費利浦·麥克莫蘭銅金 (FCX) 2005 Q4 法說會逐字稿

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

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

Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Kathleen Quirk, Chief Financial Officer, Senior Vice President and Treasurer.

Good morning, everyone.

Welcome to Freeport-McMoRan Copper & Gold's fourth-quarter 2005 conference call.

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

Our call today is being broadcast live on the Internet and we also have several slides to supplement our comments.

We will be referring to the slides during the call and they can be accessed at our website at FCX.com homepage.

In addition to analysts and investors, the financial press has also been invited to listen to today's call and a replay of the call will be available by accessing the webcast link on our Internet homepage later today.

Before we begin today's comments I'd 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 the risk factors described in our SEC filings.

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

Richard Adkerson, President and Chief Executive Officer of FCX; and Mark Johnson, our Chief Operating Officer.

I'll take a minute to briefly summarize our financial results and then Richard will review our operations and our outlook.

We'll then turn the call over for questions.

Today FCX reported fourth-quarter 2005 net income of 453 million, $2.19 per share compared with net income of 212 million, $1.08 per share for the fourth quarter of 2004.

Our full-year 2005 net income was 935 million, $4.57 per share compared with 156.8 million, $0.85 per share for the full year 2004.

The special items in the fourth quarter reduced 2005 income before taxes and minority interest by 6.3 million including a $13.8 million charge for early extinguishments and conversions of debt and a gain of 6.6 million or 4.9 million to net income from the sale of the last parcel of land in Arizona held by an FCX joint venture.

For the quarter and year diluted net income per share reflects assumed conversion of FCX's 7% convertible Senior Notes and our 5.5% convertible perpetual preferred stock.

The results that we report today are records for our Company and primarily reflect the significant sales of copper and gold during the period in positive markets for both products.

As a result of our exceptional operating performance in December PT-FI substantially offset the shortfalls reported on November 29, 2005.

Our fourth-quarter 2005 sales were a record 468.4 million pounds of copper and 1.1 million ounces of gold compared with 419 million pounds of copper and 618,000 ounces of gold in last year's fourth quarter.

Our share of 2005 sales totaled 1.46 billion pounds of copper and a record 2.8 million ounces of gold compared with 1 billion pounds of copper last year and 1.4 million ounces of gold.

Our realized copper prices during the period improved by 41% to an average of $2.02 per pound in the fourth quarter of 2005 from $1.43 in the year ago quarter.

Our realized gold prices were 14% higher to an average of $494 per ounce in the fourth quarter of 2005 compared with $432 in the fourth quarter of 2004.

Our operating cash flows were strong during the fourth quarter totaling 670 million and 1.55 billion for the year 2005; this is also a record for us.

Capital expenditures totaled 143 million in 2005.

This allowed us to complete financial transactions totaling over 1.2 billion for the year including 700 million in debt reductions and over 500 million in common stock dividends and share purchases.

Our common stock dividends totaled $2.50 per share for the year including $1.50 per share in supplemental dividends.

During the fourth quarter our Board authorized an increase in our regular dividend to $1.25 per share beginning with the February 2006 dividend payment.

Our share purchases during 2005 totaled 2.4 million shares for $80 million, an average of 33.83 per share.

We ended the year in a strong financial position, as Richard will talk about shortly.

Our debt at the end of the year approximated 1.26 billion and that's less than 500 million net of our 764 million cash position.

Our reserves at the end of 2005 totaled 40 billion payable pounds of copper and 44 million payable ounces of gold.

I'd now like to ask Richard to review the details of our operations and outlook.

Thanks, Kathleen.

Of course what you're seeing in these numbers that we report for the fourth quarter and for the year reflect just an extraordinary performance by our operating team during the month of December.

In connection with some analyst presentations we were making early in December, we issued a press release on November 29th and reported at that time we were behind on both our copper and gold production for the quarter and that resulted in a contingency related to the agreement we had with Rio Tinto in 2004 following the effects of the pitwall incidence.

We were able to make that deficit up through the hard work and diligence and success of our team in Papua and met our targets, reached an agreement for a small adjustment to Rio Tinto resulting in the numbers that Kathleen has reviewed with us.

With the strong prices that really gave us an extraordinary amount of cash flow for the year, over $1.5 billion, our capital expenditures which were below estimates because of timing issues were at very low levels, and we were able to follow the clear-cut financial policy that our Board has set of reducing debt and paying significant dividends to our shareholders.

From a debt perspective, five years ago we had about $3 billion of debt, now our net debt going into 2006 is $0.5 billion.

It's an extraordinary run for us.

The Board has increased our dividend, we paid a $1.50 special dividend this year following a $0.25 special dividend in late 2004 and the story for our Company continues to be very long lived, low-cost reserves which we are able to continue to maintain despite our very high levels of production.

And with 40 billion pounds of copper and almost 44 million ounces of payable gold reserves our Company has a very long life to take advantage of the positive markets that we're in.

The quarter itself was a record -- and I'm referring to the slides that I hope you have available to you over our website -- with very strong levels of copper and gold production, 555 million pounds of copper and 1.36 million ounces of gold for this operation in a single quarter.

This was the cause, as we've been talking about all year -- the progress that we've made with the Grasberg open pit and getting access to the very high grades at the lower areas of the pit in our Pushback 6 out -- this pushback was the area in which the pitwall incidence occurred in 2004 and now we will complete mining that entire pushback early in 2006.

We set production records and are significantly higher than we've achieved before.

Our reserves are substantial and the majority of our reserves of course now lie in the future in our underground operations.

Today the Grasberg open pit provides roughly 80% of the throughput through the mill with the remainder coming from the Deep Ore Zone mine which has been operating very effectively for some time now.

This is a very large block caving operation and its success is a good indicator of the future success that we'll have underground after we complete the Grasberg open pit in roughly ten years.

The charts you see in the upper right hand corner are really significant because after expanding operations in 1997 we continue to be able to add reserves as we're producing such significant volumes.

The reserves are summarized on page 6.

We've given both the aggregate reserves which include Rio Tinto's share in those reserves and then the net reserves for PT-FI's interest net of the Rio Tinto's interest.

You can see we basically came close to replacing our copper reserves that we produced during the year.

We added some gold as well.

And over the five-year period, if we go back to 1998 when we began our expanded operations, we've had new additions to copper reserves of 123% to our reserve base and we've replaced almost 60% of our gold reserves.

So we continue to have good exploration opportunities before.

Page 7 shows our operating cash flows.

We've always pointed to the fact that from 1996 to 2003, despite significant volatility in copper and gold prices -- and of course this was the time when Indonesia went through its change of government -- we maintained a stable range of operating cash flows as we operated as the world's lowest cost producer of copper of $500 to $600 million a year with very low levels of capital expenditures. 2004 reflected the impact of the remedial actions we took following the pit event and at the end of 2003 that allowed us to have access to very high grade ore in 2005 and with the very positive copper and gold price situation we generated such large levels of operating cash flows.

The markets remain -- continue to remain very positive.

We go into '06 with very low levels of visible inventories on the copper exchanges; producers' inventories appear to be low.

The industry supply response to these high prices has been much less significant than in the past than is generally expected going into 2005.

It's just very difficult to find new projects -- cost, environmental constraints are constraining supply.

And so even though we've had high prices now for some period of time, the market still appears to be very well situated for miners as we go forward.

Gold has been strong recently and its movement has been one that reflects a number of factors related to global economic conditions, investor issues related to the outlook and gold and copper markets both appear to be positive as we go forward.

I want to talk a little bit about our sequencing issue, and there's a chart that shows a vertical recent photograph of the Grasberg pit.

And you can see from this photograph just how remarkable the progress has been made since the pit event at the end of 2003.

In 2005 Pushback 6 was our primary source of our high grade ore.

Next year we will be moving to Pushback 6 North primarily in 6East which will, as we've been indicating in our previous presentations, will be the source of the ore for 2006.

We've updated our five-year plans to incorporate our 2005 results in our revised Grasberg mining rates.

We have not been able to achieve to date our targeted mining rates as we've been focusing on maximizing ore production and recoveries and taking advantage of the high grade ore that we had in 6South.

As I mentioned, 6South will be totally mined out early in 2006 and the 6North ore that we had previously expected to be mined, a portion of that will be -- we expected to be mined in late 2006, a portion of that is now being deferred to early 2007.

So we revised our plans about the timing of this production.

This is a timing issue, as you've seen in the past, of when we get access to this high grade ore.

It's not really a significant economic effect because we're only talking about the timing of this access in terms of a matter of a few months; it doesn't have to do with the ultimate recoveries of copper and gold from the ore body but simply just where we get it.

Now just like we talked about going into December, that we were going to try and make up this shortfall, as always we're going to start working with our team and everybody is going to be focused on improving mining rates.

And if we are successful then that could give us an opportunity to perhaps better the plans that we're laying out today.

This diagram chart on page 11, which we've used in the past, illustrates this.

You can see that where we previously estimated the 6North access to be in our previous estimates and currently we've cut that back.

It's really a relatively small amount of material that we're talking about dealing with here, but it's very high grade material and it does have the impact on volumes that the results will show.

Walking forward then as we go into 2007, we will complete mining 6North which will be in high grade; we'll be moving 7South down to lower elevations and begin at 8North.

All of this results in the long-term sequencing.

On page 13 you can see in 2008 7South will provide the access to our high graded ore as we bring down the 8 pushback sections down and by 2009 we'll complete mining 7South and 8South where we'll be approaching high grade.

By 2010 we'll complete mining 8South and 8North will be coming down.

This is consistent with what we've been talking about and we'll be updating you as we go along in terms of the progress that we make towards increasing our mine rates.

On page 16 this plan will result in the current estimate that we have for our volumes.

Of course 2004 was the year in which we deferred volumes to 2005.

We essentially made those up. 2006 reflects the lower amount of 6North ore that we'll have available to us which would be mined in 2007.

And you can see the outlook now which extends for the first time through 2010.

We'll talk about averaging over the five-year period on an annual basis 1.3 billion pounds of copper and 1.9 million ounces of gold.

Because of the sequencing that I showed in an earlier slide, our production during 2006 will have a -- is projected to have a very strong fourth quarter because that's when we'll be down with the 6North Pushback.

Our lowest quarter is expected to be the first quarter of '06.

Our current estimate for quarterly volumes is included on the slide on page 17.

The cost situation is presented on slide 18.

We have essentially a fixed cost situation in the sense that we have a workforce, a compliment of equipment and we have all of that working with our mill -- a fully developed state.

So our cost structure is fixed, it's effective -- it's affected at the margin by things like labor cost, fuel costs in particular.

And so those are all built into our cost structure.

For the year 2005 our site costs were $0.65 on a unit basis.

Because of the very strong volumes and the high gold production and the high gold prices during the fourth quarter, our production had a net credit of $0.20 a pound and for the year we ended $0.07 a pound.

Now as we look forward into 2006 these estimates are built on a continuation of today's fuel costs, a continuation of our current labor cost situation and other consumables like our steel grinding balls, the Australian dollar exchange rate which is about a sixth of our cost.

The difference between the $0.65 and the $0.86 reflects also an accounting change.

Like most mining companies we have followed the policy of deferring stripping costs and amortizing them over the life of the pit.

The new accounting rules effective for 2006 require that those costs be charged to expense as they are incurred and that has roughly a 5% impact on the -- $0.05 impact on the unit cost amounts.

The remaining difference is strictly a volume impact, also the adjustment that it has on our Rio Tinto sharing.

So that is basically a continuation of the same cost adjusted for the stripping situation and the Rio Tinto sharing situation on our volumes.

Gold credits are less based on volumes offset by higher prices.

We used essentially the current prices in coming up with this.

So this shows that our unit cost in this year of low volumes as we go forward in '06 will essentially be at the industry's average.

Over the longer run our costs will continue to be low as they have been historically.

Capital expenditure outlook is presented on page 19.

We went into the year expecting to spend about $180 million of capital, we spent just over 140.

Some of that is a timing issue that's been deferred into 2005 and we're showing that -- into 2006 and we're currently giving an estimate of $250 million for that including $115 million for our major projects, our common infrastructure, the DOZ expansion and the Big Gossan development.

By 2008 the [common] infrastructure project will have progressed so that we will begin the development of the Deep Grasberg underground which will be the ultimate replacement for the Grasberg pit and those costs are included in the estimates that you see in the gold colors at the bottom of the charts from 2008 forward.

The common infrastructure project is illustrated on the slide on page 20.

This project is our initial steps to develop the access to the underground ore bodies.

We're making progress with this according to plan both from a timing standpoint and from a cost standpoint.

As I said, it's to be expected to reach the Grasberg Block Cave by mid 2007 and at that point we'll begin mine development in other facilities.

This also gives us access for exploration drilling at depths below where we've had before, 400m, 1200 feet below our existing Amole tunnel, which is our current access to the Grasberg pit.

This is a big project for us, it's going very well and it is really the source of future for our Company -- long-term future for our Company.

Our exploration focus during 2006 has been on extensions of our existing proved reserve complexes at Deep Grasberg, the KL, the DOZ and ESZ mine complex.

We still have significant resource potential below our historical and existing ore bodies and we'll continue to do pursue those aggressively as we have greater access to do exploration drilling.

We're continuing to assess the timing for resuming exploration activities outside the Grasberg mining district, but those activities have not yet begun.

I mentioned our debt reduction that is shown on page 22 and just how significant that's been.

Included in the $500 million of net debt still remains significant amounts of convertible notes that are well in the money today.

So we made great progress with that.

Definitely mentioned our strong financial position going into 2006.

Once we pay the maturity in the first quarter of the second issue of our gold denominated preferred stock we will have a very minimal debt -- required debt payments until 2010.

We have substantial cash going into the first quarter.

We have some substantial working capital requirements principally related to the high tax payments we have because of the amount of money we made during 2005 and also this debt repayment.

The first quarter will be our lowest year in terms of volume -- lowest quarter in terms of our volume for 2006, but at today's prices we should generate substantial cash even with the lower volumes in 2006 and beyond.

This is illustrated by the charts that we've used for a number of years now on page 24, which show the sensitivity of the operating cash flows at varying copper and gold prices.

With higher prices we've adjusted these to use copper prices of $1.25 to $2.00 with 450 gold and gold sensitivities with $1.50 copper from 400 to 550.

And you can see our annual average for the next several years will be substantial in relation to our capital expenditures which will allow our Board to continue to pursue a strong shareholder friendly financial policy.

We are leveraged to both copper and gold, $25 change in copper prices results -- in gold prices results in a $21 million change in earnings and cash flows, $0.10 of copper at $65 million.

And as I said, our financial policy of our Board has been articulated very clearly.

We're working to maintain a strong balance sheet, financial flexibility, to maintain a regular quarterly dividend that can be sustained over a broad range of commodity prices.

And when commodity prices and operations provide additional cash flows we have supplemented the regular dividend with special dividend and share repurchases.

As I indicated, we paid $1.50 in special dividends during 2005.

Historically we've got a strong tradition to provide returns to shareholders since the FCX spin-off in mid-1995.

We've had $1.5 billion of open market purchases of shares, 80 million shares at just under $19 a share.

We paid $2 billion in common stock -- dividends to common shareholders since '88 and 700 million since 2003.

So our Company continues to be one that's a strong cash flow generator with long lived, low-cost reserves, we're unhedged to copper and gold markets, and we've been able to improve our balance sheet and significantly return shares to our shareholders and fundamentally we still trade at an attractive relative valuation.

I want to close with just a couple of comments about the recent articles in the New York Times.

Many of you followed the articles during 2005 that the Times has published on the mining industry.

They had an article about our Company on December 27th and then that was followed by a January 9th editorial which contained disturbing and provocative misstatements about our mining operations in Papua.

Following the publication of the editorial I submitted a two page response to the Times' editorial Board on January 11th.

They responded by saying the letter was too long.

We have posted that letter for your information, that's on our website.

I shortened it and submitted another letter on January 12th which has yet to be published.

Following these media reports and as a result of them we received informal inquiries from governmental agencies related to our Company's support of Indonesian security institutions.

We are cooperating fully with these requests.

These payments have been fully disclosed and described in our public filings.

What we do is we provide support to assist the Indonesian security institutions, which are deployed and directed by the government of Indonesia, with infrastructure, logistics and the hardship elements of being posted in the remote area of Papua.

Our practices adhere to the joint U.S. state department, British Foreign Office voluntary principles on securities and human rights which address situations such as ours.

They've been fully disclosed and I refer you to our report on sustainable development which is at our website and we'll be updating this shortly.

Many of you have been to our site and have seen it firsthand.

We had a number of analysts who visited the site in October of 2004 and who saw our tailings reclamation area and the progress there and could see firsthand just what's going on in the field in relation to what was reported in these articles.

But I wanted to mention those to you and refer you if you're interested to my responses on our website.

So with that we have Jim Bob here, Mark, Kathleen and we're prepared to answer your questions.

(OPERATOR INSTRUCTIONS).

Alberto Arias, Goldman Sachs.

Congratulations on the record performance for the quarter.

Just a couple of questions.

If you could please elaborate on the reasons why the mining rates are going to be lower than expected during 2006 which is leading you to defer some of the production in 2007?

I'll let Mark respond to that, but actually we're anticipating higher mining rates in '06 than we had achieved in '05 on average.

They're lower than what our original estimates were.

They were basically estimated at 770,000 tons a day.

We set records on our mining rates during this past year, but we have not achieved the levels that we had originally targeted for '05.

We're now basing these estimates on 730,000 tons a day per average and we're all going to work with Mark and our team to get up to those higher levels.

But since we haven't achieved them yet we thought it would be prudent not to base our estimates on achieving this.

Mark, maybe you can follow up on it?

As Richard referred to, in 2005 we did have monthly mining rates up in the order of 770,000 tons for the June and July period.

In the fourth quarter that fell off, we were down around 630,000 tons.

Much of that -- much of our forecasting is based on empirical relationships of our ability to produce.

We see opportunities mostly starting at the shovel phase creating geometries within each pushback that allow us to be efficient.

The efficiency all comes back down to keeping our truck fleet moving and properly allocated to these different pushbacks.

We feel it was prudent to reassess our 2006 mining rate.

In much of the first quarter we'll be changing our geometry in our 6North pushback which -- and 7South, which currently have multiple levels that we're mining on.

We're operating anywhere from five to six different benches in those pushbacks.

First quarter we get those down to a more conventional arrangement where we'll be operating anywhere from one to three different elevations within the pushback.

That provides better operating space, less aggressive advance rates as far as some of the extensions we mine in a month.

And we feel we'll be back up to a forecast.

We forecast 730,000 tons a day as an average over 2006.

We feel that there is upside to that, but based on where we ended the year and our empirical approach to how we're looking at 2006 we did reduce our 2006 mining rate.

Going forward we still think that there's good opportunity to continue to improve on that.

We did have a big year in 2005 also as far as adding new operators.

We had about 200 new apprentices that we added to our truck fleet -- our truck driver fleet.

We continue to see opportunities as these guys become a bit more seasoned that we'll continue to see improvements throughout the operation.

And just maybe a follow-up question just on the cost increase that you are projecting for 2006.

I'm trying to separate what is just a change in accounting versus what is the real cash flow impact of that cost increase.

You mentioned that there is a $0.05 change because of the stripping ratio.

But just clarify; is there any other accounting non-cash charge besides the stripping that we should consider in order to determine the cash flow impact on this cost increase in 2006?

No, Alberto, there are no other accounting issues.

And you're right in pointing out that this stripping is not a cash flow impact.

And in fact, it's not caused increases in terms of an absolute amount.

The cost structure that we're projecting is essentially the one that we're experiencing today and the unit cost difference reflects two factors, lower volumes and then the impact of those lower volumes on our sharing relationship with Rio Tinto.

As you know, with Rio Tinto we have a metal strip which PT-FI retains 100% interest in, and then when volumes go over that metal strip it's shared 60% by PT-FI and 40% by Rio Tinto.

With lower volumes our percent of the total become higher.

So it's those two factors, not cost increase, but the impact of the unit cost from the volume changes.

All right, thank you.

John Hill, Citigroup.

Thank you and congratulations as well on a strong result.

I think you've touched on a couple of the key issues already being the mining rate which was a little perplexing given the high rates of milling in the quarter and that was a great description.

But could you give us a bit more clarification on this Rio Tinto metal strip adjustment and how we essentially are compensated?

It just seems like there are several things going on.

There's the compensation from the '04 shortfall and then some additional changes as we look at '06.

How should we sort those out?

Okay, John, let me see if I can be clear.

The thing that I described earlier where we agreed going -- and we went back to PT-FI's reserves at the end of 1994.

And at that point when we initiated our joint venture with Rio Tinto we agreed on a year-by-year basis when the copper and gold volumes that were in those reserves would be produced and that established what we call a metal strip.

And that doesn't change except force majeure events for its life.

It's disclosed in our 10-K and it's a year-by-year amount.

To the extent that actual production exceeds the metal strip, that's shared 60/40.

When we had the pitwall failures in 2003 we had a force majeure event and we entered in -- but we negotiated with Rio Tinto and both parties recognized that the lower volumes in '04 would be expected to be produced in '05.

Ordinarily force majeure events result in additions at the end of the life of the strip which is 2021.

So we had a special agreement that dealt with '04 and '05.

We increased the strip in '04 -- in '05 and that was contingent on making our plans in '05.

We came close to making the plan, there was a minor adjustment, but that only related to '05.

As we go forward into '06 we're back in the normal pattern of following the metal strip arrangement.

Okay, great.

Thank you for that.

And then --.

And then cost per share -- let me just complete the circle.

That's how we share production, then costs are shared based on the percentage of total volumes or total sales that PT-FI has and Rio Tinto has.

So if PT-FI's share after you follow the strip adjustment and so forth is 80% then you get 80% of the cost; if it's 90% you get 90% of the cost.

And with lower volumes in '06 projected we'll get a higher percentage of those costs.

Very good, thank you.

Sam Arnold, Friedman, Billings, Ramsey.

Good morning, everyone.

Just had a question for you, Jim Bob.

You mentioned a little bit that you're continuing to assess the timing on Block B exploration.

I was wondering if you could give a little more clarity on that.

And then also on the Block A discoveries, was that -- the reserve estimates, were they -- the changes or the revisions, were they driven by just increases and cost of commodity price or was that actual discoveries?

Or if you could give me a little more detail on that I'd appreciate it.

Let's start with A and I'll answer your questions in reverse order.

The Block A reserves that we added this year were actual new drilling that we did.

Principally it is a continued effort for us to extend the Deep Grasberg.

As you remember, we have the skarn that surrounds the Deep Grasberg and then the Kucing Liar which is a fault-related deposit that lays just south of the current Deep Grasberg.

As you get the skarn and the fault-related ore in the Kucing Liar we began to see, as you get on the very south end of the Grasberg, that those two actually are connected.

Apparently they were so close together at the time of mineralization that you had -- the skarn literally merging south and the Kucing Liar merging north, and by going in and using some of the drill stations in the Deep Grasberg and Kucing Liar we were able to prove this year that they are in fact one solid block of ore that goes from Kucing Liar to the Grasberg.

So that's where we added a significant portion of our reserves by drilling that up and getting closer spacing to prove the ability to go from a resource to a reserve.

And obviously with some continued work on the deep level mining zone which we talked about last year we can [chance up] with the Ertsberg which is, as you know, to the east of the Grasberg complex we continue to block out more ore and further define the block cave ore that we want to mine in the deep level ore zone that's sitting below the current area that we're mining.

And by moving things around and trying to get a more symmetrical base to that we added ore in the deep level ore at the base of the Ertsberg.

Those were your two principal additions to reserves that were referred to in Richard's comments on copper and gold.

On Block B, we still are working with the issues that will be resolved hopefully this year and so that we can move back into our areas of 100 miles to the Northwest.

We still have great information that indicates from our magnetics that the ore body at Komopa where we had reported several Grasberg type hits; i.e. copper and gold and silver in amounts that were similar to the proportions at the Grasberg.

And we wanted to further define Komopa since it is such a huge magnetic high and is a good correlation to our Grasberg and the timing, i.e. the age of the ore body seems to be about the same age as the mineralization that occurred as the Grasberg, you would say is Jim Bob saying that these could be twin ore bodies even though they're 100 miles to the Northwest?

We say that the magnetic high is big enough and the ore that we've seen would indicate a similar type of magma, so you have to have that very unique magma to get these copper, gold and silver proportions that we have at the Grasberg.

And we just need to get in and spend a year or two drilling that up and see if we can't find the sweet spot and increase the size of those areas where we have good indications of some Grasberg type ore.

So that's our -- Komopa is our principal hit and then we've got a lot more acreage out there to try to see if we can't move further to the west of even Komopa along some of the other magnetic trends.

As you remember, the magnetic highs, they give us the sweet spot and we have to go in with helicopter rigs, bring in the helicopter rigs that are dismantled and then remantled in the field and establish some of the exploration base.

All of that is in progress, working with the Department of Mines and Energy and trying to get permits from the local areas to be able to put the people in and be convinced that the security can be provided to our people working out in the outpost area.

A lot of emotional things going on that we keep hoping to get solved.

You have probably been reading in the press that there was about 12 people that were detained in Timika and have been taken to Jakarta.

Now confessed to the fact that they, in fact, were trying to harass some of the military troops and by mistake, apparently by mistake according to the reports that we are getting, shot at these vehicles that the teachers were in.

You say, well, what's that got to do with exploration?

Solving some of those issues and finding out more about the facts of why that happened gives us the kind of information we need so we know how to deal with the local people and the local authorities to get the permits and feel comfortable that we can put our geologists and their support group into the field, establish a field base, and get back to work out there.

So I hope that answers your two questions in those exploration areas.

Yes, it does.

So it sounds like Block B is more of a waiting on security issue than of working through the law changes as far as forest protection and things of that nature.

Obviously, the forest protection is an issue, but our contract is in place and it is clear that our contract will be honored.

There's been a lot of stuff in the press about how the Department of Forestry interprets that issue and then the Department of the Environment.

But I think it has been made pretty clear that all of that is going to be resolved and that they want to let people who have had existing contracts in essence have the right to finish them up.

So the security plus the -- I won't call it a controversy.

It is just an emotional situation that has to do with the permits, and obviously we're not going to go in and stir that up.

We would just ask that our contracts be honored, and they will be.

Okay, great.

Good quarter, guys.

Thanks.

Let me just add, you asked about the impact of prices.

Our reserves are at $0.90 copper and $350 gold.

They are not sensitive to prices because of the very high grades that we have, and so as always there is some minor volume revisions as we update our plans each year, but they're not really driven by prices, and our reserves wouldn't change significantly if we had higher prices or lower prices than that.

The big picture, it's just extraordinary to have these types of opportunities given the high level of production that we have and being able to maintain this long reserve life as we go forward for what is now a relatively mature operation.

That just means we don't have to make acquisitions to maintain our Company's future production profile.

Great, okay.

Thanks.

Daniel Roling, Merrill Lynch.

Back to the political climate in all these news stories, could you just give us a general overview of the political climate as it is in Jakarta towards maybe the U.S. or towards the Freeport operation and these New York Times articles?

Are they stirring the pot to the point where it is uncomfortable, or are they just mindful that it is just news?

Let me take that for a minute.

All of the stuff that has been in the press is basically old news.

You're going to see a few articles and a few comments from Jakarta, but Jakarta when it comes down to the brass tacks, knows that our operation is sanguine, and you can rest assured as the Chairman of Parliament said over there, they know how important our mine is and they're not going to be overwhelmed by the emotions of the article in the New York Times because all of them have been to the job site and they know why our situation with both the environmental ministry and the issues of security are well in place and well established and it is old news.

So the articles have completely gone away once they started -- the headlines started talking about the 12 people that they've arrested, eight of whom have been taken to Jakarta and seen why we have to have security in the area.

A bunch of these guys -- if you can believe the press and there are many misstatements in the press about these 12 people who are going to be permanently detained as there was in the New York Times I don't know how much we can believe.

But that's now taken over the headlines and people know that this is a remote area and that we have to have unusual efforts to be sure we can operate with the 20,000 employees we have and all the other boomtown people to the south in Timika, this has gone from a small village of 400 to 250,000 people.

So I hope the tone of what I just said gives you that all of this stuff that you read as a result of the New York Times article is an emotional reaction and other important things would take it over and ration in Jakarta and this new administration over foreign investment hasn't changed.

Okay, thank you.

And Dan, this year in 2004/2005 alone we will pay over $1 billion to the government of Indonesia in taxes, royalties and dividend payments.

Our 1% fund which we contribute directly and voluntarily to the people of Papua will be over $40 million this year after ranging $17 to $18 million a year since it was instituted, it's been over $200 million in aggregate.

As you know, Business Week has named us the most philanthropic U.S. company for the past two years because of this and all indications are our relationships in both Jakarta and the job site are very positive.

The President SBY was here in the United States twice during this past year.

He knows us well, he served for a period of time as a minister of energy and mining and was very positive about what we're doing there.

Another question then and thank you for that.

Inventories went up about 100 million year-over-year.

How much of that was volume or was it price and can you tell us if we should look for those to come down?

It's almost all price.

We ended the year with very minimal amounts of concentrate inventory at site.

Our inventories are principally at Atlantic Copper and they're not abnormal levels there.

We had very low concentrate inventory job site and it is -- strictly reflects the pricing environment.

Thank you.

Bret Levy, Jefferies & Co.

Now that you guys are in significant cash flow positive mode, in addition to your local operations and opportunities to expand, are you guys going to start looking perhaps to geographically diversify a little bit and develop your ore base perhaps in other venues?

This is Jim Bob Moffett.

I'll just give you a couple of comments.

I don't know if you heard our reference to the Grasberg, since it is from this record year the most profitable and largest mining operation in the world.

When we look at other areas and we continue to do that, we never stop looking at opportunities for either new greenfield operations or take a look at all these numbers of efforts of consolidation.

This ore body as you can see from this year is so unique we try to stay focused on our exploration opportunities in Papua, in Indonesia just as we've discussed.

And if we see something that would be as good as that we would look at it.

There's certainly a good reason for someone to say well, a diversified company with more international exposure would be politically more correct.

But when you have this unique ore body, which is a blessing and a curse, it's very difficult to try to bring some other properties, either greenfield or acquisitions, that would dilute the cost-effectiveness of our current operation.

That's why we continue to try to stick to what we feel is the best asset in the world.

And then one other macro question.

If you go out five years you get copper below $1.50.

It doesn't appear there's any obvious reason why it should be there aside from some sort of global economic slowdown.

As you guys look around the world at supply and demand and go out five years, is there anything that makes you concerned about current copper prices?

Continuing on the exploration and the kind of mine that we have, as you are I'm sure well aware, there hasn't been a major discovery of the kind of Grasberg ore body that we're talking about since 1988.

There have been some properties that have been developed, many of which were discovered in areas like Chile where the Chilean government kept the properties off the block.

You'll see some of those things come back into the velocity of deals because of the price increases.

But at the bottom of the day there's not a major copper property other than probably the one that Phelps Dodge just talked about in Africa and don't know where this new copper would come from.

So the bottom line is, the current mines -- you've heard this story before -- all most of which were found at the turn of the century, with the exception of Escondido and Grasberg, are all depleting.

In other words, they're mining lower grade ore.

So your depletion of the bigger ore bodies is much more significant than additions of new ore bodies and that's why you don't see a situation where a lot of new ore is coming into the market, a lot of conflict coming into the market because there's no place to expand.

Thanks very much.

Wayne Atwell, Morgan Stanley.

Thank you and congratulations on a great quarter.

Can you outline -- a couple quick questions -- can you outline your consumption of diesel and coal and any other energy products you consume, what volumes you consume?

This is Kathleen.

We consume about 100 million gallons of diesel per year and on the order of 650,000 tons of coal.

And that -- is it for your energy?

Anything else?

You don't consume any natural gas to speak of do you?

No.

How are you doing in tires?

All we hear about is tires being very tight.

Are you guys okay and has that become an issue for you?

This is Mark Johnson.

We were fortunate that we had established some long-term arrangement with our vendors.

On the majority of our fleet, our Cat 793 fleet, which is 100 of our trucks, we've got very good arrangements that go out over the five-year period.

Where we did see some tightness was on the 797 tires, the largest Cat truck.

That's somewhat minor.

We feel that we'll be able to work through it.

Some of the other smaller pieces of equipment we've had shortnesses of volumes, we've been able to find a new arrangement.

So we've been I think in a unique situation when you talk to a lot of other mines.

Our long-term arrangements with vendors like Bridgestone have paid dividends in going forward and we've got very solid supplies for essentially 98% of our truck fleet.

Mark, you might just talk about the demographic.

You said 797s.

How many 797s do you have compared to the total fleet?

Right, we have 12 797s out of 139 large trucks.

Two of those are actually guaranteed availability units that Caterpillar provides.

And so we'll be able to most definitely keep the ten trucks that Freeport owns.

We've got good supplies out through 2007 with those trucks.

So like I said, we've been fortunate.

We don't see any problems right now.

Okay.

You've built up a lot of cash and you did buy a lot of stock back the last couple of quarters.

How much do you have authorized and how motivated do you think you'll be in buying back stock.

Well, we had a 20 million share authorization and we have purchased a total of 5.8 million shares under that authorization.

As always, Wayne, we'll, in consulting with our Board, make decisions about how to use our excess cash for dividends and stock buybacks and it will depend on a number of factors including market conditions.

Okay.

And then lastly, if I could get back to your energy, do you have your diesel hedged or do you just buy that at the spot price?

We buy at the Spot prices, we do not have it hedged.

And just as a matter of information, some of you may have read about the Indonesian government actions during this year to significantly reduce subsidies on fuel in Indonesia; we were never subsidized.

We've always bought at market prices and continue to do so.

We do benefit by the fact that in our fourth concentrator expansion in '96 and '97 we shifted from using diesel to generate electricity to coal powered electrical generating plants and we have long-term contracts using Indonesian coal for that and that's helped to mitigate some of the energy cost increases that we and the rest of the industry have faced.

Great.

So you buy your coal under long-term contracts?

We do.

Great, thank you very much.

David Gagliano, Credit Suisse First Boston.

Just quickly, back on the mining rate issue, I missed actually what caused the drop from the 770,000 tons earlier in the year to the 630,000 tons in Q4?

This is Mark Johnson.

Much of the drop -- for one thing, we had a number of major shovel rebuilds that we did this year, that drops off dramatically going forward.

The mining rate was influenced by some tight mining areas within 6South, our primary ore area.

We were very focused on achieving the volumes out of that area.

Required some over allocation or some additional allocation of equipment into that area which essentially took away from some of the other pushbacks.

As Richard and Kathleen had mentioned or Richard went through in the slides, 6South is -- we've backed off of that of substantially, we've got about 2 million tons left to be mined.

We've got some situations, there are some geometries that are getting much more productive over the first quarter.

And I believe that we'll be in that same position to be very productive over all coming into the second quarter and throughout the year.

Thanks very much.

And just as a follow-up, I notice on slide 16 it does indicate some reductions to your 2008 and 2009 gold volumes and your 2009 copper volumes versus similar slides previously and I'm just wondering what's behind those reductions?

This is strictly an impact of the changes in sequencing that we have.

There's a domino effect here.

Because of the fact that we were behind in 6North, it's deferred that will then be made up in early '07 and that just carries forward.

Similarly, if we're able to improve our mining rate and get access earlier that would then have an impact on all of our future plans.

So what you're seeing is strictly the carry-on effect of the changes in sequencing that caused the lower 2006 volumes than we had earlier.

So I should bump my volumes up say 2011 and '12 then?

Well you know, what we give you is this five-year outlook.

In our 10-K we give the longer-term mine sequencing and mine plans for the life.

We don't give year-by-years but we'll give you information there that will allow you to make those kinds of adjustments.

But we've a long established practice of giving you five-year individual year volumes.

Thanks very much.

John Tumazos, Prudential.

I know you've explained a lot about the continuity of Grasberg and Kucing Liar.

Looking at the slide 6 on reserves and almost no replacement of gold, was there any declassification of any zones, any change in the survey of holes, any rock confidence or mining issues or other things that it caused?

It's sort of odd that the copper was almost all replaced and the gold was almost none replaced?

There always is a reclassification.

There was some of that at the deep Grasberg just as we got in and increased the density of our drill holes, and there also was a refiguring of the bottom of the pit -- excuse me, of the bottom of the block cave as I explained it, the Ertsberg, just trying to square it off.

So as usual, as we drill these core holes and get the grade we try to balance the geometry with the ability to have the most efficient block cave.

And in some cases, as we increase our density, some of the ore grades go up, some of the ore grades on average go down and that causes us to rebalance the block of the ore.

Especially in this most crucial area where you have this Kucing Liar ore body that has a sheet of resources around it that we've explained, some 400 million of -- I think about 433 million tons of resource that we're trying to get into a mining plant.

And as you know, the difference between a resource and a reserve in our case around Kucing Liar and Deep Grasberg is trying to come up with the best mining plan.

So when you say reclassification, there's always going to be some of that, but most of it is driven by which is the resource that we want to put into a reserve to give us the best mine rates in future years.

Jim Bob, is it fair to characterize this as a onetime event, almost a fluke?

Well, when you're dealing with as much ore as we drill, John, I don't know if I'd use the word "flute", it's just reality.

These are complicated ore bodies and we don't know what the exact configuration is going to be of some of these until we get in and drill the drill holes.

In spite of the fact that we have thousands of drill holes that give us the geometry of [Choutover].

And as we get deeper I think you just have to expect that as we unravel the exact geometry of how Kucing Liar and Deep Grasberg come together on the very south side, it's a very unique type of deposit where you have the skarn around the original Grasberg ore body and a fault line deposit like Kucing Liar.

And all of a sudden when they merge like that you just have to wait and see what the grades are going to be right in that middle where the two meet.

And all of that will change some of our block caving plans and how we put them into our mining plan which is necessary before we go to our reserve.

Thank you.

Brian MacArthur, UBS.

Three quick questions.

First of all, you mentioned there's a large tax payment in the first quarter.

Is that the 327 million on the accounts payable, is that all payable the first quarter for last year's taxes?

Yes, it's essentially all payable in the first quarter.

So we've got tax pays this year about 300 million, CapEx of 250, debt repayment of 250 and dividends are sort of the outflows you can see right now.

Is that right?

Right.

And then we also have the maturity of our gold (indiscernible) in the first quarter.

Right, which is the 253?

Right.

The second question is just --.

The book value included in the 253, the 167 million for the gold [denome], at current prices it would be higher than that.

That's fine.

Second issue, you mentioned with the new accounting can you just tell me just generally how the strip ratio goes for the next few years?

We've talked about obviously the new accounting puts up the $0.05 this year and obviously in the past it was more fluid.

Can you just roughly tell me if there's any years where the strip goes exceptionally high through that new mine plan you're giving us?

Let me just check right here.

For the next few years our strip ratio does not vary significantly, averaging maybe 3.5 to 1.

But they're going to be -- we're now past the unusual situations we had in '04 and '05 because of the '03 slip events and now we're back into our normal range of where we have that kind of average.

And then as we get in the last five years of the pit the strip ratio, as we reach the ultimate limits of the pit and start going down the strip ratio drops.

And what would have occurred under our old accounting if we had deferred a lot of costs that would have reduced income in these last years, now these deferred costs that we had historically are going to be charged off against retained earnings, we'll be expensing on a current basis the stripping costs and that's going to mean some extraordinarily profitable years during the last five years of the Grasberg open pit life.

Right.

That's okay, but it's really it's past the next three or four years and then essentially we just took our costs up $0.05 for the accounting, that's going to be as good us anything else right now?

That's right.

Again, that's earnings. $0.05 is not a cash impact.

Absolutely.

No, it's just where it comes through.

And the final point, just while we're on exploration, I think last quarter we mentioned the common infrastructure progress tunnel is getting into the area which is new if I want to look at it that way.

Have there been any hints of seeing anything of interest there?

I know that's not the primary purpose.

And if not, are there any plans to put drilling platforms off that tunnel as we go into that new area?

Very good question.

Block A exploration again when we were talking about Block A. We're not quite to the area that would be parallel to the Kucing Liar fault trend which runs east west.

And as you know, we also at the Ertsberg to the east of the common infrastructure have now established that that zone of mineralization is probably a similar type deposit, i.e. fault controlled mineralization as opposed to just a skarn around the Ertsberg.

You probably heard us talking about it before so I'm glad you're bringing it up from memory that between those two there is a void area that's never been drilled and we have not reached that parallel so that you'd find a Big Gossan type deposit where we -- or Kucing Liar where we literally cross those with the Amole which is what you're referring to.

We certainly are watching and mapping every foot, every inch of the two faces that we have on the common infrastructure that's going toward the Deep Grasberg, and when we get closer to the area, which you can dot on the line and connect between the Kucing Liar and the Ertsberg, we would suspect that that would be the best possible place where we could find an intercept.

But if we do find an intercept, as we did in Kucing Liar, we'll of course take that.

And if there is an opportunity to chase that east or west or both ways, you can rest assured that we will be making exploration drifts off there to see if these things have any extension and continuity west or east or both directions.

We'd love to hook up the Kucing Liar and the Ertsberg type of ore mineralization.

The biggest enigma we have is the depth of the ore at Kucing Liar, the depth of the ore at Ertsberg are significantly different with the Kucing Liar being much deeper and in essence the ore becoming almost dormant above a certain level which is much deeper than the Ertsberg ore continues.

That's the old Ertsberg deposit that was mined first above the top of the DOZ.

So we've got a lot to learn and I don't want to make predictions for you, but I expect us to see some mineralizations.

I've been in the common infrastructure and there are a couple of places where at the very end of the operation where we're going forward with the new tunnels -- I've seen some things that look very interesting, some inclusions of ore looking mineralization that is very typical of some of the stuff we saw in the original Ertsberg tunnel that led to being able to debate upon that.

So there's no way to know.

I wish I could tell you whether we're going to intercept something that's commercial, but we're going to be looking awfully hard.

You mentioned you weren't quite there.

Are we talking this quarter, next quarter or the third quarter when you'll be at that?

I actually thought we were getting close to the critical point now that we'll be at that -- if you will, at that (multiple speakers) line.

(multiple speakers) out in front of us and, as I say, when I was there last I literally think I saw some inclusions and things that sort of are like spontaneous mineralization because it's so close to other mineralization.

Now whether those are good indications that we're going to run into something, but we're getting close and it could happen any time from here on as we drive toward the big underground Grasberg and Kucing Liar situation.

So we're not far and in the next several quarters -- we've already been looking extremely hard, we'll be mapping every inch and every inch could be an opportunity.

Greet, thanks very much, Jim Bob.

[Elliott Glazer], (indiscernible).

Elliott Glazer On the subject of copper, do you have an estimate for world copper supply in 2006 versus 2005?

Let me respond to that, Elliott.

We focus on the copper concentrate market.

We don't consider ourselves a source of information on that kind of data.

There are many, many sources -- consulting firms do balances, a number of the analysts come up with their own estimates and we just refer you to those for those kind of market situations.

We just big picture feel that given the copper consumption, the lower levels of inventory, the issue that Jim Bob talked about with the absence of major new mines coming on-stream, the fact that many of the mines in the lower sector of the industry's cost structure are mature, depleting, heading towards more underground production, that all those things are very favorable about market conditions.

Okay.

There are no further questions at this time.

I'll turn the call back to you.

Thank you, everyone, for your participation and we're available if you have any follow-up questions and appreciate you participating in the call.

Thanks a lot.

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.