費利浦·麥克莫蘭銅金 (FCX) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the FCX conference call.

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

Afterwards, we will conduct a question-and-answer session.

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

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

Please go ahead, ma'am.

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

The FCX earnings announcement was released earlier this morning and a copy of our press release is available on our website, 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 refer to the slides during the call and they are accessible using our webcast link on our FCX.com website home page.

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

A replay of the 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 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 Richard Adkerson, President and CEO, and Jim-Bob Moffett, Chairman of the Board.

I will start by briefly summarizing our financial results and then turn the call over to Jim-Bob, who will comment on the recent earthquake and tsunami, which affected certain parts of Indonesia and other nations.

Richard will then review operations, reserve additions and our outlook.

We will open the call to questions.

Today, FCX reported fourth quarter 2004 net income applicable to common stock of $212.5 million or a $1.08 per diluted share compared with fourth quarter 2003 net income of 0.2 million.

For the 12 months ended December 31, 2004, FCX reported net income applicable to common stock of 156.8 million or 85 cents per share compared with 97 cents per share for the 12 months ended December 31, 2003.

Diluted net income per share for our fourth quarter 2004 reflects assumed conversion of FCX?s convertible securities resulting in the exclusion of interest expense and preferred dividends on these securities totaling 25.5 million and the eclusion (ph) of 39.3 million shares.

These instruments were not diluted for the annual results or the other periods presented.

As expected, PPSI reported significantly higher production and sales in the fourth quarter, compared with the 2003 fourth quarter and the first three quarters of 2004, reflecting the mind of higher grade material in the Grasberg Pit following our recovery from last-- from the 2003 open-pit slippage events.

Our fourth quarter sales totaled 419 million pounds of copper and 618,000 ounces of gold, bringing our annual sales to 992 million pounds of copper and 1.44 million ounces of gold.

We expect our 2005 sales to increase to 1.5 billion pounds of copper and 2.9 million ounces of gold.

Our fourth quarter also benefited from several special items which Richard will review.

These items accounted for net additions to income before taxes and minority interests of about 112 million, or 65 million to net income.

They included a gain on our insurance from the open-pit claim, a gain from the sale of a parcel of land in Arizona, a sale of aptec (ph) at Atlantic Copper, net of a $12 million charge to net income related to Atlantic Copper?s workforce reduction plan.

I would now like to turn over the call to Jim-Bob, who will comment on the recent earthquake and tsunami event.

Jim-Bob?

Good morning, ladies and gentlemen.

I know everybody has been very well aware of this natural disaster that?s occurred in the northwest part of Sumatra.

I thought, for those of you that have the access to the internet, if you?ll look at these slides-- the first slide that we have, I tried to put a tectonic map of the Indian Ocean Basin and show the location of the 2004 Sumatra earthquake.

And, of course, the earthquake was the source of the energy that created the tsunami that we?ve all been reading about in Indonesia, Thailand, Sri Lanka, really the whole northern end of the Indian Ocean.

What you see here-- let?s focus for just a moment on where the earthquake was.

You?ll see Banda Aceh, which has been in everybody?s mind.

And you?ve seen many events of what the tsunami looked like coming into those coasts.

Is-- the earthquake rupture zone starts just to the south of Banda Aceh and there?s about 150 miles long to the north and about 100 miles wide.

And that zone, which I am going to explain as part of a much larger structural zone, but that?s the area where we can measure that the slip of about 20 meters or 60 feet occurred in the lateral movement.

In other words, the continent and the ocean plate slipped against each other.

And through that area, it moved about 60 feet lateral.

And there was also vertical movement because of this being under tensional pressures, as well as compressional pressures.

And we don?t know yet exactly what the vertical movements were.

Those will have to be mapped with sonar after everything is settled down and they can get in there and estimate that.

But when that zone slipped, that?s why immediately, within minutes, Banda Aceh was inundated with the tsunami and then Sri Lanka, which is to the west, some two hours later-- it?s about 1,000 miles to the west-- received their big hit.

And, of course, Thailand and Myanmar, the people to the north, got the hit much quicker because the tsunami was traveling about 500 miles an hour.

And it was just one wave of water.

To the south, there was no incidence of any significance and so you haven?t read much about that.

But let?s talk about the tsunami zone and that is along the Java trench, which is where you see the green land mass of-- that is known as Indonesia, the Sumatra Java and to the east of Java is Bali, Lomboch (ph) and then east more, then on over you see New Guinea.

The blue area on the map is-- that?s known as the Indian Ocean Basin.

It has, between the Pacific Ocean Basin, a series of plates.

The Australian, of course, plate being the biggest.

And if you?ll notice, that-- the Australian plate and the -- and the New Guinea are actually now one land mass.

And the area that you see that's in tan that?s called Australia and then the label is New Guinea, that?s really the area-- part of the land mass that?s out of water.

The green area between Australia and New Guinea is the Arafura Sea, which is all, again, part of the one big land mass of Australia and New Guinea there?s-- and it?s known as a stable platform.

And that?s because this fog zone-- it starts back in Banda Aceh and it goes all the way to the north, as I just explained, but comes down and goes along where the blue and green meet.

And then it turns at the coast of Australia and goes down south of Australia and follows south through Australia.

The slippage zone and the tensional zone that?s subject to the faults that-- hello?

Are we still connected?

Yes.

I just hear some bleeping.

I wanted to be sure we didn?t get disconnected.

Hello?

Yes.

Go ahead, Jim-Bob.

And if you [inaudible - audio gap] up to New Guinea, you?ll see that weakness turns to the north.

And that zone of weakness, when it turns to the north, compressional (ph) force-- and I?ll show you on a map if we zoom in, the much smaller map that you have of Grasberg and you see the [inaudible - audio gap] Nabire.

And Nabire is where the most [inaudible] before the tsunami earthquake occurred.

And that zone of weakness, it turns and goes west.

It goes right along the edge of the stable platform at the Arafura Sea.

And that?s why we have no earthquake in the Grasberg [inaudible].

And there?s no earthquake movement or slip [inaudible - audio gap] see.

So there?s very little reason to be concerned about a [inaudible - audio gap].

To the south, you see the tsunami hazard map of Australia that the L in green and the H in red and the M refers to low, high and moderate.

You?ll see the whole north flank coast of Australia because of-- the stable platform ahs very low risk of tsunami, just like the south coast of the-- of the-- of the island of New Guinea.

So this horrible event, of course, has gotten everybody?s attention.

And I thought that that might give you some idea of the location of where the structural zones were that caused the tsunami that-- where the slippage took place and how that differs from the geologic setting in New Guinea.

I don?t want to take a whole lot more time.

If there?s any questions about that-- those two slides-- I?ll stop now, since I know there?s a lot of curiosities about this unbelievable natural event that has created all these deaths and how it relates to Indonesia and our operation.

So, are there any questions about any one of those two slides?

I?ll take those quickly, before we go into our financials.

Operator, we?d like to take questions on these two slides, if there are any.

Thank you.

[Operator instructions].

Operator, if you have no questions, we?ll move forward with the rest of the presentation.

The first question comes from the line of Brett Levy, from Jefferies & Company.

Please go ahead.

Have any of the January shipments been at all affected by the tsunami?

No.

No.

None of our shipments were affected.

Interestingly enough, it had very little effect on ships on the-- on the seas as the tsunami was traveling and none of our shipments to any of our concentrated producer-- or buyers were affected.

Once again, when this zone ruptured, [inaudible] the Sumatra -- all the ways went to the north.

It was very-- there was obviously some effect [inaudible].

But they-- but they all went to the north.

Thank you.

Thank you.

The next question comes from the line of John Tumazos from Prudential.

Please go ahead.

Jim-Bob, thank you for your explanation of the plates, which is very interesting.

I presume that part of your explanation was to just explain to people that these events were very westward of your operations and maybe to comfort people that the Port of Tumeka (ph) has no wave risk.

Could you talk a little bit more to tectonic conditions near Grasberg as it relates to active faults and fault slippage?

It would seem like the water flows affect slippage of your controlling faults, per the tragic events of October ?03.

And there may be some relevance in terms of in 2015, hopefully you?re retired and wealthier, but when there?s block caving, the amount of explosives you use, depending on the brittleness or competence of the rock, also interact with seismic conditions.

John, thank you.

And I?m going to be live-- live eternally in [inaudible], so 2015 will be interesting.

And 2035 will be even more interesting.

But to get to the serious note, what I was trying to say, John, is that the active plate movement today, like, say, to-- where the San Andreas Fault is moving in the-- in the-- down into the Andes, you have the plates that are literally moving against each other.

And that zone goes along the Java trench in the blue.

And then when it gets to the Arafura Sea, it turns north and goes through the bird?s head.

And if you?ll notice on the second slide, I?ve got the-- as I mentioned, I talked about the Nabire earthquake, which was in the press right before the Banda Aceh.

And that series of faults that are created by the plates moving against each other goes to the north and west of our job site by 400 miles.

All of the slippages and the movement that would have taken place during our active tectonic period would have ceased.

For instance, at the Grasberg, the Grasberg?s been quiescent for three million years.

And that?s when they add the tectonics of the-- of the Australian plate and the New Guinea plate [inaudible] took place that created all of the-- the mountains and the folding in the Poplar (ph) and west Poplar (ph) Nauni (ph) that creates that mountain chain.

So those events have all become quiescent.

And the subduction zones to the north and west are all now moved out as near that I?m showing you.

And that?s where the slippages occur.

So whether you?re up on the service pit or underground, the impact of earthquakes like Nabire, which is four miles northwest of it, just is not an issue for Grasberg.

We?re in-- we?re part of the stable area that has resulted from the collision of the Australian and-- and the New Guinea plate.

And those things have been quiet now for millions of years.

And we won?t see anymore movement along those plains.

It?ll all be along this active area that I explained is much like the San Andreas Fault.

And again, just for clarification, that starts up around Banda Aceh and goes all along the Java trench, south of Java, comes in and goes north of the Arafura Sea that?s noted there and goes through the bird?s head and goes out to the north, up toward the Philippines.

And that?s the active plates that are happening today.

Thank you.

And I?m showing no--

Any questions on the tectonic belt?

-- I?m showing no further questions at this time.

I?ll turn the conference back to you.

Thank you.

And let?s hope that we can all see the aid that?s going into northwest Indonesia and really that whole northern coast of the Indian Ocean.

And let?s hope that we can get people back to some normalcy and get it-- so they can get back to some kind of livelihood.

Thank you for giving us your attention about this most devastating event.

This is Richard.

And while the event didn?t affect our operations, our company has taken a leadership position in assisting in the aid activity.

As Jim-Bob mentioned, we have contributed not only cash in Indonesia, led a fundraising effort here in the-- our headquarter city of New Orleans, but have directly participated in delivering supplies and medical supplies to the affected areas.

I want to talk now about the very positive results that we had in completing the end of the year.

During 2004, we were pointing throughout the year to the return to the high-grade areas at the lower sections of the Grasberg Pit, following the pit-wall events of the third quarter of 2003.

In our last call, I mentioned the targets that we had for producing metal in the fourth quarter, how it was coming at-- near the end of the quarter.

And there was risk to whether we?d be able to achieve it.

Our operating team did a great job in helping to achieve the levels of production that we had.

We had weather issues, unrelated to these events that we talked about, but just normal weather situation, normal maintenance situations, and yet we were able to achieve very high levels of metal production and did achieve the primary goal that we had for ?04 in returning to the high-grade areas.

We were able to resolve the insurance claim related to the 2003 slippage events in a-- in an expedited fashion.

Usually, these sorts of complicated claims take periods of time to work through.

But we worked with our insurance group, who we?ve had a very long-term and positive relationship on-- we renewed our insurance last summer, after these events, and were able to get a reasonable resolution of our claim, both for us and for our insurance group, on a very positive way.

As we?ve been doing since the discovery of the Grasberg, over time, our exploration program resulted in addition to our ore reserves.

And the net effect of that is we replaced, to our company?s interest, 200% of our copper production and 100% of our gold production.

And our estimated reserves at 2004 at over 40 billion pounds of copper and 47 million ounces of payable gold reserves net to our company?s interest give us a very long-term and profitable operation Horizon.

And we continue to add reserves, as we will mention, we expect to be able to do that.

Despite the lower metal sales this year, we were able to achieve ongoing objective of improving our balance sheet and reducing debt.

Our net debt was reduced by $330 million.

The bulk of that came through the conversion of our 8.25% convertible notes, but we also invested $300 million in common dividends.

And in open-market purchases of shares, we bought back 3.4 million shares during the second quarter.

And in addition, as we previously reported and have focused on, we acquired Rio Tintos shares in FCX that they owned, 24 million shares for $881 million, and financed that with a perpetual convertible preferred stock.

As we look forward, now, into 2005 and-- particularly ?05, but on an ongoing basis, we?re very well positioned and we look to produce 50% more copper in ?05 than we did in ?04 and double the gold production, roughly, from ?04.

I just have one picture here and a slide that?s on the next page to show you the south wall that we focused on so much during this call last year and during the first half of ?04.

You can see the very significant amount of waste material that we?ve taken from the top of the south wall, the efforts that have been made to restore the slope and just how much progress has been made.

Our team feels very confident that we?ve dealt with this issue.

And we?ve also taken a number of steps to ensure safe operations for the future.

We mined 30 million tons of waste on the south wall.

We?ve, as you can see from the picture, removed the debris.

We?ve re-sloped it.

We?ve put in new monitoring systems.

We had a very intensive drilling program to review the geology of our pit and we confirmed the decisions we made about ultimate pit design.

But we did put in new watering systems and drainage projects.

And we have made a revision that we reported earlier on our future mine plans to provide a greater insurance of stability.

And it actually extended the pit life.

So we continue to have safety as our very most top priority and we?ve made a lot of progress in that this year.

The schematic on page nine is familiar to those of you who?ve followed our company.

It shows the Grasberg Pit, which provides between 85 and 90% of the throughput to our mill, our existing production from the DOZ mine and our undeveloped reserves lying beneath the DOZ, beneath the Grasberg open pit, the Kucing Liar and the Big Gosson, all tied into our mill system.

We-- even though we?ve had very significant production from the Grasberg over the past five years, to our company?s interest, we?ve produced 6.6 billion pounds of copper and almost 11 million ounces of gold, today we have more copper reserves than we did five years ago and 92% of the gold reserves that we had.

And that?s remarkable statistics for a mine that is an mature as the Grasberg that we continue to add reserves and have great exploration opportunities in Block A at depth and in areas adjacent to our existing production horizons.

We show our analysis of our reserves during ?03 to-- that give us the details, both for the aggregate operations, including Rio Tintos joint venture interests and our company?s share of those reserves, as I said, showing that we replaced our gold reserves, had a 200% replacement of our copper production for ?04 and then have had the very significant longer-term replacement experience over the past five years, in fact, throughout the life of the Grasberg.

We have very significant geologic resources associated with the Grasberg?s operation.

And we give some details on that on page 11.

The SEC provides for purporting of measured and indicated mineralized material, different parts of the world, inferred resources are reported.

So we?ve broken those out, but showing that on a resource standpoint, we have aggregate 2.5 billion tons of mineralized material beyond our crude reserves, with very attractive grades indicating the ability to continue to add reserves as we undertake our exploration.

And our exploration that?s next year will be focused in continuing in the area around the DOZ and below the Grasberg.

And, Jim-Bob, you might want to make a couple of comments about our exploration outlook.

Well, as Richard said, we?ve been very successful in Block A, adding reserves.

And I might mention that the geologic resources that are in this resource are principally in sheaths around the existing ore.

And as you know, until we?ve drilled those with a proper density of drill holes and gotten a mine plan, they stay in our contained reserves-- into our resources.

Excuse me.

So this kind of resource that literally wraps as a sheath around areas like Kucing Liar and the deeper Grasberg are what-- we?re using these deep-drilling efforts such as we had at-- below the DOZ and bolted-on reserves to the MLZ after we found the MLZ.

In 2005, we?ll continue to the north and west of the MLZ to add-- kind of bolt on more reserves there.

And we would hope to be able to add significant reserves, 30 to 50 million ounce-- tons of reserves there.

And in the deep Grasberg, as we get our common infrastructure project completely underway, we want to be sure we know exactly what the deep Grasberg reserve looks like.

So we?re going to be drilling the deeper part of the area right below the Grasberg, which will be getting us down to the level of the KR-- Kucing Liar.

And there, we have an opportunity for 100 to 200 million tons that we might be able to add and-- with this deep drilling.

So we also, of course, as you know, have our Block B, where we?re still restricted because of the security aspect, where we would go into areas like Wabu and continue to delineate that gold deposit.

And then we have Komopa and others to the west of about 100 miles, where we had excellent indications from the magnetics that we had-- similar magnetic events going on and had drilled some drill holes.

We had hoped to be back to work, but with the new government getting themselves restructured and then the tsunami event taking everyone?s attention, it may be some six months or so before we can really know what the government?s going to recommend and feel comfortable as far as putting us-- giving us permits to go back down into the more rural areas, away from Block A. But we?re very confident that we?ll add reserves in Block A this year and that we?ve got some big resources to define out in Block B.

Thank you, Richard.

Thanks, Jim-Bob.

Near term, we have talked throughout the year about the outlook for ?05.

On slide 12, we have the details of that, the work that we did in ?04 in restoring the pit to the operating situation that it is in today will give us the opportunity to produce, really, very extraordinary amounts of copper and gold for our operations next year.

At current copper and gold prices, we would expect to generate operating cash flows that, after taxes and after interest of in excess of $1.1 billion in ?05, our gold revenues would be expected to offset our total cash costs of production to result in a 0 net cash cost and that of the gold credit.

So we are looking forward to working through ?05 and having it be a good year from an operational standpoint.

We won?t say much about markets, but obviously the copper market continues to be very, very tight, reflecting the deficits that the market has faced in ?03 and ?04.

Inventories are very low.

The outlook for the future is, of course, dependant on worldwide economic conditions and conditions in China.

But China continues to be strong.

Industrial output in the U.S. looks positive.

And the world just doesn?t have much copper available to it.

Some projects are lined up to come on-stream.

But in the context of the much larger copper markets that we have today, with China?s growth, the development opportunities for the industry are relatively limited.

So we feel very good about the markets and about where we?re placed in those markets.

And at the same time, gold prices continue to be strong at over $400 an ounce, reflecting the currency situation and the deficits in the U.S.

So we expect to have a good year operationally and the markets look very good for us.

Our five-year plan, adding in 2009, that we haven?t disclosed previously, is presented on page 15.

It shows the recovery in ?05 and return to more normal levels of operations in the subsequent years, where we?d be averaging 1.36 billion pounds of copper a year and 2.2 million ounces of gold to our company?s interest.

As you follow us, it might-- I would suggest spending a few minutes in looking at the cross-section slide that we?ve presented.

And we?ve talked about this a good bit in our past presentations.

It?s on our website.

But it gives you an indication of how the pit will evolve over the next five years.

The higher grade materials is in the lower sections of the pit.

To access that material, we have to mine the waste material at the upper levels and the lower-grade materials to get down to it.

This gives you an understanding of the sequencing that we have and the impact that that has on quarterly copper and gold sales and on annual sales.

So that is there.

And if any of you have any detailed questions, we would be happy to respond to it.

On a quarter-by-quarter basis, our copper and gold sales are presented on slide 17.

We?re off to a great start.

We didn?t achieve all the high-grade production that we had at the end of the year and so the first part of this quarter is very strong.

And we expect to be able to achieve these targets that we have set out.

But we?ll update those as we go through the year.

Roughly half our copper will be produced in the second half, and 60% of the gold, with currently the third quarter looking to be the strongest goaled quarter.

But that?s the quarterly production.

Our unit cash cost will be dependant on cost structure.

It?s copper volumes, but also gold prices.

And that?s illustrated on page 18.

At $400 gold, we would have net cash costs expected to be 3 cents, higher prices, it obviously goes down.

If gold prices drop, it would be somewhat higher.

But that?s an indication of how our cost structure is sensitive to the price of gold as we report this on a bi-product basis.

The detail analysis is presented on page 19, which shows our unit site production and delivery costs at 55 cents.

Like all other operations, we are affected by higher energy costs and other factors, the royalties at higher copper prices.

A number of cost factors are affecting us as they are other operations.

And yet, because of our strong production volumes and strong goal volumes and the strong prices, we?re able to achieve this remarkable cash-- unit cash cost situation.

Page 20 is an update of the analysis that we typically review with you to show the level of our operating cash flows.

Again, this is after taxes and interest at varying copper and gold prices.

We?re-- we use for this analysis $400 gold, varying copper from $1 to $1.5 and $1.25 copper, varying gold from 350 to 450.

And you can see that at those levels, our annual average operating cash flows for the next three years would approach 600 million to $900 million, depending on prices.

And you can vary that using the sensitivity analysis presented on page 21.

But with those levels of operating cash flows, our company has very low-level capital expenditures because of the fully developed state of the Grasberg mine. ?04, our capital expenditures was somewhat less than we had forecast for timing reasons.

And we?re showing for the next five years annual average capital expenditures of $145 million, again, with operating cash flows in the 600 to $900 million range on the price schedule that we presented earlier.

The details of our near-term capital expenditures are presented on page 23.

We have less than $100 million of sustaining capital.

We?re spending money on our common infrastructure project, the DOZ 50K expansion project-- ongoing capital at the DOZ and some capital on efficiency projects at Atlantic Copper.

The DOZ mine has operated very well.

It has exceeded name plate targets on a consistent basis.

It was over 40,000 tons a day during the fourth quarter, when the design was for 35,000 tons a day.

We are looking to spend some money on prushing (ph) and ventilation to sustain 50,000 tons a day.

It has very attractive internal rates of return at current copper prices and gold prices.

It?s over 45%.

We share these costs-- capital costs 60/40 with Rio Tinto and we would have significant incremental production as we go forward and sustain this production.

And this also, obviously, is beneficial for the ultimate development of our undeveloped reserves lying below DOZ.

Another project is this common infrastructure project.

Our analyst group that visited site in October saw this.

This is developing a new addit (ph) system that?s 400 meters below the Amalay (ph) Addit (ph), which is at 2900 meters.

Besides assisting in the production of the Grasberg Pit, this will be the initial development stage for the development of the deep Grasberg and Kucing Liar and the MLZ reserves.

So it will provide the production platform and also for the Big Gossan as we-- as we advance this addit (ph) system it will also give us exploration platforms for drilling at depth to continue to see what this great mineralization area holds for us in terms of future reserves.

But that is an ongoing capital project for us.

The Big Gossan mine is a mine that was discovered a number of years ago.

It?s a-- it?s a very high-grade ore reserve, 33 million tons of 2.8% copper and one gram per ton of gold.

We are working on a feasibility study, which we expect to have completed in the near term.

Unlike the DOZ mine, this will be an open-stoke mining, as opposed to block caving.

And the-- with the advancement of the feasibility study, we would have first production of that into 2000-- into 2008.

I want to close with some comments on financial policy.

If we look at the available operating cash flows, as illustrated on page 27, and when you see our current annual dividend for common shares of $1 a share, the dividend requirement for the high 5.5% preferred, that is a total cash requirement of about $240 million.

With these levels of production and these levels of commodity prices, we?ll be generating substantial cash in excess of that after paying our capital expenditures.

We have very low levels of debt repayment as we look forward.

On page 28, you see our five-year schedule of debt maturities, only $78 million in ?05.

Our gold preferred-- our second issue of our gold preferred comes to you in August of ?06.

But beyond that, we have very low levels of debt.

Our debt has dropped dramatically from the $3 billion level to net debt being at 1.4 billion.

And that includes $578 million of the 7% convertible notes that are well in the money today.

So our company has made significant progress in improving our balance sheet.

That?s been reflected in the credit ratings? view of our company.

We have been upgraded to a couple of notches ahead of the Indonesia Sovereign.

We will continue, as we go forward with our financial policy, to look for opportunities to repay debt.

With this structure, they may be limited.

But to the extent we have opportunities, we?ll take advantage of them.

So, given the very strong cash flow, the limited capital expenditures, the limited debt maturity obligations, our Board has been reviewing financial policy and will continue to do so continually as we go forward through 2005.

The Board initiated a cash dividend in February of ?03 at 36 cents a share.

It was increased to 80 cents per share in October of ?03 and then a year later, by 25% to $1 a share in ?04.

The Board has indicated the plan to use the excess cash that?s generated, in addition to our current dividend requirements, to pay dividends.

And as evidence of that, in December the Board authorized the payment of a special dividend of 25 cents per share to buy stock back when that is appropriate.

But these strong operating results and strong commodity prices give us a chance to fulling (ph) the outlook that we?ve been pointing towards for several years of generating cash from this great asset and returning that cash to shareholders.

And that would be our clear expectation as we go forward.

At current commodity prices, our excess cash flows above debt maturities and current dividend requirements would exceed $500 million for 2005.

And we have $550 million of unrestricted cash going into the year.

So we?re in a very strong financial position.

And this gives the Board the opportunity to move forward with the-- with the outlook that we have been pointing to, as I?ve said, for some years as we dealt with the company?s balance sheet and taking advantage of these very strong markets.

In summary, we?ve got very strong cash flow generation this year.

And over the long term, because of our long lived, low cost, fully developed reserves at the Grasberg, we?re unhedged to copper and gold prices.

We?re going to work to keep this balance sheet strong and provide returns to shareholders and work in the marketplace to improve the valuation of our shares.

With that, we?ll be happy to respond to questions.

Operator, we?d like to take questions.

Thank you.

[Operator instructions].

And the next question comes from the line of John Hale from Smith Barney.

Please go ahead.

Good morning, everyone.

And congratulations to the team on a great turnaround and a great quarter.

I was just wondering if we could take you up on your earlier offer to describe in more detail the production sequencing in ?05 within Zone 6 S and 6 N. There is considerable variation in grade.

And if you can kind of walk us through what happens, kind of quarter-by-quarter or on a percentage basis, that would be very helpful.

Well, John, normally-- and I ought to mention this, Mark Johnson, our Chief Operating Officer, is on the call.

He is actually out at job site working with our team on that plan.

But you can see where we ended up the production in ?04.

We were down mining pushback 6 to allow us to achieve the kind of production levels that we were able to achieve.

We were able to deal with the talets (ph) material on the south wall during the second quarter and continue to take the wall down to be able to achieve that in this quarter.

Then in the first quarter, we will continue to mine material there at the lower part of the pit.

And we?ll end up mining that phase and then return to mining upper-level phases more predominantly as we go forward during 2000-- during 2005.

And that?s what leads to the variation in the grades.

Particularly for gold, the grades are much stronger at the bottom of the pit, but it?s also true to a lesser extent for copper.

But that?s--

Richard, I might just give you-- give him a little help here.

As you can see, we?re in 6 South now.

And 6 South will account for a greater portion of the gold in 2005.

We also have the high-grade in 6 North.

And what?s not shown on here is there?s a 6 East, if you-- a 100-- 360 degree cross section.

So the reason that we?re having the opportunity to have such high gold grades is with-- between 6 South, 6 North and 6 East, you can see we stay in high-grade gold, which is the red and orange area that you see on the map, although there are some lower-grade areas and higher areas of 6 South and 7 South and a little bit up in 6 North, you get a-- you stay principally in that red and orange zone.

So, John, that?s-- in particular, that?s what we?re going to be doing.

We?re going to be mining 6 South, 6 North and 6 East.

Those will be our principal targets that will give us this high gold grade year.

And, of course, if you just follow your chart and look at what the predictions are for 2006, that?s the purple area, and the purple area would show you that we do have a good deal of stuff going on in 6 North.

And then you get into some lower-grade material as we go up the hill in what we call 6 North, in the green and blue area, looking at that slide.

And that provides the ore for 2006.

And then you drop right on down and go down to 2007, which is the blue area, you can see there how we?re in 6 North, but we?re mining the principal part of the higher-grade gold.

And then to the west, you see we?re mining the lower grade up there in 6 South, 7 South.

And if you go down to 2008, take the green, you?ll see once again we get into that 6 South area and part of 6 North.

In 2009, it?s the same way.

So, I hope, John, that that helps you kind of follow what the chart that we have that shows the cross section refers to.

Very good.

Thank you.

Thank you.

And the next question comes from the line of Brian MacArthur from UBS.

Please go ahead.

Good morning.

Just following up on the quarterly variation, you?ve talked a bit about how the production will vary.

But can you just walk me through-- the deferred profits between the smelters has-- I mean, you?re always going to have it, depending on price and timing.

But it?s been exasperated via the pit wall failure and the fact that shipments have been going different places.

You sort of talked about there?s $41 million to call back at current prices of which you hope to get 22.

It will be done in the first quarter.

Can you just walk me through how it?ll go through it this year in the quarterly and maybe when we get back to what I would call more normalized state from this that?s been adding a lot more variation to the quarterly earnings?

Yes.

I think the best way to think about this-- and I just want to repeat a couple of things that you just said, Brian-- is it is dependent on production levels and the timing of shipments.

And the timing of shipments gets to be a matter of matching up the needs of all of our customers, including Atlantic Copper and Gressick (ph).

So that can vary from time-to-time.

And sometimes that changes, even at the very end of a quarter.

And of course, the delaying of a ship in the shallow water seas that we have, that we?ve seen from time-to-time, have some kind of impact.

So it?s not something that you can really predict with any degree of certainty.

But what you can look to is looking-- is thinking about it in terms of quarters where we have high production levels, we?re likely to have relatively higher deferred sales.

And then when the production levels are lower, it tends to reverse or be at very, very lower levels.

And that?s why you see in the first quarter that we are-- we are-- as we look now, we?re looking at lower levels than we normally would.

Yes, Brian.

In the-- in the first quarter, based on our current shipping plan, we?re actually expecting to defer additional profits.

And so the-- it would result in a-- in an increase in the balance sheet deferral and a reduction in our net income of approximately 22 million--

Right.

-- based on current shipping schedules and prices.

And if I just go-- okay.

I think-- I think I understand that.

But now, if we go to the situation we had a year ago when you had to, you know, priority to Gressick shipments when you had the pit wall failure and therefore we had inventories of ships going and you had the Atlantic turnaround and everything.

If I just looked at a normal year, now, subject to quarterly variations, depending as you match up customer needs, all that pipeline rebuild effect, if I want to look at it that way, is that kind of all out of the system right now?

Yes.

We have-- we have-- we?re no longer [inaudible] to any of our contracts than we are at a normal customer matching-up shipping situation now.

Okay.

Great.

So I only have one set of problems, as opposed to two sets of problems when I try and figure the [inaudible].

Yes.

I?d say-- I?d add weather in as being another, because that can effect coming of shipments at the end of the quarter.

And we recognize that it?s just unavoidable because of the nature of the business.

Great.

Thank you very much.

Thank you.

The next question comes from the line of Jim Copeland from Goldman Sachs.

Please go ahead.

Good morning and thank you.

Jim-Bob, you provided a disclosure about the mineralized material at Freeport at Grasberg.

I wonder, could you please break out broadly where those mineralized materials occur, between Block A, Block B, Grasberg, Kucing Liar, et cetera, just broadly?

It would be great, please.

I?ll try to get you a slide that shows it in much more detail.

Let?s just-- you?re talking about the resources, now, is that correct?

Yes.

Yes, exactly.

Now, the resources, as I said, very little of that is anyplace else except at Wabu, where we?ve done enough drilling to have a resource.

The rest of the resources are in Block A. Substantially, they are in sheaths around KL.

KL has about 400 million tons of sheath around it that?s like a-- the bun of a hotdog.

If you?ll just imagine the current reserves of about 433 million tons at KL being the hotdog and then the bun around it we know has mineralization, we just haven?t filled it with enough vents yet and a mining plan to be able to get it.

And then you have some lower Grasberg resources where we?ve drilled a few of the drill holes down into the bottom of the-- of the Grasberg, but our plans this year are to go drill deeper holes in a density that will give us the ability to transfer them from resources to reserves.

And then you?ve got some more area around the MLZ-- the DOZ that we call resources because we?ve got a few holes out there.

So probably 90% of the reserves in our resources are in those areas that I call the sheaths around our current proven ore bodies at Block A.

Jim-Bob, let me give a little details to support what you just said.

We?ve got roughly 1.2 billion tons associated with the DOZ complex, the FZ, the deep M MLZ.

That?s 1.2 billion tons of the total resource of 2.5 billion tons.

Roughly, 600 million tons with Grasberg or Block A and roughly 600 million tons at KL.

Okay.

Thank you very much.

Thank you.

The next question comes from the line of Victor Flores from HSBC.

Please go ahead.

Yes.

Thank you very much and good morning.

Just going back to the production ramp-up and schedule for this year, could you tell us if there are any potential critical items that would affect that schedule?

Primarily, I?m thinking about getting the stripping done, et al., on sequence, but if there?s anything else that you might comment on with respect to that.

Well, our ore is exposed for this plan.

That was one of the things we got to with this-- with the work that we did in ?04.

So the important thing for us to do now is to keep all of our operating systems working well.

But we don?t have critical burdens, challenges in terms of waste removal to expose the ore for our 2005 plan.

It?s just a question of, as I said, working very hard to keep all of our operating systems and the mines, ore flow to the mill and the concentrate flow and the port working to achieve the plan.

Richard, I might just refer back to that same cross-section that we did when we were answering the question a while ago.

If you?ll look at your 2005, you?ll see that up at 8 South and 8 North there?s a section that has a line that shows the amount of waste we?ll mine in 2005.

And if you look at the next one, you?ve got 2006, you can see where that takes you.

So you?ll see very clearly that we have a substantial part of the ore that is exposed and that we?ve got stripping that will be an ongoing stripping to keep laying back this high walls.

Remember, we talked after the slip about how the most important issue was that as we got into 2006 and 2007, that we were starting to get all of the high wall laid back into what we call the country rock or limestone, which will support a 90-degree cliff.

But the only issues we have to deal with stripping in 2005 is what you see in the yellow outline at 8 South and 8 North.

So I hope that-- and if you?ll just kind of, again, as I just explained, think of this in a 300-degree circle, that?s kind of the way the issue goes as you look around the pit.

You can see where we-- with the enormous amount of ore we took out in 2004, you look at the black outline of where we are is underneath the tan matrix that shows the current exposure of the open pit, we have really taken not just 30 million tons off the south wall, but we?ve taken in excess of 30 million tons off the north wall, which gave us this kind of confidence to be able to say that the 6 South, 6 North and 6 East, which are pressibly (ph) where we?re going to get our reserves in 2005, are exposed and don?t have the problem stripping.

Those were eliminated as we concentrated on doing nothing but stripping those high walls in the first half of 2004.

Excellent.

That answers the question perfectly.

Thank you very much.

Thank you.

The next question comes from the line of Sam Arnold from Friedman, Billings, Ramsey.

Please go ahead.

All right.

Thanks, guys, and great quarter.

I just had a question for you regarding the unit production cost.

Looking at them going from 77 cents in ?04, averaged to 55 in 2005, realizing the denominator actually gets larger going from ?04 to ?05, but can you give me any type of energy cost adjustments that you expect to see going forward?

And is that the main driver?

And also, maybe some breakdown of what kind of costs you do have, like a percentage of labor and energy and things of that nature.

Yes, Sam.

The energy cost is the biggest factor among the cost structure that has caused variability in recent years.

And with diesel costs going up, that has had a factor.

Now, we benefit because of our converting our electrical generating capacity to coal, which we did in our fourth concentrator expansion.

But the energy, the diesel cost that we use for our trucks and to support our operations are-- reflect the much higher price of diesel, which has gone up to, like, $1.38 a gallon.

And that?s the number we?re using going forward.

And when you look at our total cost structure, energy represents about 20% of our cost and materials is about 40% of the cost and manpower is 28% of our cost.

Our RUPIA-based (ph) cost, which mostly consists of the labor costs for our workforce-- our national workforce, as well as some consumables we buy in Indonesia, represents about a sixth of our costs.

The materials costs include about a sixth of our costs that are material that?s purchased in Australia.

Two-thirds of our operating costs are U.S. dollar denominated costs.

Okay.

All right.

Great.

And one follow-up question on the tax rate going forward into 2005, do you think the effective tax rate will be similar to what you saw in the fourth quarter and the deferred taxes, as well?

Well, just for review, our actual income tax rate does not change.

We pay a 35% income tax on taxable income that?s earned by PT-FI in Indonesia.

And then to the extent that we pay tax and dividends from PT-FI to FCX, there is, by treaty, a 10% withholding tax that goes forward.

The book tax rate that you?re referring to is affected by the non-taxable expenses, interest and other costs that we have at the parent company in the U.S. and by operations at Atlantic Copper.

That?s going to be a big variation between ?04 and ?05.

Atlantic Copper had a significant operating loss in ?04.

We?ve had a major effort during ?04 to reduce its costs.

We had some severance costs, for example, at ?04 that you see in our special items.

We sold a Wyrod (ph) business.

And we expect a major improvement from ?04 to ?05 in Atlantic Copper.

We had roughly $80 million plus of operating losses.

And with the improved TC and RC situation, we actually expect Atlantic Copper to generate operating profit as we go forward.

At current prices and so forth, we would expect a book tax rate of roughly 50% in the first quarter and about 45% average-- 45 to 47% for the full year of 2005.

All right.

Great.

Thank you, guys, appreciate it.

Richard, I might just tack onto that answer one thing and then reemphasize what you said about the smelter situation.

As everybody knows, with the major turnaround we had over the last couple of years, plus the losses that we?ve had at Atlantic Copper because of a very low TC/RC market, in our consolidated balance sheet, even with the losses at Atlantic Copper, losses at the smelter meant profit at the mine.

It washed out in our consolidated financials.

There?s been a substantial increase and there?s a lot of talk about additional increases, smelter charges, TC/RC charges, in the industry.

But, once again, because we own our own smelter, if you look at those increases in TC/RC charges, if we weren?t in a position to be diversified and have this smelter capacity, it would have an impact on our earnings.

But if we make money at Atlantic Copper, it?s going to mean losses at the mine, but they?ll wash out at our consolidated balance sheet.

So I think it has certainly been a clear example of why we?ve tried to keep our smelter capacity, which has helped us in pricing the TC/RCs over the last six or seven years and now is going to help us as the TC/RC market has moved forward because of the pressure that the smelters are putting on the industry.

Thank you, Richard.

Thanks, Jim-Bob.

Thank you.

The next question is a follow-up question from the line of Brett Levy from Jefferies & Company.

Please go ahead.

Hey, guys, a couple questions.

I notice that treatment charges seem relatively flat from ?04 to ?05 and yet I?m hearing around the world that at least for copper treatment charges are up something close to 85%.

Can you guys talk about treatment charges for gold and for copper, you know, how much of it you guys are doing independently and how much you guys are doing in-house?

Okay.

Brett, let me just explain the difference. ?04 really reflected the special circumstances that we had when we had limited production.

We were under force majeure with our external customers.

And we supplied-- we continued to supply the contracts required the concentrate for the PT Smelting's smelter in Indonesia at Gressick.

Under our arrangements with PT Smelting, we supplied virtually 100% of the throughput there and they had the priority basis.

That contract has a floor TC and RC of 21 cents, which was designed to facilitate the project financing there.

So what you saw in ?04 was a heavy predominance of sales to PT Smelting where we had the floor of 21 cents.

And now, as we go forward, the market has risen to roughly that four-floor level.

So that?s why it looks the same year-to-year, but it just reflects the circumstances.

We sell just over half of our concentrates to Atlantic Copper, which gets roughly a quarter of our output.

That?s about half of Atlantic Copper?s or 60% of Atlantic Copper?s needs.

And they buy concentrates, then, from other miners.

And, as I said, we supply virtually 100% to PT Smelting, which takes another 25, 30% of our production.

And the remainder, then, is sold at marketplace to other customers.

Our largest customers, as they?ve been from the start of this operation, are in Japan.

All right.

Thanks very much, guys.

As Jim-Bob was just talking about, when you cut through the effects of taxes, we pay taxes in Indonesia.

We don?t pay taxes in Spain because of loss carry-forwards and minority interest.

If there?s equivalent change in TC and RC rates, it virtually offsets in our net income line.

Thank you.

The next question comes from the line of Daniel Rolling from Merrill Lynch.

Please go ahead.

Thank you.

Richard, on slide 15, when you were talking about 2009, I just want to make sure I got the numbers right.

The graph shows 1.3 billion pounds of copper.

And I think you said 1.36.

And then for gold, it says 1.9 and I missed the number you gave.

Yes.

Dan, I?m sorry.

Just to clear, the numbers I gave were the annual averages over the five-year period--

Okay.

-- 1.36 and 2.2.

For ?09 itself, our current plan is 1.3 billion and 1.9.

And, Dan, as you know, we go through a process each year of focusing on the next year?s plan and maximizing returns for that.

We?re going to be presenting that to our Board when it meets here, in two weeks, for a final approval of our budget for ?05.

And then we develop a five-year plan.

And around here, we see plans as things that create actions, not as the end of actions.

So we will be continuing to work on plans.

And over time, we?ve been able to find ways of producing higher volumes than we typically show with these plans.

And we?ll continue to do that-- to try to do that.

Okay.

And on exploration-- I would apologize, I was a little late getting on the call.

But on exploration, did I hear discussion about getting back out into Block A and then it was delayed?

And what?s the status-- or Block B and what?s the status now?

Dan, what I said was-- is that at Block B we had hoped that this year that we would be telling you that we would be getting out into Block B. We?ve been working with the Department of Mines and with the Regional Governors here.

And that was on track, I think.

With the new election, and the very positive impact of the SBY getting elected, we had hoped that we would be well into some negotiations to get back out there.

And then the tsunami hit and we?ve sort of been unable to move and advance that for the last three weeks, as you might imagine.

And so we?re just going to have to wait and see when we can get people to focus back on the track that we have to get back to life after this horrible event and the tsunami.

We hope that it doesn?t disrupt the government and we can get the approval that we need.

So it might-- we might be into the second half of the year before we have the outlook to get out there.

We?re ready to go back to work at both Wabu and Komopa.

Thank you very much.

Thank you.

The next question is a follow-up question from the line of John Hale from Smith Barney.

Please go ahead.

Yes.

Thank you.

Two quick questions, first, when we recently visited the site as part of the larger group, it was clear that you had installed quite a bit of new stability-- slope stability monitoring equipment from the survey prisms to a new robotic system.

And you?d actually applied that to a number of different areas around the pit, besides just at the high area on the south side.

I was wondering if there was new information or data that gives you any more confidence or any more concern that?s come out of that.

Thank you.

The answer is that the data has given us a huge amount of confidence.

Once again, the amount of waste that we moved out of the pit in 2000-- in the last part of 2003 and in 2004, the new monitors-- we don?t have any areas of concern that indicate any reason for us to presume that we?ve got another potential dislocation.

I don?t know how many of you saw the TV pictures of the slide in California that buried those people in California.

But if any of you got to see that, we?re still researching to see if we can get some more data.

That was probably a liquefication (ph) of that slab of earth after that 15 days of rain.

And as you noticed on the TV as you saw those things run over and over again, that earth looked like water flowing down that mountain.

And literally, you had people covered up in 30 seconds.

Now, that?s the stuff we?ve been looking for and have not identified any new areas.

And the new slope monitoring system should give us a great opportunity to be able to do that.

Great.

And just a quick follow-up, I was wondering if there were any more drill results off that deep common infrastructure that you?d be willing to share with us.

There were a number of holes underway in that very interesting and prospective area.

Obviously, a little bit too early for reserves and resources, but I wondered if you could tell us what?s going on there.

Same old, same old, every time we drill into the bowels of this mine, we see the kind of cores you were seeing.

We continue to get those kind of results.

And what we?re hoping, of course, and have always hoped, is that as we drive these different addits (ph), that we get the same kind of geological information we?re talking about.

Remember, when we drove the Amalay (ph) Addit (ph), the original tunnel that was initially going to be to de-water the lower Grasberg.

That?s when we bumped into Big Gossen.

And then as we crossed the next fault system, we ran into KL and used that Amalay (ph) system to be able to drive some exploration shafts.

And that?s how we proved up the almost half a million tons of ore at KL.

We hope that with this infrastructure work that we?re going to be able to get some more information to try to tie the KL, MLZ, DOZ zones together because we have that gap between them that?s right in that big valley-- the big glacier valley that you see as you fly up to the pit.

So to answer your question, more of the same.

And I hope that we?ll be able to get enough density of drilling to be able to start talking resource and, of course, then ultimately to reserve.

Because it?s all going to be, as you could tell from where you were looking in the vicinity of our infrastructure, as it was with Amalay (ph).

Very good.

Thank you.

Thank you.

I?m showing no further questions at this time.

I would now like to turn to conference back to you.

Please continue with your presentation or closing remarks.

Well, this is Richard and we appreciate everyone?s interest.

We look forward to reporting to you as we go forward in ?05.

And if you have any follow-up questions, as always, feel free to give us a call.

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.

Have a good day.