費利浦·麥克莫蘭銅金 (FCX) 2006 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by.

Welcome to the Freeport-McMoRan Copper & Gold first-quarter 2006 earnings conference call.

During the presentation all participant lines will be in a listen-only mode; afterwards there will be 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 with Freeport-McMoRan Copper and Gold.

Please go ahead.

Thank you and good morning.

Welcome to Freeport-McMoRan Copper & Gold first-quarter 2006 earnings conference call.

Our FCX earnings announcement was released earlier this morning and a copy 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 refer to the slides during the call and they are accessible using the webcast link on our FCX.com website homepage.

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

And a replay will be available by accessing the webcast link on our Internet homepage later today.

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

Please refer to the cautionary language included in our press release and slide presentation and to the risk factors described in our SEC filing.

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

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

I will start out by summarizing our financial results and then turn the call over to Richard who will review operations and our outlook.

We will then open the call for questions.

Today FCX reported first-quarter 2006 net income applicable to common stock of $251.7 million, $1.23 per share compared with net income of $130.4 million, $0.70 per share for the first quarter of 2005.

First quarter 2006 net income included a $36.6 million or $0.17 per share loss on the redemption of FCX's gold denominated preferred stock, and a $1.3 million, $0.01 per share loss on early extinguishment and conversions of debt.

For the quarter our diluted net income per share reflects the assumed conversion of our 7% convertible Senior Notes and 5.5% convertible perpetual preferred stock resulting in the exclusion of interest expense totaling $5.1 million and dividends totaling $15.1 million and the inclusion of 31.9 million shares.

PT-FI share of first-quarter 2006 copper sales of 225 million pounds were approximately 15 million pounds below previous estimates, and gold sales of 472,500 ounces or 132,500 ounces above previous estimates.

Our realized copper prices improved during the quarter by 61% to an average of $2.43 per pound compared with $1.51 in the first quarter of 2005.

Our gold prices in the first quarter averaged $556 before revenue adjustments associated with the redemption of FCX's gold denominated preferred stock totaling $150 per ounce for a net realization of $405.54 per ounce compared to $426.74 per ounce in the first quarter of 2005.

Our cash used in operations totaled $124 million during the first quarter of 2006, which included $501 million in working capital requirements.

During the first quarter our operating cash flows were impacted by $454 million of income taxes paid to the government of Indonesia, including $328 million attributable to our 2005 results.

Also included other working capital requirements totaling $173 million for the quarter.

Our capital expenditures totaled $52 million for the first quarter of 2006; we are currently estimating approximately $250 million for the year.

We ended the quarter with total debt of approximately $1.1 billion, and that is $817 million net of our $284 million cash position.

During the quarter we paid $153 million in common stock dividends; that also included a supplemental dividend of $0.50 per share paid on March 31, 2006.

Since December of 2004 the supplemental dividend had totaled 5 -- at $2.25 per share to a total of $411 million.

Now I would like to turn the call over to Richard who will review operations and our outlook, and will be referring to the slides on our website.

Good morning, everyone.

Going to our slides I hope you -- each of you have had a chance to see our annual report for 2005, which we titled "The Element to Shareholder Value."

And we focused on the Grasberg as being the right asset at the right time.

Having the very large production volumes that we were achieving at this time with our long life, low-cost and fully developed pit reserves, at a time when commodity prices for copper and gold are so strong, I think really points to our efforts that we've made over many years to preserve this asset for the benefit of our shareholders.

We said many times we have no need to retain cash in our Company, and having the right financial strategy returning cash to shareholders at the time when commodity prices are so strong, to me reflects really the benefits of again what we've done over many years.

And we want to talk about our future because even though today the Grasberg open pit is a mature mine with our reserves being -- three-quarters of our reserves being underground, that gives us a very bright future as we look forward past 2006.

Kathleen reviewed the highlights for the first quarter; the first quarter of '05 was our weakest quarter for that extraordinary year for us, and in the first quarter of '06 we produced 30% less copper and 20% less gold.

Had sales less than the first-quarter last year and yet because of the leverage of prices this is our strongest, second strongest quarter in the history of our Company following only the fourth quarter of last year.

Kathleen mentioned the impact of working capital changes on our cash flows for the first quarter.

Most of that was taxes that were accrued from last year but we will have significant cash flows for the balance of the year.

Again depending on commodity prices which will allow us to execute our financial strategy as we go forward.

Our capital spending target of $250 million for this year reflects the fact that we failed to spend our allocated capital from last year, and we spent $52 million in the first quarter and we are actually spending at a bit lower rate than we had anticipated.

Our total debt is now down to $1.1 billion, reflecting the debt reductions that we made in the first quarter and of course, we continue to pay our regular dividend and $0.50 supplemental dividend.

For the year we are continuing our guidance that we presented to you during our January earnings call.

We are expecting copper sales of $1.3 billion and gold sales of $1.7 billion, at $2.25 copper and $550 gold for the balance of the year, we would have annual operating cash flows of $1.2 billion, and as I said our CapEx for the year estimated at $250 million.

What that means for the final three quarters we will be generating very substantial amounts of cash flows, approximately $700 million of cash flows over our expected capital expenditures, our scheduled debt payments, our regular common and preferred dividends and other cash performance that we have.

So the outlook for the year remains strong.

Of course that reflects the very strong copper and gold prices with copper over $3.00 today and gold over $600, that is really extraordinary.

I was down in Chile last week at the CRU Conference and the CESCO dinner and the attitude there as you've seen in a number of reports of people who attended is remarkably different from a year ago, as the global copper industry continues to struggle with cost factors, operating factors and also overriding all is the absence of major new development projects even in the time of such strong prices.

Turning to our operations specifically on page 7 to review where we are this year and where we will be going in future years, we show a vertical picture of the Grasberg open pit mine, which is now just over halfway through its expected life in terms of volumes of material that we will be mining.

In 2005 the pushback of 6 South was our primary source of high-grade ore, as we talked about throughout last year.

This year we will complete mining the remaining amounts of very high-grade material at the bottom of the pit in 6 South.

The majority of our ore from the Grasberg in 2006 will come from the 6 North pushback and the related 6 East pushback.

Then we are looking forward to 2007 and 2008 where pushback 7 will provide the majority of our ore.

We update our mine plans on a continual basis to take into account the data that we gain both from our mining activities and the extensive drilling activities that we have to gain an understanding of the geology and the geotechnical aspects of our mine.

And our objective is always, is first of all, to operate safely and safety is always an issue in a large-scale open pit mine like this and particularly in the conditions -- the severe conditions that we operate in.

We need to manage those risks, and then we maximize economic values by bringing volumes forward as quickly as we can within those constraints.

We are currently undertaking studies of the recent geotechnical data that we've gained in developing our plans, we are having a specific study that we expect to complete during the third quarter.

As we look to the five-year plan that we presented to you in January, we had expected to produce 1.3 billion pounds on average over the five-year period and 1.9 million ounces of gold.

To date with our current analysis indicates that certain of the high-grade ore that we had originally expected to mine in '07 and '08 may be deferred, and all of this is subject to completing our analysis, but that would be made up in subsequent years.

And today we would indicate that we would be within 5% of the total over the five-year period from what we previously estimated.

We are also looking at this data in terms of our long-range mine plans as we work to determine the optimal, ultimate design of the Grasberg open pit and how that affects the development of the Grasberg blockade reserves that lie underneath the pit which would come into play after the pit is depleted.

This is not an issue of the existence of the ore or the grades.

It's just a question of how we can mine it under the kind of conditions and to optimize values as we normally do with our plan.

I want to walk through the sequencing slides that we have; one of the good things about our business is we are able to tell you specifically about where we stand with our mine plans.

It is a large, complicated business in terms of operating where we do but at the end of the day, it is a really straightforward asset and business to analyze and understand.

And I will go through these quickly, they are available on our website, of course, but in the first quarter, as I said, we were mining the remains of the 6 South pushback as we were lowering the 6 North pushback down and doing mining in the north wall.

The second quarter, the source of our ore will be principally from the 6 North pushback as it goes from the lower grade material towards higher grade material, and we will continue to be mining in the upper reaches of the South wall at 7 South and as we work to move it down.

Then in the third quarter the 6 East pushback will give us high-grade ore at 6 North, it's coming down towards higher grade ore and we will be mining in the South wall to provide the 7 South pushback for future volumes.

The fourth quarter which is projected to be our largest quarter of the year and how much of this high-grade ore in the fourth quarter we will achieve will depend on our mine rates.

If we are able to be successful in increasing our mine rate as we are trying to do, we could have the opportunity to get more ore.

If there are issues that cause the mine rate to fall behind what we currently expect then some of that ore could be pushed into 2007.

But the fourth quarter looks to be a very strong quarter for the year because of the availability of ore in the 6 North pushback, which is expected to be by that time down in the high-grade sections.

Page 13 shows our quarterly outlook for copper and gold.

We were able to exceed our gold expectations in the first quarter for some carryover reasons from last year and just mine sequencing decisions that were made.

But you can see the fourth quarter is looked to be substantially higher than any quarter during '06 with respect to copper and to be higher in gold in relation to the next two quarters.

We will update you with this as we go forward throughout the year as we always do.

Then quickly looking forward beyond '06, our current plans and these are what we are currently studying in relation to the new data that we are analyzing -- which show that 2007 would involve continual mining in 6 North but also the extension of the 7 South section of the mind towards high-grade material.

And then '08 with the year which we would have a stronger year than '06 or '07 because of the extent to which we would be in high-grade ore with 7 South.

And what our studies will be focused on is to what extent, what kind of slope, angle we will be mining that 7 South and whether we will get that high-grade ore in '08 or in subsequent years.

And then in our plan that we disclosed earlier shows '09 completing mining 7 South, pushing 8 North down with then in 2010, 8 South providing our high-grade ore for that.

And that is how we will operate the pit throughout its life to access the high-grade ore as quickly as we can within safety parameters.

Our five-year plan that we presented earlier beginning of the year showed volumes as shown on the slide on page 18, as I mentioned the average was 1.3 billion pounds, 1.9 million ounces.

This could well be changed when we report to you next but over the period of time we don't expect the average change to be anything over 5% in total.

Our unit costs for the first quarter averaged $0.40 per pound.

Now that is significantly higher, obviously, on a unit cost basis than what we had in 2005 when our unit cost was $0.07 a pound.

The change for the remainder of the year reflects the fact that we will have a lower average quarterly gold sales than we did in the first quarter, and that is the difference.

The actual cost level that we incurred between 2005 and 2006 on an aggregate basis is roughly the same.

Our costs have risen significantly in recent years, but at this point our cost experience is being consistent with what we had last year.

And the changes in unit costs that you're seeing here reflect simply the volumes plus the fact that this year we are including in these costs all stripping costs.

They were deferred in prior years and with an accounting change this year stripping costs are included in there and in the first quarter this year that was about $0.14 a pound within that $0.40 number that you see there.

Development projects that we have underway include the expansion of our DOZ underground mine.

This mind is currently operating above its design capacity and has been for some time now.

It operated at over 40,000 tons a day last year.

We are putting in some capital with a crusher and ventilation system to get it where it can operate at consistently over 50,000 tons a day.

We are optimizing the mill.

We're developing the high-grade Big Gossan mine as an underground mine, which will add some volumes (inaudible) return on capital project and allow us to further train our workforce for our expanding underground operations in the future.

But on page 21 I want to point out the important common infrastructure project that we have.

This involves putting in a new added system 400 meters below our existing Amole adit, which will be the development structures or access that allow us to develop our major underground mines in the future, including the Grasberg blockade, the Kucing Liar and the deep reserves we have lying under the DOZ.

This project is moving forward.

You can see where we are at the end of the quarter in terms of this progress.

Besides the access for future production this gives us the ability to do exploration at much lower elevations, 1200 feet below the existing tunnel access and our exploration efforts in the current year will be focused on extensions of the Grasberg blockade.

The relationship between the Kucing Liar ore body and the Grasberg underground reserves and how they might be connected at depth, as well as we are looking at exploring beneath the Ertsberg and associated with original Ertsberg Pit as we go forward.

So we have yet to determine the mineralization in this vast area, and we have a whole series of exploration opportunities as we go forward.

Exploration outside the Grasberg production area is still suspended.

We have been given authority recently from the government of Indonesia to extend the timing requirements for that.

We have some very interesting prospects, and when the time is right from a securities and regulation standpoint we will be returning to field outside of block A.

Page 22 shows the capital expenditures that I mentioned; the expenditures for 2005 include some carryover costs from 2006.

And then you can see the relationship between our ongoing sustaining projects and our longer-term projects that I just mentioned.

We have significant financial flexibility on page 23 -- you can see our debt slide which shows the total debt and its scheduled maturity during the three quarters for 2006, we have $87 million.

And then very low debt requirements from 2007 to 2009.

We will continue to look for economic opportunities to reduce our longer-term debt, and we do have the ability to call the remaining $282 million of our 10-1/8 notes in the first quarter of 2007.

Looking at our expected future or potential future operating cash flows on the schedule on page 24, we show annual average volumes for the next five years that were in our five-year plan, over a range of prices that are much lower than today's prices that we see the commodities traded at.

We've also indicated that if there is a 5% volume average, annual volume increase over that five-year period what impact that would have.

But you can see that even with this range of prices below today's prices we would be generating substantial cash flows, $600 million to $1.2 billion on average over that period of time with very low capital expenditures.

So that leads to a conclusion comment about our financial policy, our Board has set forth a very straightforward policy.

We've worked and we've achieved strengthening in our balance sheet, maintaining our financial flexibility by devoting some of our cash to reduce our debt levels.

We've set -- our Board has set a regular dividend that can be sustained over much lower commodity prices.

And then as prices have been higher and as we earn cash we have been distributing that to shareholders in the form of special dividends and at times buying stock back under our authorized stock program.

We just paid a 50% regular dividend, a special dividend.

We paid three $0.50 dividends during 2005 and a $0.25 dividend at the end of 2004.

And with the current commodity price outlook and our volume and cost situation, we should have additional cash going forward end of the year to execute this policy.

And we have a long-term history of being shareholder friendly with substantial amounts of stock purchases, $1.5 billion since FCX was spun off in the mid-90s.

We've also paid very substantial dividends, over $2 billion since FCX had its IPO in 1988.

So we have a record of doing this.

We have a policy to do it and we have the asset and the commodity price environment to continue to execute it.

With that we would be happy to open up the line for questions.

(OPERATOR INSTRUCTIONS) John Hill, Citigroup.

Good morning, everyone, and thank you very much for a detailed presentation as always.

I was wondering, Richard and team if you could explore for us a little bit the geotechnical data you referred to in the past.

A lot of the resequencing issues that seem to revolve around kind of haul road configurations and traffic and loading patterns.

This sounds a little bit different.

What kind of data are you looking at, and what are the implications?

Does this mean you're getting nervous about some of the big limestone overhang over zone 7 S or which is not far from the infamous Poker Chip zone or what should we be thinking about here?

Why don't we let Mark comment on that?

John, this is Mark Johnson.

Since late 2003 we have added significantly to our drill coverage.

Most of that drill coverage was focused on the Grasberg contact zone or the heavy sulfide zone in that area between the limestone and the intrusive rocks.

As a result of that we have just had a much more detailed model of the location of that contact zone.

We've also got a much better understanding of the variable properties of it from a geotechnical standpoint.

And we have also mined through a lot more of that area.

In addition to that we have drilled areas of limestone.

We've got a lot more coverage within the limestone.

Limestone still remains to be a confident high wall material overall.

There are some zones particularly in adjacent to this contact zone where we do have some lower quality limestone that we are incorporating into the designs.

In addition we've got a much better understanding of all the geotechnical rock types.

In the mid-90s we had a very simplistic geotechnical model which involves four different slope angles, as a result of our experiences over the years, including our drill hole, added drill hole information we have added different rock types.

We've got some other constraints also as far as the high wall height.

All of these things we've continued to adapt them as we went.

We have had, like I said, since the start of 2004 we've had an extensive drilling program that has accelerated our knowledge base and our implementation of that is ongoing.

We are in, as Richard described, we are in a study cycle right now where we are incorporating it; we've given some initial indications, and we are continuing to work through the pit designs and the blockade designs as we over the second quarter.

We hope by the start of the third quarter we will have an update to that.

And we are, like you said, this is an ongoing process.

We are continuing to drill.

We don't have any geotechnical issues in the pit to date.

Right now things are as the pictures I think would illustrate it, the high walls are standing fine.

This is forward-looking studies, and we will continue to modify that as we gain that knowledge.

John, this is not a new issue.

These are issues we've been considering for some time, a number of years.

It is incorporating new information that we've gained over time through mining and drilling activity into our analysis of dealing with these issues.

And these are the sorts of things that are common to open pit mine planning activities.

As you noted, we are very transparent in giving mine plans over periods of time.

So you get probably more information about us than you might otherwise would if we didn't have the kinds of disclosures that we have.

If I could add a couple of things to it.

We've talked about this now really since 2003.

There's really nothing new here.

What we're trying to do is because we are giving five-year plans as we have in the past, we want to make sure that everybody understands that as we go forward that we will look at the economy, what it costs to mine in the pit versus what it costs to mine underground, etc. etc. and look at these geotech issues.

We're trying to be sure that for full disclosure purposes we're looking out into not only a five-year period but to the life of the pit as we give all of the parameters that we're working with.

So you and the rest of our investment group understands that we are continuing to get the most economic development of this mine.

Thank you, Jim Bob.

Daniel Roling, Merrill Lynch.

(inaudible)

Hisaaki Yokoo, Goldman Sachs.

Good morning.

Congratulations on the strong result.

My question is related to the adjustment of the [concentry] sales which contributed to $0.26 per share for this quarter.

That compares to $0.14 of last quarter and $0.03 of the year before.

I just wonder is that mainly related to the higher price in first quarter compared to the end of 2005?

And also could we also relate that to your higher realized copper price versus LME this quarter?

That is, if you could elaborate a little bit more that will help very much.

That was exactly right.

I mean we have as is common in the industry, these provisional pricing arrangements of where we have provisional pricings at the time we recognize sales when concentrate is loaded on the ships.

And then it varies from contract to contract, but then typically over the next three months the prices are finalized.

To give you, and so in the first quarter as prices rose and contracts were finalized from '05 sales, we had upward price adjustments.

The way our operations work 90% of our sales for the first quarter were booked at the provisional prices at the end of the quarter.

And that meant and that was at $2.03 on average per pound.

And as those contracts are then finalized during the -- most all will be finalized during the second quarter -- if prices remain where they are we would have a substantial upward adjustment in the open pounds at the end of the quarter.

Thank you.

Victor Flores, HSBC.

You mentioned that the adjustment for the adoption of EITF 04-06 was $0.14 per pound in the first quarter.

Could you give us a dollar number and perhaps the number of tons that that corresponded to?

Well, the dollar number --.

The dollar number was about 30 -- would have been about $32 million if we had been deferring stripping costs like we did in the previous quarters.

And the tons that it relates to our sales for the quarter.

Right, but what I am after how many tons of material of waste does that represent, if you have the number?

Well actually during the first quarter --.

The strip ratio was roughly 4 to 1 in the first quarter versus about a similar amount in the first quarter of '05.

Yes, and it is 3.5 to 4 to 1 Victor during this period of time.

Obviously in the very early years of the pit life we had lower stripping rates, it has built up now and the last few years have been the peak rate.

Beginning in '09 and '10 it will be falling off to below our life of mine average, which is about 2.2.

Great.

Thanks, and is there a way you could give us a status as to what that number is for the year?

Because you are talking about unit cash costs in the remaining three quarters of about $0.57.

How much of that would be due to deferred stripping adjustment?

Well, last year it was -- last year our net cost was $0.05.

For the year, Victor, let me go answer a couple more questions, and let's see how much we deferred last year.

(inaudible)

The deferred cost was $0.05 a pound.

And practically with the new accounting rules we are not tracking that;

I only mentioned it in the first quarter because it was the first quarter we've done it.

So we are just treating all our costs now as part of our costs of operations, and those are incorporated in these numbers.

I appreciate that.

I was just trying to get a sense of how much that $0.57 number included that.

If you can get it to me that's fine, if not, it is okay.

Thanks.

Okay, thanks.

John Tumazos, Prudential Equity Group.

Congratulations on all the tremendous results and accomplishments.

I am a little embarrassed to ask this question, but at almost $3.00 copper and $600 plus gold and a nice contango of about $2.50 plus per month gold, you could hedge out in excess of $700 gold just a few years forward and buy puts on gold, buy puts on copper.

I know your company has not hedged historically, but we are in this new territory of very good prices.

Do you think you could rule out any action to try to lock in these prices in the future, or minimum prices such as buying puts?

John, the problem you have is if we were smart enough to figure that out it would be great.

But you know when copper went over $2.00 a lot of smart people thought that was a peak of cycle prices.

It was just three years ago right now that prices were in the mid '70s.

And as we look at the marketplace given the nature of copper as a commodity in its basic uses, the strong growth in China which I think just announced a 10% growth in the first quarter, and the lack of development, we are not a trading company and we don't have confidence that we can predict prices.

We recognize there is risk that could happen and prices could go lower.

Philosophically we believe that that decisions about how our individual investors deal with the price environment should remain with the investors and we shouldn't try to override that.

We do continue to monitor put prices and historically we have bought some puts when we thought that was appropriate.

That was at a time we were spending a lot of capital to develop the Grasberg.

At this point with our cost structure we don't need to protect ourselves for lower prices.

We would earn less but it would not put any of our operations or our plans at risk if prices went, returned to much, much lower level.

So it is basically a financial decision and our approach historically has been to leave those financial decisions to our investors rather than trying to make them ourselves.

Said simply as we said for the last 15 years people buy our stock as a hedge on copper and gold prices.

If we start to hedge that takes away the reason for them to own the stock if they're buying us the hedge commodity.

If you read and look at other commodities to reinforce what Richard just said, there were a lot of people when oil went over $40 a barrel that decided they should start hedging oil.

I think in the clips this morning there is a major independent that just took a, recognized that he was going to have a bid in, 100 million hedge loss because he was hedging oil.

And that is just an example of what Richard just said because $40 to 50 oils two years ago sounded like a high price.

Today the price of oil is at $70.40.

So with gold at $616 it sounded like that is a lot of money.

But there are people now talking about $800 gold.

And people buy our stock to own these commodities as a hedge on these commodities.

That has worked pretty well for us in the past.

Thank you.

(indiscernible) [Hildreth] Waterstone Capital.

Just trying to look at your cash flows and what you have to spend your money on other than CapEx.

One of the things that is elusive is your minority interest payments.

Can you give us some guidance on how we should think about that?

Is there a ratio or something -- or how do we figure how much you have to spend?

No, there is an accounting issue and a cash issue.

The minority interest comes about from the ownership interests, the 9.36% interest that the government of Indonesia owns in PT-FI.

And for accounting purposes we are allocate recognized profits to that minority interest.

The actual cash flow impacts of that depends on dividend payments from PT-FI to its shareholders, which are FCX and the government of Indonesia, and those aren't on any regular scheduled periods of time.

So we are not able to give you any kind of formula to estimate that from a cash flow standpoint.

Is it fair to say that there will be over a longer period a correlation in the higher the cash flows generated by PT-FI, the likelihood is going to be just higher overall, that dividends will be higher?

Absolutely, because we earn the cash within PT-FI and for that cash to be distributed to shareholders of FCX it has to come from PT-FI to FCX.

And when that happens the government gets their share of the dividends.

So you are right over time, and I am glad you mentioned that because it is just in terms of predicting it quarter to quarter it varies significantly.

But over time all the cash is earned at PT-FI and distributions come out to FCX and the government gets its share.

[Terrance Orsland], [DSO and Associates].

Thanks, and thanks for a detailed presentation again.

Just two questions, one is with respect to the fuel costs and all.

Can we talk about what the mining costs are right now per ton, and how do you expect for the rest of the year the way it's going to shape up, fuel costs trickling into the cost of all operations, including yours?

And second question is that the present prices as they are and will there be any adjustment to the cut-off grades due to price adjustments for your reserves and reserve resource calculations?

Is that possible that you're considering it?

And does that mean the whole (indiscernible) and everything else is going to be changing as well?

Thanks.

Okay, let's see; let me start with your last question.

In developing our mine plans, we do take into account economic conditions, and that gets to be a question of valuing the ore and determining which is the right ore to process through the mill.

So it does have an impact.

Not as much for us as others because of our overall low cost structure, but we do take it into account.

In terms of cost, looking back over time from 2002 to the current level, our diesel costs are up to like $1.70 a gallon, and they are at market prices, and they are up about 130% over that period of time.

And in our plans that we go forward with, we are basically sticking in the numbers that we show the cost numbers with $1.70 a gallon for diesel.

We do generate the vast majority of our electricity using coal that comes from Indonesia.

During that same period of time when you've had diesel go up 130%, our coal costs have gone up less than 40%.

Diesel represents about two-thirds of our total energy cost.

In terms of cost per ton mined, in the Grasberg open pit it is about $2, a bit over $2 per ton in the open pit.

In the DOZ, it is about $4.50 a ton.

The DOZ has been just an excellent mine for us.

It was a mine that was an extension of underground mining that we have done since the early 1980s.

PT-FI was planning blockade mining during the late 1970s.

At the time of the Grasberg discovers, it was totally a block caving operation running 20,000 tons a day through our mill.

We then developed subsequently lower elevations of the mine that we were mining then.

We were always targeting about 20,000 tons a day from underground to blend the limestone there with the Grasberg ore to manage our tailings.

And then the economics of underground mining kept improving so much and so this DOZ mine has gone from 25,000 to 35,000 now to over 50,000 tons a day and there is potential for expanding that.

And that is just an excellent indicator of what this operation will be able to do in years past the operations of the Grasberg open pit.

Richard and Kathleen, just on the $2.00 a ton open pit obviously that is where the energy costs really come into play.

Would you -- could we say today at $2.00 a ton approximately 30% or 35% will be energy?

Our energy cost in our total operation is about 20% of our cost.

Total, but not --

20% of our cost, our other materials costs are roughly 40%, as I recall.

Yes.

And our manpower costs are about 25% of the costs.

Thanks a lot, guys.

Daniel Roling, Merrill Lynch.

Sorry about the disconnect before.

Questions regards the recovery rates in copper and gold.

They seem to have dropped a lot quarter versus quarter, 82% down from 89% on copper.

Could you expand on why that happened?

It is the nature of the ore.

You know we had much higher grade ore than in the fourth quarter, and historically effectively you will see much higher recovery rates as we mine that kind of ore versus a lower grade material that we had available to us this year.

There has been nothing, Dan, that is changed in the performance of our mill.

It has operated very well.

You also know our mill rates were down.

Now that was affected by the four-day outage that we had from the illegal miner situation.

But as we moved to higher grade material you will expect to see our mill rates step up, and we are expecting much higher average mill rate for the rest of the year, and you will see our recoveries step up just because that's what we can do with the kind of ore that is available to us.

And one other follow-up question.

In the text you say no shares were repurchased during the first quarter.

Yet, and there has got to be a simple explanation, yet common stock held in treasury increased.

Could you tell us how it went up without share repurchases?

That had to do with stock options.

Under our stock option program we have provisions for holders to submit shares for the exercise price and for taxes.

All of this is consistent with our program, consistent with the corporate practice.

So that means that when option holders exercise shares they don't sell them in the marketplace for those features but they submit them shares to the company so that is all you're seeing there.

Thank you.

There are no further questions from the phone lines.

I will now turn the call back over to you.

All right, everyone.

We appreciate your interest, and we look forward to reporting our results as we go forward.

If you have questions you can call us, and we would be happy to respond to them.

Thanks.

Ladies and gentlemen, that does conclude the conference call for today.

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

Have a good day.