費利浦·麥克莫蘭銅金 (FCX) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Freeport-McMoRan Copper & Gold second quarter earnings 2005 conference call.

During the presentation all participants will be in a listen-only mode. [Operator instructions.] I would now like to turn the conference over to Kathleen Quirk, Chief Financial Officer, Senior Vice President and Treasurer.

Please go ahead, ma'am.

Thank you and good morning, everyone.

Welcome to the Freeport-McMoran Copper & Gold second quarter 2005 earnings conference call.

The FCX earnings announcement was released earlier this morning, and a copy of our 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, and they are accessible using the webcast link on fcx.com website home page.

In addition to analysts and investors, we've also invited the financial press 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'd 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 today are Jim Bob Moffett, Chairman of the Board, Richard Adkerson, Chief Executive Officer of FCX, and Mark Johnson, Senior Vice President and Chief Operating Officer.

I will briefly summarize our financial results and then turn the call over to Richard, who will review our operations and outlook and then we will open the call for questions.

FCX reported second quarter 2005 net income applicable to common stock of $175.2 million, $0.91per -- $0.91 per fully-diluted share, compared with a net loss of $53.3 million, or $0.30 per share for the year-ago period.

For the six months ended June 30, 2005, FCX reported net income of $305.6 million, or $1.62 per fully-diluted share, compared with a net loss of $72.9 million, $0.39 per share in the 2004 first-half period.

Results for the 2005 period primarily reflect the expected substantially higher copper & gold sales volumes and prices than in the 2004 periods following our return to normal operations last year in the Grasberg Open Pit.

Our diluted net income per share for the 2005 period reflects the assumed conversion of our 7% convertible notes and five and a half convertible perpetual preferred stock, resulting in the exclusion of interest expense totaling $10.3 million and dividends totaling $15.1 million for the second quarter, an interest of $20.6 million and dividends of $30.3 million for the first six months of 2005, and the inclusion of 39.8 million shares for the second quarter and 39.7 million shares for first six months of 2005.

These instruments were not dilutive for the 2004 period.

Our second quarter 2005 sales totalled 313.7 million pounds of copper and 616.4 thousand ounces of gold, compared with 204 million pounds and 351,000 ounces in the second quarter of last year.

Our realized prices for copper improved by 25%, to an average of $1.53 per pound in the second quarter, 2005 from $1.22 in the year-ago period.

Our realized gold prices improved by 10%, to an average of [inaudible] per ounce in the second quarter of '05 from $390 per ounce in the second quarter of 2004.

FCX's operating cash flows totalled $458 million for the second quarter of 2005 and $620 million for the first half of 2005 with the year-to-date capital expenditures of $59.3 million.

Total debt at the end of June was $1.78 billion, or $1.2 billion net of the $585 million cash position.

FCX also announced today that our board has authorized the supplemental dividend of $0.50 per share to be paid on September 30, 2005 to shareholders of record on September 15, 2005.

Richard will be reviewing our outlook for the second half, and we expect for full-year our annual copper and gold sales to -- to approximate 1.47 billion pounds of copper, and 2.8 million ounces of gold.

Now I'd like to call -- turn the call over to Richard Adkerson who will be reviewing our operations and outlook.

Good morning, everyone and thanks, Kathleen.

We have our slides at fcx.com and I will be referring to those and you can follow along as I go through.

The slide on page three, the second quarter 2005 highlights, captures the numbers that Kathleen just reviewed with you.

Our quarterly copper and gold sales are very strong, operating cash flows over $600 million for the six months, our improving debt situation, which we will continue to focus on, and our returns to shareholders.

The open-market purchases of stock that we purchased, 2.4 million shares at an average of less than $34 a share, and our board's today announcement of another supplemental dividend of $0.50 a share continues the strong performance.

We expect a good year, a very good second half, continuing our ability to have an unusual access to high-grade material in 2005 following the activities we undertook in 2004, as we undertook remedial action following the pit wall slippage events in the fourth quarter of 2003.

Our copper and gold sales are now projected to be 1.5 billion pounds of copper and roughly 2.8 million ounces of gold, with the net cash cost of $0.05 a pound.

And this would be a higher production in sales in the second half than we had the first half by about $0.30.

As Kathleen mentioned, at prices $1.40 for copper and $4.20 for gold for the rest of the year, we would have over $1.2 billion of operating cash flows.

That would be $600 million in the second half, that's dependent on prices, of course.

It would be higher if current prices sustain.

And -- and so that would mean that we would have approximately $300 million of incremental cash above capital expenditures, debt repayments, and regular dividends in the second half.

So this continues where we have been.

Our sales for the second quarter were slightly below those we had given an outlook for at the beginning of-- at the end of the first quarter.

This was a combination of factors.

Because of the availability of very high-grade ore in 2005 we adopted aggressive plans to maximize both production and sales.

We simply did not mine as much of the high-grade material in the second quarter as we had anticipated, and then at the end of the quarter, when we did have some very high-grade material available, we had some maintenance issues in our mills that didn't allow us to process it in the second quarter.

This material is still there in the mine and it's been incorporated into our plans for the second half of 2005 and into 2006 as we go forward, so it's simply a question of the material being there, and because of a number of factors we just didn't mine as much of it as we had anticipated, but the values are still there.

Copper markets and gold markets, as the charts illustrated on page five, continue to be very strong; with a very, very low level of inventory in the world today, the overall market is very stretched and as we look at the situations, as mines and smelters, operate at these kind of capacity levels, inevitably, there are issues that continue to put stress on the system.

So with Chinese demand remaining strong, with the U.S. economy doing reasonably well, and the very low levels of inventory, the prices remain strong during the summer and during the time we once knew as the copper doldrums, it certainly hasn't been the doldrums in July.

The picture on page six how the Grasberg Open Pit.

A recent photograph looking vertically down into the pit.

And it is a very remarkable change to the picture from this -- how this picture would have looked a year ago as we were dealing with the issues associated with the fourth quarter pit wall situation.

It's virtually full unnoticeable at this point, and we are operating in all levels of the pit in accordance with our mine, and operations have been proceeding well.

We've noticed pushback [six], which is our current high-grade pushback, and this is the area that will continue to be the major contributor of metal for the rest of 2005.

We have increased our mining rate.

We averaged over 720,000 tons per day, which was a record for our operations during the second quarter, and with this mining rate it allows us to mine a combination of waste in order to maximize the value of the pit safely over the long-haul.

The schematic on page six shows, for the year 2005, why we're able to mine such high-grade material.

Because of the mining activities of waste that we did in the upper reaches, principally at the south part of our high wall during 2004, and 2005, we can concentrate, and are concentrating, our mining acre in the lower section of the Grasberg where our higher-grade material is, and we continue to do mining of waste at the upper reaches of the pit, but this year the principal area of mining will be in 6 South

On page eight, we have the quarter-by-quarter outlook, and this shows where we mined in the first quarter, in the second quarter, then in the third and fourth quarters as we mined proportionally into higher-grade portions, and you can see by the color screens -- schemes, that we'll be mining in very high-grade areas of the pit.

On page nine, again, an illustration of the high-grade material, and as an explanation for our announced change in our quarterly outlooks between the third and fourth quarter this year, you can see the remaining section of the 6 South pushback.

We had about 2 million tons of this ore that we previously expected to be mined during the third quarter, two million tons at our mining rate is about two weeks of production.

We still expect to complete mining this 6 South pushback during 2005, but these two million tons we now expect to occur early in the fourth quarter rather than in the third quarter.

Now, this material is over 2% copper grade, almost 4.7 grams per ton of gold.

So it's 5.5% equivalent material, and with our recovery rate you're looking at our share of production being roughly 75 million pounds and over 200,000 ounces, so that is the reason that we have the adjustment.

Again, it's a question of timing and mine sequencing as we mine the Grasberg Pit.

Walking forward just briefly to illustrate where we'll be beyond 2005.

In 2006, on page ten, after mining at the lower part of the pit, we'll be progressing pushbacks at upper level at 7 South and 8 South, and during 2006 our principal higher-grade ore will come from the 6 North pushback which will be progressively lower as we go throughout the year.

And then in 2007, on page 11, you can see that pushback will provide higher-grade ore in 2007 as we then progress with the 7 South and 8 South pushbacks, starting at waste and getting to lower-grade material, and progressively toward the bottom of the pit where the higher-grade material will come in, and by 2008, we will have the opportunity to have significant production in 7 South and the high-grade sections of the lower part of the pit.

And that will be the story as we go forward in years beyond 2008.

We have -- our final pushback is the 9th pushback, which will be progressing beyond that.

But this, we hope, will give you a perspective in explaining the quarter-by-quarter and year-by-year variations in our copper production and copper sales.

We've done extensive geological and engineering work to understand this ore body, where the grades are; we've adopted mining plans to give us safe access to this, and our annual and quarterly sales is simply dependent on mine sequencing of when we're able to reach the higher-grade material in a safe and efficient way.

Page 13 presents the variations from 2004 to 2005, of course 2004 was constrained, and we're in essence able to make that up in large part in 2005, and we're continuing with our previously-disclosed estimates for the remainder of our five-year plan.

The second half of the year, as is our custom, we will go through a detailed analysis of our outlook, we will look for ways of maximizing our long-term plan and then we will be reporting results of that effort as we get later in the year.

Our new quarterly estimates are presented on page 14.

We are looking to have -- now a very strong quarter with this deferral of these two million tons from 6 South from the third quarter to the fourth quarter, and we're looking to have 380 million tons of copper to our interest in the third quarter -- pounds of copper in the third quarter, and 575,000 ounces, and then substantially higher amounts in the fourth quarter as we go forward.

Page 15 presents our net cost situation, like all industrial enterprises today we are being faced with higher input costs, in our case it's principally the effects of diesel costs, which are roughly double the level of costs that they were in terms of price per gallon than they were three years ago.

But we still remain a very low-cost producer because of the volumes of copper and the value of the gold byproduct credit in our operation.

At $425 gold, we would estimate our costs would be about $0.04 net a pound for the year 2005.

Our capital expenditures are presented as previously projected,on page 16.

Our -- we had relatively low expenditures during the first half of the year.

We think that this [timing] but we will see as we go forward with our Capex, but this shows that our capital expenditures will be ranging between $170 to $200 million over the next few years, which will be very low in relation to our operating cash flows.

We have a number of development projects that our progressing.

The DOZ 50,000-ton per day expansion, the progress of our common infrastructure project, which is driving a new added system to allow us to ultimately develop the significant underground reserves below the Grasberg and in the Kucing Liar ore bodies.

These will come into production after the be after the depletion of the pit, in about ten years.

We're optimizing our current mill situation to allow us to get higher recoveries out of the older north/south mill line, and, as previously announced, we're proceeding with the development of the Big Gossan Mine.

Page 18 has summary information on the DOZ 50,000-K expansion; the DOZ mine, as you may recall, was developed initially as a 25,000-ton per day mine to supplement production the Grasberg Pit.

That was a $250 million aggregate capital project that we shared with our partner, Rio Tinto.

We then expanded to 35,000 tons per day, which is the current nameplate production level, but we've been producing for a period of time now at over 40,000 tons per day.

We have approved a capital project that we're now engaged in to spend $62 million of aggregate capital to add a new crusher and ventilation to allow us to operate a sustained level of 50,000 tons per day.

This operation provides about 20% of the throughput to our mill.

It is one of the world's, if not the world's single largest underground mine, and its success is a great indicator of the future of our operations when we move underground.

The first step in doing that, and that will occur in 2015 timeframe and beyond, is the development of this Common Infrastructure Project, which is shown on page 19.

It comes in at our Ridge Camp location, which is a supply facility located below the mill.

Our current lowest added system is at 2900 meters of elevation, the level of our mill.

This is the Amole Tunnel.

For those who followed us in the past, recognize that as we drove that tunnel, we discovered the Kucing Liar ore body and we were able to significantly expand the deep Grasberg underground reserves through that.

This progress is being made significantly in this major new dual-added system which will reach access to our underground, undeveloped ore reserves, assist in the final production activities for the Grasberg Pit, as well as giving us the ability to conduct exploration drilling at depths we previously couldn't reach.

And it is progressing as anticipated.

I mentioned that we are taking some steps, a step to improve the operations of our older north/south concentrator, our operations have three mill lines, two modern side mills, and this was the original milling facility for the operations, which dates back to the 1970's.

By installing these high-pressured grinding rolls, we will be able to improve recoveries, provide potentially higher throughput and gives us some flexibility as we move underground.

Relatively low capital costs, just over $20 million to our company's interest with very positive -- very positive rates returns.

We are also moving forward, as previously announced, with the development of the Big Gossan Mine.

This is a very high-grade ore body, 44 million tons of over 3% copper equivalents.

It will be mined, not using the block-caving techniques we've historically used in our operation, but using an open stope operation.

Again, it provides for higher returns on our capital and our share will be just under $200 million.

It will provide 7,000 tons per day, with full production by 2010, and an important benefit of this is that it allows us to begin an extensive effort to develop our underground work force in preparation of our future large-scale block scaling -- block-caving operations underground.

We continue to explore in areas adept and adjacent to our existing proved and probable reserves associated with the Grasberg and DOZ.

This year we expect to be spending about $15 million to our company's interests and we're focused on testing extensions of the MLZ and the deep MLZ where we added reserves in recent years to evaluate potential resources at the deep Grasberg and the deep Dome, and this is a very positive situation for us to continue to examine the geological opportunities that this great Grasberg ore body provides to us.

Even though this is a mature operation, we now mined over half of the waste and roughly half of the ore in the life of the Grasberg Pit, but today we have more copper reserves than we did five years ago, and I understand a plus of our gold reserves.

We continue to assess the timing of resuming expiration opportunities outside of the Grasberg.

There was a reasonable -- recent favorable action in Indonesia when the supreme court affirmed the government's decision to allow the resumption mining in certain protected forest operations for certain contractor work areas.

And as conditions continue to improve Indonesia we will look forward to resuming activities in these areas, but we do not have any cost budgeted for that in the second half of this year.

From a financial situation, this is again consistent with our previous guidance.

On page 23, we're showing that with $1.40 copper and $4.20 gold and our current outlook for volumes and cost, we would be generating $1.2 billion of operating cash flows this year.

As we go forward, because this year is an exceptional year for volumes, our operating cash flows will stay strong but at levels lower than they have been.

The next three year averages, you can see over varying copper and gold prices, would be $500 million to $900 million a year on average, a bit lower than that for the next two years, but during this period we have low debt requirements.

We currently have just under $600 million of unrestricted cash on our balance sheet, and as we look forward, we have a maturity in 2006 of the second issue -- second series of our gold denominated preferred stock.

Current gold prices first quarter, that would require about $180 million, and then we have a very minimal maturities until 2010.

We continue to look for opportunities to improve our balance sheet as we go forward.

Our company's stated financial policy is to maintain a strong balance sheet and improve our financial flexibilities during these periods of positive copper and gold prices.

Year-to-date we've reduced our debt by $170 million.

We want to be able to have a regular quarterly dividend, which is now $0.25 a quarter, that can be sustained over a broad range of commodity prices, and then, as our operations and commodity prices provide additional cash flows, we have no needs to retain cash in our business, and so we're supplementing our regular dividend with special dividend and share purchases.

We have a long track record of doing that, since the Grasberg was discovered in 1988 we have purchased 80 million shares of our company's stock at an average of $18.66, that's $1.5 billion, and that excludes the transaction we did to buy Rio Tinto shares back.

In addition we've paid $1.7 billion in common stock dividends over that period of time.

So, in total, since 1988, we've returned over $3 billion to shareholders.

Since 2003, when we reinstituted our dividend, we have paid $420 million in dividends and $180 million in share purchases.

So we have a financial policy that's supported by a track record and philosophy of our board and our management as we go forward, and we look forward to continuing to execute our operating plans to support this financial policy.

With that, we'd like to see -- be happy to respond to your questions.

Jim Bob's on the line, and Mark Johnson and Kathleen are here with me, so we're prepared to see what your questions are.

Thank you. [Operator instructions.]

Our first question is from the line of John Hill from Smith Barney.

Please proceed with your question.

Congratulations on a great quarter, and thank you for the presentation.

I was wondering if you could talk in some more detail about the gold ore grade distributions this year.

You've talked about the 2 million tons of high-grade, yet it does seem curious that the third quarter is expected to be down.

Also, I would ask, are we setting up a situation similar to 2004, super back-end loaded in Q4, where we're dependent on the timing of the last ship to leave the dock to make the earnings numbers?

So, I was wondering if you could fill in a little more around the various pieces of that?

Let me say just a couple of things and then I'll let Mark -- Mark address things.

John, as the Grasberg Pit matures, and we're roughly halfway through its life now, some of the flexibility that we had in earlier years to mine in different parts of the pit is not as great as it once was.

And as we develop these plans, they are anticipated on reaching certain high-grade materials during certain timeframes.

And for that -- and when issues such as shovel setups or maintenance issues occur, that results in the sorts of deferrals that we had, and as you can see, we are truly benefited by the fact that we have sections in this pit that has the kind of grades that we were talking about, five and half --- two million tons of 5.5% equivalent copper to have access at a particular quarter is just fantastic, and because of that, that was designed to be mined at the end of the third quarter for the operational reasons I mentioned it will go in the fourth quarter, and it's as simple as that.

And we -- the fourth quarter will be a big quarter.

We expect it to be earlier in the fourth quarter than the issue we had at the end of '04, but all of that depends on how these operational issues unfold.

And at the end of the day, the material is there, the value is there, and there's not really much value difference between getting that during one two-week period versus another two-week period.

John, I just add that 6 South, where we're at right now, we're just starting to access that very high-grade section of the golden horseshoe we've talked about so many times. 's a very, as you've seen out there, we have areas as high as 10 grams per ton in that zone.

We continue through the third quarter to continue to open it up.

In the fourth quarter, our real peak comes in the middle of the fourth quarter, kind of into November, late October-November timeframe.

We -- from that standpoint, gold grades are going be at their peak at that point.

We need to average somewhere in the order of about 110 to 115,000 tons a day in 6 South through the remainder of the year to finish it by the end of 2005.

We really don't see any risks to that, and as Richard stated, we, I guess you could say we're about two weeks behind where we thought we'd be, and that caused this swing from what would have been before in our previous forecast towards the end of the third quarter now shows up in the beginning of the fourth quarter.

Very good.

Thank you.

Thank you.

Our next question comes from the line of Daniel Roling from Merrill Lynch.

Please proceed with your question.

Thank you.

Richard, can you elaborate a bit on the power issue that you referred to and what caused the unplanned maintenance?

The maintenance issues were more normal course of business things.

There were - the mill was scheduled to operate at an aggressive level, and when there were issues associated with maintaining it, it resulted in -- in a deferral.

There was -- some of these issues caused some electrical issues with our power plant that were resolved very quickly.

There's nothing fundamental or major that's involved here.

It's just a question that, during a period of time where we had very high-grade material that was available for the mill to operate, we had some unscheduled maintenance issues that prevented us from achieving the production levels that we hoped.

These issues were fixed and we're going forward and, subsequently, the mill has been operating in a very normal fashion.

We have some scheduled maintenance activities to perform in August, and one of our SAG mills, but that's normal course of business and is built into our system.

So, Dan, it was not anything that was what you would characterize as a major shutdown, but something that just delayed production for a period of time.

Okay.

So there was nothing really wrong with the power plant or the coal delivery, it was just operational?

That's correct.

That's right.

Certainly no issues with coal delivery.

That's been an issue within the industry and I just might comment that generally about our availability of parts -- tires and parts for our equipment, we have been in operation for a very long period of time here.

We've been -- have very long-standing relationships with our suppliers and we are not having issues in terms of having deliveries of coal for example or tires or other replacement parts.

It's more expensive because of worldwide commodity conditions, but in terms of affecting our ability to operate, we're not -- we're not seeing those effects, so it was issues that caused the power plants to trip.

The were -- production was restored quickly and it's just part of having-- but we have-- it was obviously a very large complex mine and mill operation, the largest mill structure in the industry.

We have a year in which we're trying to get as much of these volumes that are available to us as we can, so we're stretching our people, our facilities, and operations are well, but we just had these issues that caused part of it to be deferred for a period of time.

Thank you.

Thank you.

Our next question comes from the line of Alberto Arias from Goldman Sachs.

Please proceed with your question.

Yes, good morning.

Just elaborating more about the second quarter production.

You mentioned several factors that affected the lowered [then] guidance, copper and gold production.

There was the issues of the mine with the access of the high-grade not happening soon enough, and then also the new maintenance.

You also talked about that your mine rates were record-high and that you were trying to optimize the net present value of your operations.

What is the cause of the delay of getting into the high-grade area during the second quarter given that you have so much throughput?

Is it something related with ratios or maybe some of the issues that we saw in the past with regards to the stability of the walls?

It wasn't stability issues.

We've set our new mine plan last year as we evaluated the circumstances following -- following with the slips, and we've been following that mine plan.

So first all, there has been no further adjustments.

In fact, we're all very pleased with the progress that we've made from a geotechnical standpoint and a stability standpoint, so that hasn't been an issue.

For example, as we were mining in 6 South, we had some of our hydraulic shovels there, we had electric shovels, we had a maintenance issue with an electric shovel that just didn't allow us to progress as fast as we wanted to.

We opted not to try to relocate some of the shovels in the higher locations so that we can continue with our mine rate of waste, because that has important implications as you can see from those schematic, how fast we get these upper levels down and the subsequent pushbacks has major impacts on the amount of metal that we will have in future years.

So there's a balance activity in terms of sticking with your long-term mine plan, both for safety and also for long-term production levels, and when we fell short and had maintenance issues at this one pushback area, we simply accepted the fact that we'll mine this material a bit later than we would have had we re-committed equipment and operations to try to push that much harder for it.

And what's the likelihood that you might experience something similar in the mills in the rest of the year, given that you were saying that it was in part due to running at such high capacity utilization rates and everything has been stretched.

We would assume that that will continue in the second half of this year.

Is there any chance that you would have a more unexpected maintenance shut-downs that perhaps could delay some of your plans?

Listen, in this kind of operation, you always have those sorts of issues to potentially contend with.

We've had a long history of good operations in the mill.

We have three mill lines.

It's not that we're relying on one particular mill line.

We're concentrating on resources and maintenance activities to respond to these issues.

They are not major issues and we feel that our plans that we have for the second half of the year are reasonable and achievable, and we think there's an opportunity to do better than that, but Alberto, you always have to say that there's risks that are associated with achieving plans in an operation like this.

We set aggressive plans, but we believe they're achievable and some of our guys are very optimistic about doing better than that, but we don't feel like what you're seeing here is any kind of change in the fundamental nature of our operations and the reliability of what we're doing.

Richard, this is Jim Bob.

Let me just emphasize that both to Dan's question and Arias's question, we're talking about a mine that's moving the amount of earth it is and it's got all kind of moving parts, including the mill, the facility at the dock where we sell our copper, and the kind of things that they've been referring to here are just routine maintenance issues.

Some time one of these power outages that's not a big-time deal, would trip things, and in one instance we got some moisture in one of the [SAG mill] motors, and it's not supposed to happen.

We cleaned it up right quick and got going with it, but when you're trying to operate a mine of this size, and of course we have to report to you on a quarterly basis, it's impossible to predict on a weekly or bi-monthly basis when some of this ore is going to come out.

We do -- our team, I would give them a marriage star for having done it in the past and we'll do it in the future.

But the kind of stuff we're moving, ladies and gentlemen, and the moving parts here, you're going have some things that slip from quarter to quarter, and it's just reality on a mine this size.

It's impractical to try to run a mine of this size on a quarter-to-quarter financial basis, but we -- since we're a public company, we have to do that, ladies and gentlemen,.

But none of these issues that you're listening to, by some of these routine maintenance deals that's delayed us a week or two weeks getting the high-grade ore in the second quarter, are big-time deals.

And the pit has never looked better because of the amount of waste material that was moved after the 204 event, so I understand your question Arias, but seriously, the pit and our equipment is ready for this second half, it's ready for the next four years.

This is a great mill.

It's maintained on a continuous basis, and, as Richard says, we're going to have a hiccup from time to time.

We're gonna have one of these minor events in the mill.

It frustrates people and causes us a week or week and a half delay of getting something into the second quarter that falls in the third quarter, but this is too many moving parts out here to say that that's to be of a concern.

I hope that puts it into perspective for you.

All right, thank you.

Thank you.

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

Please proceed with your questions.

Thank you.

If we could change the subject a little bit and look at the smelting area.

Can you give us your thoughts on the outlook for the smelting in the third and fourth quarters, the level of TC/RC's, and are you building any concentrate or are you able to get all your concentrate processed?

I realize you do a lot of this internally.

Is there any risk you will build concentrate?

Let me, Wayne, just say a couple things for those who might not be as particular as you are with this.

We have interest in two smelters.

We own 100% interest in a smeltering well with Spain by Atlantic Copper and a 25% interest in a smelter in Surabaya in Indonesia that's operated by Mitsubishi, and those two smelters absorb just over half of our concentrate output.

We have not and do not anticipate building any significant levels of concentrate inventories.

We had very low levels at the end of the year, and basically are shipping, have been shipping, concentrate as we produce it to both our smelters and to our non-affiliated customers.

So that's not a particular issue.

TC and RC rates are up.

They basically doubled from the end-of-year negotiations in 2003 to 2004.

We are a very significant supplier to the custom concentrate business and will be entering -- will be entering into negotiations with our customers later this year.

We -- we have very minimal mid-year negotiations for our rates.

Ours are end-of-year negotiations.

As we sit down with our -- if we sit down with our suppliers, our customers, we're going to be negotiating for as low of rates as we can get and they want higher rates.

And s, it's a commercial outlook that we'll have to deal with.

The market changed from one of being significantly oversupplied to significantly undersupplied, and part of that was as a result of our lack of production last year.

We're one of the world's two largest suppliers, and for much of last year, all of our production was going to our affiliated smelters and none to the outside world.

So when that changed, the market balance changed, it tightened and now it's loosened some, but from our perspective we're selling all the concentrate that we produce.

The rise in the level of TC/RC's, will that have no impact on you in the second half because these are annual contracts and it won't hurt you or help you?

The way our contracts are generally structured, they're for two-year periods.

So for any particular year, for example,in 2005, the rates are roughly half from 2004 negotiations and half from 2003 negotiations.

So, as we negotiate at the end the of this year to 2003 will roll off and next year we'll have 2004-2005 rates.

So that will be the impact.

On a consolidated basis, because Atlantic Copper has no taxes and no minority interest, if we have an equivalent change in TC and RC rates, up or down, they offset in our balance sheet -- in our income statement essentially even.

So that, we did not -- while we did not benefit to the extent that some other miners did when TC and RC rates were very low, we're not going to be adversely affected as rates go higher like other miners who don't have investments in smelters.

Thank you.

Thank you.

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

Please proceed with your question.

Good morning.

I just wanted to go a little bit on Wayne's question, but also referring to the deferred profits.

You talked about how there's $50.5 million to be brought in over the next number of future periods, and we talked about at certain prices which are lower than probably what it was in their company booked at.

You gained $5 million in the third quarter and 35 in the fourth quarter.

Can you just -- I know we've done this before -- can you go through where the other differential prices-- is there some of that flowing into the first quarter next year as well?

And if so, I guess that assumes, back to Wayne's question, are any of that inner company affected by the TC/RC's going up or will that just for all new shipments going forward past 2005?

Okay, Brian, let me just say one thing.

I think I heard you say, our current estimate is that our net income would be increased in the third quarter by $5 million but decreased in the fourth quarter by $35 million, and not increased.

Now, all of this is dependent on the timing of shipments.

Right.

We ship to meet our customers' needs, and when we ship to unrelated third parties, we have a sale recorded at the time the ship leaves our port at job site.

With shipments to Atlantic Copper and for 25% of the profits on shipment to Gresik, those get deferred until that concentrate is processed at smelters, and that's what accounting rules require and that's what creates this inner company thing.

So we have an advance shipping schedule, which was the basis for these estimates.

That shipping schedule could change, and unfortunately, that's just part of business and part of our being a good supplier to our customers.

So quarter-to-quarter that could change, but, with the high level of production that we have in the fourth quarter that will lead to the fact that some of that shipment will go to Atlantic Copper.

The profit will be deferred and then it would be recognized during the first quarter of the next year.

So, the profit is earned, it's just a question, for accounting period, which quarterly bucket it falls into.

Right, and in that assumption, though, you just assume that everything, back to John Hill's question, gets out by year-end and there's no delay in ships or anything that are stacked up in December, and if they're all stacked up and go late, then it all gets pushed into the next quarter?

Well, again, there's two factors--

Depending -- assuming it's going --

Of how much production we have, you know in achieving that, and then where does it go.

Right.

Does it go to Japan?

In that case, it's all fourth quarter earnings.

To the extent it goes to Spain and it's been a shipment during the fourth quarter, then it gets recognized when our smelter in Spain processes that concentrate and produces copper.

The profits earned is just a question for accounting purposes, when does -- which period does it get recognized in, and we've tried to give you outlooks.

It's still just changes in the values of the product that's in inventory, so we give you our best estimates.

We didn't for a while and I know it was a issue for you and others who had to develop these quarterly estimates.

So we're giving you our best look right now, and we'll -- we will keep you informed as that changes.

Maybe just one last-- not to beat this to death, so, in the assumption for the back half of the year would you be assuming like in those numbers 50% goes -- or what would be the percentage you're assuming to third party versus inter-company right now?

Is it 50/50 still roughly?

It would be roughly 50/50, including Gresik and only 25% of Gresik's profits get deferred since 75% of that smelter is owned by outsiders and then roughly 25% to Atlantic Copper.

Great.

Thanks very much.

Richard, this is Jim Bob again.

Just to put this in the big-picture perspective again, we made a corporate decision that we had to be integrated and be able to get our copper to market in times of [tight] smelter capacity, and I think that's served us well, especially getting our copper into the European market through the smelter in Seville.

I think also, the fact that we are not affected by [inaudible] in TC/RC 's for four or five years people would wonder why in the smelter business?

Well, for the last year we found out, but Richard made a good point, and we should re-emphasize it.

At the end of the day on a consolidated basis, we either make the money at the mine or we make the money at the smelter.

Of course, by doing that and giving our share of that sort of a protection against TC/RC's going up or down, we get into this accounting issue as to quarter rollover, if we have to sell to ourselves and report it in the next quarter.

Once again, from an operation this size, the thing that I see, or is that we have to focus on, is making sure we had a market for the copper concentrate and also insulate ourselves from these swinging TC/RC charges which used to be really volatile and they were low for a number of years, now they've gotten volatile again.

And, therefore, I think the corporate decision to be integrated in spite of these accounting issues has proved to be the only way to be in business when you're the largest concentrated seller in the world.

Fair enough.

It just adds to the quarterly volatility, as you say, but there's not much you can do about it.

Thank you.

Thank you.

Our next question comes from the line of John Tumazos tum from Prudential Equity Group.

Please proceed with your question.

I presume from the lack of discussion that your company has not entered into any of these min-max power strategies for price protection?

That is correct.

We have no hedges on our coal purchases or our diesel purchases.

That's great.

My question involves the concentrate market as well, and I'm thinking back to last October when the sheet steel companies in the U.S. had their customers completely suckered that a $750 sheet -- hot-rolled sheet was sustainable, and nearly all the auto and machinery companies signed contracts at spot prices when spot prices were twice today's level and they were all sure that their suppliers were telling the truth.

And I don't understand how there's a concentrate shortage -- concentrate surplus, I'm sorry, when every copper mine in the world except your company and Antamina missed their production target.

It just feels like the smelters in India and China and Japan, where antitrust laws aren't the same as here, got together and played games.

Physically, when you ship concentrate, are your customers desperate for the arrival?

How do you judge the day-to-day concentrate market right now?

It would seem, if Chilean output is down like April, 6.5%, that, the likelihood of a concentrate surplus must be a lot less as [inaudible] goes on strike, lots of problems exist in the market.

Okay, John, let's see if I can respond.

In terms of our customers, looking back you can say that in 2004 they were very anxious to have concentrates when we weren't producing.

Then, as we began producing, there was also other events in the industry of concentrate producers producing more volumes and there were at the same time a number of smelters that were undergoing maintenance activities, and there were some changes in mine practices, and so, at that point, we were able to place concentrates,but the customers weren't as desperate for it as they were earlier.

What I can tell you is, again, stepping back, looking at the bigger picture and longer-range, all of our concentrate customers want more of our concentrate.

We have a very highly-desirable product for the industry.

It's the right grade, it's very pure, and we have no problems in trying to sell it.

In fact, we have customers consistently who would like to have more volumes of our concentrate.

So we're very comfortable that we are -- that we can supply it.

We sell a tiny amount in the spot market.

All -- virtually all of our concentrate is under long-term contracts where TC/RC rates are re-negotiated on an annual basis.

On a moment day-to-day basis, when your boat shows up a couple weeks late, or there's a shipping delay or demurrage or port problem, are they desperate to get the concentrate now?

We have such a regular flow of output, regular flow of ships, that we just don't -- we're not dealing in a spot market situation.

We have a normal business process of having ships arriving continually, ships being loaded and ships going away.

So it's a -- it's a very smooth process and we don't have our finger on this, on the margins of the business that the spot market is dealing with.

Thank you.

Thank you.

Our next question comes from the line of Paul Forward from Legg Mason.

Please proceed with your question.

Hi, good morning.

Can you maybe give us an update on the status of Antam's purchase of the 9.4% stake in PT Freeport, and what kind of assurances do we have that the transaction will be in the interest of FCX shareholders?

Let me tell you what we know from reading press accounts.

First of all, the facts are, the government approached us last year about our -- whether we would be willing to consider a sale of up to a 9.4% interest of our ownership of shares of PTFI that had been an entity called PTII, that was in a connection as we were seeking to merge PTII in with PTFI.

We indicated to the government that we would consider a sale to Indonesian interests, and that we both agreed that that sale would be done on a business-to-business basis at fair market value so that it would be in the protection of our shareholders.

Antam, which is a publicly-owned entity with a 65% ownership, interest by the Government of Indonesia has made certain comments in the press about being interested in acquiring shares in PTFI.

They have recently said they would be entering into discussions with the government for the government's shares in PTFI.

The Government owns 9.36% interest in PTFI, and that's where we understand those discussions are.

We are -- we obviously have disclosure obligations if anything proceeds along these lines and we have nothing to report to you beyond what I just said.

All right.

And I guess secondly, on the supreme court decision in Indonesia, does that directly affect areas owned by Freeport, and how soon before the outlook on restarting exploration activities, something other than just kind of wait-and-see until things change?

What really has to change in order to start restarting exploration outside the immediate Grasberg area?

First of all, just to clarify.

Our existing operations with the Grasberg DOZ and our mill operations were never affected by this because they were not located in what was designated as protected forest.

The decision had an impact on areas outside the Grasberg under PTFI's contract of work and clarified that the government's ruling that exploration, the mining activities, could proceed there was affirmed by the supreme court.

So it was a positive situation.

We're continuing to update our stage, our exploration plans for conducting field work and drilling, and as I indicated, as continuing progress exists in Indonesia, particularly in terms of the relationship with the central government and the province, we'll be returning to the field but we don't have any field work going on now or planned for the very immediate future.

Our contract of work rights have been subject to suspension, so we're retaining rights to the 2.2 million acres of exploration rights that we have, and we're very-- we're looking very forward to returning to the field.

Okay.

Very good, thanks.

Thank you.

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

Please proceed with your question.

Yes, thank you.

Good morning.

I have what I think are two fairly simple questions.

One refers to slide 10 in the presentation, where you show us the cross section for 6 North, which will be the area of operation for next year.

Without trying to pin you down on a quarterly basis, because I realize that's not possible, but can you just confirm for me what I think I understood during your presentation, which is that the mining will essentially proceed through the highest grades first, and then more or less, in a sense, move up the pit towards the lower grades as 2006 progresses?

No.

You've got to -- , you've got to a start at the higher levels and go down.

Top.

All right.

I mean, if you just look back at page seven, which shows 2005, because of all the work we did in 2004 at the higher levels on 6 South, we were able in 2005 to mine at the lower levels as we begin lowering the elevation at 6 North.

Then in 2006, back on slide 10, we will be continuing to progress from the higher levels of 6 North down to the higher-grade areas.

At the same time, we are back on the south wall lowering the elevations of 7 South and 8 South, so that in subsequent years they will be down to the levels.

So, you have to start on the the top and go down.

And so this indicates that early in the year we'll be mining at the higher levels of 6 North and progressively get to higher grade material as we go through the year.

Right, well that's what I would have assumed, but I guess I misunderstood what you said.

So, essentially, next year could be, without pinning you down, similar to this year with a slower startup and then better production in the second half?

Right.

Okay.

Second question is an accounting question and refers to the note in the financials regarding the emerging issues task force decision on deferred stripping, and my understanding was that some of these issues with regards to the accounting determination and how this would be implemented in transition were still somewhat in flux.

The note in your financials makes it sound like it's all essentially done and dusted, and the decision has been made, and you and other companies will be adopting this, I guess, beginning next year.

Well, Victor, you know, accounting issues do remain in flux from time to time, and let me tell you how this one proceeded.

There was a mining group that we participated in that looked at this issue after the SEC began raising comments on companies' financial statements about deferred mining cost, and I'm sure all of you are aware that in today's world all companies are being subject to very -- much more detailed reviews by the SEC than in the past.

In fact, we just went through a review and completed it.

But the SEC raised this issue of mining group, looked at it, they came up with a recommendation that basically would have considered our present method of accounting to be acceptable.

That went to the FASB emerging issues task force.

The SEC expressed a view that these costs should be expensed, and that has now been adopted as a -- an EITF decision.

So, as we stand right now, with an effective date beginning next year, stripping costs will have to. essentially, in our case, be charged to expenses incurred.

That would have meant this year we would have had about $35 million net of taxes and minority interest of stripping costs to be expensed.

It's about $0.05 a pound on our cost, and we would have had about $270 million of capitalized costs on our balance sheet that would be charged to retain earnings, and that means that those costs which otherwise would have flown through earnings in future years now will not.

They will be just charged as an accounting adjustment at the beginning of the period.

This is required to be adopted next year, and so that's where we stand with that.

I also would mention that we and other companies will also be faced with a current requirement to begin expensing stock options next year.

That's another accounting change.

Had we expensed stock options this year, that would have had roughly a $13 million net income effect for 2005, or $0.07 a share.

So those are two accounting requirements that have been adopted, and there will be full disclosures of all these impacts in our 10-Q, but they're not required to be applied until 2006.

Okay, great.

Thank you very, very much.

Okay.

Thank you.

Our next question comes from the line of Terence Ortslan from TSO & Associates.

Please proceed with your question.

Thanks.

Just a straight-forward question.

On the -- looking at the section, I can't tell what the strip ratio is going to be.

Is your balance for the year and the next few years, if you have, just a number that you can use, thanks.

Okay, Terry, let me get those numbers.

For the second half of this year, Terry, it's 2.9 to 1, and for the next few years it averages about 3 to 1.

For the next three years, did you say?

Next few years.

Okay.

Next few years, and it was higher than that in the first half.

It was--

3.7.

3.7 in the first half.

Okay.

Is there a peak year somewhere in the next few years?

Seems to be 2008, looks like the section's probably higher than 2007 [inaudible].

Yes, there's -- you can get a sense from that, again by going to these little cartoons that we have on the charts, because obviously, in years of where we're mining at the upper levels of the pit, stripping ratio's up, so when you see in 2007 where we're doing significant waste mining, the strip ratio's going to be up to, we currently think about 3.8 that year.

And then, you know, as we move towards the last years of the pit, we'll -- the stripping ratio will be falling, our truck needs will be dropping, our grades will be rising, and in the last five, six years of the pit's operations,we'll have some very high years of volumes and very low stripping ratios and we will be retiring equipment and trucks and it will be an interesting time before we transition to an underground operation.

Yes.

So that's only a few years to go before that, but what unit costs should be used the next few years then, as an average, per ton -- per ton mined?

Well, I tell you, as we look back at what's caused the variation on the per-ton mines, we're paying $1.70 for diesel right now and I can remember when we paid$0.50, so that's going to have a big impact on these numbers, but currently -- let me just double check some numbers here, Terry.

Currently, we're looking at, like, $1.70 in '05 for the Grasberg Pit, and that's assuming a continuation of high diesel costs.

For that the DOZ's about $5 a ton, and a lot of our costs are fixed.

A lot of our costs are fixed, we have a set compliment of equipment and people, so, at the margin the variations are more caused by input cost levels, and that, in our case, is energy to a much lesser extent, Australian dollar costs, our labor costs, our -- principally we pay the [fee-based] cost.

We -- I just might mention we completed negotiation of our new CLA, our contract with our workforce there, and we successfully completed that.

That's a once every three year-- once every two year exercise that we go through.

Great.

Thank you very much.

Okay, Terry.

Thank you.

Thank you.

Our next question is a follow-up question from the line of John Hill from Smith Barney.

Please proceed with your question.

Thanks for a great display of fortitude and stamina on the call, everyone.

Just a quick follow-up on the subject of dividends.

Obviously, we've had now three special dividends announced, a series of share buybacks, obviously, a one-time expenditure with recurring benefits.

What is the temperature or disposition towards hiking the common dividend, or does it sound, from your language, that you're comfortable with where it is and that's what we should look for in the foreseeable future?

Well, John, this is something we review with our board every quarter at our meeting, and as I said, we've -- our board has stated a policy of wanting to be comfortable with the level of the common dividend over a broad range of commodity prices, and the issue about commodity prices is obviously been one where there's been a great deal of differences of opinion. mean, we're living at a time now that, nine months ago, many people thought we would have much lower prices than we do now, and there are different views about where prices will be.

So, we look at what's actually going on, we run our business on a cash flow basis.

Our business is -- maybe -- as we talk with Brian, it's may be difficult to carve up into quarters some time, but on a big-picture basis, it's a price, volume, cost business, and so we can show our board a different -- different scenarios of future cash flow outlooks at different prices and then we make judgments -- the board makes judgments about where to set this common dividend.

They have set it at $1 now, which they're comfortable with, and as we generate additional amounts in this exceptional year from a volume standpoint and a good year from a price standpoint, we're able to return additional amounts to shareholders, but the board is going to be continuing to review that on an ongoing basis, and it will be the board's decision about where to set it.

Certainly we'll not expect the team to speak for the board, but would we be incorrect in detecting a change in tenor of the commentary relative to past periods where there's been the ever-present refrain of cash back to shareholders and the three particular buckets of buybacks debt reduction and dividends.

Is this commentary, do you think, different, or am I misinterpreting that?

Not at all.

Not at all.

We had a business issue in '04 of dealing with the restrained production that we had this year.

This year we have access to high-grade materials and good markets, so there is absolutely no change in the philosophy and we're just simply executing.

We're in effect doing what we said we would do.

John, this is Jim Bob.

Let me just reiterate that Richard gave some numbers at the beginning of the presentation, why don't you repeat them, Richard, as to what we did in dividends in the first years of the pit.

Well, since 1988, we have purchased, excluding the shares we bought from Rio Tinto and the transaction where we bought back their shares at about -- for about $800 million, but just in the open market we've purchased 80 million shares and have spent $1.5 billion doing that, an average of 18.66 and that's $18 million in share purchases since 2003.

And then we paid dividends in total of $1.7 billion.

Some of you have followed us long enough to recall that we suspended our dividend and in December of 1996. we reinstated it in 2003, and we have paid a total of $42 million in dividends since 2003.

420.

$420 million, I'm sorry. $420 million.

So we are -- we've demonstrated the focus on shareholders that our board and our company's management has.

This is Jim Bob again.

The reason I wanted you to hear the numbers, John, people sometimes don't have these historical numbers.

This is basically the same philosophy that guided us in the first part of the life of this mine, and will continue to guide us as we have cash flow, especially the volatile nature of the cash flow when you just look back three years ago when you were in $0.70 [comp] and here you're $1.50 comp for prices.

Very difficult to set a dividend,and a permanent, common dividend, because if you look at the industry at large, Richard said we suspended our dividend, everybody suspended their dividend that was in the copper business because copper prices stretched everybody.

And as prices improve the copper companies have put back together in place their common dividend.

d what we're trying to do is see if we can come up with a common dividend that people can rely on and pay additional money when we have these exceptional prices and exceptional years so that we continue the philosophy of giving back to the shareholders.

So there's no change in our philosophy, the big change is trying to deal with the volatility of a copper price that's sub-80's a couple of years ago, and then all of a sudden you're dealing with $1.50-$1.60 copper.

How do you deal with that volatility?

And we're trying do it rationally to make sure that the shareholders benefit in good times and I understand that we have to manage our business in finer times.

Very good.

Thank you for that perspective.

Thanks, John.

Thank you.

And our final question comes from the line of Daniel Roling from Merrill Lynch.

Please proceed with your question.

Thank you.

Just a simple one, Richard.

It deals with explosives.

Have the cost of your explosives gone up much, and the more important part of the question, were they under contract and have those contracts up for renewal or have they just gradually affected your costs over time?

Dan, this is Mark Johnson.

We are under contract for our explosives.

The ammonium nitrate hasn't gone up.

Obviously, diesel plays a bit of a role, about 6% of ANFO is fuel oil, but the explosive part, the ammonium nitrate, the emulsion that we use has not gone up significantly.

We're still at -- in the order of $0.08 a ton for our blasting in the [Grasberg] Pit.

That's not dramatically different.

That's very much -- probably a bigger variation for us has just been, just the different rock types that we have and the closer spacing and the powder factor that we use, but materials haven't gone up substantially.

Thank you very much.

Well, we appreciate everyone's interest in the call, and good questions that you've given us.

We know that you'll continue to have questions as you review the release and the supporting information in our 10-Q as it gets filed.

As always, we're available, so please contact us for those other questions and we look forward to reporting our progress as we go forward in 2005.

Thanks, everyone.

Thank you, everyone.

Thank you, ladies and gentlemen, that concludes the conference call for today.

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

Have a good day.