費利浦·麥克莫蘭銅金 (FCX) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

(OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Kathleen Quirk, SVP and CFO and Treasurer of Freeport-McMoRan.

Please go ahead, ma'am.

Thank you, Deborah, and good morning, everyone.

Welcome to the Freeport-McMoRan Copper & Gold third-- third 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 being broadcast live on the Internet and we also have several slides to supplement our comments this morning.

We will be referring to the slides during the call.

They are accessible using the webcast link on our fcx.com website home page.

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

A replay of this call will be available by accessing the webcast link on our Internet home page 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.

We would like to refer our participants to the cautionary language included in our press release and slide presentation and to our risk factors described in our SEC filings.

Also on the call with us today are Jim-Bob Moffett, Chairman of the Board;

Richard Adkerson, President and CEO of FCX; and Mark Johnson, our COO.

I will briefly summarize our quarterly results and then turn the call over to Richard, who will provide an update on our operations and exploration activities.

Mark Johnson will also be making some comments on our operations.

Today FCX reported third quarter 2004 net income applicable to common stock of $17.1 million, 10 cents per share.

Results for the nine months period ended September 30th, 2004, were a net loss of $55.7 million or 30 cents a share.

They reflect the lower ore grades and reduced mill throughput compared to the year-ago period as we restored safe access to the higher-grade ore areas in our Grasberg open pit following the fourth quarter 2003 slippage and debris flow events.

We are currently accessing higher-grade materials.

Our third quarter sales totaled 262 million pounds of copper and 350,000 ounces of gold and in the fourth quarter we are projecting sales of 410 million pounds of copper and 625,000 ounces of gold.

I'd now like to turn the call over to Richard, who will go through our quarterly highlights in more detail.

Good morning, everyone, we appreciate your participation in our call.

I'm on page three of the slides for those of you who are following along on our website and when you look at our third quarter it has been a quarter where we've continued to make progress on the plan that we set out at the beginning of the year to restore our operations to a normal state.

We've achieved a number of important milestones throughout the year and in the third quarter it was the quarter in which we conducted normal activities in the Grasberg pit and, as a result of that, we have established access to our higher-grade material in the lower sections of the pit in the 6 South pushback, which will be available-- available to us for mining during the fourth quarter and into 2005.

Our mill rates did ramp up during the quarter and by the end of the quarter we were operating at normal levels.

As previously announced, we've had positive exploration drilling results in our deep MLZ underground target below the DOZ mine, which has been operating in a very positive fashion and, as a result of achieving these results that we have established at the beginning of the year, and in light of our confidence in our ability to meet our targets as we go forward, our board has acted to increase the common dividend from 80 cents a share on an annual basis to $1 a share.

With respect to the Grasberg open pit, as we've emphasized, we have emphasized safety throughout our organization and it continues to remain our top priority.

And that was evidenced by our actions that we took in December of last year to suspend operations in the lower part of the pit where our high-grade material is until we would ensure that it was safe to operate there.

At this point, we have confidence that we've achieved that, as we did by the middle of the year, and that was a result of accelerated stripping of 30 million tons of material from the high wall in the south part of the pit.

That enabled us, as we were accelerating stripping of the waste material, to reach the talus broken rock material during second quarter that was remaining there from the fourth quarter events and we've re-sloped that area and removed the talus and, as we've gone forward, we've installed monitoring systems.

We've done drilling to confirm rock quality.

We've continued our de-watering activities and our pit drainage projects.

All of these were items, as you know, that we set out to do at the beginning of the year.

We successfully achieved them and, as a result of that we're-- we have confidence in achieving our long-term mine plan.

The chart on page five shows how we've ramped up mill throughput during the year.

During the first quarter, much of that mill throughput came from the DOZ in very low grade material because of the suspension of activity of the mining of the high-grade material.

We've returned more to normal operations.

By the end of the third quarter we were operating at over 200,000 tons per day.

As we've said since we began operating our fourth concentrator in 1998, the actual throughput rate will vary, depending on the nature of the rock that we're dealing with.

Our focus is on metal that we generate from the mill and the mill throughput has and will continue to vary depending on the nature of the rock that we've-- that we deal with.

I'm going to turn the presentations over to Mark to talk to you specifically about what we've been doing in the Grasberg.

OK.

Thank you, Richard.

Slide number six is a picture that we've shown, a view that we've shown over the last few quarters.

What I'd like to highlight in here on this picture is in the third quarter we finished mining the accelerated portion of 7 South.

From the last quarter we had mined down another 30 to 50 meters in this area.

This reestablished over 200 meters of high wall on the south portion of the pit.

The shovels from this accelerated stripping effort have moved back up to the crest of the pit and are mining the next phase, which will continue to establish more of the south wall in the limestone during 2005 and beyond.

The high wall to the left of the picture is where the switch-back roads are.

It's an area where we have established the wall in limestone.

We have two more phases in that area, so we'll continue to push that wall back to the south to achieve our final high wall.

Six South, down at the bottom of the picture is currently being mined at a rate of over 200,000 tons a day, primarily ore, and this pushback will provide the majority of the metal through 2005 and will complete in early 2006.

I've got some slides further in the presentation that will go into more detail on the mine plan and the grades coming out of 6 South.

The next slide -- over the last year we've-- we've improved both our haul road systems and our drainage systems.

The picture on the left is of a recently completed diversion system on the west side of the pit that intersects nearly 30 percent of the surface water and routes it through a 500-meter-long tunnel and that water ends up outside of the-- out of the pit area and ends up on the lower section of the HEAT road.

The other picture, on the lower right, illustrates one of our in-pit sump systems where we collect a portion of our in-pit water and pump it outside of the pit.

Fortunately, with the Amole drift that we have, which is located 500 meters below the pit, we can take advantage of gravity for much of our pit de-watering requirements.

Any water that reaches the pit bottom is currently pumped up a relatively short distance to a drain hole that connects to the Amole drift.

This water flows to the mill and is used as process water.

Slide number eight gets back to our mine plan.

As you can see, the slide illustrates the different grade ranges of copper equivalent.

It shows the relatively quick transition from lower grade to very high grade.

The higher-grade ore in the Grasberg is of a horseshoe shape that we've referred to many times in the past and, as you can see, we have this high-grade core in the center that is graded at 3 percent copper equivalent.

Six South is identified on the lower left and 6 North, which is on the upper part of the slide, represent our two ore faces for 2005.

Six South has begun accessing the high-grades and we'll continue to see higher grades over the remainder of the year and will be in high grade for all of 2005.

Six North is just now accessing the lower grades and will be a primary ore provider starting in 2005, and will last until mid-2007.

Cutoff grades in the pit are currently in the area of .45 copper equivalent and drop slightly in 2005 to .35 to .4-- to .4.

The next slide is the cross section that illustrates both our fourth quarter monthly mining on the 6 South area and also illustrates the quarterly mine plan for 2005.

As shown, grades from 6 South will continue to increase over the fourth quarter and we'll be into a relatively thick zone of our highest grade ore in 2005.

Although 6 South will be providing 55 percent of the ore tons for 2005, with the rest coming from 6 North, it produces approximately 75 percent of the copper and 95 percent of the gold.

Grades from 6 South are higher in the second half of 2005 and 6 South ends the year-- ends the year of 2005 in 1.8 percent copper and 5 grams per ton gold.

In 2005, grades from 6 North will average over .6 copper equivalent and we'll start to access higher grades in 2006 and, although not illustrated, in 2006 7 South, our next space on the south high wall, will also start to expose significant quantities of ore.

Thanks, Mark.

Two weeks ago we had a group of analysts who visited site with us to observe what progress had been made during the year.

This was our first visit since the events of the fourth quarter of last year.

The guys got to see operations in very rain conditions, which is not uncommon for us.

The rain stopped right after they left and we've had two weeks of dry weather, but they had a thorough review of the mine, the mill and the infrastructure, the tailings deposition area and the reclamation activities that we've taken there and they've written reports since then which are available over First Call.

As Mark said, if you look on the page-- on page nine, the slide on page nine, you can see where we'll be at the end of the fourth quarter.

As a result of sequencing, we will have a very substantial of our metal plan to be produced during December of this year.

We're always subject to weather conditions. to loading conditions at the port and those conditions could result in some of that metal being produced in early of 2005.

Then the slide illustrates the sequencing that will happen to show that the bulk of our production for 2005 will be during the second half of the year.

To put that in perspective, on page 10 there's a slide that I've used in many of the presentations that you've seen me make in the past where we've talked about this sequencing issue, which gets to be more significant as the Grasberg-- as the Grasberg matures, but it's something that's been part of our operations for many years.

It shows the quarterly variation in production as we move from mining the high-grade material at the bottom of the pit to taking waste at the top of the pit and repeating that cycle.

It's particularly pronounced for gold because of gold's very high grades at the lower part of the pit, but even for copper on a quarter-to-quarter basis it has historically varied, even though on an annual basis copper has tended to average out relatively consistent.

But this is-- this factor that we'll be seeing in the fourth quarter of '04 and second half of '05 is something that's been a consistent part of our operations.

Page 11 we have now approved and our joint venture partner, Rio Tinto, has approved the expansion of the DOZ mine to where it can be operated on a sustained basis at 50,000 tons per day.

This has been a very good project that has been undertaken.

It was initially a 25,000 ton per day mine that we expanded to 35,000 tons per day.

The expansion-- and it's been operating at over 40,000 tons per day and on a single day during the third quarter operated at over 60,000 tons per day.

A very large mine, as an underground operation, and very important to us because of what it indicates for the future for us as we develop our very large undeveloped underground reserves to replace, ultimately, the Grasberg pit.

As you can see, the capital that's involved with this has very attractive rates of returns, even using conservative-- very conservative copper and gold prices.

The expansion capital of $62 million will be for a second crusher and additional ventilation and for development costs.

We share that cost 60 percent for PT-FI and 40 percent for Rio Tinto and our share of the cost of $37 million will be spread over a two-and-a-half-year period and we've included it in our CapEx costs as we go forward.

But this is a very attractive operation, as I said, very good for the long-term view of our operations.

Also a positive factor that occurred during the third quarter was the continued success that we've had with our exploration drilling.

We've completed a large diamond drill hole program below the DOZ-producing reserves and the MLZ undeveloped reserves that we had.

We continue to intersect very high areas of mineralization, averaging 1.8 percent copper equivalent.

We are working now on further drilling and engineering studies.

By the end of the year we expect to add 130 million tons of 1.25 percent copper and 1 gram per ton gold, which is equivalent to 3 billion pounds of copper and 3 million ounces of gold, into our reserves as we complete the engineering studies for this deep MLZ target and further additions are certainly in the offing as we continue drilling.

In fact, as we drill throughout Block A, the area of producing reserves, for PT-FI we continue to have expectations of adding to our reserves and this will be-- this has been a feature of our company and we expect it to be an ongoing feature of our company.

Copper prices, of course, are on everybody's mind after the events of last week when technical trading activity resulted in copper prices, which had risen to 16-year highs, dropping to $1.30.

It's been quite a ride over the last 18 months, when copper prices were 75 cents and the industry wasn't very optimistic at that point, to the point of where we're seeing prices at this level.

Throughout 2004, even during the traditionally slow summer months, copper inventories worldwide continued to drop.

Copper demand strong in China.

It's been strong earlier this year in the U.S.

Ultimately, those factors, from a demand standpoint, will determine where the market rests, but we do have an industry that today is characterized by a very tight situation.

Inventories are very low.

Demand continues to be strong and supply interruptions could be-- could create a very interesting situation, as we've seen by the effect of a hurricane here on the oil industry in the New Orleans area where we're located.

So we feel very good about the copper markets and particularly where our company's positioned with our very long-lived, low-cost and fully developed reserves.

Page 14 is a chart that shows the historical movement for treatment and refining charges for copper concentrate and reflects the recent and, I would say unexpected, upward movement in spot market TC and RC rates.

These movements have reflected more concentrate coming to the market from our operations and other operations, some of which have been curtailed in the past, as well as some downtime for smelters, which has included our Atlantic Copper smelter, and maintenance programs and delayed startups of smelters in Asia.

So that market has turned around.

As you can see, that turnaround has occurred historically and we are now beginning the negotiations for long-term contracts for 2005-2006 and it's in a very changed market place.

With respect to our company, I want to point out something that we mention every quarter, but I guess this quarter, because of this change, has particular relevance, and that shows what happens to FCX on a consolidated basis as a result of changes in TCs and RCs.

Of course, our mining operations at PT-FI are affected when TC and RC rates increase, but at PT-FI we have taxes that we pay to the government of Indonesia and we have minority interests.

We also own 100 percent Atlantic Copper smelter in Spain.

There's no minority interests and because of our tax situation there with loss carry-forwards, there's no tax to pay, so an equivalent change in TCs and RCs at Atlantic Copper and PT-FI essentially offset in our consolidated financial statements, and this was one of the reasons, in addition to having a home for our concentrate, was the reason for our investment in Atlantic Copper that we made 10 years ago and as we've run that business.

As we look forward on page 16, Kathleen indicated we have a very positive outlook as we'll be significantly increasing our copper and gold sales in the fourth quarter and into 2004-- into 2005.

That, of course, will translate into a lower unit cost and at prices of $1.30 copper and $400 gold we would be generating operating cash flows with these production levels of approximately $1.3 billion over the next five quarters.

This is something we've been pointing to all year.

The-- page 17 shows the quarterly output for metal for copper and gold, showing the very strong volumes, 410 million pounds of copper and 625,000 ounces of gold in the fourth quarter, and, as I mentioned earlier, a lot of that comes right at the end of the year, so there's some possibility that it would be pushed over into '05.

You know, that is not a significant financial consequence to us as to whether it gets shipped at the end of-- in the last week of '04 or the first week of '05, although recognizing it would affect financial models and financial results for our company.

Our long-term mine plan is presented on page 18.

This is consistent with what we've indicated before, showing the low volumes for '05, the very high-- '04, the very high volumes for '05, when we mine proportionally more ore than waste, and then our outlook as we go forward for the remaining three years.

This is, again, consistent with our previous guidance.

Our capital expenditure slide on page 19 has been updated to reflect our share of the $37 million of DOZ expansion costs, which will basically be over a two-and-a-half-year period of '05 to the first half of '07. '04 capital costs, which is, again, consistent with our previous guidance, includes our-- some replace cost for equipment that was affected by the fourth quarter slippage events last year and addition of a new shovel.

We've spent roughly $100 million of that capital through the first nine months of the year and some of that may be affected by timing, depending on when the actual expenditures occur.

On page 20, we've updated our cost slides to show both '04 and '05.

With this updated information, which reflects current energy costs, the impacts of higher copper prices, which translates to higher royalties, higher TCs and RCs, and the new TCs and RCs that-- environment that would affect PT-FI, again, being offset at Atlantic Copper, we do show that at $400 gold our-- our gold revenues would essentially offset our cash costs in 2005 and we'd have a two-year weighted average of 16 cents a pound.

The industry's costs are going up for these factors and we, obviously, are affected by things like diesel cost and currency cost and the like and higher copper prices.

The details of that in the common standard format that we present are shown on page 21 and you can see the effect of those factors on our site production and delivery costs, our royalty costs, treatments costs and the like, ending up with the numbers that I referred to earlier.

We will be generating very strong cash flows, of course, as we return to these higher production volumes.

That's illustrated on page 22.

This shows annual average results for the three years, '05, '06 and '07, and varying copper prices from 90 cents to $1.40 and gold from $350 to $450.

You can see that we'd be generating operating cash flows, that's after cash taxes and after cash interest, of $400-plus million to $800 million over those ranges.

The sensitivities to changes in prices are presented on page 23, $25 of gold translates to a $28 million effect and 10 cents in copper is $65 million, on average, for those three years.

Let me remind you just how attractive our debt situation is.

Page 24 shows the debt maturity schedule.

At 9-30 we had $2 billion of debt and $300 million of cash.

That's a net debt of $1.7 billion, but it's-- and that is very attractively structured.

That includes, in that $1.7 billion, $578 million of our 7 percent convertible notes that have a convertible-- a conversion price of just over-- just under $31 a share.

Net of that conversion, our debt is-- net debt is just over $1 billion and our maturities for the next five years are very low.

We have a gold-denominated preferred that's due in 2006, but this is a very attractive maturity schedule and reflects the steps we've taken in 2003 and 2004 to restructure our balance sheet.

On page 25, we've combined that operating cash flow slide, taking into account capital expenditures, and then showing our dividend requirements.

With our new common dividend of $1 per share, the dividend on our 5.5 percent preferred stock that we issued earlier this year, our dividend requirement is-- aggregates $240 million and, looking at the annual average cash flows that would be available beyond those dividend requirements, you can see that they will be substantial, depending on commodity prices as we go forward.

The board did act to increase the dividend to $1 per share in October.

We had been indicating, all along, that the board would be looking at this later in '04 or early '05 and with the progress we made, we're pleased that our board moved forward with this dividend increase.

We have 179 million shares, so, of course, that means that the requirement for that would be $179 million per annum.

The first dividend will be paid in December at that level.

We do have almost 16.6 million shares remaining on our share buy-back program.

We spent $100 million in the second quarter this year and as we go forward and realize the volumes, see the prices that the market gives to us, our board will have the opportunity to consider supplementing our dividend or buying shares back, depending on market conditions at the time.

So the quarter has been a very good quarter for us.

With where we are in the mine, it sets us up to have an excellent fourth quarter and 2005.

During this-- during 2004, of course, Indonesia has been given a lot of credit for the election process that it's gone through in electing a new parliament, now having elected a new president who will be inaugurated on October 20th, this week, and Jim-Bob, the country's gotten a lot of positive international press for the conduct of the election and the will of the people that was voted.

We, of course, have been there for over 30 years and for the past 20 years, under Jim-Bob's leadership and, Jim-Bob, I thought it would be good if you comment a bit on the Indonesian elections.

Thank you, Richard.

Frankly, the most important thing is that over 70 percent of the people voted in this election and by doing that, I think it proves a pretty substantial change in the whole philosophy of the country.

There really were no events of any vote irregularities that were reported.

The election was peaceful from the beginning of the campaigning period throughout the actual poll.

So I think that the winner, Bambang Yudhoyono, who we know well, he served as the Minister of Energy, Mining and Energy, and also served as minister of what we would call homeland security.

We know him for years.

He is a pro-business person.

For those of you that have been at some of the meetings in Washington and New York with me over the years as the various presidents have visited, specifically in the most recent years with Gus Dur and Megawati, you've met Bambang, who was in both of their cabinets.

He always made it very clear that he understands that the economy is important and that foreign investment is important to the economy.

He most recently has come up with a troika, which is, in his definition, a balance between industry, government and society and he's going to be pushing very hard to try to improve the unemployment situation, to improve the strength of the rupiah and, in general, going to make every effort to try and improve the investment climate in Indonesia.

Those are his basically campaign platforms.

He's gotten a real mandate, which, unfortunately, in the last few years with Gus Dur and Megawati, none of them received a mandate, for two reasons.

First of all, they were not elected by a majority vote.

They were basically appointed by the parliament that was elected by a majority vote.

So this is the first direct election where people have voted for the president as opposed to voting for a parliament that would select a president.

So two really important changes in the venue in Indonesia in terms of the political venue and, in our opinion, the economic venue, and that is we have a president with a mandate who's talked about the economy, talked about investment and talked about a society that was focused toward understanding that foreign investment was integral to the continued improved of the Indonesian investment climate.

Having said that we would have had this call on Wednesday instead of Tuesday, because tonight our time the cabinet will be announced by the President.

They've been very secretive about who that is.

There are going to be a lot of candidates and I wished I could give you the cabinet, because many of the posts that are the important posts that we would be able to comment on -- the Senior Economic Minister, the Minister of Mines and Energy, the Minister of Environment, Minister of Finance, Minister of Social Affairs -- all those various ministers will be named, literally, tonight as we, in this country, are asleep.

So we expect to have a cabinet which will-- which will basically be a cabinet that Bambang tries to put forth, his first real statement that he, in fact, is going to follow the campaign promises and the campaign philosophy that's given him this overwhelming majority mandate.

So I hope that covers, for most of you, what we think are the salient points of the political situation in Indonesia.

I'll turn the questions-- excuse me, the call back to Richard so that we can answer any questions you might have that we haven't already answered.

Deborah, we'd like to take questions now.

Thank you. (OPERATOR INSTRUCTIONS) John Hill, Citigroup.

Good morning, everyone, and thank you for a characteristically polished presentation.

What I would like to ask about, really, is the production profile that you've laid out going ahead, guidance generally reiterated, but certainly Q4 targets taken down a little bit for copper, 430 million to 410, similarly on gold, and we saw a slide that showed us just tailing into the high-grade part of 6 South at the end of the year, but we've so many examples where-- where years and scenarios that were back-end-loaded then unraveled somewhat and I was just wondering if you could express for us your degree of confidence in delivering on these now back-end-loaded goals.

Well, we're very confident in the plan that we've laid out.

We've studied.

As you know, John, we continue to review the plans to maximize the PV opportunities for us and we'll be doing that as we go forward.

So we're confident about the plan and our ability to execute it.

Things have really proceeded very well for us this year.

The only risk that I've emphasized a couple of times now has to do simply with conditions at the very end of the quarter, which could cause us, as always, to have sales realized a few days later and that could affect the quarterly results.

As we go forward into 2005, we're-- we are continuing to evaluate opportunities to realign our mine plans to move metal forward.

In past years we've found ways of doing that.

Historically, we've met or exceeded our estimates on an annual basis.

We'll continue to do that work, so we're very confident about our plans, but we are subject to the conditions that are beyond our control relating to loading concentrates, timing of shipments and the like at the end of the year.

Very good.

And then one just quick follow-up.

Any observations or forward guidance on the tax rate, which on an effective basis came in quite high.

You've talked about that before, but just an update on those rates in the low 60s.

Yes, we-- and just-- John, I know you and I have talked about this enough, but for the rest of the people on the call, when you're looking at our tax rates, just a reminder, our taxes that we pay don't change.

We pay a 35 percent tax rate in Indonesia.

That's been the tax rate under our contract since 1991.

It is 5 percent higher than the current corporate tax rate in Indonesia, but that does not vary.

And then we pay a 10 percent on interest and dividends that are transferred from PT-FI to the parent company, FCX.

We do not get tax benefits for the interest and other costs we incur in the U.S. at the corporate level and then the operations in Atlantic Copper aren't subject to either tax effects, benefits or otherwise.

So that's-- if you're looking at projecting our tax rate, you need to go to our segment information and look at the PT-FI results and look at the tax rates and then factor in the corporate and Atlantic Copper results.

Our current outlook, John, calls for that effective corporate tax rate to be about 49 percent for the fourth quarter.

And any thoughts on '05?

On '05 it would be, at this point, approximately the same level.

And that's using the $1.30 copper, John, and $400 gold and it'll vary, quarter-to-quarter just depending on the mix of income between PT-FI and Atlantic Copper.

Very good.

Thank you.

Thanks, John.

Anthony Rizzuto, Bear Stearns.

I've got two questions.

Just a follow-up on the throughput issues in the third quarter that affected the processing of ore types, you know, requiring additional grinding.

Is it strictly due to the blending of the underground ore, which is clearly harder, and how confident are you guys that this is simply a transitory issue?

And then I've got a question on Atlantic Copper.

Tony, let's take this question first.

Mark, why don't you respond to Tony's question.

Yes, Tony, most of the variability comes from the Grasberg pit itself.

We have a mix of different rock types.

In the third quarter we had over 45 percent of our mill feed was coming from an area that is generally referred to as the hard zone.

It requires more horsepower to get-- meet our grind targets.

We're out of that zone, primarily, now.

We're down less than 10 percent of our material is in the hard zone for the fourth quarter.

We're going to be into our softer grinding ores.

Our high-grade ore is typically very easy to-- very easy to grind.

In our high-grade, we not only get better grinding characteristics, we get the higher recoveries.

We see milling rates above 240,000 tons a day being a regular event over the fourth quarter.

In fact, we've had several days, as we've dropped out of this hard zone, that we've seen these higher mill rates.

In the underground we have-- like you said, we do have a number of different ore types.

That-- most of that material goes to our north/south mill.

It's less sensitive to the ore types that the underground delivers in the crushing system that we have there.

As we move into 2005, in the DOZ,, we'll start our caving off to the west and in the second and third quarter we'll start to see a lot higher tonnage from the DOZ come from our higher grade-- what we call the Halo ore, which is also much easier to grind and much better recoveries.

So the mill rates, like I said, or our model, based on all these different inputs, but for the third quarter it was primarily the hard zone from the Grasberg that influenced the mill rates.

Thanks very much, Mark.

And then just a question on Atlantic Copper and your attempt there to reduce the work force.

First of all, how are the discussions with the Spanish government proceeding?

And can you guys discuss the level of work force reduction that you're contemplating there?

Yes, Tony, let me just add one thing to what Mark said about this throughput level, though, because we had known, in the long-term mine plan for the Grasberg from the start that we were going to have these areas of hard rock to deal with and so, obviously, the mining activity's been affected this year as we've recovered from the slippage, but this issue of the variability of the grinds is something that's been in our long-term plans since the design of the Grasberg pit and was known to be a factor.

So there's nothing unusual there.

The mill itself has operated very effectively from the very start and continues to do so.

So this is sort of business as expected.

The situation at Atlantic Copper is, as a reminder -- Tony, I know you're aware of this -- we undertook a major maintenance turnaround during the first half of the year.

It was a once in nine-year event where we shut the entire operations down and did a refurbishment.

Our plan had been that coming out of that activity we would undertake a review of those operations and we engaged consultants and have undertaken steps to simplify our business there, to address our costs and to make this as efficient a facility as possible to support our PT-FI marketing activity.

And that was the thrust of what we've been doing.

Obviously, when you look at cost a facility like this, it involves head count reductions and we were-- we were looking at reducing about a hundred people out of a work force of, say, roughly 500 people.

And then-- and in Spain, the majority of those people are at Huelva.

We did some of them with early retirements, but it did involve some severance activities for a relatively small part of that and that involves going through the process of dealing with the unions and dealing with the government and we're involved in that process.

We've actually resolved those issues at three of our four locations.

We feel we're making progress and that we hope to have this resolved in the very near future.

It's just part of what you go through in a country like Spain to reduce your work force and reduce cost, which we felt was an important thing that we needed to do.

Richard, thanks very much for that very detailed overview.

I appreciate it.

OK, Tony.

Alberto Arias, Goldman Sachs.

Maybe just a follow-up on the Atlantic Copper and also talk about oil prices.

With regards to Atlantic Copper, could you quantify the impact that we're going to see in the fourth quarter from the strikes.

We understand that there was no copper production.

Were you able to divert some of the copper concentrates to other smelters?

And the second question, with regards to oil prices, what kind of oil price assumptions have you factored into your guidance for cost on next year?

And what's the sensitivity there?

OK.

Let's see.

With Atlantic Copper, so far, they've had, I believe, four days of strikes.

It's not a consistent, but they'll have one one day and then operations will come back up the next.

It has not had an impact on our ability to move our concentrates.

We have a number of alternatives for that, you know, including the Gresik smelter, where we provide 100 percent of the throughput and Gresik, which also did maintenance activities earlier in the year, has come back and has set operating records during the third quarter and has operated very efficiently.

So this has not had an impact on our ability to sell concentrates and we're working with our customers to deal with that.

So we've also had a couple of boiler issues as we've come back from the turnaround that's kind of to be expected with a major startup like this.

So all of those things are factored into our results.

We expect Atlantic to return to normal operations during the fourth quarter and into 2005 and for its operations to be benefited by both the more positive TC and RC market and by the cost efforts we're-- we've been following.

In terms of our plans, we have factored a diesel cost, which is the way oil prices translate to an impact on our operations, of $1.25 a gallon.

You know, I remember the days not too long ago where it was 60 to 70 cents a gallon.

We burn 90 million gallons a year currently and so 10 cents is $9 million of gross charges to us and that's the impact that we have, pretax and pre-minority interest, which you can effectively cut that in half for us to get the net income effect.

All right.

Thank you.

John MacKinnon, Deutsche Bank.

Thanks very much.

Just a couple of questions, Richard.

First, just on the grade profile for 2005, Mark gave a couple of figures there in terms of what that overall, but perhaps could you give us a sort of a start grade and finish head grade for both copper and gold, if possible.

The other question was just in terms of gold recovery overall.

When do we start to see that start to pick up?

Well, gold recovery is a factor that we expect to pick up as we move into higher-grade materials and our plan reflects a pretty conservative of gold recoveries and this is one of the areas where we have a potential to improve on.

Overall grades, during the year we will move from levels about where we've been in the third quarter for copper and gold up to an average for the year of, like 1.1 percent copper and over a 1.5 gram for gold per ton, as an average for the year.

And because of the mine sequencing factor that I mentioned earlier, John, that will vary quarter by quarter in a fairly substantial way for gold.

OK.

And for copper earlier in the year.

And, Alberto, Kathleen had pointed out that the numbers I gave you for that diesel includes Rio Tinto's share, so you'd need to reduce that by about 20 percent, a little less than 20 percent, say 15 percent, for Rio Tinto's effect on that to get to the PT-FI number.

Sorry, John.

Just one other question.

When do you expect to get the 50,000 tons a day rate out of DOZ?

Well, you know, we've-- on a number of days we get to it and we'll continue to optimize it.

We expect to complete this project to have a sustained 50,000 ton per day during the first half of '07.

OK.

Thanks, Richard.

Thanks for your effort.

OK.

Wayne Atwell, Morgan Stanley.

Thank you.

Could you give me an estimate of the cost that you're incurring to modify the pit and put in more pumping and such to avoid another slip like you had last year?

Wayne, the cost of the drainage systems is relatively small.

It's an effort that we've had ongoing.

Pit de-watering-- we drilled a number of holes.

As I said, we're able to use some of the old holes that we've had in place and we continue to be able to use them as we mine through the pit to pump to them and drain down to the-- drain down to the Amole drift.

The costs there are-- you know, it's in the order of $5 million a year, in that order, that we spend on drainage.

It's all part of our road maintenance.

It's all part of our operating costs going back in time and it's things that we've highlighted a bit and we've made some vast improvements in our installations, but they don't come at a high cost.

They don't involve a lot of special construction techniques.

It's things that we've done in the past and are able to do with our own groups.

As far as the cost of the slope angles and all that, we've included the slope designs into our stripping requirements.

It's all part of our forecast going forward, it's just a matter of working into our sequencing and our operating costs.

So there's no real incremental costs associated with that, also.

Is there--?

What we're doing is we're using our existing work force, our equipment, our facilities, to do this and these people would be working on things involving the pit, in any event, and the effect that you see has to-- results in the effect on our-- ultimately our metal production and the timing of that production.

You know, I will mention, you know, this whole-- the changes that we've made have not resulted in any lost ore.

The ultimate pit design, long-term plan, remains in place.

The changes have affected the timing.

Right.

So there's minimal cost increase associated with this?

Can you put a number on it?

Well, Mark put a number of $5 million, but that illustrates that the-- that the cost effects are inconsequential in terms of our total cost of $700 million a year of operating costs.

So it's a question of where we direct our efforts.

We're not having to bring in new construction works or new equipment or things of that nature to incrementally add to our cost structure.

Right.

And the system that I showed, the diversion system on the west side of the pit is a life-of-mine system.

It'll be there from now until the end of the life of the pit.

The systems that we have in the bottom of the pit that allow us to pump and drain down to the Amole drift is also one that'll be there for us to use over the life of the pit.

James Copland, Goldman Sachs.

Your production and delivery costs in the first half of 2003 were 40 cents per pound.

You're guiding us now to 52 cents per pound in 2005, which is a record production year.

I wonder, are you able to quantify or reconcile where those cost increases are coming?

Because it is a substantial one and we may have some exposure on the costs going forward if 52 cents is a reasonable number to use, going forward.

You know, in rough terms, Jim, in rough terms, you can say maybe 4 cents per pound results strictly from the higher copper price and how that translates into royalties and TCs and RCs.

As you know, TC and RC contracts have price participation features so that as price rises, there's more paid in TCs and RCs.

You know, energy costs have added maybe another 3 cents per pound to that number.

Depending on how TCs and RCs settle out, that's another-- that could be another-- another penny to that number, beyond just the current price participation feature that has with that.

And the remainder has to do with our continuing efforts to-- to increase the productivity of our heavy equipment through maintenance cost investments.

Some of that factor reflects the higher volumes coming out of the DOZ mine than we had earlier, which is a very efficient underground mine, but that results in some higher costs.

So those are the-- those are the principal factors that lead to the numbers.

Right.

And is 52 cents a reasonable number to use, going forward?

And secondly, there's no suggestion that there is any-- you know, obviously, since the first half of '03 there's been a pit slide.

There's no suggestion that there's any increased waste mining associated with that increased per pound number, is there?

Well, you know, we've seen the effects in '04 of waste.

In '05, we'll have relatively more ore and then we'll be moving back to the normal pattern that we've had in the past.

So you've seen those short-term effects, but in the long run, you know, we've changed sequencing some, but that is not a major change in that factor.

And, as we look forward in the future, you know, it's diesel cost, it's copper prices.

You know, those factors are variables that will affect these costs and if the oil market changes our diesel costs will go down and that'll go down.

If copper prices increase from these levels, royalties and TCs and RCs will go up.

If copper prices drop, they'll go down.

So the fundamental cost structure that we have is in place and has not changed and that's the key to it and much of those costs are fixed.

We are fighting every day to find ways of reducing those costs and we'll continue to do so, but the fundamental cost structure has not changed, it's these variables at the margin that causes the changes.

Great.

Thanks very much, Richard.

Kent Greene, Boston America Asset Management.

Yes, my question pertains to the movement of the industry to-- you know, to contracts.

Is this-- you know, is this normal?

What percentage of your copper is being sold, say, in the spot market?

What is tied up in long-term contracts?

And, you know, you might explain, you know, what you think is going to change in that arena?

OK.

This question, Kent, has to do with TC and RC market for the copper concentrates.

We're not talking about the refined copper sales, but the sales that we make of our product, copper concentrates, and as we've done historically we only sell less than 5 percent of our product in the spot market. 95 percent of it is sold under long-term contracts.

Just over half of that goes to our affiliated smelters, Atlantic Copper and Gresik.

We supply about half of Atlantic Copper's throughput under a market-based contract.

The factors that are affecting the near-term movements in TC and RC rates are an increase in near-term concentrate production over recent levels as we ramp our production up, as other mines ramp up, as grades fall in some mines and that results in more concentrate to be produced at a time when smelter capacity has been constrained by maintenance activities, by delayed startup of certain smelters and by buying practices of the Chinese smelters, and that's resulted in a very near-term effect on that.

Longer range, those factors will-- it will be determined by how much smelter capacity is developed -- Japanese smelters are talking about expanding capacity -- and how concentrate is developed from new mines.

So that's why I showed that historical chart.

This market place is one that's been-- that's been-- reflects ups and downs like most commodities and that's one of the reasons why we have our investment in our smelter activities, to give us an operating hedge over those kinds of changes.

Richard, this is Jim-Bob.

Let's be sure, for the rest of the listeners, you did try to clarify it, that this is not a discussion about how we sell copper in the spot market or on fixed prices, long-term contracts.

This is only about how we pay for the treatment and refining charges for our copper concentrate.

This is-- this has no relationship to what we-- how we sell our copper.

That's right.

For our copper concentrates, we get paid market prices for the copper and gold that's contained in those concentrates, whatever the current prices are, subject to the timing of the pricing on the contracts, and then that's reduced by this negotiated TC and RC rate and freight charges and that's what we get paid for.

So that's a good point, Jim-Bob.

Terence Ortslan, TSO & Associates.

A question to Mark.

Best guess, next year's ranges for cost per ton, Mark, at the operations, mining and milling?

Yes, our unit costs in the Grasberg were a bit higher this year.

We see the cost dropping from about $1.70 a ton down to in the order of a $1.30 a ton.

That's a ton of ore and waste.

That's our total production mining rate.

Our strip ratio next year is 3 to 1, so you could figure out the cost per ton of ore.

In the mill, also, this year we were-- the lower mill rates that we had at the beginning of the year as the result of the slide resulted in higher unit rates.

We see that dropping down to in the order of $2.50 a ton.

The underground mine, actual mining of the block cave comes at about $4 a ton mined and that will continue to drop down as we get more of the-- a lot of the development costs show up in the operating costs and it's a mixture of both capital and operating, but that will drop down over the long term to be in the order of $3.50 a ton for our block cave operations.

So as the volumes go up, you're going to drop down on the costs in the block cave, and despite the inflationary pressures your unit costs are probably going to be down next year.

Is that true?

Yes.

We see higher volumes coming out.

In the mill-- in the mill, some of the fixed costs, the influence of having higher volumes through the mill will result in lower unit rates and we'll see that also in the Grasberg pit.

That's great, Mark.

Just maybe-- the year is coming to an end, Richard, what would you figure your TC/RCs will average this year with the spots and the contracts and all that?

As a reference point, it's easier if we can figure out for next year's sensitivity.

Yes, we have-- you know, we have the impact, Terry, which I'm sure you're aware of the TC and RC rate that we would have at Gresik, which is factored into it.

That is now 21 cents as a floor price.

It was in the past 23 cents.

It's ratcheted down to 21 cents now.

And so we would expect PT-FI this year to average something like 20 cents a pound for the year.

And I think that's actually shown on chart-- on page 21.

OK.

I missed that one.

No problem.

John Hill, Citigroup.

Just a quick follow-up here.

Could you give us some guidance on SG&A, which ticked up a little bit this quarter, so what we should look for on a go-forward basis?

Also, just as a minor detail, with the recent dividend hike, any impact to the conversion price to the perpetual preferred, which I recall did have a trigger embedded in it?

OK.

The third quarter we did have-- most of our options are not mark-to-market-type options under current accounting rules.

As you know, the FASB recently will require us and other companies, all other companies, to start expensing options in the third quarter of 2005.

But we do have some older SAR-type options that had a $2 million effect in the third quarter in our G&A.

John, as we look forward, for our next year we actually see G&A coming in at around $20 million a quarter, but there are some factors like this SAR that would be factored into it and I don't believe we have the options figured into that at this point, do we?

Yes, that's right.

We do not have.

That would be exclusive of the charges for stock options that would be coming in, beginning at the third quarter of next year, when all companies will have to start expensing options and we'll be having disclosures in our SEC filings for that effect.

In the second question, John, you asked about the threshold levels at which the convertible securities would be included in the diluted shares and those, for the 5.5 percent perpetual preferreds, that would be $2.93 on an annual basis.

So that works out to about 73 cents a quarter.

OK.

And what about any changes to the conversion price triggered by the change in the dividend policy on the perpetual preferred?

Yes, it's about-- for the increase in the dividend for the fourth quarter, it worked out to about 7 cents.

So it went from-- the conversion price went down to about $53.12.

Great.

And I guess while we're on this subject of equity capital structure, any comments on the share buy-back program?

Obviously no activity this quarter.

Any-- any thoughts on the decision criteria, other than simply the share price as we go ahead?

Well, it's-- it's not just the share price, John, but it's just a question of the amount of cash flow that's available and, as I said, decisions will be made as we consult with our board about how that cash will be used for dividend policies and share buy-backs.

And that is just our general policy about what we say on that.

Very good.

Thank you.

I will just mention, as a follow-up to John's question, there was a change in the conversion-- convertible market so that after we issued our 7 percent converts in 2003, which does not have any kind of adjustment for increases in common dividends, that has become a common feature in the convertible offering market and it is-- it does affect our 5.5 percent preferred converts.

Any other questions?

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

I'll turn the call back to you.

Please continue with your presentation or closing remarks.

I just want to thank everyone for participating in today's call and, as usual, we're here for any follow-up questions.

Operator, that completes our call.

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