費利浦·麥克莫蘭銅金 (FCX) 2006 Q4 法說會逐字稿

Welcome to the Freeport-McMoRan Copper & Gold fourth quarter 2006 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 Ms. Kathleen Quirk, Chief Financial Officer, please go ahead, ma'am.

Thank you and good morning, everyone.

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

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

Today's conference call is being broadcast live on the internet, and will also have several slides to supplement our comments this morning.

We will be referring to the slides during the call, and they are accessible using our webcast link on our FCX.com website home page.

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

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

Please refer to our cautionary language included in the 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, and Mark Johnson, Chief Operating Officer.

I will briefly summarize our financial results and turn the call over to Richard, who will review operations, our outlook, and provide an update on FCX's pending acquisition of Phelps Dodge.

We will then open the call for questions.

Today FCX reported fourth quarter 2006 net income applicable to common stock of $426.4 million, which was $1.99 per share, compared with net income of $463.2 million, $2.19 per share for the fourth quarter of 2005.

Our full-year 2006 net income was $1.4 billion, $6.63 per share, compared with $934.6 million, or $4.67 per share for the year ended December 31, 2005.

PT-FI's share of fourth quarter 2006 sales volumes totalled 433 million pounds of copper and 508,000 ounces of gold.

Those exceeded our previous estimates we reported in October of 2006 of 415 million pounds of copper and 470,000 ounces of gold.

Our fourth quarter 2005 sales totalled 468 million pounds of copper and 1.1 million ounces of gold, during a period where we were mining in the very high grade section of the Grasberg open pit.

PT-FI's share of 2006 sales totalled 1.2 billion pounds of copper and 1.7 million ounces of gold, that compared with 1.5 billion pounds of copper and 2.8 million ounces of gold for 2005.

Our realized copper prices improved by 43% in the fourth quarter to average $2.88 per pound, from $2.02 per pound in the fourth quarter of 2005, and our gold prices also improved, were up by 27%, to an average of $628 per ounce in the fourth quarter of 2006, compared with $494 per ounce in the fourth quarter of 2005.

For the year, our average realized prices of $3.13 per pound of copper, was 69% higher than the 2005 average of $1.85 per pound.

And average gold realizations of $567 per ounce, or 24% higher than the 2005 realizations.

Our operating cash flow during the fourth quarter approximated $798 million, and brought our 2006 operating cash flows to $1.9 billion for the year.

Capital expenditures during the quarter totalled $73 million, and $251 million for the year 2006.

Common stock dividends during the fourth quarter totalled $357 million, $1.81 per share, and that included $1.50 per share dividend paid on December 29th, 2006.

We completed $1.6 billion in financial transactions in 2006.

And that included over $1 billion in common stock dividends and share purchases, and $576 million in debt reduction.

We ended the year with cash of $907 million, and that exceeded our debt, which totalled $680 million at the end of 2006.

PT-FI's share of estimated recoverable reserves at the end of 2006 totalled 38.7 billion pounds of copper and 41.1 million ounces of gold.

During the fourth quarter, we announced an agreement to acquire Phelps Dodge for cash and stock in a $25.9 billion transaction, which would create the world's largest publicly-traded copper company.

Richard will provide an update on the status of the transaction, which is expected to close in March 2007.

And now I would like to turn the call over to Richard Adkerson, who will be reviewing our operations and outlook, and will be referring to the slides on our website.

Good morning, everyone.

I have a lot of material to cover today because we are going to update our 5-year and long-term mine plan.

We will initially focus on our Company on a standalone basis.

I will go through the slides, and I hope you can follow it, because we have some schematics that I think will help you understand the information I will be presenting.

And following that, Jim Bob and Mark will be available with Kathleen and me, to respond to your questions.

It was a very good quarter for us and a good 2006.

With the volumes of copper and gold that Kathleen mentioned, we were able to meet our expectations for the quarter.

I will point out that because of the mechanism in pricing, our sales under our concentrate sales agreements, virtually all of our sales were accrued at a sales price that was the quarter end price, and so it reflects the impact of the drop in price that we saw in December.

Our average realization during the quarter was $2.88 per pound, where the LME average price during the quarter was $3.21 a pound and that reflects this.

Nevertheless, in a year in which we had 20% less copper sales, and almost 40% less gold sales, our net income went from $935 million to $1.4 billion, on the strength of our operations and strong prices.

Our operations were good.

During the fourth quarter, we set a record through our mill of averaging 247,000 tons per day.

On one day we actually reached 300,000 tons to set a daily record.

We adjust our mill rates to reflect the nature of the ore that we process, and we had good ore during the quarter, and this just shows what our mill could do during that quarter.

Our mill rates will be substantially lower during 2007 because of the ore that we will be processing.

Our DOZ mine, our underground mine, that's a great indicator of the future of this operation also set a record at 45,000 tons per day on average for the year.

On slide 5, you can see the operating cash flows that we have in relation to our capital expenditures. 2005 we thought would be an exceptional year, and it certainly was from a volume standpoint because during that year, we mined volumes that we had deferred from 2004, when we were dealing with the impact of the pit wall failure during the fourth quarter of 2003.

But because of strong prices, we ended up with record operating cash flows during 2006, in a year in which we had very low capital expenditures, which reflects the strengths of this operation.

Because of that, we were able to follow through on our Board's previously established policy of returning cash to shareholders.

We paid over $900 million in common dividends.

We bought back shares, we spent $100 million on that.

We significantly reduced our debt during 2006, and by the end of the year, we had net, we had grossed at $680 million, and cash on hand of $970 million, which considering the focus that we have put on this in recent years, just indicates what the markets in our operations have allowed us to do.

In fact, on page 7, we have summarized this over the past 3 years, we have reduced our debt by $1.8 billion, while we returned cash to shareholders of $1.9 billion, in the form of regular dividends, supplemental dividends, and share buybacks.

Our reserves are presented on page 8.

And I will talk a little bit more about this when we talk about our mine plans.

You can see that during the year, we had revisions to our reserves.

As a result of this much of that was offset by continued additions that we have in the reserves from our exploration program.

And so we have ended 2006 with our preliminary reserve estimates of 39 billion pounds of copper and over 41 million ounces of gold.

Since we expanded our operations and reached our current level of productive capacity beginning in 1998 through our exploration activities, we've more than replaced the significant amounts of copper we've produced and we replaced half the gold through reserve additions.

Looking forward to 2007 as we have previously indicated, we expect sales of 1.1 billion pounds of copper and 1.8 million ounces of gold.

With current prices, this would result in significant cash flows at $2.50 copper and $600 gold, our full-year operating cash flows would exceed $1.3 billion.

Page 10, of course everyone is focused on markets with the recent drop in copper prices beginning in December, obviously reflecting weaker demand in the U.S. from the residential markets and other factors.

But fundamentally, the copper markets continue to be well situated.

Inventories are low by historical standards.

The industry is characterized by an absence of near term major new development projects, with the prices that we received at over an average over $3.00 a pound during 2006.

Everyone was pushing to produce as much copper as they could, and find ways to expand supply disruptions factored into the market in '06.

And given the nature of the market supply side, surprises are likely to continue to be negative for supplies as we go forward.

But with the strength of the economy in China, Europe, Japan, and with the U.S. economy being as it is but with some positive signs there, we feel very good about the long-term fundamentals about the copper business, and are pleased with the exposure that our company will have as we proceed forward with our proposed transactions to combine our business with Phelps Dodge.

Gold markets were also strong in 2006, and a number of factors leave for our continued optimism about gold as we look forward.

Turning specifically to our Company on page 11, we have a photograph vertically looking down into the Grasberg open pit mine, with the different sections that we call pushbacks indicated.

Then we have a horizontal view looking at the 6 North pushback and the 7 South pushback.

After we mine out the remaining high grade section of pushback 6 North in the first half of 2007, pushback 7 will provide the majority of the ore in 2007 and 2008, where 6 North and 6 East were the sources of the higher grade ore in the current year in the 2006.

This is shown on the slides on page 12.

This will give you an indication of why unlike last year, in 2007 we will have a substantial majority of our production coming from the first half of the year in 2007.

In fact, the first quarter is expected to be our strongest quarter from a volume standpoint in 2007.

And that's because we are continuing to mine this high-grade section of 6, 6 North, during the first quarter, you can see the black line shows where we ended the year, as we also began to lower the elevation of the 7 South pushback.

Second quarter, we will continue to complete the mining in 6 north, as 7 south comes down into higher grade.

In the third quarter, 6 north will essentially be completed mining, and 7 south continues to come down, but in relatively low-grade material.

And in the fourth quarter, you can see where we will end up there.

As a result of that, as I have said, we will have high volumes early in '07, and lower volumes later in the year.

Then in 2008, 7 south continues to be lowered towards the higher-grade sections.

And again, I think most of you follow this, but the Grasberg is characterized by very high grades of copper and gold, and particularly gold at the core of the mine.

You can see the red section is plus 3% copper, the orange is plus 2%, the green is plus 1%.

We are also during 2008 lowering the 8 East pushback down, which will provide ore as we go forward.

In 2009, 7 South will be in the highest section of the mine, as we continue to mine 8 East.

And then in 2010, 8 East will be the primary ore pushback for our high grade, or during 2010, and in 2011, the 8 East pushback will be at the bottom of the pit.

This results in a 5-year mine plan that's shown on page 20.

As I indicated for 2007, 1.1 billion pounds and 1.8 million ounces.

In relation to our previous 5-year plan, we have adjusted production between 2008 and 2009, to manage our cutoff rates more effectively.

And there is a relatively small change over the 4-years that we have previously reported.

For the 5-year period we will be averaging 1.24 billion pounds of copper per year, and 1.8 million ounces of gold.

Mine plans are dynamic, they will change as we get new information.

And as you know, we are one of the few, if not the only company to give you a 5-year volume outlook for these plans, this is where we stand now, and we will update you as we go forward.

Our objective is always to move volumes forward to the extent we can safely, and with the parameters of protecting our long-term mine plan.

The quarterly results are shown on page 21, and this shows just how dramatic the impact is of the mine sequencing that I referred to earlier.

During the first quarter, we expect to have 400 million pounds of copper and 850,000 ounces, with substantially lower production during the second half of the year.

And this is because of the completion of mining of the 6 north section during the first half, and then mining of the 7 south section with its lower grades during the second half of the year.

Our unit production costs are presented on page 22.

As all operations have been affected in our industry, we have seen over the past 5 years significant increases in our input costs.

Our diesel costs where we burn 100 million gallons of diesel a year, coal costs, labor costs, steel costs, all have risen.

Fortunately the sales prices of our commodities have risen more at a percentage standpoint, and our margins remain very strong.

During the fourth quarter, our net cash unit costs were $0.44 a pound, and $0.60 for the year.

This reflects very strong gold credits.

You can see that our PC and RC charges were significantly higher than historical rates, and higher than we expect in 2007 because of changes in the smelter business.

I will point out that these higher costs resulted in higher profitability of our smelter operations, particularly Atlantic Copper.

So we have an offset to that in our consolidated financial statements.

Certain of our costs are driven related to higher copper prices, including our roll of these historical PC and RC charges because of price participation features in those contracts had been affected by that.

Our outlook for 2007 with average gold pricing of $600 an ounce, would be a unit cost of $0.63 a pound.

We have a series of development projects under way that I will refer to, these are listed on page 23, with our DOZ expansions, current name plate is 35,000 tons a day.

We have operated last year at 45,000 tons a day.

We are expanding DOZ to 50,000 tons a day with our current project, and we have a further expansion project that we are pursuing to take it to 80,000 tons a day, which would make it a very large block cave operation in the context of the mining industry.

We are continuing to produce, to advance our Common Infrastructure adage system, which will provide the means of producing our underground mines in the future.

We are having improvements in our mill operations, we are developing the small but high grade Big Gossan underground mine.

And we are beginning the development as we advance the Common Infrastructure project for the Grasberg block cave mine, which will be the source of our ore after the completion of the Grasberg pit.

Page 24 shows some information on the DOZ mine.

You can see how this has ramped up.

This is an extension of block caving operations that have been done at our Ertzberg/Grasberg complex since the early 1980s, we have added reserves, we added productive capacity.

It's consistently operating in excess of its name plate capacity.

We expect to complete the 50K expansion in mid next year, and then further expand it to 80 per day.

Interesting you can see in terms of the context of industry supply, the number of years that it takes to develop a mine like the DOZ, and this mine has benefited from the fact that it had infrastructure support, mill living quarters, and so forth.

But it just takes time to develop underground mines to reach significant production levels.

We continue to have success as shown on page 25 for the advancement of the underground tunnel system, which we are calling our Common Infrastructure project.

This is at 400 meters below our existing tunnel section, the [Emole] added at 2900 meters, we have advanced it essentially just past the old Ertzberg pit.

We will be driving a section into the DOZ, MLZ complex, and continuing on to the Grasberg pit.

We expect to complete the tunnel to the Grasberg block cave during the second half of 2007, which will allow us then to begin the initial underground development for the Grasberg block caving operations.

In addition to the production aspects of this, the location of this tunnel will allow us to do exploration drilling in areas that we haven't been able to reach previously with our exploration drills, and because of the faulting system and the mineralization, it will provide us access to some highly prospective areas as we move forward with this in 2007.

We have indicated earlier this year that we were studying our long range mine plans, and specifically assessing the life of the Grasberg open pit, and when we would then transition from the pit to the underground mine.

On page 26, we have got some data here to show that we have had significant increase in geological data over the last couple of years.

We have in addition to the substantial drillings that we have done, our mining activities have resulted in a significant increase in the rock that's been exposed in our high wall.

We have gained new data and this has resulted in a refinement in our slope and pit design.

And as I indicated, this affects the timing of metal production from the Grasberg open pit.

Turning to page 27, we have now completed the studies of these long range mine plans, to come up with the revised optimal design of the pit, and the timing of the development of our underground mine.

We have incorporated our geological model, our geotechnical studies, taking into account economic factors.

And we redesigned the Grasberg open pit pushbacks with the final changes being these.

We will mine out a northwest corner of the open pit to accommodate the revised geometry of a limestone contact, and I have got some schematics here to illustrate that.

As a result of that change, we reconfigured the Southwest corner of the open pit, in order to optimize the value and give us access to ore, both in the near term and in the longer term period in an economic fashion.

And this results in a section of this Southwest corner that had some high grades, being transferred from the open pit to the underground mine.

Aggregate reserves approximating 4 billion pounds of copper, and 5 million ounces of gold, would be now mined through the block cave, as opposed to the open pit.

The cross sections are shown on page 28.

Through the dotted blue line we show the new limestone contact that we have defined through our analysis of the data that's become available to us.

You can see where the previous pit design was.

And the current final pit design has now been moved outwards with a different slope design to accommodate this new geological data.

And looking vertically on page 29, this shows the expansion of the pit in the Northwest corner.

And the resulting step-in of the pit in the Southwest corner.

The pit is large, 2.5 kilometers in diameter, 1.2 to 1.3 kilometers deep.

We will continue to mine in the pit through mid 2015.

We looked at plans that would have had a significantly shorter pit life, we looked at other plans that would have extended it.

This is what we concluded is the optimal pit design for geotechnical as well as economic reasons.

So our pit life continues on into 2015.

You can see the tons that will be mined, the stripping ratio.

As a result of these and other changes, the pit and underground reserves have been reduced roughly 600 million pounds of copper and 1.8 million ounces of gold.

This is really a transfer of this material from the reserve classification to a resource classification.

Reserves have to meet certain parameters that are driven by the mine plan.

The material is still there, and as we go forward, we will be examining ways of adding to our reserves from these resources, and other opportunities that are available to us.

We have a couple of other schematics that use our plan views that we have used earlier.

You can see the extension of the pit in the Northwest corner.

The step-in of the pit in the Southwest corner, and approximately 100 million tons of ore that was in the Southwest corner will now come through the block cave.

We are able to do this because of the attractiveness of our block cave operations.

It allowed us to access this high grade ore in a large scale fashion with the economies of scale.

We have had lots of experience with this, as I said for many years, our DOZ mine is a very efficient and profitable operation.

Our underground ore bodies are close to our existing mill facility, and our topography allows us to have horizontal access to this and to be able to use it.

We have got some statistics in the little box, that shows just the difference between the open pit and the DOZ mine.

Currently, the open pit we are mining roughly 175,000 tons a day, and 45,000 tons a day in the block cave.

And look at the difference in equipment, 17 shovels, 148 trucks, versus 20 loaders and 10 trucks.

And you can see the operating cost differential, in terms of dollars per ton of ore that was mined during 2006.

Long range this redesign of the Grasberg pit does not have a significant effect on the timing of when we will transition from the pit to the underground, roughly a half year.

Does not have a significant effect on our ultimate recoverable reserves, and the low incremental cost of mining these reserves in block cave, will leverage our underground infrastructures, and allow us to be large scale profitable operations as we go forward.

The success of our underground operations, the progress we have made to establish infrastructure allows us to deal with this.

And as we go forward now that we have got a long-term plan established, we will continue our efforts during the remaining life of the pit, to increase the value of the operations.

We expect to have opportunities as we have had in the past, to be able to look at the possibility of steepening the slopes in the open pit.

We are looking at improving our mill operations to add values, and we are continuing to look at ways of faster ramping up the Grasberg underground mine, and to take advantage of other opportunities to develop resources as we go forward.

This Company was built on exploration and in 2007, we will have an expanded exploration program, both in Block A, as well as returning to the field in areas outside Block A. Within Block A, where the Grasberg and DOZ operations are, we'll be looking at extensions of the D Grasberg and KL mining complex.

And we have studies underway to evaluate previous results, supplement that with additional drilling.

We have two areas of where we are going to test potential new open pit opportunities.

One is the old Ertzberg open pit resource, where some high grade ore was left from the previous mining.

The Ertzberg was the original mine that was developed back in the early 1970s for this operation.

It was depleted by the late 1980s at the time the Grasberg was discovered.

And we are doing drilling and evaluations for potential there.

We also have a gold deposit prospect in the Wanagon area, that we will be evaluating during this year.

Then we will be testing the area, the gap between the Ertzberg and Grasberg system as we advance the Common Infrastructure project.

And as I mentioned, we will be resuming activities outside the Grasberg mining district.

When we signed our new contract of work with the government of Indonesia in 1991, we got the rights to a broad area of prospective acreage in the highlands in the western half of New Guinea, and the Indonesian province of Papua.

We initially had 6.5 million acres.

During the mid 1990s, we in 1995 we were joined by Rio Tinto, invested significant amounts in doing exploration.

We had to relinquish acreage, now we're down to roughly 2.2 million acres remaining as we go forward, and we've identified a number of prospects.

When commodity prices dropped so significantly in the late 1990s, and as Indonesia was going through it's economic and political changes, and our cost of capital was so high, we temporarily suspended field activity.

We are now planning to return, we have got some very attractive prospects, and various contracts of work that we have available to those.

We will be returning to the field, in terms of doing additional drilling at Lagare, at Komopa, at Wabu, Obano, and continuing to evaluate additional prospective acreage there during 2007, it is a very exciting opportunity for us.

Just remind you that a number of mines were developed over the years in the eastern half of the island in the country of Papua, New Guinea, we have the only mine in the Indonesian sector, this mountain range crosses the island and has the same geologic dynamics that created the Grasberg and other mines.

And this has to be considered one of the most prospective areas in the world to explore.

In the meantime, we will continue to generate substantial cash flows, regardless of the copper prices that potentially is available.

On page 35, we have updated for our new 5-year plan.

Our operating cash flow sensitivities looking at copper prices varying from $1.50 to $3.00 per pound.

We are not predicting what prices will be.

They could be higher or lower than $3.00 under scenarios and factors that none of us can predict today.

But because of our fully developed long-lived assets, looking at gold from $400 an ounce to $700 an ounce, you can see that we have substantial cash flow, cash flows varying with an annual average under those potential prices, from $750 million a year, to over $1.5 billion a year.

Our price sensitivities are shown on page 36, $25 change in gold is a $23 million variation in cash flows and earnings, $0.10 changes in copper, is $55 million impact on cash flows and earnings.

We have updated our capital expenditures, and with a positive outlook for prices and the opportunities that we have had, we asked our operating team to find ways of profitably investing in new capital, and our new 5-year outlook for capital spending is shown on the slide on page 37.

Previously, we have talked about $250 million of CapEx for '07.

We are now projecting 400 million, and you can see what it is for the out years.

This includes some new projects, but it also represents an acceleration of our underground development, because of our progress we're making with our Common Infrastructure.

So we have $50 million in '07, for example, and $60 million in '08.

That's attributable to the accelerated underground development, which helps us ramp up faster at the end of the pit life in 2015.

All of our capital spending has very high rates of return.

Our previous average was $215 million a year, it's now $275 million a year.

And of course with our level of cash flows, we can certainly justify spending this level of capital.

Our debt picture, and we were at a net cash position at the end of '06 as I mentioned earlier is shown on page 38.

Very modern maturities until our 2010 remaining balance of our 10.125 notes are due.

Talk about the status of our pending acquisition of Phelps Dodge.

The process is going extremely well.

We are progressing on all fronts, we continue to expect to complete the transaction in March.

We received U.S. regulatory approval under Hart Scott Rodino.

We are working with our filing with the European Commission to obtain antitrust approval in Europe.

We do not anticipate any issues from an antitrust standpoint.

We have filed our registration statement with the SEC, and we are working with the staff to incorporate their comments, so they can complete their review, and declare the registration effective.

Once the SEC takes this step of making our S Corp effective, we and Phelps Dodge will schedule our shareholder meetings to approve the transaction.

And based on our progress to-date, we expect the shareholder meeting to occur in March, with closing thereafter.

We have been very pleased with the response with the shareholders we've met with the major shareholders of both companies.

And talked about the advantage of this transaction to the shareholders of each company.

And we feel very positive about the response we are getting and are confident that the deal we negotiate with Phelps Dodge will proceed under it's current terms, and that that deal will be approved by the shareholders.

And by the time we have our next conference call, we will be reporting on the results of the combined companies.

So with that, I know it's a bit longer than our usual comments, but we had a lot of information to cover about our operations.

And we will be pleased to respond to your questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from David Gagliano, Credit Suisse.

First of all, thanks very much as usual, for the detailed overview and update.

I just had a question with regards to the Phelps Dodge transaction.

I was wondering if you had the opportunity to conduct any additional due diligence on the PDS, as to how you visit the operation, since the transaction was announced, and if so, if you had any main takeaways, or what were you main takeaways from the additional due diligence?

Thanks.

Thanks, Dave.

We have, during '06, we were really focused on a couple of things.

We were focused at that time in talking with investors in explaining the transaction.

We felt this was very important, because it was such a significant change in the strategic direction for Freeport.

And so our real focus in '06 was on meeting with investors and getting our SEC filing submitted and our regulatory filings.

As we go into 2007, we are now planning, we're engaged in ongoing discussions with the management of Phelps Dodge.

Because our businesses don't overlap, this is not just a case of folding in an operation to an existing business.

It's a true combination and we'll be working together with them.

So we have had discussions on business integration, and that will be a real focus for us as we get closer to closing.

So we were, we had done what we believed to be, we were very confident with the level of due diligence that we were able to do before the transaction.

And as we learn more about the business and dealing with the Dodge people, we are more comfortable, even more comfortable and more excited about the opportunities that we have before us.

So has your team had the opportunity to visit the Congo at this point?

We have not made a site visit at Congo.

Of course the project there is a new development project.

So there is really limited amounts of issues to see there.

Since the deal was announced, Phelps Dodge has given tentative approval to their initial project there.

And that feasibility study is out, and we have had the opportunity to see that, and discuss it with the PD management, and that's going to be an ongoing process.

Thanks a lot.

Thank you.

And our next question comes from the line of Victor Flores, HSBC.

Please proceed with your question.

Thanks.

Good morning.

I was hoping you could give us perhaps a little bit more detail on the economic decisions driving the decision to move some of that open pit material into the underground.

It seems, if I am right that it's due to the higher strip ratio.

And that fact that given fuel costs, you can move ground more effectively through underground means.

But I was hoping, perhaps you could put a finer point on that.

Victor, let's start by saying the first thing that caused us to do this was the geological and geotechnical data that we had in the Northwest corner.

It was an issue because of this new limestone contact point that we had to redesign the Northwest corner.

Now given that, then we had to look at the other alternatives for what was the maximum value that we could get, to accommodate that expansion of the Northwest corner.

And that's where we ended up taking into account the factors that you mentioned.

The stripping ratios, the access to ore in the near term, the access to ore in the longer term.

Things like truck roads, all of the designs that went into it.

And then built into that was, was this fact that you mentioned with the changes in fuel costs and other costs, maintenance costs, and so forth in the open pit, the very large differences with costs that were evident during the early years of the Grasberg, between underground and open pit operations were not there.

So that allowed us to make this decision in a way that we are able to maximize the value, given the fact that we had to step out the Northwest corner.

This may sound like a bit of an off the wall question.

But do you have a sense for what fuel price you would need, in order for that material to end up back in the open pit?

I don't think that it's a question of the fuel price.

Now as we go forward, we will look at ways of optimizing this opportunity, and certainly fuel is a component to that.

But when you look at the issues associated with just the amount of waste that has to be moved, the equipment that you would have to do it, the maintenance of that equipment, the cost of tires, for example, is very high now.

It's a lot of those factors.

Now some of those factors, of course will be correlated to fuel costs, as our copper price is to a certain extent.

But we will be looking at that as we go forward.

But we believe that our studies have given us a path forward now that we will, this will be our long-term plan, and then we'll be optimizing this at the margins.

Through steep pittening opportunities, and factors like that.

Good, thank you very much.

Okay, thanks.

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

Please proceed with your questions.

Good morning, I had a couple of questions.

First of all on the reserves you talked about the material that was lost as a result of the long-term mine plan.

Did you actually have any new reserves added this year?

Or are we still waiting for the engineering studies on the KL material that you talk about in Deep Grasberg.

I'm just trying to figure out whether that differential was all lost material, or whether there was some material added?

Well, we did have material added at the DOZ complex, what we call the Mill Level Zone, or the Deep Mill Level Zone, we added almost 42 metric tons of material that averaged, you know, about 1.1 copper equivalence.

And so that was a continuation of our activity there.

That makes that almost a 400 million ton complex, with average grades of over a percent for copper, and over 0.8 for gold.

So it's a continuation of our opportunities there.

And as you mentioned, Brian, we do have data that we are evaluating from drilling activity and the economic analysis that we've done there.

And we'll be supplementing that as we go forward in '07.

Okay.

But that won't be done until the end of '07?

Well, we will report reserve activity from our normal ongoing activities as we go along.

I mean, on an annual basis.

We do an annual reserve study that takes into account the drilling activity and the economic analysis.

Of course, we have matters of significance that occur during the year, and we will be drilling in some very interesting areas, both within Block A and outside Block A. If we have favorable results from that drilling activity, we will report that to you on a current basis.

Great.

Thank you.

And the second question, which is unrelated.

Just for your unit production costs guidance for 2007, and I realize you're probably still in negotiations, and this may be somewhat difficult to answer, but you've given a guidance for TCRCs of $0.30 a pound, fourth quarter you were $0.33, down from $0.40 throughout the year, and obviously that reflects partially the copper price falling.

But what actually goes into the $0.30?

Did we take out total price participation?

And can you just review how the brick contract structure works for you?

Thank you.

Thanks, Brian.

Let me just mention that I think most people on this call understand this, but some may not.

That we sell virtually all of our copper concentrates under long-term contracts.

We have virtually all of our contracts are year-end negotiations, and those are underway now with our major customers.

In any given year, the TC and RC will reflect one-half of the most recent year's negotiation, and one-half from the year before that.

It's for a two year period, and it's a continual rolling factor.

So as we go into 2007, half of those roughly will be reflected with the 2005 negotiations, and the remainder will be the negotiations that we have now.

It's based on a copper price of $2.50, and then the results of those contract analysis that we talked about.

So it would be a combination of that.

It's been reported in the press that certain contracts have been negotiated without price participation features, but we can't really comment on where our contracts stand, because they are under negotiations.

Okay.

So would it be fair to say, you know, obviously half of it is on last year, half of it is on this year.

This year's are based at $2.50, and we made some adjustment to the base price has been brought down, but, you know, we are still working on the other parts.

We are about that, yes.

Okay.

And then I will remind you that roughly in a normal year 25 to 30% of our sales volumes goes to PT Smelting.

Right.

And that has it's own contract.

And that is, and that is not affected by the current negotiations that we have.

Right.

So that will just stay at that original price that you negotiated based on the capital recovery, and all of that before it kicks into whatever that straight line price, which I think was the low 20s if I remember.

That's correct.

It's got a floor price on it that is $0.21.

Great.

Thank you very much.

And our next question comes from the line of John Hill from CitiGroup.

Please proceed with your question.

Thanks.

Good morning, everyone.

And congratulations on really great operating results across the board.

A lot of the key issues have been touched on.

I was wondering if you could speak a few words on mill throughput at 246,000 tons, very strong, probably some soft ore going through there, but also some optimization programs, the grinding rolls, et cetera, are coming.

What should we look for in the out years if we understand that in prior periods the average has been more in the 220 to 225 range with maybe a peak of 230?

Well, I think the thing that you touched on, John is the fact that the mill, we don't measure success in the mill by just the number of tons that we can push through it.

We really measure success of our operations by the metal that we produce and sell out of the mill.

And what we showed, I think, during the fourth quarter is that given the access to the highest grade ore that we have available to us, the mill can perform in an extraordinary fashion.

This was a mill that was designed in 1996-'97, to operate at a name plate capacity of 190 tons per day.

And we hit 300,000 tons per day on a day during the fourth quarter, and we operate at very high levels.

We are continuing to operate at high levels during the first quarter, but as we reach the lower grade material during the second half, we will operate at much lower levels, and you will see our average rate be substantially lower than 247,000 tons a day during 2007.

If we look out over the 5-year period, I think you can see the mill operating at rates in the range on average of 220,000 tons per day, with lower levels during periods when we have the low grade ore.

Understood, understood.

And then a quick follow-up.

Obviously we are all waiting to see what kind of underground drilling results may come off the Common Infrastructure tunnel.

It doesn't sound like there's been a whole lot done yet.

Just wondering, though.

As you excavate some of the key gaps underground.

Have you hit any structure or apparent mineralization, or hints that would make you any more or less optimistic about the potential down there?

We are just not getting to the point of where there is prospectivity.

It will be from here forward.

We are right now virtually just crossing through the old Ertzberg pit.

And it's the area beyond that, and we'll be able to do drilling off of the Common Infrastructure and the ventilation drifts that will be there.

And we will be able to do a series of drill fans from that, and that will decide where we go from there with further exploration drilling, and so forth.

But we just haven't gotten to the point yet that is of interest.

Got it.

Got it.

Finally.

What kind of exploration budget are you setting aside for drilling or recon off Block A?

Well, we expect our exploration budget to basically double next year, up to, for our share of it, and of course outside Block A, well inside block A too, Rio Tinto funds 40% of our exploration budget.

So our share would be a total of $25 million, roughly, split roughly in half between Block A and outside Block A.

Great.

Great.

And good luck with the transaction.

Thanks a lot, John.

And our next question comes from the line of John Tumazos, Prudential Equity Group.

Please proceed with your question.

Congratulations on the underground plan with $3.58 per ton lower cost.

That's absolutely remarkable.

Why didn't you choose to go underground three years sooner, for example?

Can you take this plan to Caterpillar, BridgeTown, and other people, and get price concessions?

And when will be the last time you buy a truck from Caterpillar or Komatsu, or any of those people?

Let's see if I can talk about that, John.

Part of the issue in terms of transitioning to underground is the ramp-up, and in our 10-K we'll have some updated information, as we have in past years, that shows the consequence of stopping mining the pit and ramping up underground.

Because the Grasberg block cave reserves are directly underneath the pit, we cannot start the block caving operations the until the pit is completed.

So there is an economic impact of that transition with the ramp-up.

We are working hard, and we have made some progress in limiting that valley of production that's inherent in this transition.

But the fact that we are able to extend the pit in a profitable way to continue to use our additional equipment, and then make this transition in 2015, gives us the maximum NPV from the alternatives that we considered.

Let's see, the second question was --

Can you show these numbers to Caterpillar or Komatsu, and get discounts on trucks?

You know, we have great relationships with both of those companies.

They are obviously taking notice of our new transaction, which will involve the significant expansion of the operations of the combined companies.

We expect that to be beneficial to us in dealing with suppliers and projects in a lot of different ways.

So I can give you assurance that we will get the best, the best value that is available from suppliers as we go forward, because of the scope of our operations.

And we have been a very long standing good customers for that.

We do have some trucks in our budget that we will be buying to help us with our mining rates.

But given the high values that are available to us, it makes economic sense for us to continue to operate in the open pit and transition as we talked about, to keep our mining rates high, and continue to advance our underground infrastructure and to begin the development, so we can limit the amount of time for the ramp-up.

Rich, you mentioned on page 4 of the release the 100 million metric tons that will get delayed?

Yes.

Should we assume that the material substituted in its place is similar to the first half of 2004 when you substituted some peripheral material?

Well I don't think you can make that direct comparison.

No, not in first half of 2004, John, we were in an unusual situation as you recall.

We were not mining at all at the lower reaches of the Grasberg open pit.

We were focusing on mining what was then the high wall in the South, the 6 South high wall, to mine out the area with the failures had occurred during the third quarter of '03, and also to manage the loose talus rock that was there in the high wall that remained from those materials.

Our only real source of hight grade ore during the first half of '04 was from the DOZ mine.

And we really did not have any access at all to the bottom part of the pit.

And we were mining waste from the pit.

So it's not at all similar here.

We will have a section of the high grade ore that we will continue to be managing.

And as I said, we will now have the opportunities, and as you know from your experience, as pits reach the end of their lives, mining engineers are frequently able to find ways of optimizing and creating values beyond their expectations in that circumstance.

And with this grade ore body and this resource, we are certainly going to be looking for those.

Thank you.

And our next question comes from the line of from Hongyu Cai , Goldman Sachs.

Please proceed with your question.

Morning.

Thanks for the presentation.

My question is regarding costs.

In your cost guidance for next year, the site production delivery increased about $0.20.

I wonder if that's purely because of the lower volume, or do you see any incremental increase of costs, of your overall costs?

And to follow-up on the [compression] with the long-term normalized cost when Grasberg turns into an underground operation, do you have just a guidance for the normalized site and production cost for the underground operations?

Hongyu, it's almost totally driven by volumes.

Okay.

There's a, we're basically keeping energy costs constant from year to year.

There's some slight increases in some cost elements like labor costs.

Australian dollar costs, which is a sixth of our cost.

And there is another factor that comes into play here, and that's our sharing with Rio Tinto.

We will be picking up a greater percentage of the cost in '07 than we did in '06, because of the way the metal strip works.

But by far, the principal factor that you are looking at is the lower, the lower copper volumes that we will have during 2007.

Okay, and the second question is about the long-term normalized production and site delivery costs for the underground operation.

Yes.

Let me pull up one thing right here.

You know, previously, when we looked at net cash costs, and we were looking at a dollar copper, our longer term plan at a dollar copper and $500 gold, we were looking at costs that were into mid-$0.30 range for our net unit cost.

Now those costs have increased somewhat, the copper price, gold prices are higher.

And at this point, we are still, we are showing very attractive costs as we go forward.

But I think you would say something in the still very low, at $1 copper, $600 gold, maybe $0.40 to $0.45 unit costs.

Okay.

That's very helpful, thank you.

And our next question comes from the line of Victor Lazarovici, BMO Capital Markets.

Please proceed with your question.

Good morning.

I have a couple of questions.

Housekeeping item, Richard.

You said you were hoping to report next quarter on the combined companies.

In terms of the accounting, I presume you are going to use purchase accounting and you'll account for the Phelps Dodge operations as of the date of acquisition.

Or were you thinking that it would be more of a theoretical report, and you'd give us the full picture on the PD quarter?

Well, it will be purchase accounting.

So in the Freeport consolidated financial statements, we record the purchase acquisition as of the date of closing, and then operating results will be then prospective with the combined PD operations.

But we would anticipate giving complete disclosures of the Phelps Dodge historical results, the operating results, as well as ours, because you'll need that to understand the what the prospects of the company will be going forward.

But you're right in terms of the accounting rules now require you and the fact that we have substantially amount of cash in this transaction, under the old rules even it would have been a purchase transaction.

The other thing, obviously companies that have closed deals close to the end of the reporting period have had to make, you know, some sort of assumptions on the allocation of purchase price variances to different assets and assets classes, and often they've needed expensive studies to determine what the appropriate allocations are.

How are you thinking of this process if you close say mid-March, you've got two weeks to close the books and do all of that accounting?

The accounting rules are pretty clear cut on that.

It provides for a period of time to gain an understanding of the assets and do your studies.

And we will be looking at that throughout 2007.

If you have seen our filing with the SEC, you see in our pro forma financial statements, we have some broad assumptions there, that are consistent with the pro forma rules.

And we will update that with the initial recording of the assets, and then undertake a process that's typical of purchase accounting, and of gaining information on the assets, and doing the analysis to come up with the final recorded amounts, and how they are allocated to specific assets, and to the excess costs and how that's treated over time and the inventories.

So all of that will be, that's just standard operating procedure.

Nothing, nothing unusual in this transaction versus any other transaction.

If I could get back to your plans for Block B. It's been a long time since you have been in the region, and exploration targets, or the attractiveness of exploration targets have changed in a lot of ways in this cycle.

People have taken a different view of the attractiveness of copper versus gold, for instance.

Have you given any thought to changing the priorities for what you had been doing in Block B?

You mentioned I think [Kimoto] as one of your high targets.

I'm trying to remember the name of the very large [asymmetry], the copper ore body that you to the, I think it's to the east of Block A. And also in terms of your rethink on the economics of the open pit and the underground operations, have you looked at long-term metal price assumptions differently?

Well, in response to your second question, we definitely have.

We never, we never focus on any particular price.

We look at, we look at opportunities on a scenario of different prices.

We consider risks that would be faced with a low price environment and opportunities that higher prices would give us.

So in all the economic analysis that we've done, we have run them on the basis of a scenario of varying prices, and reached our judgment about how to balance that risk/reward opportunity.

So that is just a way we have always done things.

As you know, Vic, we don't have any confidence in our ability to predict prices any more than we do anybody else's.

We just have to be prepared for different price scenarios as we go forward.

In terms of the prospects, you know, I would say that while we take into account economics on it, these are geologically driven.

And we look for geologic opportunities there that indicate the potential for mineralization of significance and size of ore bodies for significance, so this is really more of a pure exploration driven factor.

And then we take into account economics as we evaluate committing capital to a project.

So are you saying really that in terms of the range of price assumptions, that the pecking order of the various options didn't change?

No, not, they did not.

This is Jim Bob, Victor, if you remember the really big magnetic anomaly to the west of us about 100 kilometers, Komopa, where there had been some drilling done by the French, we thought that was our best prospect when we pulled out of Block B. The last core test we drill there, intercepted Grasberg-type copper and gold and silver, so when you say where do you go when you go back in the area, we are going back to this huge magnetic anomaly, which is almost a twin to the Grasberg, and now having said that, Wabu, is as you know 40 miles to the north in Block B, we have a smaller anomaly there.

And as we go to the north because of the age of the rock, we found the Wabu gold prospect.

In terms of where you would go drill if you were going to go back into the exploration, then it's clearly, the Komopa area, which has the almost twin magnetic anomaly, you go see if you can find that ore body, it's a Grasberg-type like ore body, regardless of what the cost of copper and gold is.

Great.

Thanks.

And our next question comes from the line of Daniel McConvey, Rossport Investments.

Please proceed with your question.

Good morning, Richard, Jim, Bob, Kathleen, everyone.

Couldn't miss the last Freeport conference call, at least in the old form.

Congratulations on two great years.

Two questions, longer term.

One, you kind of answered this partly with John's question, but if the transition, I know it's 8 years away, but as you go from open pit to underground in 2015, what kind of, what kind of value are you looking at?

Is it, I guess you will have low-grade stockpile to put through the mill, but how much of a dip would you see when you get to that period?

Well --

I know it'll change.

Daniel, we'll have some specific information for that when we file our 10-K for the year.

But there is, the issue that we face is the drop there and the time it takes to ramp-up the underground.

Now the good news is that with the success of our exploration programs, we now have the opportunity of as we ramp up, returning our operations to plus 200,000 tons per day through our mill.

But there will be a couple of years there of where we will have lower production, and we are working now on these, like this Ertzberg pit opportunity, which could provide us some incremental ore to deal with that.

We will deal with stockpiling, not all the stockpiles will be low-grade material.

But that is what we are working to deal with, it's been something that's been, you know, inherent in our long-term plans since really the initial planning for the Grasberg pit.

So we knew that this was happening there.

And over time, that valley has gotten smaller and smaller, but it is still there.

Okay.

Second question is, just looking at your slide on DOZ underground, when you first did the part one for the 25,000 tons per day.

Quite a chunk of capital.

I guess we have been expecting over the years to see large capital go through for the underground development.

And what's happening is, not only getting better production, but the CapEx it would seem is coming down for an incremental time, I just wondered what the dynamics are of that taking place.

Obviously you got the initial infrastructure in, pressures, et cetera, but what things here are surprising you, or turning out a lot better than you thought they would be, in terms of CapEx per incremental production ton?

Size and grade of the ore body.

That has been the whole story of the Grasberg, I mean from the start.

If you go back to the discovery of the Grasberg in 1988, over time this ore body has just kept getting larger with strong grades.

Initially the DOZ was to replace the IOZ mine, which was a mineralization at higher elevations, and that mine produced substantially more than its initial plan provided.

We talked about it at the initial stage of needing the limestone from the underground to put in to deal with our tailing, and then as we got into it, we were able to expand the operations, it operated better than expected.

Now we are putting in a new crusher, and so it's just, just the quality of the ore body that allows us to do all of this.

Being technical, Richard, though in terms of being able to get throughput up on the mine?

Just the fact that the ore is there, and the mining techniques work, and nothing, go ahead, Mark.

I was just going to add that, as we ramp up, as we end the Grasberg pit era, we will have contributions from the DOZ, the ESZ, the Big Gos is going to be running full steam.

We will be starting up the MLZ.

Currently in our plans, we have the Dom reserves that we are looking at at that point.

And then it gets into a stage of ramp-up in the Grasberg block cave.

In our ramp-up that we have considered there is to be very similar to the sort of ramp-up we've had on DOZ, and it is very much driven by how quickly you can open up the draw points.

And there really isn't any, anything beyond what we have been able to do previously in that ramp-up.

Going out to the, well into the underground era and the mill rates that Richard discussed as being over 200K.

We will have, again the Grasberg will continue to be the mainstay, but we also have other very large underground mines that will be continuing.

So we will be anywhere from 3 to 5 large understood ground mines operating, contributing to that overall mill rate.

We will be making modifications to the mill.

We, in our capital plans, we looked at adding crushing and grinding capacity that corresponds with this additional underground ore.

And the optimal recovery characteristics of that ore.

Also, the fact that we don't get the benefit of dropping the Grasberg ore.

Right now, as you know, we drop down the ore path that has a certain amount of power essentially that it contributes to that grinding and rock [combination].

So anyway, it's, we have got a lot of opportunities still in the underground era.

We are optimizing a lot of the optimization will be taking on the milling and metallurgical side.

Thanks, Mark.

Just wanted to say we look forward to the same, you know, great disclosure for Phelps Dodges' large mines in the future, that we get from your great disclosure at Grasberg.

Thanks, guys.

Thanks, Daniel.

And our next question comes from the line of Brett Levy, Jefferies & Company.

Please proceed with your question.

Hey, guys.

Most of the questions have been answered.

In wake of the Phelps Dodge announced transaction, have you guys decided to sort of during the initial period after the transaction, rethink the idea of not hedging any production?

And with that, sort of in the context and obviously the demand side is tougher to predict, but is there anything out there that makes you think that the supply side of the equation might be any different going forward?

I know there's no big finds out there that's sort of hit the radar screen for anyone.

But can you give a little bit of an update of what you guys are thinking on the supply side?

And also how that and the transaction make you think about hedging going forward?

Okay, Brett, philosophically, we have not hedged copper other than during the 1990s we bought some puts, when we were spending capital and there was significant price risk.

There are no hedging requirements under any of our committed financing that we have for this deal.

The financing is firmly committed, it's not a function of any level of copper prices, and there's no requirements for us to hedge, and because of our philosophy, our feelings about the positive outlook for the copper market, it's very unlikely that we would do any sort of forward selling of copper going forward.

We continue to monitor put potential opportunities.

Puts are very expensive because of the volatility in the copper price.

Have been, and in the past we have not elected in recent years to do that.

We will manage our debt aggressively.

We will take steps to pay that debt down as we go forward.

And we will be looking at potential opportunities to monetize our values out of Freeport's existing goal stream.

And that might involve some sort of derivative transactions, and so forth.

But you will not, you should not look for us to be doing any kind of forward selling of copper.

On the supply side, the laws of supply and demand work with our copper prices, people look to expand production to debottleneck.

Phelps Dodge one of the very attractive things about their set of assets, is they have an expanding base of copper volumes coming out of the projects that they have developed over time.

And looking beyond their current announced plans, there are opportunities for further expansion, and that's something that we consider very attractive.

The absence of major new development projects, such as the ones that were undertaken by the industry in the 1990s, is a defining characteristic of this copper market.

And so the smaller projects will be pursued, but they in many cases are offsetting depleting grades, or depleting deposits of grades for the industry are declining.

There is a transition industry-wide, from open pit mining to underground mining, and not all underground mines have the same kind of scale of economics and cost structures that we are fortunate enough to have at Freeport.

So the permitting issues, the political risk issues, environmental issues around the world today are making new projects more technically challenging.

The industry is strapped for people, resources, and equipment.

And with this price volatility, that is going to have an impact on the way people view new projects.

So we believe the market continues to be fundamentally structured attractively for cooper producers, and that's why we are very optimistic about this new opportunity with Phelps Dodge that we have, to provide copper to a world that we believe will need copper.

Alright.

Thanks very much, guys.

Alright, thanks, Brett.

And our next question comes from the line of Mike Brown, Sailfish Capital.

Please proceed with your question.

Hello?

And Mr. Brown, you line is open.

Yes, are you planning to secure any of the Phelps or Freeport paper that is outstanding now, the subnotes?

Mike, this is Kathleen Quirk, in terms of the existing debt that we have at FCX, that will require us to secure the debt.

There are also provisions that will require us to secure the existing Phelps Dodge debt, although the security packages will be different between the two.

And will they be different than the overall security package for the term loans and the bank paper?

The FCX debt will be secured, the existing unsecured debt will be secured in the same security that the bank debt and the term debt at FCX is.

Okay.

Thank you very much.

And our next question comes from the line of Scott Middleman, Jefferies Asset Management.

Please proceed.

Hello.

Good morning.

I was wondering, is there an update on the Brazil, Bulgaria, China, Japan, South Korea, and Mexico antitrust filings?

Hello?

No, we really have nothing to report on any of the regulatory filings.

As I said earlier, we do not expect to have any issues from any sort of regulatory standpoint.

And just one quick follow up.

On the commitment for the debt issuance for the merger.

Are the commitment letters public or not?

The commitment letters --

No, they're described in the proxy that has been filed with the SEC.

Okay.

But they're not public?

Right.

Thank you, thank you very much.

And there appear to be no further questions at this time.

All right.

Well, thanks, everyone.

If you have follow-up questions, please call David, and he will get you in touch with, he'll either answer your questions, or get you in touch with somebody who can.

We appreciate your interest. 2007 is going to be a very exciting year, and we are very optimistic about getting it under way.

Thanks for your participation.

And 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.