beginning and during (indiscernible).

So once again, on slide 10, the purple area is the bedrock, the red are the competent intrusives, and the yellow is the altered intrusives and volcanics, which are the rocks that we -- by the time you get to 2010, going through this next five-year sequencing, 2010 -- you can see that almost all of that has disappeared (ph) with two minor exceptions around the core of the ore body.

And by the time you get to 2015 we will eliminate that.

And what page 12 shows you is that we have it down to bedrock.

And this is the limestone, the metamorphic rock that supports all of the high 90-degree cliffs around us.

So that's why we were able to get (technical difficulty) the bottom of the pit with the full process that we can go with a one-to-one strip ratio.

That is the plan view looking down at the open-pit.

To further emphasize it, we give you on page 13 a cross-section.

And you'll notice on the right lower corner that the cross-section is slightly candid to the northeast but mostly a north side cross-section.

And what this does is tell you what the current pit level is, which is the black.

And then the purple was the previous plan before we restudied during the last eight months how we would go about this.

The only changes we have made on the north side, we've just gone and laid back the highwall further and gone back deeper into the limestone to give us a more secure (indiscernible) secure as it is.

Just to overcompensate, we're going to take it down and flatten that highwall on the north-end.

On the south-end you see we've pushed back the south wall, and that gives us the opportunity as we show on the next slide, which is 14.

And remember, the different color codes there show you in red and orange and yellow the various ore grades.

In green -- the (indiscernible) right at the top, with the red of course being the 5 percent copper equivalent, orange being 3 to 5 percent, the yellow being 1 to 3 percent, and the green being 0.4 to 0.99.

So you can see the golden horseshoe, as we've called it, this very rich core.

And with our current plan overlay by our previous plan, and now our final plan -- excuse me, the current -- our current final plan -- don't get confused; the black says current, the red says current plan.

That means the current plan that we would have to take the pit down based on what we just showed you with our modifications.

And that's where we get the two benches that we have added -- or 30 meters that we've added to the pit.

And you can see that it's in that high-grade ore, and that's where the 20 million tons comes from that has about $1 billion worth of ore in it; that's at today's prices.

On page 15 and 16, we show you the stripping ratios.

We have used this before, but you can see our strip and (indiscernible) 15 goes from a 2.68 to a 2.06.

You can see that the amount of ore we -- the waste we've moved is about the same in the last 10 years, but our ore grows goes from 0.63 billion tons of ore to 0.81 billion tons of ore.

A year-by-year would give you even a better feel, because here we are in 2004 -- you can see the spike we had in 2004 and last half of 2003 where we accelerated our stripping.

And we head down and getting into 2007, and we've got one more spike there just because of the shape of the pit.

And then from there it just falls down the (indiscernible) and goes down to the one-to-one strip we were just talking about in 2014 and 15.

But the strip ratio has fallen to one-to-one once we get into 2011.

So I hope this gives you a really bird's eye view of what the pit looks like today, gives you some summary of the kind of reshaping we have done, and gives you both the feel that this line is going to yield a lot of ore at the safest mining plan.

Jim Bob, let me add just a comment here.

Because this gives a lot of detail about our long-term mine plans and indications of where we expect to be, currently based on our plan, over the period of time.

If we were to go back and look to what our mine plan would have shown in past years and then look at our actual results, our team working together with the ore body, and as Jim Bob indicated, working to optimize on the year-by-year basis the metal that is available to the ore body, historically we have been able to improve the projected results that our long-term plan would've indicated.

Up through the third quarter of 2003, historically we've produced 4 percent more copper and roughly 10 percent or better more gold through these optimization efforts.

So I think as we look at these plans, they should be put in the perspective of knowing that we will work to improve the metal production.

Thank you, Richard.

And Richard is going to talk a lot more about the financials and the plan that he is going to submit to you, but those are very good additional comments, Richard, about the optimization.

Let me just go on with the -- that completes my comments about the operations.

And, obviously, I'll be happy to take questions.

But let me go ahead and cover quickly the other news that was included in our last week's press release, and that is the hits that we have had in our MLZ Deep target.

If you will refer to page 17, you've been following this ore body for years just as we have.

The upper portion, of course, was depleted as the Ertsberg East and the IOZ, Intermediate Ore Zone.

We're currently producing the DOZ ore zone, which you've seen fabulous results from; some days over 50,000 tons a day.

Last year we bolted on the MLZ reserve.

And you can see we're basically following the structure down and basically (technical difficulty) the sweet spot of this ore body, that 160 million tons was added last year as reserves.

Our target, called the Deep MLZ, at the beginning of the year we told you about was for somewhere between 150 and 200 million tons, just right below the MLZ.

As we've gotten in and drilled this we've actually given you two bird's eye views of the cores -- the most recent last week.

And as you've seen, some of these cores range up as high as 7 percent copper and is still open at bottom.

So we have now revised our target to 250 million tons that we would bolt on to the MLZ reserve.

Let me just kind of give you a preliminary idea of what that means.

We said last year that the 160 million tons has about 2.5 billion pounds of copper and just under 3 million ounces of gold.

That is what we had said the reserves were last year.

This 250 million ton target which would bolt onto that right below it -- we've tried to use similar mining premises, and looked at the grades that we're getting in the 250 target.

And remember, this is a target; this is not proved yet.

But based on our core (indiscernible) results, we feel by the end of the year 100 to 150 of it will move into reserves.

But just because of the massive size of this thing, we believe there's a good chance that by the time we get through we'll bolt on 250 sometime between now and the first half of next year.

In that 250 million tons, if you use the same type of approach that we did in MLZ as far as the mining practices, you're looking at something that's got a potential of 5 billion pounds of copper and 7 million ounces of gold.

And of course, if you look at those two MLZ -- and MLZ is one ore body that we may can get from one lift, i.e. from one cave, you're talking about a total ore body of what we added last year and this year of 7.5 billion pounds of copper and 10 million ounces of gold, and their deposit is still open at the bottom.

In other words, those cores that you see that went through the bottom of our current MLZ Deep target are still in high-grade ore.

So I hope you understand the significance of the mineralized zones that we have still to explore in the vicinity of this Grasberg, and this is just a good example of the magnitude of the kind of things that are in store for us as we complete our exploration.

(technical difficulty) page 18 is just a reemphasis of how the geometry of these ore bodies fit each other, and that's why they've been so prolific for us, because we can use existing infrastructure to continue to just enhance it to mine these deeper zones that are adjacent and associated, and bolt it on to the existing reserves.

Quite a story at the Ertsberg underground mine.

That concludes my remarks.

Richard, would you like for me to answer questions about any of that before we go into the financials, or what would we like to do?

Why don't I briefly walk through the financials, and then we can do all the questions at the end.

That's fine.

I will turn it over to you.

The first half of 2004 was, of course, a very important time for our company as we set out in our plan on January 20.

The focus was on establishing safe access to our high-grade sites at the lower section of the mine and resume normal operations.

We achieved the plan that we set out.

Early in the second quarter we began mining at 6 South and 5 South.

By June we had returned to normal milling operations.

We met our targets for our copper sales that we projected in our first-quarter earnings release of just over 200 million pounds of copper and 350,000 ounces of gold.

It was also the time when we did the major nine-year maintenance turnaround at Atlantic Copper.

This had a significant impact on our second-quarter and first half earnings results, and so both of these factors were coming into play from the financial perspective in the first half of the year.

The exploration drilling at the Deep MLZ that Jim Bob talked about is just a continuing chapter in the successful expansion of the Grasberg/Ertsberg district, and we have a lot of future opportunities as we have access to deeper and mineralization areas and areas on strike with our existing reserves.

Our financial steps that we took beginning in the first quarter of 2003 and continuing in 2004 gave us the ability to execute on our Board authorization for our stock buyback, in addition to paying our increased dividends.

And early in the second quarter we spent approximately $100 million to acquire 3.4 million shares of FCX stock at roughly $30 a share, or a little less than that.

That leaves us with currently shares outstanding of 174 million.

That will increase to 178.5 million upon the conversion of the remaining balance of our 8.25 percent notes.

You will recall that in 2001 we issued $605 million of those notes, and through tender offers, calls of those securities issued will be totally retired by the end of July.

The second half and into 2005 will give us the ability to move forward and access higher-grade ore and return our operations to the level of historical operations and make up some of the lost material that we had in the first half of the year.

During the second half of 2004, our copper and gold sales are expected to more than double that of the first half, resulting in the previously projected amounts of roughly 1 billion pounds of copper and 1.5 million ounces of gold, increasing in 2005, when we will mine proportionately more ore and less waste to 1.5 billion pounds of copper and 2.9 million ounces of gold.

At the current prices of roughly $1.30 copper and $400 gold, our operating cash flows over the next 18 months are expected to total approximately $1.5 billion at those price levels.

And on page 21, we have included one slide on markets.

This is a time, of course, where copper markets fundamentally are very strong.

Since peaking in 2002, beginning late that year into 2003, 2004 copper stocks worldwide had dropped dramatically.

LME stocks are down over 75 percent since the end of December of 2003, and the reduction in the second quarter alone is roughly equivalent to today's stock levels.

The drop in 2003 occurred at a time when industrial output in the U.S. and the rest of the industrialized world was soft.

It was driven by growth in China.

Now that the U.S., Japan sees its economic activity increasing, inventories are at very low levels.

And considering the available supplies being (indiscernible) for the marketplace, we feel very good about the copper markets, and particularly about our company's place in those markets with our long-life, low-cost and fully-developed reserves.

We have updated our quarterly estimates for the remainder of 2004.

While the expected annual amounts are in line with what we had previously projected, we are now showing a projection of 260 million pounds of copper in the third quarter, going to 30 million pounds -- roughly the same amount of gold in this third quarter that we had this year, going to 660,000 ounces in the fourth quarter.

And this simply results from the impact of the timing of the mining of the ore in 6 South as it reaches the high-grade levels during the latter part of this year.

Jim Bob talked about the reasons for our revisions to our mine plans, the fact that this results in simply an adjustment in the timing of the waste and ore movement in a fashion that is consistent with our geotechnical analysis of the pit, as a result of the study we have done over recent months.

This is an ongoing process as I mentioned, and we'll continue to work to maximize the NPV value of the ore body in a way that is consistent with the principal priority of insuring safe operations.

Compared with the plan that we've been talking about over the five-year period, the result of this will be a consistent production with the levels we've talked about, essentially through 2006; slightly less gold in 2006 and 2007; slightly less copper in 2007 and increased amounts in 2008.

As Jim Bob indicated, these changes will give us the opportunity to accelerate mining some ground -- some ore from underground, effectively extending the life of the Grasberg pit, which adds to our profitability for approximately a year.

The schedule that we've been showing on our five-year mine plan on a year-by-year for copper and gold production is included on chart 24.

This is PT-FI's net interest, that's net of Rio Tinto's joint venture interest.

And you can see the numbers that I referred to on the previous page.

It does result in annual averages of 1.3 billion pounds of copper and 2.2 million ounces of gold over the period.

Our unit costs are illustrated on page 25, the slide there.

Essentially we have fixed costs because of our worker force there, our workforce there, our equipment, our infrastructure.

And so our unit costs are driven by the units that we produce in each year and the prices -- the price of gold, which results in a credit using the byproduct credit for our cost situation.

Because of the low units, low in historical perspective, at $400 gold our average costs are expected to be about 38 cents in 2004, those levels dropping to a minus 4 cents in 2005 with an average over the two-year period of 13 cents a pound.

Certain elements of our cost are increasing because of diesel costs, the weak dollar effect on the Australian dollar purchases that we have.

At higher copper prices our royalty rate is higher.

And so at the margin, certain costs increased, but essentially it's a fixed-cost operation.

Those costs are shown on page 26, and this is the analysis that those of you who follow us are accustomed to seeing.

It shows our site cost, our royalties and the copper and gold credits tying back into the schedule that you saw on the previous page.

The chart on page 27 illustrates our cash flow-generating capacity.

We have updated this to show an annual average for the years 2005, 2006 and 2007, with sensitivities of copper prices of 90 cents to $1.40 and gold from 350 to 450.

And this shows annual average operating cash flows -- that's net of cash taxes and net of cash interest -- approaching $500 million to approaching $900 million per year.

Actual amounts of course will depend on the commodity prices. 2004 will be a low year because of the constrained production early in the year from PT-FI and the Atlantic Copper turnaround.

We're currently projecting operating cash flows, net of some significant working capital effects, because with the significant increase in production in the fourth quarter that affects working capital uses for the year.

So we're projecting operating cash flows now of $215 million for 2004, growing to over $1 billion at these commodity price levels in 2005.

Our sensitivities to prices are shown on page 28. $25 in gold means $28 million in cash flow effects and earnings effects, 10 cents in copper at $65 million effects.

Our updated capital expenditure outlook continues to reflect the fully-developed nature of the asset.

We're still projecting $165 million of capital for 2004, and then 120 to $135 million over the next four years.

This does not include a project that is in the process of being considered and expected to be approved by Rio Tinto and our Board, to expand the DOZ to a sustained production level of 50,000 tons per day.

That would result in some additional capital spread over three years -- roughly 15 to $20 million a year for (indiscernible) share over that period of time.

Strong cash flows, low capital expenditures, and then on page 30 you can see that because of the restructuring of our balance sheet we have very low levels of required debt payments for the next five years.

These are our maturities that we have, and then beyond that the maturities associated with our recent securities.

And putting all that together on page 31, we have showing the available cash flow looking at different commodity prices that would result from our operations, after we pay our current cash dividend on our common stock and our preferred stock, which requires about $200 million.

And at these levels you can see roughly 200 million to, say, $600 million of additional cash which would be available for us to look for ways to repay debt earlier than its required maturity, to consider increases in our dividend and for execution of our stock buyback program.

So the story remains the same about the cash flow generating capacity of our company.

In summary, the first half was a very important year because we achieved our operational goals.

We're well positioned to generate cash using our long-life reserves, and with our company and with our markets that we're in, we have a very positive outlook.

I'm sure most of you noticed that last week S&P did notch up our credit rating to B+, reflecting the improved credit situation of our company, but still constraining our credit rating because of their comments about our asset being located in Indonesia.

And while they commented on those conditions, as I always point out we've operated there for over 30 years.

We've never amended a contract.

Our operations have continued on our agreement with the government during difficult times in Indonesia in the 1990's with the government change.

Indonesia is improving, as S&P noted, and they recently had the second round of the elections, including the first direct election for the president.

And Jim Bob, maybe you want to make a couple of comments to put the recent events in Indonesia in perspective.

Thank you, Richard.

I don't have much to add to that.

As you all know, on July 5, they had a runoff between five candidates.

And the results are almost finished now.

I think that they at this point have accepted the fact that SBY, as he's known, Susilo Bambang Yudhoyono was the winner (indiscernible).

He received 33 percent of the vote.

Second was Megawati with 26.

The next closest was Wiranto with 22.

And then you had Amien Rais at 14 and Hamzah Haz at 3.5, plus or minus.

I'm going to give you those because, clearly, now what will happen is since this is not only a election about people but it's about parties.

There will be a (technical difficulty) try to get some coalitions going.

Most recently it appears that though the yellow party, the Golkar part which was represented by Wiranto who was a third-place finisher, has idealistically suggested that they may be better suited to form a coalition with Megawati's party.

Some of that is driven by the fact that Golkar in the election for the parliament seats actually won the most parliament seats, with Megawati second.

And some people would probably feel that the politicians that are in charge of these coalitions would (indiscernible) that that makes for a strong consensus president; however, if you look at the statistics and the demographics of how the vote went, many of the people that would have -- that were not only Golkar people in terms of the voter demographics voted for Bambang.

So I think that with the race being as close as it is, 36 versus 24, it will matter significantly how the individuals decide to vote like they did in the first primary.

The most important issue -- Jimmy Carter was over there observing the elections; he made a comment that the elections in Indonesia were more democratic than even the USA, mainly because they have about a 70 percent voter turnout, where we have about a 40 percent in the USA.

So that's quite a comment for the first presidential election where people actually got to vote for individual candidates.

So all in all, the most important thing is the first round of election results were democratically favorable in terms of the way it was conducted and the peaceful way it was conducted.

Let's hope that in the second round things stay on the same type of emotional level and we get a good president in Indonesia.

And I think all these issues about S&P and concern about political risk with what is going in the world today will be reassessed by everybody, and we'll see how our election goes in the United States.

That will have a big impact on the relationship between the United States and Indonesia.

And of course, we'll see how the situation in the Middle East goes.

With the Middle East basically having the Muslims and the West in such a contentious mode, as we're all well aware of, with the Indonesian country being the largest Muslim country in the world, personally I was happy to see such a non-emotional, if you will, election compared to what it could have been in this kind of international environment.

So we once again (indiscernible) to feel that we're in a great place with the world's best ore bodies, and we think the politics of the world have shown that Indonesia is (indiscernible) countries in the world compared to some of the kind of things that are going on around the rest of the world, on the African continent and the Middle East, South America, Colombia, Peru, Venezuela.

Political risk is a headline, and we'll see how those headlines look three, fou0r months from now.

Operator, we would like to turn the call over for questions now.

(OPERATOR INSTRUCTIONS).

Dan Roling, Merrill Lynch.

Jim Bob, a question for you.

I missed when you said the runoff elections were to be held?

Yes; that's September the 20th.

Maybe I didn't say it, Dan.

September the 20th.

Richard, the $80 million that Jim Bob referred to that was spent for the pre-stripping -- was that expensed or capitalized?

That's amounts to be spent in future years over time.

And, Dan, that will go right into our stripping calculation.

And so it will depend on whether we are mining at above our average or below our average, but it's just normal stripping costs like the stripping costs we incur in each year, and it's spread over a number of years.

How much did you spend, then, on removing all that waste on 7 South, and was that capitalized to be amortized in the future?

Well, the amount that we spent was our normal mining cost.

I mean, we conducted the mine, we operated our equipment, we paid our people.

And so we mined throughout this period.

We were mining waste as opposed to ore.

And to the extent that that was in excess of our long-term average, certain of those costs were deferred and certain was expensed.

The amount deferred -- getting that number right now -- during the first half was $57 million, and the remainder was expensed.

Do you anticipate any more being deferred going forward?

We will be continuing during the second half of '04 to mine in excess of our stripping average, and additional cost would be deferred during that year as we do that.

You can get a sense of that by looking at that schedule that Jim Bob had -- page 16.

You can see in which years we'll be mining waste above our long-term stripping rate and which years we'll be mining above.

And that's (technical difficulty) convention that's consistently followed throughout the mining industry to average waste cost over the life of the mine.

Like a lot of accounting issues, that is being discussed by the accountants; the alternative would be to expense costs as they are incurred.

And we'll just follow whatever accounting is required for us.

As you know, Dan, we really focus on the cash flows of our company.

And, you know, cash flows means the cash that we're spending on whether we're mining waste or ore.

And that's the real key.

And that gets taken into account in all those operating cash flow numbers that I talked about.

So like depreciation and the like, to the extent we are deferring mining costs in our income statement, when we look at those operating cash flow numbers, those are deducted.

Brian MacArthur, UBS.

A few questions if I may.

Just (indiscernible) a bit on what Dan was talking about -- on page 16 you have this footnote saying the strip ratio will change if you go ahead with the expansion of the DOZ from 35,000 tons per day to 50,000 tons per day.

Can you just give me a general feel for what is going to happen, which year is it going to be impacted?

Mark Johnson, our Chief Operating Officer, will handle that one for you.

With the DOZ expansion that we are considering, we would ramp up to tons in DOZ starting in 2007.

The 15,000 tons a day potential from the DOZ -- the increment from DOZ -- would (technical difficulty) ore from the Grasberg, lower-grade ore.

Essentially the mining rate would stay the same in Grasberg; the total tons would stay the same.

There would be a swap of the lower-grade Grasberg 15,000 tons a day from ore to waste, which would then influence the strip ratio calculation.

Right.

But as far as, then, the actual overall -- what you're moving from the pit (indiscernible) tons from the open-pit, that's not going to change a whole lot then if it's just 15,000 tons a day.

No.

The total tons per day stays the same from the pit; it's just a minor modification to the cutoff grade in the Grasberg pit.

Put very simply, it's a matter of whether you want to -- if we're in one of the lower-grade areas of the pit, whether you want to put 4/10 of 1 percent on ore versus 1 percent-plus coming out of the underground.

And that's a no-brainer.

But it's basically, as you said, not material.

The other thing we're looking at is other opportunities in the mill to continue to improve our throughput.

This year we commissioned a new pebble crusher that added another 6000 tons a day of throughput capacity.

Any of those sort of projects that we consider and commission in the future would offset that adjustment to the Grasberg.

Right.

So are we still talking like ultimately like -- and we're talking 220 this year -- but back to 235, 240 on a run-rate going forward?

That varies by year.

Next year, 2005 will be very close to 240.

That year where you see the spike in the strip ratio in 2007, that's during a year when we have a lower mill rate due to the higher percentage of harder to mill ore, harder to crush ore coming out of the pit.

So it's purely based on our ability to mill the different material types coming out of the Grasberg, is really what drives the mill rates.

Okay, great.

Maybe asking another question related to strip, but I'm talking now about the strip with Rio Tinto.

As a result of all the pit wall failure, the readjusting of everything here, has the historical strip that you share with them changed at all as a result of all this?

Brian, this is Richard.

Under our agreement with Rio Tinto there are provisions that govern how changes in the operations resulting from events like the slippage events, or like a labor strike or a disruption to operations or work.

And there's a provision that governs that.

We applied that in 2003.

That resulted in a reduction in the metal strip, and those were reflected in our numbers.

And then 2004 will depend on how the total results for the year 2004 play out.

But the agreement governs how that works.

And to the extent the metal strip is reduced in any given year, it's added on to the end of the strip.

So when you say the end of the strip, you mean like whatever it is 2015, 16; it's not like this -- like what you're giving us now for '05 to '08, let's say -- that's not going to change at all if by the end of this year you change the strip with Rio Tinto.

It will be way out in the future?

Or will it have some effect on the shares you get between '05 and '08?

The agreement provides that it's added on to the end of the strip, which (technical difficulty) to 2021.

So the numbers between '05 and '08 are pretty will set, subject to how the actual ore comes out of the pit?

And subject to how 2004 plays out in our discussions with Rio Tinto.

But the agreement itself provides that any reduction of the strip is added on to the end.

Great.

Maybe one another question.

I know it's it another tough one because it depends on commodity prices and everything else.

Can you give us even a ballpark tax rate for this year and maybe next year, assuming the assumptions you've made $1.30 copper and $400 gold?

We'll give you a ballpark, and I just want to emphasize -- I know you understand it, Brian, but I want to say just so that it's very clear, our tax rate doesn't change.

We have a fixed income tax rate of 35 percent income tax, and then we pay a 10 percent tax on interest and dividends that are paid from PT-FI to FCX.

The book tax rate will vary depending on the relationship between earnings of PT-FI and the earnings effect at the parent company and Atlantic Copper, which has no tax rate.

But at $1.30 and $400 gold, the tax rate will be plus or minus 50 percent on a booked basis.

Again, that's booked and not what we actually pay in cash.

And that's for both '04 and '05?

'05 it's 50 percent; '04 will be higher.

It's roughly 65 percent.

Leon Cooperman, Omega Advisors.

Thank you very much for your very comprehensive presentation.

It's the usual, but it's welcome.

Two questions really.

If I gave you the following assumptions -- everything else is unchanged; prices of commodities are unchanged; the mining plan is unchanged; your stock price is unchanged; interest rates are unchanged -- what do you think you do with the $800 million of free cash flow?

What do you think the Board's preferences would be in terms of dividending that money or share repurchase?

I think, as you say, if you want to leave the stock price where it is, I think that usually we would have a balance between the two.

And realizing that it's a year where we have a lot of cash, we've made sure that the shareholders get the best benefit of the $800 million.

And so, we would probably go to a balance and do some of both, depending on where we thought our future needs were.

Secondly, more of a question of timing.

The bulk of the stock you bought back, I think, was bought in April.

And then you were waiting for mine production to come back onstream, and the volume that would give you the free cash flow.

Where are we in that process now?

In other words, are we now producing on a daily, weekly, monthly rate that provides us with cash that we have the luxury of doing something, or we still have to wait awhile?

What happens is, as you said, Lee -- and you sort of answered your own question.

Now that we're ramped up back to full production we'll be putting cash away, assuming these prices hold at the rates that we have discussed.

And by the end of the year, we would estimate that we would have approximately 300 million in cash.

Richard, what would you estimate for the end of the year if things -- if copper prices stay where they are and we meet our plan?

Lee, just a comment -- as you can see on page 22, we do have a much stronger fourth quarter than third quarter.

And by the end of the year, our unrestricted cash at those levels would be between 450 and $500 million.

So by the end of the year -- so we should assume that probably nothing much would be happening in the area of repurchase until the fourth quarter, if it was to happen at all?

Again, market opportunities not precluded, we took a market opportunity when, for some reason, people got weak because the concern about the rising interest rates, and we bought stock below $30.

If we get market opportunities -- we're big boys and girls, Leon, and we'll do what's right for the shareholders.

Just to make sure, the number that Richard just mentioned -- based upon the current plan and assuming current prices maintain themselves, at year-end we'll have something between 450 and 500 million of unrestricted cash.

And next year, if everything continues along the plan, that's another about 800 million on top of that?

Right?

That's correct.

So just throw up a ball in the air, and it's about 1.2 billion for the next 18 months.

Thank you very much.

The one caveat on those numbers is, at the end of the year we're always subject, Lee, to working capital swings.

And those are just more often than not the questions about when the cash comes in in February -- I mean, in December or January.

So, (multiple speakers)

The 297 million of maturities in '06 -- what kind of coupon do they carry?

In '06 --

That's the commodity preferred?

The commodity (indiscernible) -- the average coupon on all that debt is very low because of the nature of it.

The senior notes -- which is the purple part of this, and it has a rate of 7.5 percent -- commodity coupon is about -- it depends on the price of gold, but it's 3.5, 4 percent based on today's gold price.

And the amount that we would be required to pay at that time will be based on the price of gold when that comes due.

But overall, because we have put in much of our debt, even at times when our senior notes were trading at very high levels, the actual interest rate that we paid was low because we put in the debt prior to the debt we added in the last couple of years, in years before the government changed in Indonesia.

So our carrying cost on our debt has been very reasonable.

Alberto Arias, Goldman Sachs.

A couple of questions.

With regards to your production forecast for 2004 and 2008, I just wanted to make clear what is the DOZ production rates that you're assuming?

Are you at 35,000 metric tons per day?

This is Mark Johnson.

For the remainder of this year we'll be at 40,000.

None of the numbers here include the expansion that we are considering, so they're right in that range from 35 to 37,000 tons a day.

Great.

The second question -- with regards to the mine plan changes, there has been a lot of changes in the slope of the northeast sector lay-back, which is far away from the 7 South area of the active end that you had.

It seemed that it was already a very shallow part of the open-pit.

If you could please tell us what are the issues that you were finding in that part of the open-pit that led you to do that change in already a shallow part of the open-pit?

The northeast corner of the pit is a different situation.

We've got the contact between the limestones and the intrusives that's shown on the slide, and what we wanted to do was to establish a better geometry of that contact (indiscernible) as the highwall comes through the area.

That unloading, if you will, or just reconfiguration of the geometry, provides a much better situation as we mine 6 North.

So it's not a lay-back; we haven't added any tons in the ultimate pit in that sector for the five-year plan.

It's more of a sequencing of the 8 North and 6 North push-backs.

To reemphasize what Mark Johnson just said, this is Jim Bob.

Basically what we're doing is after having studied the geotech issues, we are taking every effort to take our waste removal and do the most conservative thing.

And given this ore -- given this waste mined off the northeast is just one of those; it's not an issue.

We can handle it the way it is, but we wanted to get the most conservative, so we took it down.

Wayne Atwell, Morgan Stanley.

Most of my questions have been asked.

Do you have any plans for the next year and a half or so for anymore turnarounds with any of your smelter capacity?

No.

We completed, in addition to the turnaround for Atlantic Copper, during the fourth quarter there was a turnaround at PT Smelting's smelter in Gresik in Indonesia.

We have a 25 percent interest in that smelter, so the financial impact isn't as significant in our 100 percent-owned operation.

But the turnaround at the PT Smelting is a once in a four-year event, and we did that this year as well.

There are no major turnarounds.

And as we talked about Atlantic Copper, this type of turnaround where we shut the entire operation down for an extended period of time only occurs once every nine years there.

There are maintenance activities that occur on a more frequent cycle, but they're much less significant.

And that doesn't occur for another three or four years.

You said the one was in the previous fourth quarter or it's going to be in this fourth quarter?

No; the Gresik smelter occurred also during the first half of this year.

So it is behind us as well.

Jim Copeland (ph), Goldman Sachs.

I thank you very much for that detail looking forward about the mine plan.

Just on the MLZ, I know it is early days still, but just wondering if you had a sense at all where that might fit in the underground ore sequencing over the next 10 years?

Or any details you can share on thoughts about the MLZ would be appreciated, please.

Thank you.

As you know, we are -- right now the focus in the DOZ mining is on the eastern half -- from the middle to the eastern half of the ore body.

We're beginning to deplete some of the drop points on that eastern half.

And starting towards the end of this year, we will start moving the DOZ cave front to the west.

The opportunity that we'll look at with the MLZ and MLZ Deep would be to look at the capabilities of establishing a Deep MLZ while we are currently concurrently mining in the DOZ and ESZ.

To be -- a similar situation is what we had in the IOZ and DOZ on (indiscernible) the DOZ start-up.

Towards the later part of this year when we get a better -- some of this information and some of the engineering studies, we're going to be focused on that sequencing and the interaction between those caves.

There is the possibility that would it fall within the next 10-year period.

John Tumazos, Prudential.

Congratulations on all the progress.

In the second quarter your tons per day at 164,000 nominally only improved 8 percent from the first quarter, but your copper almost doubled and your gold tripled because your quality tons went up with the good grades on the south wall.

Could you tell us what the tons per day were in the last week of the quarter or the last week most recently, or April versus May versus June, so we could get a flavor of the ramp-up, and just when the mill got to 210 or 220 or 230?

This is Mark Johnson.

We're currently operating at 210,000 tons a day-plus.

We were in that range, the 190 to 200, starting in June.

And we have been operating at that range very much -- right now in the 6 South area the grade of the ore is higher.

We're also mining much more confident (ph) ore in that part of the ore body, and that's really what's driving our mill rate right now.

There's nothing mechanically or any difficulties with the availability of the tons' it's just simply our material types that we have built into our forecast and the corresponding mill rates.

John, by the fourth quarter when we get 6 South down to higher grade levels, we'll be up to 230 to 240,000 tons a day.

Just consistent with what Mark said.

Terrence (technical difficulty), TS Owen & Associates (ph).

Thanks.

Just a further question on MLZ. (technical difficulty) in operations of IOZ, DOZ and ESZ; what kind of a lead-time do you need to develop MLZ, and how much would it roughly (indiscernible) our costs given the experience at the DOZ (indiscernible)?

This is Mark Johnson again.

As far as the cost, it is early.

So we will have some infrastructure in the area that we can continue to leverage off.

The common infrastructure that we're driving for the KL and Grasberg blockade ore body is a platform in which we could then address the deeper areas of the MLZ.

So we'll leverage off of some of that development which has started.

We've taken our first-rounds in our common infrastructure tunnel.

We will really begin our engineering studies on this in the next two months, and by the end of the year we'll have a much better answer for you.

This is Jim Bob again.

From an exploration standpoint, remember we have said that exploration drives the mine plan.

And now that we have identified this very rich ore that you just have seen in the Deep MLZ, as well as the MLZ was already bolted on last year -- as Mark said, as we drive toward the underground and get the common infrastructure, the old Ertsberg infrastructure is sitting there at mill level.

And we will be (indiscernible) as we have always done, try to see how quickly we can bring that rich ore into production.

If we didn't have the Deep MLZ it would be a lot more touchy as to whether we could go in and start caving below the DOZ ESZ, as you can see on page 18.

But with now the expense of the MLZ and MLZ Deep, if we bolt them on, what Mark was saying a while ago is we could start a blockade in the Deep MLZ and control the cave so that we wouldn't undercut the DOZ.

We did this very same type of operation in the IOZ, which used to sit right on top of DOZ -- the so-called Intermediate Ore Zone.

So with this kind of ore available to us, as you might imagine, Terry, we're going to be very anxious to get it into the mill as soon as possible.

Much like some of the 35 to 50,000 ton ore that we're talking about bringing in, it's a matter of whether we can bring some 1.5, 1.75 (indiscernible) copper and some of this real rich ore, and displace 0.4 in the pit, it's a no-brainer and we just go do it.

Jim Bob, I'm not following the runoffs that well in Indonesia.

Are there any issues with respect to on the political front here with respect to (indiscernible) and PT-FI?

You've been a very big taxpayer in the past;

I guess other people pay more taxes than you are now.

But where do you rank on the taxes, number one?

Number two, any issues on PT-FI and (indiscernible) specifically in the election?

Thanks.

Well, the contract we have is the contract, and the government has never violated that contract.

So really, the election and the new cabinet will just be -- I think we've been through now (indiscernible) regime, we've been through the BB (ph) regime; we've been through the GusDur regime; and now we're into the Megawati regime, and whatever the next regime will bring.

As you've seen through these changes in the cabinets and from the most recent activities that have gone on, including the mining in the protected forest issue that was just improved by the government, this government is moving more and more everyday.

Part of the election was driven by the fact that the government wants to improve the business climate for investments -- international investments.

The thing that you're aware of -- it's happened since Suharto stepped down -- that the democratic elections are a great victory for the people.

Unfortunately it's come at quite a cost, because the international investments have gone down by probably 90 percent.

And what they're struggling to do is to get the investments back, and honoring contracts is a big part of that.

So I don't think that the election will impact Irian Jaya, Cophua (ph) or Indonesia in terms of these long-term government contracts.

(OPERATOR INSTRUCTIONS).

John Hill, Smith Barney.

Thank you for a great presentation, and I think we're all glad to see no major changes to the stripping ratio as relates to the near-term production forecast.

But that subject seems like it's been beaten to death.

I wanted to ask about the cost side of things.

Looking ahead to 2005 guidance at current commodity prices, looking for a credit of 4 cents.

I know that's rather embarrassing in a way to ask about why isn't that lower.

But if we look back to your sensitivities provided, let's say at the end of last year, we would have expected a cost credit on the order of 10 to 12 cents.

And I know, Richard, you touched on some of the drivers, but I wonder if you could just aggregate for us the differential between those numbers.

The reasons for those numbers increasing are these, John.

First of all, we have seen continued increases in diesel cost.

Our fuel costs are about $150 million a year; 2/3 of those are diesel cost, and as diesel cost goes up that's an element that increases our cost.

The strength of the Australian dollar, which is now at 75 cents to the dollar; you know it historically was at 55 cents.

That's only about 1/6 of our cost, but it adds an increment.

Higher copper prices, which of course is a huge benefit to us, also results in some increases in the cost because of our royalty rate, which is as a percentage of copper.

And above $1.10 it's at 3.5 cents.

So that's the good news.

The bad news is it increases the royalty rate; the good news is, of course, it adds so much to our revenue volumes.

The issues related to truck maintenance, which as we work to increase our mine rate -- which has been a focus of the Company for several years.

We are working with our suppliers to make our trucks more efficient and increase their availability, and we're spending some money on maintenance.

So all of these items, you know, at the margin -- while we don't sell our freight on stock markets, as our freight contracts roll over with the freight rates, that's added some cost.

So like all the rest of the industry there are certain elements that do add to our costs, but because that we're essentially a U.S. dollar business, the Rupea has not strengthened in relationship to the dollar like other commodities.

The fact that we put in our coal for our power generation, that we have long-term freight contracts and so forth -- these effects, while you do see them, have -- the number effect that you talked about aren't major in relation to our operations.

And then as time goes forward, we'll see how those factors play out.

Thank you very much.

I was just sort of curious, because your previous sensitivity table, obviously, captured the royalty effects at common commodity prices.

Could you rank for us the other elements, whether it's the diesel, the Australian dollar, the truck maintenance, etc?

Which of those are the principal driver?

Not at year-end, John.

The number that you referred to when we were talking about the 10 or 12 cent credit -- and in fact at year-end, I think, was 5 cents -- but at those times we were using $1 copper.

So at the $1 copper we have less than 3.5 percent royalty rates.

So that does figure in to the comparison that you asked me about.

It was the sensitivity we showed, but when you talk about the absolute change, it was that.

The other amounts are relatively small, but they add up to that amount.

I think diesel is probably the single most important issue in that area.

And today I think are diesel costs are like a $1.10 a gallon in our plan.

This is Kathleen Quirk.

Just to be clear, our first quarter press release we gave guidance for 2004 of a net credit of a minus 5 cents for 2005.

And that was at the same copper price, $1.30, and at the same gold price, 400.

And now we're at a net credit of 4 cents.

So it's a penny difference between the two.

And John is referring to the presentation that I was using with him last year when we were looking forward, the numbers when the amount was bigger.

Very good.

And then, just a final question.

Any thoughts as to the timing of lifting force majeure on concentrate contracts, and can you comment on your concentrate shipping schedule as we look out over coming weeks and months?

As we return to normal mill rates, we are making deliveries to our customers.

These are force majeure clauses that apply to individual contracts.

And the delivery requirements under those contracts are different in some respects.

Some of them are similar, some different.

So it will be on a contract by contract basis.

And as we work with the customers on their particular needs and meeting our obligations under -- our obligations to PT Smelting where we supply all the contracts, these things will be lifted over time.

And by the time we reach the fourth quarter we will be delivering our full requirements, by the end of that quarter, under our contracts.

Jim Bob, when you inferred the potential size of the Deep MLZ at 5 billion pounds of copper and 7 million ounces of gold, was that on 100 percent basis or would that be net to FCX net recovery losses?

100 percent.

It's payable but 100 hundred percent, including Rio Tinto's share.

It is -- just because you mentioned recovery and Rio Tinto, it is recoverable payable reserves, but it does include Rio Tinto's joint venture interest in it.

And most importantly it's a target, John.

You know -- since you're a professional, you know that we've got a lot of work to do.

We've got the rest of these core holes to drill.

We wanted to give you some kind of an idea on an expect-to-be (ph) basis of what the target reserve might be, because it is such a rich intercept -- group of intercepts that we had.

And unfortunately this ore body is so great that when you see something like this 250 million tons of ore, 5 billion pounds of copper, 7 million ounces of gold, that's bigger than most mines are.

So we just -- we were just trying to delineate it for you, for people that might not have the ability to convert 250 million tons, even with the core holes we've given them.

But it's a target; it's a speculative target, and hopefully we'll be able to refine it more as we get the rest of these core holes drilled.

Jim Bob, you made my day.

I guessed 4 billion pounds of copper and 5 million ounces of gold, and that's FCX.

If I'm within 25 percent of you, I'm pretty good.

You're always conservative;

I'm the wild geologist in the crowd.

But I appreciate those comments.

Miss Quirk, there are no further questions at this time.

Thanks, everyone.

We're available for any follow-up questions; just give us a call.

And we thank you all for your participation.

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.