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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002
Commission File Number: 1-9916
Freeport-McMoRan Copper & Gold Inc.
Incorporated in Delaware 74-2480931
(IRS Employer Identification No.)
1615 Poydras Street, New Orleans, Louisiana 70112
Registrant's telephone number, including area code: (504) 582-4000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
On June 30, 2002, there were issued and outstanding 144,894,108
shares of the registrant's Class B Common Stock, par value $0.10
per share.
FREEPORT-McMoRan COPPER & GOLD INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Financial Statements:
Condensed Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Remarks 8
Report of Independent Public Accountants 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information 25
Signature 26
Exhibit Index E-1
2
FREEPORT-McMoRan COPPER & GOLD INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FREEPORT-McMoRan COPPER & GOLD INC.
CONDENSED BALANCE SHEETS (Unaudited)
June 30, December 31,
2002 2001
----------- ------------
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 8,663 $ 7,587
Restricted investments 49,809 49,809
Accounts receivable 146,638 118,611
Inventories 388,128 369,188
Prepaid expenses and other 5,993 3,075
Total current assets 599,231 548,270
----------- ------------
Property, plant, equipment and
development costs, net 3,356,677 3,409,687
Restricted investments 70,268 92,079
Deferred mining costs 60,010 47,590
Investment in PT Smelting 54,926 57,194
Other assets 51,216 57,109
----------- ------------
Total assets $ 4,192,328 $ 4,211,929
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 268,891 $ 307,526
Current portion of long-term debt
and short-term borrowings 139,697 205,420
Unearned customer receipts 56,426 33,422
Rio Tinto share of joint venture
cash flows 67,423 33,646
Accrued interest payable 31,527 31,394
Accrued income taxes 7,965 17,019
----------- ------------
Total current liabilities 571,929 628,427
Long-term debt, less current portion:
FCX and PT Freeport Indonesia credit
facilities 505,000 475,371
Convertible senior notes 603,750 603,750
Senior notes 450,000 450,000
Infrastructure asset financings 333,933 355,970
Atlantic Copper debt 179,814 198,089
Equipment and other loans 44,157 50,000
Accrued postretirement benefits and
other liabilities 114,785 119,404
Deferred income taxes 680,776 671,015
Minority interests 105,162 92,955
Redeemable preferred stock 462,504 462,504
Stockholders' equity 140,518 104,444
----------- ------------
Total liabilities and stockholders'
equity $ 4,192,328 $ 4,211,929
=========== ============
The accompanying notes are an integral part of these financial
statements.
3
FREEPORT-McMoRan COPPER & GOLD INC.
STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2002 2001 2002 2001
-------- --------- --------- ---------
(In Thousands, Except Per Share Amounts)
Revenues $407,999 $ 538,259 $ 800,679 $ 985,346
Cost of sales:
Production and delivery 206,124 265,703 441,041 461,317
Depreciation and amortization 62,305 78,319 115,359 146,448
-------- --------- --------- ---------
Total cost of sales 268,429 344,022 556,400 607,765
Exploration expenses 800 2,420 1,554 4,471
General and administrative
expenses 16,360 16,142 32,772 30,551
-------- --------- --------- ---------
Total costs and expenses 285,589 362,584 590,726 642,787
-------- --------- --------- ---------
Operating income 122,410 175,675 209,953 342,559
Equity in PT Smelting losses (2,537) (1,393) (3,359) (2,697)
Interest expense, net (43,492) (41,393) (87,774) (89,830)
Other income (expense), net (9,331) (57) (9,295) 3,120
-------- --------- --------- ---------
Income before income taxes
and minority interests 67,050 132,832 109,525 253,152
Provision for income taxes (46,040) (72,408) (74,854) (133,023)
Minority interests in net (5,975) (15,007) (11,529) (27,608)
income of consolidated
subsidiaries (5,975) (15,007) (11,529) (27,608)
-------- --------- --------- ---------
Net income before cumulative
effect of accounting change 15,035 45,417 23,142 92,521
Cumulative effect of
accounting change, net - - (3,049) -
-------- --------- --------- ---------
Net income 15,035 45,417 20,093 92,521
Preferred dividends (9,459) (9,125) (18,671) (18,190)
-------- --------- --------- ---------
Net income applicable to
common stock $ 5,576 $ 36,292 $ 1,422 $ 74,331
======== ========= ========= =========
Net income per share of common stock:
Basic:
Before accounting change
Cumulative effect of $0.04 $0.25 $0.03 $0.52
accounting change - - (0.02) -
----- ----- ----- -----
Net income per share of
common stock $0.04 $0.25 $0.01 $0.52
===== ===== ===== =====
Diluted:
Before accounting change $0.04 $0.25 $0.03 $0.51
Cumulative effect of
accounting change - - (0.02) -
----- ----- ----- -----
Net income per share of
common stock $0.04 $0.25 $0.01 $0.51
===== ===== ===== =====
Average common shares outstanding:
Basic 144,698 143,954 144,403 143,930
======= ======= ======= =======
Diluted 147,370 145,232 146,410 144,977
======= ======= ======= =======
The accompanying notes are an integral part of these financial
statements.
4
FREEPORT-McMoRan COPPER & GOLD INC.
STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
-----------------------------
2002 2001
--------- ---------
(In Thousands)
Cash flow from operating activities:
Net income $ 20,093 $ 92,521
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 115,359 146,448
Cumulative effect of accounting change 3,049 -
Deferred income taxes 25,368 42,086
Equity in PT Smelting losses 3,359 2,820
Minority interests' share of net income 11,529 27,608
Change in deferred mining costs (12,420) (18,045)
Currency translation adjustments 8,726 (4,346)
Amortization of deferred financing costs 6,005 1,633
Other 6,123 5,998
(Increases) decreases in working capital:
Accounts receivable (21,076) (28,255)
Inventories (18,278) 15,371
Prepaid expenses and other (2,894) 6,861
Accounts payable and accrued liabilities (13,145) 12,214
Rio Tinto share of joint
venture cash flows 31,087 (35,796)
Accrued income taxes (10,050) 23,706
--------- ---------
Increase in working capital (34,356) (5,899)
--------- ---------
Net cash provided by operating activities 152,835 290,824
--------- ---------
Cash flow from investing activities:
PT Freeport Indonesia capital expenditures (80,215) (73,339)
Atlantic Copper capital expenditures (1,254) (7,329)
Sale of restricted investments 23,678 -
Other (156) 4,572
--------- ---------
Net cash used in investing activities (57,947) (76,096)
--------- ---------
Cash flow from financing activities:
Proceeds from debt 314,631 103,758
Repayments of debt (396,981) (280,150)
Cash dividends paid:
Preferred stock (18,350) (18,265)
Minority interests - (4,181)
Purchases of FCX common shares - (3,436)
Loans to Nusamba - (5,548)
Proceeds from exercised stock options 7,549 572
Other (661) (500)
--------- ---------
Net cash used in financing activities (93,812) (207,750)
--------- ---------
Net increase in cash and cash equivalents 1,076 6,978
Cash and cash equivalents at
beginning of year 7,587 7,968
--------- ---------
Cash and cash equivalents at end
of period $ 8,663 $ 14,946
========= =========
The accompanying notes are an integral part of these financial
statements.
5
FREEPORT-McMoRan COPPER & GOLD INC.
NOTES TO FINANCIAL STATEMENTS
1. EARNINGS PER SHARE
Freeport-McMoRan Copper & Gold Inc.'s (FCX) basic net income per
share of common stock was calculated by dividing net income
applicable to common stock by the weighted-average number of common
shares outstanding during the period. Diluted net income per share
of common stock was calculated by dividing net income applicable to
common stock by the weighted-average number of common shares
outstanding during the period plus the net effect of dilutive stock
options and unvested restricted stock. Dilutive stock options
represented 2.4 million shares in the second quarter of 2002, 1.0
million shares in the second quarter of 2001, 1.7 million shares in
the first six months of 2002 and 0.7 million shares in the first
six months of 2001. Dilutive restricted stock totaled 0.3 million
shares for all periods presented.
Options with exercise prices greater than the average market
price of the common stock during the period are excluded from the
computation of diluted net income per share of common stock. This
amounted to options for 7.8 million shares (average exercise price
of $23.43 per share) in the second quarter of 2002, 11.3 million
shares (average exercise price of $21.56 per share) in the second
quarter of 2001, 9.7 million shares (average exercise price of
$22.24 per share) in the first six months of 2002 and 11.3 million
shares (average exercise price of $21.56 per share) in the first
six months of 2001.
FCX's 8 1/4% Convertible Senior Notes issued in August 2001 and
its convertible preferred stock were not included in the
computation of diluted net income per share of common stock because
including the conversion of these instruments would have increased
the diluted net income per share reported for all applicable
periods presented. The senior notes were convertible into 42.2
million shares of common stock and accrued interest totaled $12.8
million in the second quarter of 2002 and $25.8 million in the
first six months of 2002.The preferred stock was convertible into
11.7 million shares of common stock and accrued dividends totaled
$6.1 million in the second quarters of 2002 and 2001, and $12.2
million in the first six months of 2002 and 2001.
2. ACCOUNTING CHANGE - DEPRECIATION AND AMORTIZATION
Effective January 1, 2002, FCX changed its methodology used in the
determination of depreciation associated with PT Freeport
Indonesia's (PT-FI) mining and milling life-of-mine assets. Prior
to January 1, 2002, PT-FI depreciated mining and milling life-of-
mine assets on a composite basis. Total historical capitalized
costs and estimated future development costs relating to its
developed and undeveloped reserves were depreciated using the unit-
of-production method based on total developed and undeveloped
proven and probable copper reserves. Estimated future development
costs, which are significant, are necessary to develop PT-FI's
undeveloped ore bodies and are expected to be incurred over the
next 20 to 25 years.
After considering the inherent uncertainties and subjectivity
relating to the long time frame over which these estimated costs
would be incurred, and after consultation with the accounting staff
of the Securities and Exchange Commission, management decided to
revise its depreciation methodology prospectively. Effective
January 1, 2002, depreciation for the mining and milling life-of-
mine assets excludes consideration of future development costs.
Instead, under the new methodology, PT-FI depreciates only the
historical capitalized costs of individual producing mines over the
related proven and probable copper reserves. Infrastructure and
other common costs will continue to be depreciated over total
proven and probable copper reserves. The cumulative effect of this
change through December 31, 2001, as reflected in FCX's first-
quarter 2002 results, reduced net income by $3.0 million, net of
taxes and minority interest sharing.
The effect of the change in depreciation methodology was to
reduce depreciation and amortization expense by $3.9 million in the
second quarter of 2002 and $7.7 million in the first six months of
2002, thus increasing net income by $2.0 million, $0.01 per share,
in the second quarter of 2002 and by $4.0 million, $0.03 per share,
in the first six months of 2002. On a pro forma basis, the change
in depreciation methodology would have reduced depreciation and
amortization expense by $15.6 million in the second quarter of 2001
and $28.9 million in the first six months of 2001, thus increasing
net income by $7.6 million, $0.05 per share, in the second quarter
of 2001 and by $14.1 million, $0.10 per share, in the first six
months of 2001.
3. BUSINESS SEGMENTS
FCX has two operating segments: "mining and exploration" and
"smelting and refining." The mining and exploration segment
includes the copper and gold mining operations of PT Freeport
Indonesia in Indonesia and FCX's Indonesian exploration activities.
The smelting and refining segment includes Atlantic Copper's
operations in Spain and PT Freeport Indonesia's equity investment
in PT Smelting in Gresik, Indonesia. The segment data presented
below were prepared on the same basis as the consolidated FCX
financial statements.
6
Mining Smelting
and and Eliminations
Exploration Refining and Other FCX Total
---------- -------- --------- ----------
(In Thousands)
Three months ended June 30, 2002:
Revenues $ 319,411 a $176,070 $ (87,482) $ 407,999
Production and delivery 122,637 164,431 (80,944)b 206,124
Depreciation and amortization 52,157 6,892 3,256 62,305
Exploration expenses 777 - 23 800
General and
administrative expenses 17,022 2,110 (2,772) 16,360
---------- -------- --------- ----------
Operating income $ 126,818 $ 2,637 $ (7,045) $ 122,410
========== ======== ========= ==========
Interest expense, net $ 18,797 $ 4,742 $ 19,953 $ 43,492
========== ======== ========= ==========
Provision for income taxes $ 42,396 $ - $ 3,644 $ 46,040
========== ======== ========= ==========
Capital expenditures $ 48,719 $ 421 $ 495 $ 49,635
========== ======== ========= ==========
Total assets $3,225,780 c $633,647 d $ 332,901 $4,192,328
========== ======== ========= ==========
Three months ended June 30, 2001:
Revenues $ 421,062 a $194,399 $ (77,202) $ 538,259
Production and delivery 143,539 198,866 (76,702)b 265,703
Depreciation and amortization 70,153 6,846 1,320 78,319
Exploration expenses 2,311 - 109 2,420
General and
administrative expenses 12,043 2,153 1,946 16,142
---------- -------- --------- ----------
Operating income (loss) $ 193,016 $(13,466) $ (3,875) $ 175,675
========== ======== ========= ==========
Interest expense, net $ 24,085 $ 7,073 $ 10,235 $ 41,393
========== ======== ========= ==========
Provision for income taxes $ 62,224 $ - $ 10,184 $ 72,408
========== ======== ========= ==========
Capital expenditures $ 37,075 $ 3,864 $ 392 $ 41,331
========== ======== ========= ==========
Total assets $3,264,190 c $671,185 d $ (7,396) $3,927,979
========== ======== ========= ==========
Six months ended June 30, 2002:
Revenues $ 589,137 a $375,597 $(164,055) $ 800,679
Production and delivery 253,268 353,910 (166,137)b 441,041
Depreciation and amortization 95,679 13,644 6,036 115,359
Exploration expenses 1,500 - 54 1,554
General and
administrative expenses 29,828 4,086 (1,142) 32,772
---------- -------- --------- ----------
Operating income $ 208,862 $ 3,957 $ (2,866) $ 209,953
========== ======== ========= ==========
Interest expense, net $ 37,910 $ 9,080 $ 40,784 $ 87,774
========== ======== ========= ==========
Provision for income taxes $ 63,137 $ - $ 11,717 $ 74,854
========== ======== ========= ==========
Capital expenditures $ 79,207 $ 1,254 $ 1,008 $ 81,469
========== ======== ========= ==========
Six months ended June 30, 2001:
Revenues $ 781,108 a $353,525 $(149,287) $ 985,346
Production and delivery 258,641 349,851 (147,175)b 461,317
Depreciation and amortization 130,172 13,635 2,641 146,448
Exploration expenses 4,286 - 185 4,471
General and
administrative expenses 22,818 4,172 3,561 30,551
---------- -------- --------- ----------
Operating income (loss) $ 365,191 $(14,133) $ (8,499) $ 342,559
========== ======== ========= ==========
Interest expense, net $ 54,599 $ 14,219 $ 21,012 $ 89,830
========== ======== ========= ==========
Provision for income taxes $ 114,529 $ - $ 18,494 $ 133,023
========== ======== ========= ==========
Capital expenditures $ 72,641 $ 7,329 $ 698 $ 80,668
========== ======== ========= ==========
a. Includes PT Freeport Indonesia sales to PT Smelting totaling
$38.9 million in the second quarter of 2002, $111.9 million in the
second quarter of 2001, $138.1 million in the first six months of
2002 and $202.5 million in the first six months of 2001.
b. Includes effect of changes in the deferral of intercompany
profits on 25 percent of PT Freeport Indonesia's sales to PT
Smelting that are still in PT Smelting's inventory at quarter end,
totaling $(0.5) million in the second quarter of 2002, $(1.0)
million in the second quarter of 2001, $(1.1) million in the first
six months of 2002 and $0.1 million in the first six months of
2001.
c. Includes PT Freeport Indonesia's trade receivables with PT
Smelting totaling $16.1 million at June 30, 2002 and $26.7 million
at June 30, 2001.
7
d. Includes PT Freeport Indonesia's equity investment in PT
Smelting totaling $54.9 million at June 30, 2002 and $53.3 million
at June 30, 2001.
4. COMPREHENSIVE INCOME
A recap of FCX's comprehensive income is shown below (in thousands).
Three months ended Six months ended
June 30, June 30,
---------------- ----------------
2002 2001 2002 2001
------- ------- ------- -------
Net income $15,035 $45,417 $20,093 $92,521
Other comprehensive income (loss):
Cumulative effect of change in
accounting, no tax effect - - - (982)
Change in unrealized derivatives' fair value:
Rupiah/Australian dollar currency contracts 3,446 302 6,874 (4,169)
Tax effect (1,402) (118) (2,795) 1,636
Minority interest effect (210) (29) (419) 392
Euro currency contracts, no tax effect 11,475 (6,309) 9,020 (17,717)
Interest rate swap contracts, no tax effect (1,125) (160) (947) (1,280)
Reclass to earnings:
Rupiah/Australian dollar currency contracts (2,731) 1,140 (4,276) 1,620
Tax effect 1,112 (448) 1,739 (636)
Minority interest effect 167 (107) 261 (152)
Euro currency contracts, no tax effect 651 1,031 1,963 1,331
Interest rate swap contracts, no tax effect 774 150 1,577 (66)
------- ------- ------- -------
Total Comprehensive Income $27,192 $40,869 $33,090 $72,498
======= ======= ======= =======
5. INTEREST COST
Interest expense excludes capitalized interest of $3.5 million in
the second quarter of 2002, $2.1 million in the second quarter of
2001, $6.6 million in the first six months of 2002 and $4.1 million
in the first six months of 2001.
6. RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the first six months of
2002 and 2001 was 2.1 to 1 and 3.7 to 1, respectively. For this
calculation, earnings consist of income from continuing operations
before income taxes, minority interests and fixed charges. Fixed
charges include interest and that portion of rent deemed
representative of interest.
7. NEW ACCOUNTING STANDARD
In July 2001, the Financial Accounting Standards Board issued SFAS
143, "Accounting for Asset Retirement Obligations," which requires
recording the fair value of a liability for an asset retirement
obligation in the period incurred. The standard is effective for
fiscal years beginning after June 15, 2002, with earlier
application permitted. Upon adoption of the standard, FCX is
required to use a cumulative-effect approach, which requires the
cumulative effect of adoption to be reflected in earnings as a
separate line item - "Cumulative effect of accounting change" - for
all existing asset retirement obligation liabilities, asset
retirement costs and accumulated depreciation. FCX has begun work
on identifying and quantifying its asset retirement obligations in
accordance with the new standard, but currently do not expect to
adopt the new rules before January 1, 2003.
----------------------
Remarks
The information furnished herein should be read in conjunction with
FCX's financial statements contained in its 2001 Annual Report on
Form 10-K. The information furnished herein reflects all
adjustments which are, in the opinion of management, necessary for
a fair statement of the results for the periods. All such
adjustments are, in the opinion of management, of a normal
recurring nature.
8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of
Freeport-McMoRan Copper & Gold Inc.:
We have reviewed the accompanying condensed balance sheet of
Freeport-McMoRan Copper & Gold Inc. (a Delaware Corporation) and
subsidiaries as of June 30, 2002 and the related statements of
income for the three-month and six-month periods ended June 30,
2002 and the statement of cash flows for the six months ended June
30, 2002. These financial statements are the responsibility of the
Company's management. The accompanying statements of income
for the three-month and six-month periods ended June 30, 2001 and
the statement of cash flows for the six months ended June 30, 2001
were reviewed by other accountants whose report (dated July 18,
2001) stated that they were not aware of any material modifications
that should be made to those statements for them to be in
conformity with accounting principles generally accepted in the
United States.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data,
and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted
in the United States, which will be performed for the full year
with the objective of expressing an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
statements as of June 30, 2002, and for the three-month and six-
month periods then ended for them to be in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New Orleans, Louisiana
July 18, 2002
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
We operate through our majority-owned subsidiary, PT Freeport
Indonesia, and through PT Irja Eastern Minerals (Eastern
Minerals) and Atlantic Copper, S.A. (Atlantic Copper), our wholly
owned subsidiaries. PT Freeport Indonesia also has a 25 percent
interest in PT Smelting, an Indonesian company that operates a
copper smelter and refinery in Gresik, Indonesia. In addition to
the PT Freeport Indonesia and Eastern Minerals exploration
activities, we conduct other mineral exploration activities in
Papua (formerly Irian Jaya), Indonesia, pursuant to joint venture
and other arrangements. Our field exploration activities outside
of our current mining operations in Block A have been temporarily
suspended (see "Exploration Activities"). The results of
operations reported and summarized below are not necessarily
indicative of future operating results.
Increased Ownership in PT Freeport Indonesia. In 1997, PT
Nusamba Mineral Industri (Nusamba), an Indonesian company and a
subsidiary of PT Nusantara Ampera Bakti, acquired from a third
party approximately 51 percent of the capital stock of PT
Indocopper Investama. PT Indocopper Investama is an Indonesian
company whose only significant assets are its 9.4 percent of PT
Freeport Indonesia's common stock and its 10.0 percent of Eastern
Minerals' stock. Nusamba paid $61.6 million in cash and financed
$253.4 million of the $315.0 million purchase price with a
variable-rate commercial loan from a syndicate of commercial
banks, including JP Morgan Chase Bank as agent, which was to
mature in March 2002. We guaranteed the Nusamba loan for the
purpose of continuing minority Indonesian ownership of PT
Freeport Indonesia. We also agreed to lend to Nusamba any
amounts to cover any shortfalls between the interest payments due
on the commercial loan and dividends received by Nusamba from PT
Indocopper Investama.
In discussions subsequent to December 31, 2001, Nusamba
informed us that it did not expect to be able to repay the bank
loan or our loan at maturity. On February 27, 2002, we repaid
the bank loan as provided for under the terms of our amended
credit facilities (see "Amended Bank Credit Facilities" in our
"Capital Resources and Liquidity" discussion) and acquired
Nusamba's ownership in PT Indocopper Investama. As a result of
our payment of the Nusamba bank loan, our balance sheet as of
December 31, 2001, includes the following:
* An additional liability of $253.4 million to reflect the
payment of the Nusamba bank loan,
* A reduction of "other assets" by $61.6 million to reflect
the nonpayment of our loan to Nusamba for interest shortfalls
through June 30, 2001,
* An increase in deferred income taxes by $4.2 million to
reflect tax liabilities relating to our increased equity
ownership in PT Freeport Indonesia,
* A reduction in minority interests by $52.0 million to
reflect our increased equity ownership in PT Freeport Indonesia,
and
* An increase in property, plant and equipment of $267.3
million to reflect the cost of the acquisition in excess of the
book value of the equity ownership in PT Freeport Indonesia we
acquired.
For 2002, our earnings reflect an increased ownership
interest in PT Freeport Indonesia resulting from the Nusamba
acquisition (90.6 percent compared with 85.9 percent for 2001),
which resulted in additional income, after income taxes, of
approximately $2.6 million in the second quarter, net of
approximately $0.2 million of additional intercompany profit
deferred for PT Freeport Indonesia's concentrate sales to
Atlantic Copper, and approximately $3.5 million in the first six
months, net of approximately $0.9 million of additional
intercompany profit deferred. Interest costs related to the
$253.4 million loan under our bank credit facilities totaled $3.6
million in the second quarter of 2002 and $7.8 million for the
first six months of 2002. Since June 2001, we have been
recognizing an expense for the interest costs we were required to
fund under the Nusamba loan guarantee. The Nusamba acquisition
resulted in additional depreciation and amortization expense for
the increase in property, plant and equipment which reduced net
income by $2.4 million in the second quarter of 2002 and $4.4
million in the first six months of 2002.
CRITICAL ACCOUNTING ESTIMATES
Management's discussion and analysis of our financial condition
and results of operations is based upon our consolidated
financial statements, which have been prepared in conformity with
accounting principles generally accepted in the United States.
The preparation of these statements requires that we make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. We base these
estimates on historical experience and on assumptions that we
consider reasonable under the circumstances; however, reported
results could differ from those based on the current estimates under
10
different assumptions or conditions. The areas requiring
the use of management's estimates are discussed in Note 1, "Use
of Estimates," to our consolidated financial statements included
in our Form 10-K for the year ended December 31, 2001. Unless
otherwise noted, the assumptions and estimates described below
are critical accounting estimates for our mining and exploration
segment, our most significant segment.
Management has reviewed the following discussion of its
development and selection of critical accounting estimates with
the audit committee of our board of directors.
* Reclamation and Closure Costs - Our mining operations
involve activities that disturb the area in and around those
operations and require us to incur reclamation and closure costs
during production and after our mining operations cease. Our
estimates for reclamation and closure costs include estimates of
costs to treat acidic water (also known as acid rock drainage)
created by overburden and other costs to decommission operating
assets. We believe the accounting estimates related to
reclamation and closure costs are critical accounting estimates
because (1) most of these costs will not be incurred for a number
of years and require us to make long-term estimates; (2)
reclamation and closure laws and regulations issued by the
Government of Indonesia could be amended from time to time,
resulting in significant changes to our current plans; and (3)
given the magnitude of our estimated reclamation and closure
costs, changes in these estimates could have a material impact on
net income.
As of June 30, 2002, PT Freeport Indonesia had $26.1 million
accrued for mine closure and reclamation costs. The most
highly uncertain matter that could have a material effect on
the assumptions underlying this critical estimate is the costs
associated with the management of acid rock drainage.
We currently accrue for our estimated reclamation and
closure costs on a unit-of-production basis over the life of
our estimated proven and probable copper reserves. For a
discussion of the assumptions utilized in the estimation of
proven and probable copper reserves, see "Depreciation and
Amortization" below. PT Freeport Indonesia's best estimate at
this time is that ultimate reclamation and closure costs may
require in excess of $100 million but are not expected to
exceed $150 million. Our estimated reclamation and closure
costs are based on management's internal assessments of the
costs to develop and implement technology for the treatment of
captured acid rock drainage and of costs to decommission
assets.
Future changes to governmental rules and regulations could
also require us to revise our plans, and could result in
material changes to our critical accounting estimate for
reclamation and closure costs. In addition, we are currently
working with third-party consultants to develop a
comprehensive mine closure plan as part of our environmental
commitments to the Government of Indonesia and to prepare
estimates of our asset retirement obligations in anticipation
of our adoption of Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations." This
new accounting standard, which we must implement effective no
later than January 1, 2003, requires the fair value of
estimated asset retirement obligations to be recorded in the
period incurred. These obligations are to be estimated using
an expected cash flow approach, in which multiple cash flow
scenarios that reflect the range of possible outcomes and a
credit-adjusted risk-free rate are used to estimate fair
value, with a corresponding amount reflected in property,
plant, equipment and development costs.
The completed mine closure plan and the adoption of
Statement of Accounting Standards No. 143 may result in
material adjustments to our property, plant, equipment and
development cost balances and our accrued reclamation and
closure liabilities as of January 1, 2003, as well as
additional depreciation expense and accretion expense
thereafter. Because the closure plan study and our assessment
of the impact of our adoption of Statement of Financial
Accounting Standards No. 143 are in progress, we are unable to
quantify the impact that changes in these estimates may have
on our financial condition or results of operations.
* Depreciation and Amortization - As discussed in the notes to
our consolidated financial statements included in our 2001 Form
10-K, our mining and milling assets are depreciated using the
unit-of-production method based on estimated recoverable proven
and probable copper reserves. We have other assets that are
depreciated on a straight-line basis over their estimated useful
lives. Our depreciation and amortization expense is impacted by
our estimates of recoverable proven and probable copper reserves
and our estimates of the useful lives of our straight-line
assets. Both our
11
"mining and exploration" and "smelting and
refining" segments are affected by some or all of these
estimates.
Effective January 1, 2002, we changed our methodology used in
the determination of depreciation associated with PT Freeport
Indonesia's mining and milling life-of-mine assets. Prior to
January 1, 2002, PT Freeport Indonesia depreciated mining and
milling life-of-mine assets on a composite basis. Total
historical capitalized costs and estimated future development
costs relating to PT Freeport Indonesia's developed and
undeveloped reserves were depreciated using the unit-of-
production method based on total developed and undeveloped
proven and probable copper reserves. Estimated future
development costs, which are significant, are necessary to
develop PT Freeport Indonesia's undeveloped ore bodies and are
expected to be incurred over the next 20 to 25 years.
After considering the inherent uncertainties and subjectivity
relating to the long time frame over which these estimated
costs would be incurred, and after consultation with the
accounting staff of the Securities and Exchange Commission, we
decided to revise our depreciation methodology prospectively.
Effective January 1, 2002, depreciation for the mining and
milling life-of-mine assets excludes consideration of future
development costs. Instead, under the new methodology, PT
Freeport Indonesia depreciates only the historical capitalized
costs of individual producing mines over the related proven
and probable copper reserves. Infrastructure and other common
costs will continue to be depreciated over total proven and
probable copper reserves. The cumulative effect of this
change through December 31, 2001, as reflected in our first-
quarter 2002 results, totaled $3.0 million ($0.02 per share),
net of taxes and minority interest sharing. The effect of the
new methodology was to reduce depreciation and amortization
expense by $3.9 million, $2.0 million to net income or $0.01
per share in the second quarter of 2002 and by $7.7 million,
$4.0 million to net income or $0.03 per share for the first
six months of 2002. Had PT Freeport Indonesia followed the new
methodology during 2001, our second-quarter 2001 depreciation
and amortization expense would have been reduced by $15.6
million, $7.6 million to net income or $0.05 per share and by
$28.9 million, $14.1 million to net income or $0.10 per share
for the first six months of 2001.
We believe the accounting estimates related to
depreciation and amortization are critical accounting
estimates because (1) the determination of copper reserves
involves uncertainties with respect to the ultimate geology of
our reserves and the assumptions used in determining the
economic feasibility of mining those reserves, including
estimated copper and gold prices and costs of conducting
future mining activities and (2) changes in estimated proven
and probable copper reserves and useful asset lives can have a
material impact on net income. We perform annual assessments
of our existing assets, including a review of asset costs and
depreciable lives, in connection with the review of mine
operating and development plans. When we determine that
assigned asset lives do not reflect the expected remaining
period of benefit, we make prospective changes to their
depreciable lives.
We made changes to certain asset lives at PT Freeport
Indonesia, primarily power generation assets, in 2001. As
disclosed in Note 1 to our consolidated financial statements
included in our 2001 Form 10-K, these changes resulted from a
review of recent operating history and current maintenance
practices. The impact of the changes was to decrease
depreciation expense for 2001 by $25.6 million, increasing net
income by $12.5 million ($0.09 per share). Also as disclosed
in Note 1 to our consolidated financial statements included in
our 2001 Form 10-K, in 2001 we increased our estimates of
future development costs related to our undeveloped ore
bodies, which increased deprecation expense for 2001 by $39.8
million, decreasing net income by $19.4 million ($0.13 per
share). However, because of the change in our depreciation
methodology effective January 1, 2002 discussed above, we no
longer include estimates of future development costs in our
depreciation calculations.
There are a number of uncertainties inherent in
estimating quantities of reserves, including many factors
beyond our control. Ore reserves estimates are based upon
engineering evaluations of samplings of drill holes and other
openings. Our estimates of recoverable proven and probable
reserves are prepared by employees and verified by independent
experts in mining, geology and reserve determination. As of
December 31, 2001, aggregate recoverable proven and probable
copper reserves totaled 52.5 billion pounds and PT Freeport
Indonesia's estimated share totaled 39.4 billion pounds.
These estimates involve assumptions regarding future copper
and gold prices, the geology of our mines, the mining methods
we utilize and the related costs we incur to develop and mine
our reserves. Changes in these assumptions could result in
material adjustments to our reserve estimates that could
result in changes to unit-of-production depreciation and
amortization expense in future periods, with corresponding
adjustments to net income. If aggregate estimated copper
reserves were
12
10 percent higher at December 31, 2001, we
estimate that our annual depreciation expense for 2002 would
have decreased by approximately $12 million, increasing net
income by approximately $7 million. If aggregate estimated
copper reserves were 10 percent lower at December 31, 2001, we
estimate that our annual depreciation expense for 2002 would
have increased by approximately $15 million, decreasing net
income by approximately $8 million. Although some degree of
uncertainty is expected, we believe the extent of our
technical data and operating experience - specifically as it
relates to our Grasberg open pit mine, which we have been
mining for over 10 years - mitigates the potential for
significant changes in reserve estimates, especially as
compared with mines that are undeveloped or newly developed.
Changes to our estimates of recoverable proven and probable
copper and gold reserves could also have an impact on our
assessment of asset impairment. As discussed in Note 1 of our
consolidated financial statements included in our 2001 Form 10-
K, we review and evaluate our long-lived assets for impairment
when events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. However, we
believe it is unlikely that revisions to our estimates of
recoverable proven and probable copper and gold reserves would
give rise to an impairment of our assets because of the
significant size of our reserves in relation to our asset
carrying values.
* Deferred Mining Costs - In general, mining costs are charged
to operations as incurred. Because of the configuration and
location of the Grasberg ore body and the location and extent of
surrounding overburden, the ratio of overburden to ore is much
higher in the initial mining of the pit than in later years. As
a result, surface mining costs associated with overburden removal
at PT Freeport Indonesia's open-pit mine that are estimated to
relate to future production are initially deferred and
subsequently charged to operating costs when the ratio of actual
overburden removed to ore mined falls below the estimated average
ratio of overburden to ore over the life of the Grasberg open
pit. The Grasberg open-pit mine is currently our only open-pit
mine.
We believe the estimated average ratio of overburden to
ore over the life of the Grasberg open pit is a critical
accounting estimate because (1) it is susceptible to change
from period to period because it requires management to make
assumptions about the future mine plan; and (2) changes in it
could materially impact net income. Our mine plan is derived
from a computer model that takes into consideration available
geological data and determines the most efficient and cost
effective method of accessing the economic reserves.
Significant assumptions underlying our mine plan include the
amount of total overburden and ore we expect to move in a
given year and the ultimate configuration of the pit.
For 2002, PT Freeport Indonesia's estimated life-of-mine
overburden-to-ore ratio is 1.8 to 1. PT Freeport Indonesia's
geologists and engineers reassess the overburden-to-ore ratio
and the remaining life of the Grasberg open pit mine at least
annually, and any changes in estimates are reflected
prospectively beginning in the quarter of change. As
disclosed in Note 1 to our consolidated financial statements
included in our 2001 Form 10-K, ongoing delineation drilling
efforts combined with successive large expansions of PT
Freeport Indonesia's mining and milling capacity caused
significant variability in engineering estimates of the
quantity of overburden to be removed over the Grasberg pit's
life. As a result, PT Freeport Indonesia's deferral of
overburden removal costs was determined using overburden-to-
ore ratios excluding the years near the end of the productive
life of the Grasberg pit, and had not varied significantly
prior to 2000. However, during the fourth quarter of 2000 PT
Freeport Indonesia determined that its future surface mine
plans were sufficiently established to substantiate the use of
estimated life-of-mine overburden tonnage in its 2001 mine
plan in the determination of its deferred overburden removal
costs at the Grasberg open-pit mine and changed its life-of-
mine overburden-to-ore ratio to 1.6 to 1 from 2.4 to 1. The
fourth-quarter 2000 impact of the change was a $9.9 million
deferral of mining costs, which increased net income by
approximately $5 million.
Although some degree of uncertainty is expected, we believe
the extent of our technical data and operating experience -
specifically as it relates to our Grasberg open pit mine,
which we have been mining for over 10 years - mitigates the
potential for significant changes in overburden-to-ore
estimates, especially as compared with mines that are
undeveloped or newly developed. For 2002, if the life-of-mine
overburden-to-ore ratio was 1.65 to 1 as calculated using a
different pit configuration, instead of our current 1.8 to 1,
we estimate our deferral of mining costs for 2002 would be
approximately $7 million higher and net income would be
approximately $4 million higher.
13
CONSOLIDATED RESULTS
Summary comparative results for the second-quarter and six-month
periods follow (in millions, except per share amounts):
Second Quarter Six Months
---------------- ----------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues $408.0 $538.3 $800.7 $985.3
Operating income 122.4 175.7 210.0 342.6
Net income applicable to common
stock before cumulative effect
adjustment 5.6 36.3 4.5 74.3
Net income applicable to common stock 5.6 36.3 1.4 74.3
Diluted net income per share:
Before cumulative effect adjustment 0.04 0.25 0.03 0.51
Applicable to common stock 0.04 0.25 0.01 0.51
Our consolidated revenues include PT Freeport Indonesia's
sale of copper concentrates, which also contain significant
amounts of gold, and the sale by Atlantic Copper of copper
anodes, cathodes, wire and wire rod, and gold in anodes and
slimes. Our revenues and net income vary significantly with
fluctuations in the market prices of copper and gold and other
factors. At various times, in response to market conditions, we
have entered into copper and gold price protection contracts for
some portion of our expected future mine production to mitigate
the risk of adverse price fluctuations. We currently have no
copper or gold price protection contracts relating to our mine
production. We have outstanding gold-denominated and silver-
denominated preferred stock with dividends and redemption amounts
determined by commodity prices. Based on PT Freeport Indonesia's
projected share of 2002 copper sales (1.5 billion pounds), a
$0.01 per pound change in the average price realized would have
an approximate $15 million impact on our annual revenues and an
approximate $8 million impact on our net income. A $5 per ounce
change in the average price realized on PT Freeport Indonesia's
share of projected 2002 gold sales (2.2 million ounces) would
have an approximate $11 million impact on our annual revenues and
an approximate $6 million impact on our net income.
Our consolidated revenues for the second quarter and first
six months of 2002 primarily reflect lower copper and gold
revenues at PT Freeport Indonesia, compared with the same periods
in 2001. During the second quarter of 2002, our Grasberg mine
operations transitioned from the lower grade material which had
been mined in recent months to higher grade ore which we expect
to mine for the next several quarters. The sequencing in mining
resulted in a delay in accessing the anticipated higher-grade ore
and extremely heavy rainfall in late June hindered production and
delayed concentrate shipments.
Second-quarter 2002 consolidated revenues include net
deductions of $5.9 million ($3.0 million to net income or $0.02
per share) primarily for metal volume adjustments based on final
assays and final pricing of concentrates sold in prior quarters,
compared with an increase of $0.7 million ($0.4 million to net
income or less than $0.01 per share) to second-quarter 2001
revenues. Six-month 2002 consolidated revenues included net
additions of $5.4 million ($2.8 million to net income or $0.02
per share), compared with net deductions of $2.7 million ($1.3
million to net income or $0.01 per share) in the first six months
of 2001.
Consolidated cost of sales for the 2002 periods were lower
compared with the 2001 periods largely because of lower sales
volumes and lower depreciation and amortization expense at PT
Freeport Indonesia because of a change in our depreciation
methodology (Note 2). Our exploration expenses declined to $0.8
million in the second quarter of 2002 and $1.6 million in the
first six months of 2002, from $2.4 million and $4.5 million,
respectively, in the 2001 periods reflecting efforts to reduce
costs during periods of continued low commodity prices and our
suspending exploration outside Block A.
Our "Other income (expense), net" includes the impact of
translating Atlantic Copper's net euro-denominated liabilities,
primarily its retiree pension obligation. Changes in the
U.S.$/euro exchange rate require us to adjust the dollar value of
our net euro-denominated liabilities and record the adjustment in
earnings. The exchange rate was $0.88 per euro at December 31,
2001, $0.87 per euro at March 31, 2002 and $1.00 per euro at June
30, 2002. Exchange rate effects on our net income from euro-
denominated liabilities totaled $(9.3) million in the second
quarter of 2002, $1.2 million in the second quarter of 2001,
$(8.7) million in the first six months of 2002 and $4.3 million
in the first six months of 2001.
Our effective tax rate for the first six months of 2002 was
68 percent compared with an effective rate of 53 percent for the
first six months of 2001. The higher effective rate for the
first six months of 2002
14
primarily reflects the impact of lower
income at PT Freeport Indonesia and higher interest costs at our
parent company (see "Other Financial Results").
RESULTS OF OPERATIONS
We have two operating segments: "mining and exploration" and
"smelting and refining." The mining and exploration segment
includes PT Freeport Indonesia's copper and gold mining
operations in Indonesia and FCX's Indonesian exploration
activities, including those of Eastern Minerals. The smelting
and refining segment includes Atlantic Copper's operations in
Spain and PT Freeport Indonesia's 25 percent equity investment
in PT Smelting. Summary comparative operating income (loss) by
segment for the second-quarter and six-month periods follows (in
millions):
Second Quarter Six Months
---------------- ----------------
2002 2001 2002 2001
------ ------ ------ ------
Mining and exploration $126.8 $193.0 $208.9 $365.2
Smelting and refining 2.6 (13.5) 4.0 (14.1)
Intercompany eliminations and other (7.0) (3.8) (2.9) (8.5)
------ ------ ------ ------
FCX operating income a $122.4 $175.7 $210.0 $342.6
====== ====== ====== ======
a. Profits on PT Freeport Indonesia's sales to Atlantic Copper
and 25 percent of PT Freeport Indonesia's sales to PT
Smelting are deferred until the final sale to third parties
has occurred. Changes in the amount of these deferred
profits impacted operating income by $(6.1) million in the
second quarter of 2002, $0.7 million in the second quarter of
2001, $2.9 million in the first six months of 2002 and $0.6
million in the first six months of 2001. Our consolidated
quarterly earnings fluctuate depending on the timing and
prices of these sales.
MINING AND EXPLORATION
A summary of increases (decreases) in PT Freeport Indonesia
revenues between the periods follows (in millions):
Second Six
Quarter Months
------- -------
PT Freeport Indonesia revenues - prior year period $ 421.1 $ 781.1
Increases (decreases):
Sales volumes:
Copper (28.4) (56.6)
Gold (112.1) (193.0)
Price realizations:
Copper 8.4 (1.3)
Gold 16.4 25.6
Adjustments, primarily for copper pricing 0.6 14.4
on prior period sales
Treatment charges, royalties and other 13.4 18.9
------- -------
PT Freeport Indonesia revenues - current year period $ 319.4 $ 589.1
======= =======
PT Freeport Indonesia's revenues for both the second quarter
and first six months of 2002 were impacted by lower sales volumes
of copper and gold when compared with the 2001 periods. For the
second quarter of 2002, compared with the second quarter of 2001,
copper sales volumes were 10 percent lower and gold sales volumes
were 52 percent lower. The lower copper sales volumes primarily
reflect an increase in concentrate inventories caused by delayed
shipments because of weather conditions at our port site.
Concentrate inventory at June 30, 2002 included approximately 30
million pounds of copper and 55,000 ounces of gold, net to PT
Freeport Indonesia's interest, compared with less than 5 million
pounds of copper and less than 6,000 ounces of gold at December
31, 2001. The lower gold sales volumes also reflect
significantly lower grade ore processed during the 2002 periods
compared with the higher grade material mined during 2001. Gold
realizations in the second quarter of 2002 were nearly $42 per
ounce higher than second-quarter 2001 realizations, and
realizations in the first six months of 2002 were over $35 per
ounce higher than the prior year period. Treatment charges in
total were lower in the 2002 periods primarily because of the
lower sales volumes. Royalties were $3.9 million lower in the
second quarter of 2002 and $7.0 million lower in the first six
months of 2002 compared with the 2001 periods primarily because
of lower gold sales.
Substantially all of PT Freeport Indonesia's concentrates
sales contracts provide for final copper pricing in a specified
future period based on world metals prices, primarily prices
quoted on the London Metal Exchange (LME). PT Freeport
Indonesia records revenues and invoices its customers based on
LME prices at the time of shipment. Under accounting rules,
these terms create an "embedded derivative" in our concentrate
sales contracts that must be adjusted to fair value through
earnings each
15
period until the date of final copper pricing. PT
Freeport Indonesia's second-quarter 2002 revenues include net
additions of $4.1 million for adjustments to the fair value of
embedded derivatives in concentrate sales contracts, compared
with net reductions of $16.2 million to second-quarter 2001
revenues. PT Freeport Indonesia's six-month 2002 revenues
included net additions of $14.4 million for adjustments to the
fair value of embedded derivatives in concentrate sales
contracts, compared with net reductions of $28.1 million in the
first six months of 2001.
At June 30, 2002, we had consolidated embedded derivatives
on copper sales totaling 130.0 million pounds recorded at an
average price of $0.76 per pound. Nearly all of these sales are
expected to be finally priced during the third quarter of 2002.
A one-cent movement in the average price used for these
provisional billings will have an approximate $0.7 million impact
on our 2002 consolidated net income.
At times PT Freeport Indonesia has entered into derivative
contracts to manage certain risks resulting from fluctuations in
commodity prices. During 2001 and the first six months of 2002,
and as of June 30, 2002, PT Freeport Indonesia did not have any
price protection programs in place for its copper and gold sales
other than our gold-denominated preferred stock. As conditions
warrant, PT Freeport Indonesia may enter into new contracts for
its future sales.
PT Freeport Indonesia has commitments from various parties,
including Atlantic Copper and PT Smelting, to purchase virtually
all of its estimated 2002 production at market prices. Net of
Rio Tinto's interest, PT Freeport Indonesia's share of sales for
the third quarter of 2002 is projected to approximate 420 million
pounds of copper and 800,000 ounces of gold. PT Freeport
Indonesia's share of sales for 2002 is projected to approximate
1.5 billion pounds of copper and 2.2 million ounces of gold.
Projected 2002 sales reflect the expectation of mining higher
grade ore in the second half of 2002.
PT Freeport Indonesia Operating Results
Second Quarter Six Months
------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- ---------
PT Freeport Indonesia, Net of Rio Tinto's Interest
Copper
Production (000s of
recoverable pounds) 374,500 359,100 671,200 736,200
Production (metric tons) 169,900 162,900 304,500 333,900
Sales (000s of
recoverable pounds) 350,400 389,800 646,500 723,200
Sales (metric tons) 158,900 176,800 293,200 328,000
Average realized
price per pound $.75 $.72 $.74 $.74
Gold
Production (recoverable ounces) 444,200 751,500 780,000 1,482,400
Sales (recoverable ounces) 393,700 813,600 730,300 1,458,300
Average realized
price per ounce $308.76 $267.04 $300.17 $265.11
Gross profit per pound of copper (cents):
Average realized price 74.6 72.2 73.6 73.8
------- ------- ------- ---------
Production costs:
Site production and delivery 34.9 a 36.6 a 38.8 a 35.8 a
Gold and silver credits (35.2) (57.1) (35.2) (54.6)
Treatment charges 17.5 18.3 18.4 18.2
Royalty on metals 1.2 2.0 1.1 2.0
------- ------- ------- ---------
Cash production costs 18.4 (0.2) 23.1 1.4
------- ------- ------- ---------
Depreciation and amortization 14.9 18.0 14.8 18.0
------- ------- ------- ---------
Total production costs 33.3 17.8 37.9 19.4
------- ------- ------- ---------
Adjustments, primarily for
copper pricing on prior
period open sales 0.1 (1.0) 1.9 (0.2)
------- ------- ------- ---------
Gross profit per pound of copper 41.4 53.4 37.6 54.2
======= ======= ======= =========
16
Second Quarter Six Months
------------------- -----------------------
2002 2001 2002 2001
------- --------- --------- ---------
PT Freeport Indonesia, 100% Operating Statistics
Ore milled (metric tons per day) 239,600 240,000 241,900 234,800
Average ore grade
Copper (percent) 1.14 1.04 1.02 1.08
Gold (grams per metric ton) .98 1.57 .85 1.62
Gold (ounce per metric ton) .032 .050 .027 .052
Recovery rates (percent)
Copper 87.1 86.6 86.4 87.9
Gold 86.3 89.3 86.0 88.6
Copper
Production (000s of
recoverable pounds) 457,600 412,400 814,700 847,300
Production (metric tons) 207,600 187,100 369,500 384,300
Sales (000s of
recoverable pounds) 428,300 447,700 784,700 832,600
Sales (metric tons) 194,300 203,100 355,900 377,700
Gold (recoverable ounces)
Production 581,000 982,500 1,000,000 1,928,500
Sales 516,200 1,061,800 936,100 1,894,800
a. Net of deferred mining costs totaling $7.7 million (2.2
cents per pound) in the second quarter of 2002, $9.7 million (2.5
cents per pound) in the second quarter of 2001, $12.4 million
(1.9 cents per pound) in the first six months of 2002 and $18.0
million (2.5 cents per pound) in the first six months of 2001.
PT Freeport Indonesia's second-quarter 2002 copper
production increased, compared with the second quarter of 2001,
because of higher ore grades and recovery rates; however, sales
volumes were lower primarily because severe weather in June
delayed concentrate shipments. Copper production and sales for
the first six months of 2002 were lower, compared with the first
six months of 2001, primarily because of lower grades, recovery
rates and the weather delays. Gold production and sales were
lower in the 2002 periods primarily because of lower ore grades.
During the second quarter of 2002, Grasberg mine operations
transitioned from the lower grade material which had been mined
in recent months to higher-grade ore which we expect to mine for
the next several quarters. As a result, we expect higher copper
production and significantly higher gold production for the
remainder of 2002 and into next year.
At the Deep Ore Zone underground mine, production averaged
19,300 metric tons of ore per day in the second quarter of 2002,
compared with 4,400 metric tons of ore per day in the second
quarter of 2001. Full production of 25,000 metric tons of ore per
day is expected in the second half of 2002. We are nearing
completion of a study on the feasibility of expanding the Deep
Ore Zone mine's production rates to as much as 35,000 metric tons
of ore per day. Production from our other producing underground
mine, the Intermediate Ore Zone, averaged 18,200 metric tons of
ore per day in the second quarter of 2002, compared with 21,200
metric tons of ore per day in the 2001 period. We expect the
Intermediate Ore Zone mine to be depleted by the end of 2003.
Unit site production and delivery costs in the second quarter
of 2002 averaged $0.35 per pound of copper, $0.02 per pound lower
than the $0.37 reported in the second quarter of 2001. For the
first six months of 2002, unit site production and delivery costs
of $0.39 per pound were $0.03 per pound higher than the $0.36 per
pound in the 2001 period because of lower volumes. Lower grades
of ore mined resulted in lower gold credits of $0.35 per pound in
the 2002 quarter, compared with the 2001 quarter level of $0.57
per pound. Gold credits for the first six months of 2002 of
$0.35 per pound were also lower than the gold credits of $0.55
per pound in the 2001 period. Gold ore grades for the second
quarter of 2002 declined by 38 percent, compared with the second
quarter of 2001, and gold ore grades for the first six months of
2002 declined by 48 percent, compared with the first six months
of 2001. Royalties totaled $4.1 million in the second quarter of
2002, $8.0 million in the second quarter of 2001, $7.3 million in
the first six months of 2002 and $14.3 million in the first six
months of 2001, reflecting lower copper and gold sales volumes in
the 2002 periods.
Unit net cash production costs, including gold and silver
credits, totaled $0.23 per pound for the first six months of
2002, but for the full year 2002 we expect them to average
approximately $0.10 per pound of copper, assuming second half
gold prices of $316 per ounce and annual gold sales of 2.2
million
17
ounces. In the second half of 2002, unit costs are
expected to be lower than the average for 2002, as both ore grade
and production are expected to increase.
We conduct the majority of our operations in Indonesia and
Spain where our functional currency is the U.S. dollar. The
majority of our revenues are denominated in U.S. dollars;
however, some costs and certain asset and liability accounts are
denominated in Indonesian rupiahs, Australian dollars or euros.
Generally, our results are positively affected when the U.S.
dollar strengthens against these foreign currencies and adversely
affected when the U.S. dollar weakens against these foreign
currencies.
Since 1997, the Indonesian rupiah/U.S. dollar exchange rate
has been volatile. One U.S. dollar was equivalent to 8,710
rupiahs at June 30, 2002, 9,660 rupiahs at March 31, 2002 and
10,160 rupiahs at December 31, 2001. PT Freeport Indonesia
recorded losses totaling $1.2 million in the second quarter of
2002 and $1.6 million in the first six months of 2002, compared
with $0.2 million in the second quarter of 2001 and $0.6 million
in the first six months of 2001 related to its rupiah-denominated
assets and liabilities. Operationally, changes in the U.S.
dollar/rupiah exchange rate primarily impact PT Freeport
Indonesia's labor costs, which are mostly rupiah-denominated. At
estimated annual aggregate rupiah payments of 900 billion and the
June 30, 2002 exchange rate of 8,710 rupiahs to one U.S. dollar,
a one-thousand-rupiah increase in the exchange rate would result
in an approximate $11 million decrease in annual operating costs
and a one-thousand-rupiah decrease in the exchange rate would
result in an approximate $13 million increase in annual operating
costs, before any hedging effects.
PT Freeport Indonesia purchases materials and supplies
denominated in Australian dollars. The exchange rate was $0.56
to one Australian dollar at June 30, 2002, $0.53 to one
Australian dollar at March 31, 2002 and $0.51 to one Australian
dollar at December 31, 2001. At estimated annual aggregate
Australian dollar payments of 225 million and the June 30, 2002
exchange rate of $0.56 to one Australian dollar, a $0.01 increase
or decrease in the exchange rate would result in an approximate
$2 million change in aggregate annual costs.
At times, PT Freeport Indonesia has entered into foreign
currency forward contracts to hedge a portion of its aggregate
anticipated Indonesian rupiah and Australian dollar payments. As
of June 30, 2002, PT Freeport Indonesia had foreign currency
contracts to hedge 239.7 billion of rupiah payments, or
approximately 50 percent of aggregate projected rupiah payments
for the remainder of 2002 at an average exchange rate of 12,941
rupiahs to one U.S. dollar. Each 1,000-rupiah change in the
Indonesian rupiah/U.S. dollar exchange rate impacts the market
value of these contracts by approximately $3 million.
PT Freeport Indonesia had foreign currency contracts hedging
the Australian dollar during 2001, but currently has no contracts
hedging the Australian dollar. PT Freeport Indonesia recorded
net gains (losses) to production costs for its foreign currency
contracts totaling $2.8 million in the second quarter of 2002,
$(1.2) million in the second quarter of 2001, $4.4 million in the
first six months of 2002 and $(1.7) million in the first six
months of 2001. On a consolidated basis, we recorded net gains
(charges) to Other Comprehensive Income, a component of
stockholders' equity, totaling $0.4 million in the second quarter
of 2002, $0.7 million in the second quarter of 2001, $1.4 million
in the first six months of 2002 and $(1.3) million in the first
six months of 2001 related to PT Freeport Indonesia's currency
hedging contracts that remained open as of the end of those
periods.
Exploration Activities
Block A exploration efforts in the first half of 2002 were
associated with the delineation drilling project known as the
Deep Ore Zone Northwest Extension. This program is intended to
test a 400-meter extension immediately adjacent to the current
Deep Ore Zone block cave mine reserve. The drilling program will
target an 80 million metric ton resource with 4,800 meters of
drilling in eleven holes that fill in gaps between existing
exploration drill holes.
Field exploration activities outside of our current mining
operations area are in suspension due to safety and security
issues and uncertainty relating to a possible conflict between
our mining and exploration rights in certain forest areas covered
by our Contracts of Work and an Indonesian law enacted in 1999
prohibiting open-pit mining in protected forest areas. The
current suspensions were granted for one-year periods ending
February 26, 2003 for Block B, March 31, 2003 for PT Nabire Bakti
Mining and November 15, 2002 for Eastern Minerals. We expect to
continue to seek suspension renewals for additional one-year
periods by written request to the Government of Indonesia for
each of the suspended areas if required.
18
SMELTING AND REFINING
Our investments in smelters serve an important role in our
concentrate marketing strategy. Approximately one-half of PT
Freeport Indonesia's concentrate production is sold to its
affiliated smelters, Atlantic Copper and PT Smelting, and the
remainder is sold to other customers.
Treatment charges for smelting and refining copper
concentrates represent a cost to PT Freeport Indonesia and income
to Atlantic Copper and PT Smelting. However, because we have
integrated our upstream (mining and milling) and downstream
(smelting and refining) operations, we are able to achieve
operating hedges which substantially offset the effect of changes
in treatment charges for smelting and refining PT Freeport
Indonesia's copper concentrates. While low smelting and refining
charges adversely affect the operating results of Atlantic Copper
and PT Smelting, low charges benefit the operating results of PT
Freeport Indonesia's mining operations.
As a result, changes in smelting and refining charges do not
have a significant impact on our consolidated operating results.
Taking into account taxes and minority ownership interests, an
equivalent change in the charges PT Freeport Indonesia pays and
the charges Atlantic Copper and PT Smelting receive would
essentially offset in our consolidated operating results.
Atlantic Copper Operating Results
Second Quarter Six Months
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Cash margin (in millions) $12.6 $(3.7) $23.1 $4.7
Operating income (loss) (in millions) $2.6 $(13.5) $4.0 $(14.1)
Concentrate treated (metric tons) 242,500 195,300 500,800 400,800
Anodes production (000s of pounds) 152,100 134,300 322,200 278,300
Cathodes, wire rod and wire sales
(000s of pounds) 140,400 129,100 276,200 264,700
Gold sales in anodes and slimes
(ounces) 159,800 181,000 411,400 289,200
Atlantic Copper's cash margin, which is revenues less
production costs, was $16.3 million higher in the 2002 quarter,
compared with the 2001 quarter, and $18.4 million higher in the
first six months of 2002, compared with the first six months of
2002, primarily because of a scheduled 27-day major maintenance
turnaround in April 2001. The major maintenance turnaround was
completed at a total cost of approximately $15 million
(approximately $9 million of direct costs and $6 million related
to lower sales volumes). The next scheduled major maintenance
turnaround is expected to occur in 2004. Atlantic Copper's
cathode cash production costs per pound of copper, before
currency hedging, averaged $0.12 in the second quarter of 2002,
compared with $0.18 in the second quarter of 2001, and $0.11 in
the first six months of 2002, compared with $0.16 in the first
six months of 2001. The higher unit costs in the 2001 periods
primarily reflect lower throughput and higher maintenance costs
associated with the major maintenance turnaround. Atlantic
Copper's average treatment rates, which are what Atlantic Copper
is paid to smelt and refine concentrates, continue at
historically low levels of $0.17 per pound for the 2002 periods,
compared with $0.18 per pound for the 2001 periods.
The majority of Atlantic Copper's revenues are denominated
in U.S. dollars; however, some costs and certain asset and
liability accounts are denominated in euros. Atlantic Copper's
estimated annual euro payments total approximately 100 million
euros and at a June 30, 2002 exchange rate of $1.00 per euro, a
$0.05 increase or decrease in the exchange rate would result in
an approximate $5 million change in annual costs, before any
hedging effects.
As part of refinancing its debt in June 2000, Atlantic
Copper was required to significantly expand its program to hedge
anticipated euro-denominated operating costs. At June 30, 2002,
Atlantic Copper had contracts to purchase 94.5 million euros at
an average exchange rate of $1.01 per euro through December 2003.
These contracts currently hedge approximately 60 percent of
Atlantic Copper's projected remaining 2002 and 2003 euro
disbursements. Each $0.01 change in the US$/euro exchange rate
impacts the market value of these contracts by approximately $1
million. Atlantic Copper's operating results reflect losses on
currency hedging contracts that matured during the period
totaling $0.7 million in the second quarter of 2002, $1.0 million
in the second quarter of 2001, $2.0 million in the first six
months of 2002 and $1.3 million in the first six months of 2001.
On a consolidated basis, we recorded net gains (charges) to Other
Comprehensive Income, a component of stockholders' equity,
totaling $12.1 million in the second quarter of 2002, $(5.3)
million in the second quarter of 2001, $11.0 million in the first
six months of 2002 and $(16.4) million in the first six months of
2001 related to Atlantic Copper's euro hedging contracts that
remained open as of the end of those periods.
19
Atlantic Copper had euro-denominated net monetary
liabilities at June 30, 2002 totaling $82.3 million recorded at
an exchange rate of $1.00 per euro. The March 31, 2002 exchange
rate was $0.87 per euro and the December 31, 2001 exchange rate
was $0.88 per euro. Adjustments to Atlantic Copper's euro-
denominated net liabilities to reflect changes in the exchange
rate are recorded in "Other income (expense), net" on our income
statements and totaled $(9.3) million in the second quarter of
2002, $1.2 million in the second quarter of 2001, $(8.7) million
in the first six months of 2002 and $4.3 million in the first six
months of 2001.
Atlantic Copper has an unfunded contractual obligation
denominated in euros to supplement amounts paid to retired
employees. Atlantic Copper makes annual payments, which totaled
$5.7 million in 2001, to the retired employees. Amended Spanish
legislation requires that Atlantic Copper begin funding its
contractual obligation to the retired employees through a third
party in November 2002. In August 2002, Atlantic Copper complied
with the amended Spanish legislation by agreeing to fund
approximately $7 million euros annually for the next 15 years to
an approved insurance company in settlement of its estimated $72
million euro contractual obligation.
PT Smelting Operating Results
Second Quarter Six Months
-------------- ---------------
2002 2001 2002 2001
----- ------ ------ ------
(In millions)
PT Freeport Indonesia sales to PT Smelting $38.9 $111.9 $138.1 $202.5
Equity in PT Smelting losses 2.5 1.4 3.4 2.7
PT Freeport Indonesia profits
deferred (recognized) (0.5) (1.0) (1.1) 0.1
PT Freeport Indonesia accounts for its 25 percent interest
in PT Smelting under the equity method and provides PT Smelting
with nearly all of its concentrate requirements. PT Smelting
treated 130,600 metric tons of concentrate in the second quarter
of 2002, 27 percent less than the 179,700 metric tons treated in
the 2001 quarter, and 308,300 metric tons in the first six months
of 2002, 10 percent less than the 341,400 treated in the first
six months of 2001. The lower level of concentrate treated in
2002 and the resulting decline in anodes and cathodes production
and sales were caused by a scheduled maintenance turnaround. PT
Smelting's copper cathode cash production costs per pound totaled
$0.25 in the second quarter of 2002, compared with $0.12 in the
2001 second quarter, and $0.18 for the first six months of 2002,
compared with $0.12 for the first six months of 2001, reflecting
the impact of the 28-day maintenance turnaround in May 2002. The
next scheduled 30-day maintenance turnaround is expected to occur
in 2006.
Our revenues include PT Freeport Indonesia's sales to PT
Smelting, but we defer recognizing profits on 25 percent of PT
Freeport Indonesia sales to PT Smelting that are still in PT
Smelting's inventory at the end of the period. The effect of
changes in these deferred profits was the recognition of
operating profits totaling $0.5 million in the second quarter of
2002, $1.0 million in the second quarter of 2001, $1.1 million in
the first six months of 2002 and the deferral of $0.1 million in
the first six months of 2001.
OTHER FINANCIAL RESULTS
The FCX/Rio Tinto joint ventures incurred $1.3 million of
exploration costs in the second quarter of 2002, $3.6 million in
the second quarter of 2001, $2.5 million in the first six months
of 2002 and $7.1 million in the first six months of 2001. Lower
exploration costs reflect the continued suspensions of our
contracts of work outside of Block A and our efforts to reduce
costs during periods of continued low commodity prices. We
reported exploration expense of $0.8 million in the second
quarter of 2002, $2.4 million in the second quarter of 2001, $1.6
million in the first six months of 2002 and $4.5 million in the
first six months of 2001 for our share of exploration costs.
Second-quarter 2002 general and administrative expenses of
$16.4 million were slightly higher than the $16.1 million
reported in the 2001 quarter, while general and administrative
expenses for the first six months of 2002 were $2.2 million
higher at $32.8 million, compared with $30.6 million reported in
the 2001 period.
On May 2, 2002, at FCX's annual shareholder meeting the
shareholders approved the conversion of each outstanding share of
Class A common stock into one share of Class B common stock. The
transaction simplified our capital structure and enhanced trading
liquidity of our common stock. The
20
conversion also created a new
measurement date for FCX's Class A stock options that were
converted to Class B stock options. Under accounting rules, the
in-the-money value of these stock options on the new measurement
date ($8.8 million) must be charged to earnings over the
remaining vesting period of the options, which extends through
January 2006. The charge to second-quarter 2002 general and
administrative expenses totaled $0.4 million. The first quarter
of 2002 also included a $0.5 million charge for costs related to
the proposal to convert our Class A common stock into Class B
common stock.
Our total interest cost (before capitalization) was $47.0
million in the second quarter of 2002, $43.5 million in the
second quarter of 2001, $94.4 million in the first six months of
2002 and $93.9 million in the first six months of 2001. We
capitalized $3.5 million of interest costs in the second quarter
of 2002, $2.1 million in the second quarter of 2001, $6.6
million in the first six months of 2002 and $4.1 million in the
first six months of 2001.
Our effective tax rate was 68 percent for the first six
months of 2002 and 53 percent for the first six months of 2001.
PT Freeport Indonesia's Contract of Work provides a 35 percent
corporate income tax rate and a withholding tax rate of 10
percent (based on the tax treaty between Indonesia and the United
States) on dividends and interest paid to us by PT Freeport
Indonesia. No income taxes are recorded at Atlantic Copper,
which is subject to taxation in Spain, because it has not
generated significant taxable income in recent years and has
substantial tax loss carryforwards for which no financial
statement benefit has been provided. Additionally, we only
receive a small U.S. tax benefit on costs incurred by our parent
company because it has no U.S.-sourced income. As a result, our
effective tax rate varies with the level of earnings at PT
Freeport Indonesia, Atlantic Copper and the parent company. The
higher effective tax rate for the first six months of 2002
primarily reflects the impact of lower income at PT Freeport
Indonesia and higher interest costs at our parent company.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operating activities was $152.8 million for
the first six months of 2002, compared with $290.8 million for
the 2001 period. Net cash used in investing activities totaled
$57.9 million in the 2002 period, compared with $76.1 million in
the 2001 period. Net cash used in financing activities totaled
$93.8 million in 2002 compared with $207.8 million in 2001.
Lower net income in 2002 primarily because of lower sales
from PT Freeport Indonesia, along with working capital changes,
resulted in a decrease in operating cash flow to $152.8 million
from $290.8 million in the year-ago period. We used our
operating cash flows to fund capital expenditures of $81.5
million in 2002 and $80.7 million in 2001, and preferred
dividends of $18.4 million in 2002 and $18.3 million in 2001.
After funding our capital expenditures and making scheduled
dividend payments, we were able to reduce outstanding debt by
$82.4 million in the first six months of 2002 and $176.4
million in 2001. During the first six months of 2002, we used
$23.7 million in proceeds from the sale of restricted
investments to pay interest on our 8 1/4% convertible senior
notes. Debt, net of the change in restricted investments, was
reduced by $60.4 million in the first six months of 2002.
For the second half of 2002, we expect operating cash flows to
improve significantly as PT Freeport Indonesia mines higher-grade
ore and sales volumes improve. At copper and gold prices of
$0.73 per pound and $316 per ounce, respectively, for the second
half of the year, our operating cash flow is expected to
approximate $500 million for the year, which would allow us to
reduce net debt by over $225 million during the year. Net debt
includes debt and mandatorily redeemable preferred stock, net of
restricted investments. Our capital expenditures for the second
half of 2002 are expected to total approximately $130 million,
including approximately $30 million for haul truck purchases and
$20 million for final development of the Deep Ore Zone
underground ore body, which started production in 2000 and is
expected to reach full production of 25,000 metric tons of ore
per day in the second half of 2002.
Amended Bank Credit Facilities
In October 2001, we amended our bank credit facilities to extend
the maturities and to provide financing to repay the commercial
bank loan to Nusamba that we guaranteed. As discussed earlier,
we repaid the Nusamba loan on February 27, 2002. We believe that
the amended bank credit facilities together with our cash flows
from operations will enable us to fund our ongoing capital
expenditures and meet our debt maturities and other commitments
over the next several years.
* Commitments and Availability. Aggregate commitments under
our amended credit facilities total $734.0 million. Borrowings
on July 18, 2002, totaled $182.0 million for PT Freeport
Indonesia and $385.0 million for FCX, including a $149.0 million
term loan.
21
We are able to use the amounts available under the amended
credit facilities to satisfy interest and principal
requirements on our other debt when due. We are currently
required to use all operating cash flows remaining after
scheduled payments of other debt, permitted capital
expenditures and payment of operating and other costs to
reduce our borrowings under the amended credit facilities.
Thus, no portion of our operating cash flows is currently
available for general corporate purposes. At such time that
our aggregate borrowings and unused commitments under the
amended facilities are less than $200 million and our ratio
of consolidated debt to EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) is less than or equal
to 3.0:1.0, 25 percent of our operating cash flows will be
available for general corporate purposes and 75 percent will
reduce our borrowings under the amended credit facilities.
Our amended facilities do not restrict our planned
exploration activities. The amended credit facilities,
however, impose annual limitations on PT Freeport
Indonesia's capital expenditures, which limit the amount of
funds that we can use for development activities. These
annual limitations are approximately $171 million in 2002,
$188 million in 2003, $128 million in 2004 and $136 million
in 2005. If our capital expenditures in any year are less
than 80 percent of the annual limitation for the year, then
the unused amount may be carried forward to the next two
succeeding years. We have approximately $34 million of
unused amounts from 2001 that we may use in 2002 and 2003.
* Mandatory Repayments and Reductions in Commitments. If we
raise proceeds from future offerings, 25 percent of the proceeds
from debt issuances and 50 percent of the proceeds from equity
issuances will be available to us for general corporate purposes,
provided that the balance of such financing proceeds are used to
repay borrowings and to reduce commitments under our amended
credit facilities. All other proceeds from financings and all
available cash of FCX and PT Freeport Indonesia will be used to
pay outstanding borrowings under the amended credit facilities
and the commitments under the facilities will be reduced by those
amounts, except as necessary to maintain our availability to
repay $250.0 million for the 7.20% senior notes (see "Revised
Debt and Redeemable Preferred Stock Maturities") and to preserve
the $150.0 million revolving facility that will continue to be
available through December 31, 2005.
* Maturities and Term Loan Conversion. Amounts that we borrow
under our amended credit facilities will mature on December 31,
2005. On December 31, 2003, all revolving loans will convert to
term loans, except for a $150.0 million revolving loan for
working capital purposes. Scheduled principal payments on the
term loans will not be required until maturity. Instead, we will
repay the principal amount of the term loans through semiannual
payments of any excess operating cash flows remaining after
scheduled payments of other debts, permitted capital expenditures
and payment of operating and other costs. Any remaining balance
on the term loans will be due on December 31, 2005. Any
outstanding balance on the remaining $150.0 million revolving
loan will be due on the earlier of December 31, 2005, or one year
following repayment in full of the term loans.
* Interest Rates. Initial interest rates on all loans under
the amended credit facilities were LIBOR plus 4.0 percent with
annual increases of 0.125 percent on each anniversary of the
closing of the amended facilities with provisions for lower rates
if our credit ratings improve. In May 2002, Standard & Poor's
announced an upgrade of our corporate credit rating to "B" from
"CCC+" and our senior unsecured debt rating to "B-" from "CCC".
Additionally, on June 3, 2002, Standard & Poor's assigned its "B"
rating to FCX's bank credit facility allowing for a 50-basis-
point reduction in the borrowing rate to LIBOR plus 3.5 percent
from LIBOR plus 4.0 percent. Under the terms of our credit
facilities, our borrowing rates improve if our senior unsecured
credit rating or bank credit facility rating are above "B3" or "B-
," respectively. As a result, the initial scheduled annual
increase of 0.125 in the borrowing rate is now deferred until
June 3, 2003. As of June 30, 2002, the interest rate on the
amended facilities was 5.3 percent based on a LIBOR rate of 1.8
percent.
* Gold-Denominated Preferred Stock Due in 2003. Under the
amended credit facilities, we have limitations on the amount of
preferred stock we may redeem. In addition, if by August 2003 we
have not refinanced or extended the maturity of 80 percent of the
Gold-Denominated Preferred Stock beyond 2005, we will not
thereafter be permitted to redeem or pay dividends on any of our
preferred stock. Therefore, prior to the August 2003 mandatory
redemption date of the depositary shares representing our Gold-
Denominated Preferred Stock, we intend to refinance or
restructure our redemption obligation as to at least 80 percent
of the outstanding 6.0 million depositary shares.
22
* Other Covenants. The covenants under the amended credit
facilities include (a) a minimum consolidated debt service
coverage ratio of 1.25:1.0 through December 2002, and thereafter
1.5:1.0 and (b) a maximum ratio of consolidated debt to EBITDA
equal to 4.25:1.0 through September 30, 2002, and thereafter
3.5:1.0. The covenants also include prohibitions on common stock
dividends and common stock repurchases, prohibitions on changes
in control of FCX or PT Freeport Indonesia, limitations on
capital expenditures to specified budgets, limitations on
investments, limitations on liens and limitations on transactions
with affiliates. In addition, the covenants include a
requirement that we implement minimum hedging protection for
copper prices under certain circumstances. These covenants will
require us to hedge at least 33 percent of our exposure to
declines in copper prices for a period of up to one year if put
options providing for the sale of copper at a floor price of at
least $0.90 per pound become available at a cost of $0.02 or less
per pound of copper. These put options would protect operating
cash flow from the impact of declines in copper prices below the
floor price while continuing to provide full participation at
higher prices. The price of copper would have to increase
substantially from current levels for put options to be available
at this price.
* Security and Guarantees. Our obligations under the amended
credit facilities are secured by a first security lien on over 80
percent of PT Freeport Indonesia's total assets (the remaining
assets secure other obligations) and by our pledge of 50.1
percent of the outstanding capital stock of PT Freeport Indonesia
and all of the outstanding capital stock of PT Indocopper
Investama owned by us. PT Freeport Indonesia's obligations also
continue to be secured by its pledge of its rights under the
Contract of Work. In addition, PT Freeport Indonesia guarantees
FCX's obligations under the credit facilities.
* Revised Debt and Redeemable Preferred Stock Maturities.
Below is a summary of our debt and redeemable preferred stock
maturities based on loan balances as of June 30, 2002, and gold
and silver prices (which determine the preferred stock redemption
amounts) as of June 30, 2002 (in millions):
2002 2003 2004 2005 2006 Thereafter
------ ------ ----- ------ -------- ------
Infrastructure financings
and equipment loans $ 52.1 $ 57.7 $63.1 $ 46.4 $ 48.5 $190.8
Atlantic Copper facilities
and other 47.7 21.4 10.1 24.1 24.1 111.6
7.20% Senior Notes due 2026 a - 250.0 - - - -
Amended bank credit facilities - - - 505.0 - -
7.50% Senior Notes due 2006 b - - - - 200.0 -
8 1/4% Convertible Senior
Notes due 2006 c - - - - 603.8 -
------ ------ ----- ------ -------- ------
Total debt maturities 99.8 329.1 73.2 575.5 876.4 302.4
Redeemable preferred stock d 11.7 198.8 11.4 11.4 145.7 -
------ ------ ----- ------ -------- ------
Total maturities $111.5 $527.9 $84.6 $586.9 $1,022.1 $302.4
====== ====== ===== ====== ======== ======
a. Although due in 2026, the holders of the 7.20% senior notes
may, and are expected to, elect early repayment in November 2003.
b. Due November 15, 2006.
c. Due January 31, 2006.
d. Represents $11.7 million in 2002 and $11.4 million each year
through 2006 for our Silver-Denominated Preferred Stock, $187.4
million in August 2003 for our Gold-Denominated Preferred Stock,
and $134.3 million in February 2006 for our Gold-Denominated
Preferred Stock, Series II. As discussed above, we intend to
refinance or restructure our redemption obligation as to at least
80 percent of the outstanding Gold-Denominated Preferred Stock.
DEVELOPMENTS IN INDONESIA
In Indonesia, President Megawati Sukarnoputri continued to make
progress toward improving the nation's economy during the first
half of 2002. The government concluded a new agreement with its
Paris Club group of creditor nations on $5 billion in debt and
reached tentative agreement with its London Club of commercial
bank creditors to reschedule another $1.3 billion in sovereign
debt. After demonstrating progress on key reforms, the government
in June received a disbursement of $350 million of the $5 billion
International Monetary Fund recovery program.
23
Weakness in the U.S. dollar and the economic progress made
by the new administration has resulted in a stronger Indonesian
currency. After beginning the year at a rate approximating
10,160 rupiahs to 1 US dollar, the rupiah strengthened to 8,710
rupiahs to 1 US dollar at June 30, 2002, an approximate 14
percent improvement. The inflation rate dropped to 11 percent,
meaning the country's goal of single-digit inflation for 2002
could be within reach.
In Papua, where Christianity is the predominant religion of
the local population, there have been sporadic conflicts
historically between separatists and the Indonesian military.
President Megawati's government has implemented special autonomy
rules, which provide greater revenues and control to the
provincial leaders, and passed a law to change Irian Jaya's name
to Papua at the request of the indigenous population. Our mining
operations have continued to operate normally. No recent
incidents of separatist violence have occurred in PT Freeport
Indonesia's area of operations, where the local community leaders
continue to support peaceful solutions to the complex issue of
regional autonomy. While violence between separatists and the
Indonesian military still occurs elsewhere in Papua, such
incidents are becoming less frequent and the province's
leadership is working hard to focus its population on the
challenges of greater self-rule under the autonomy law.
Six ambassadors of European Union nations visited Papua in
March and confirmed their support for Papua and Indonesia, and
the continuation of Papua being an integral part of Indonesia. A
month earlier, the same support was pledged by Australian Prime
Minister John Howard after meeting with President Megawati in
Jakarta. The US Ambassador to Indonesia, Ralph L. "Skip" Boyce
and his team also concluded a highly productive and positive
visit to PT Freeport Indonesia's operations area. Mr. Boyce made
strong public comments regarding the territorial integrity of
Papua in Indonesia and supporting greater autonomy and financial
assistance to the region.
CAUTIONARY STATEMENT
Our discussion and analysis contains forward-looking statements
in which we discuss factors we believe may affect our performance
in the future. Forward-looking statements are all statements
other than historical facts, such as those regarding anticipated
sales volumes, ore grades, commodity prices, unit costs,
operating cash flows, capital expenditures, debt maturities and
other commitments, and political, economic and social conditions
in our areas of operations. We caution you that these statements
are not guarantees of future performance, and our actual results
may differ materially from those projected, anticipated or
assumed in the forward-looking statements. Important factors
that can cause our actual results to differ materially from those
anticipated in the forward-looking statements include
unanticipated declines in the average grades of ore mined,
unanticipated milling and other processing problems, labor
relations, weather conditions, the speculative nature of mineral
exploration, fluctuations in interest rates and currency exchange
rates and other adverse financial market conditions, and other
factors described in more detail under the heading "Risk Factors"
in our Form 10-K for the year ended December 31, 2001.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Yosefa Alomang v. Freeport-McMoRan Inc. and Freeport-McMoRan
Copper & Gold Inc., Civ. No. 96-9962 (Orleans Civ. Dist. Ct. La.
Filed June 19, 1996). The plaintiff alleges environmental, human
rights and social/cultural violations in Indonesia and sought
unspecified monetary damages and other equitable relief. In March
2000, the Civil District Court for the Parish of Orleans, State
of Louisiana, granted our exception of no cause of action and
dismissed the entire case with prejudice. The plaintiff appealed
to the Louisiana Fourth Circuit Court of Appeal and, in February
2002, the Louisiana Fourth Circuit Court of Appeal affirmed the
lower court's dismissal of the case with prejudice. The plaintiff
appealed to the Louisiana Supreme Court, which unanimously denied
the appeal, effectively concluding this litigation.
In addition to the foregoing proceedings, we are involved
from time to time in various legal proceedings of a character
normally incident to the ordinary course of our business. We
believe that potential liability in such proceedings would not
have a material adverse effect on our financial condition or
results of operations. We maintain liability insurance to cover
some, but not all, potential liabilities normally incident to the
ordinary course of our business as well as other insurance
coverage customary in our business, with coverage limits that we
deem prudent.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits to this report are listed
in the Exhibit Index beginning on Page E-1 hereof.
(b) During the quarter for which this report
is filed, the registrant filed no Current Reports
on Form 8-K.
25
FREEPORT-McMoRan COPPER & GOLD INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
FREEPORT-McMoRan COPPER & GOLD INC.
By: /s/ C. Donald Whitmire, Jr.
-------------------------------
C. Donald Whitmire, Jr.
Vice President and
Controller-Financial Reporting
(authorized signatory and
Principal Accounting Officer)
Date: August 7, 2002
26
Freeport-McMoRan Copper & Gold Inc.
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.1 Agreement, dated as of May 2, 1995 by and between Freeport-
McMoRan Inc. (FTX) and FCX and The RTZ Corporation PLC, RTZ
Indonesia Limited, and RTZ America, Inc. (the Rio Tinto
Agreement). Incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-3 of FCX filed November 5, 2001
(the FCX November 5, 2001 Form S-3).
2.2 Amendment dated May 31, 1995 to the Rio Tinto Agreement.
Incorporated by reference to Exhibit 2.2 to the FCX November 5,
2001 Form S-3.
2.3 Distribution Agreement dated as of July 5, 1995 between FTX
and FCX. Incorporated by reference to Exhibit 2.3 to the FCX
November 5, 2001 Form S-3.
3.1 Amended and restated Certificate of Incorporation of FCX.
Incorporated by reference to Exhibit 3.1 to the Quarterly Report
on Form 10-Q of FCX for the quarter ended March 31, 2002 (the FCX
2002 First Quarter Form 10-Q).
3.2 Amended By-Laws of FCX dated as of March 12, 1999.
Incorporated by reference to Exhibit 3.2 to the Annual Report on
Form 10-K of FCX for the fiscal year ended December 31, 1998 (the
1998 FCX Form 10-K).
4.1 Deposit Agreement dated as of July 1, 1993 among FCX,
Mellon Securities Trust Company (Mellon), as
Depositary, and holders of depositary receipts (Step-Up
Depositary Receipts) evidencing certain Depositary Shares, each
of which, in turn, represents 0.05 shares of Step-Up Convertible
Preferred Stock.
4.2 Form of Step-Up Depositary Receipt.
4.3 Deposit Agreement dated as of August 12, 1993 among FCX,
Mellon, as Depositary, and holders of depositary receipts
(Gold-Denominated Depositary Receipts) evidencing certain
Depositary Shares, each of which, in turn, represents 0.05 shares
of Gold-Denominated Preferred Stock.
4.4 Form of Gold-Denominated Depositary Receipt.
4.5 Deposit Agreement dated as of January 15, 1994, among FCX,
Mellon, as Depositary, and holders of depositary receipts
(Gold-Denominated II Depositary Receipts) evidencing certain
Depositary Shares, each of which, in turn, represents 0.05 shares
of Gold-Denominated Preferred Stock II.
4.6 Form of Gold-Denominated II Depositary Receipt.
4.7 Deposit Agreement dated as of July 25, 1994 among FCX,
Mellon, as Depositary, and holders of depositary receipts
(Silver-Denominated Depositary Receipts) evidencing certain
Depositary Shares, each of which, in turn, initially represents
0.025 shares of Silver-Denominated Preferred Stock.
4.8 Form of Silver-Denominated Depositary Receipt.
4.9 Amended and Restated Credit Agreement dated as of October
19, 2001 among FCX, PT Freeport Indonesia, the several financial
institutions that are parties thereto, U.S. Bank Trust National
Association, as PT Freeport Indonesia Trustee, J.P. Morgan
Securities Inc., as arranger, and The Chase Manhattan Bank as
administrative agent, security agent, JAA security agent and
documentary agent. Incorporated by reference to Exhibit 4.13 to
the Quarterly Report on Form 10-Q of FCX for the quarter ended
September 30, 2001.
4.10 Indenture dated as of August 7, 2001 from FCX and FCX
Investment Ltd. to The Bank Of New York, as trustee.
Incorporated by reference to Exhibit 4.1 to the FCX November 5,
2001 Form S-3.
E-1
4.11 Registration Rights Agreement dated as of August 7, 2001 by
and between FCX and FCX Investment Ltd., as issuers, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as initial purchaser.
Incorporated by reference to Exhibit 4.2 to the FCX November 5,
2001 Form S-3.
4.12 Collateral Pledge and Security Agreement dated as of August
7, 2001 by and among FCX Investment Ltd., as pledgor, The Bank of
New York, as trustee, and The Bank of New York, as collateral
agent. Incorporated by reference to Exhibit 4.3 to the FCX
November 5, 2001 Form S-3.
4.13 Senior Indenture dated as of November 15, 1996 from FCX to
The Chase Manhattan Bank, as Trustee. Incorporated by reference
to Exhibit 4.4 to the FCX November 5, 2001 Form S-3.
4.14 First Supplemental Indenture dated as of November 18, 1996
from FCX to The Chase Manhattan Bank, as Trustee, providing for
the issuance of the Senior Notes and supplementing the Senior
Indenture dated November 15, 1996 from FCX to such Trustee,
providing for the issuance of Debt Securities. Incorporated by
reference to Exhibit 4.5 to the FCX November 5, 2001 Form S-3.
4.15 Rights Agreement dated as of May 3, 2000 between FCX and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
Incorporated by reference to Exhibit 4.26 to the FCX 2000 First
Quarter Form 10-Q.
4.16 Amendment No. 1 to Rights Agreement dated as of February 26,
2002 between FCX and Mellon Investor Services. Incorporated
by reference to Exhibit 4.16 to the FCX 2002 First Quarter
Form 10-Q.
10.1 Contract of Work dated December 30, 1991 between the
Government of the Republic of Indonesia and PT Freeport
Indonesia. Incorporated by reference to Exhibit 10.1 to the FCX
November 5, 2001 Form S-3.
10.2 Contract of Work dated August 15, 1994 between the
Government of the Republic of Indonesia and PT Irja Eastern
Minerals Corporation. Incorporated by reference to Exhibit 10.2
to the FCX November 5, 2001 Form S-3.
10.3 Agreement dated as of October 11, 1996 to Amend and Restate
Trust Agreement among PT Freeport Indonesia, FCX, the RTZ
Corporation PLC, P.T. RTZ-CRA Indonesia, RTZ Indonesian Finance
Limited and First Trust of New York, National Association, and
The Chase Manhattan Bank, as Administrative Agent, JAA Security
Agent and Security Agent. Incorporated by reference to Exhibit
10.3 to the Current Report on Form 8-K of FCX dated November 13,
1996 and filed November 15, 1996.
10.4 Concentrate Purchase and Sales Agreement dated effective
December 11, 1996 between PT Freeport Indonesia and PT Smelting.
Incorporated by reference to Exhibit 10.3 to the FCX November 5,
2001 Form S-3.
10.5 Participation Agreement dated as of October 11, 1996 between
PT Freeport Indonesia and P.T. RTZ-CRA Indonesia with respect to
a certain contract of work. Incorporated by reference to Exhibit
10.4 to the FCX November 5, 2001 Form S-3.
10.6 Second Amended and Restated Joint Venture and Shareholders'
Agreement dated as of December 11, 1996 among Mitsubishi
Materials Corporation, Nippon Mining and Metals Company, Limited
and PT Freeport Indonesia. Incorporated by reference to Exhibit
10.5 to the FCX November 5, 2001 Form S-3.
10.7 Amended and Restated Power Sales Agreement dated as of
December 18, 1997 between PT Freeport Indonesia and P.T.
Puncakjaya Power. Incorporated by reference to Exhibit 10.9 to
the FCX 1997 Form 10-K.
10.8 Option, Mandatory Purchase and Right of First Refusal
Agreement dated as of December 19, 1997 among PT Freeport
Indonesia, P.T. Puncakjaya Power, Duke Irian Jaya, Inc.,
Westcoast Power, Inc. and P.T. Prasarana Nusantara Jaya.
Incorporated by reference to Exhibit 10.10 to the FCX 1997 Form
10-K.
Executive Compensation Plans and Arrangements (Exhibits
10.9 through 10.36)
E-2
10.9 Annual Incentive Plan of FCX as amended effective February
2, 1999. Incorporated by reference to Exhibit 10.11 to the 1998
FCX Form 10-K.
10.10 1995 Long-Term Performance Incentive Plan of FCX.
Incorporated by reference to Exhibit 10.6 to the FCX November 5,
2001 Form S-3.
10.11 FCX Performance Incentive Awards Program as amended
effective February 2, 1999. Incorporated by reference to Exhibit
10.13 to the 1998 FCX Form 10-K.
10.12 FCX President's Award Program. Incorporated by
reference to Exhibit 10.7 to the FCX November 5, 2001 Form S-3.
10.13 FCX Adjusted Stock Award Plan, as amended.
Incorporated by reference to Exhibit 10.15 to the 1997 FCX Form
10-K.
10.14 FCX 1995 Stock Option Plan. Incorporated by reference
to Exhibit 10.8 to the FCX November 5, 2001 Form S-3.
10.15 FCX 1995 Stock Option Plan for Non-Employee Directors,
as amended. Incorporated by reference to Exhibit 10.17 to the
FCX 1997 Form 10-K.
10.16 FCX 1999 Stock Incentive Plan. Incorporated by
reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q
of FCX for the quarter ended June 30, 1999.
10.17 FCX 1999 Long-Term Performance Incentive Plan.
Incorporated by reference to Exhibit 10.19 to the Annual Report
of FCX on Form 10-K for the year ended December 31, 1999 (the FCX
1999 Form 10-K).
10.18 FCX Stock Appreciation Rights Plan dated May 2, 2000.
Incorporated by reference to Exhibit 10.20 to the Quarterly
Report on Form 10-Q of FCX for the quarter ended June 30, 2001
(the FCX 2001 Second Quarter Form 10-Q).
10.19 Financial Counseling and Tax Return Preparation and
Certification Program of FCX. Incorporated by reference to
Exhibit 10.21 to the FCX 2001 Form 10-K.
10.20 FM Services Company Performance Incentive Awards
Program as amended effective February 2, 1999. Incorporated by
reference to Exhibit 10.19 to the 1998 FCX Form 10-K.
10.21 FM Services Company Financial Counseling and Tax Return
Preparation and Certification Program. Incorporated by reference
to Exhibit 10.23 to the FCX 2001 Form 10-K.
10.22 Consulting Agreement dated as of December 22, 1988
between FTX and Kissinger Associates, Inc. (Kissinger
Associates). Incorporated by reference to Exhibit 10.21 to the
FCX 1997 Form 10-K.
10.23 Letter Agreement dated May 1, 1989 between FTX and Kent
Associates, Inc. (Kent Associates, predecessor in interest to
Kissinger Associates). Incorporated by reference to Exhibit 10.22
to the FCX 1997 Form 10-K.
10.24 Letter Agreement dated January 27, 1997 among Kissinger
Associates, Kent Associates, FTX, FCX and FMS. Incorporated by
reference to Exhibit 10.26 to the FCX 2001 Form 10-K.
10.25 Agreement for Consulting Services between FTX and B. M.
Rankin, Jr. effective as of January 1, 1990 (assigned to FMS as
of January 1, 1996). Incorporated by reference to Exhibit 10.24
to the FCX 1997 Form 10-K.
10.26 Supplemental Agreement between FMS and B. M. Rankin,
Jr. dated December 15, 1997. Incorporated by reference to
Exhibit 10.25 to the FCX 1997 Form 10-K.
10.27 Supplemental Agreement between FMS and B. M. Rankin,
Jr. dated December 7, 1998. Incorporated by reference to Exhibit
10.26 to the 1998 FCX Form 10-K.
E-3
10.28 Supplemental Agreement between FMS and B. M. Rankin,
Jr. dated February 2, 2001. Incorporated by reference to Exhibit
10.29 to the Annual Report on Form 10-K of FCX for the fiscal
year ended December 31, 2000 (the FCX 2000 Form 10-K).
10.29 Letter Agreement effective as of January 7, 1997
between Senator J. Bennett Johnston, Jr. and FMS. Incorporated
by reference to Exhibit 10.31 to the FCX 2001 Form 10-K.
10.30 Supplemental Letter Agreement dated April 13, 2000
between J. Bennett Johnston, Jr. and FMS. Incorporated by
reference to Exhibit 10.30 to the FCX 2000 First Quarter Form 10-Q.
10.31 Letter Agreement dated November 1, 1999 between FMS and
Gabrielle K. McDonald. Incorporated by reference to Exhibit
10.33 of the FCX 1999 Form 10-K.
10.32 Supplemental Letter Agreement dated May 17, 2000
between FMS and Gabrielle K. McDonald. Incorporated by reference
to Exhibit 10.35 to the Quarterly Report on Form 10-Q of FCX for
the quarter ended June 30, 2000.
10.33 Executive Employment Agreement dated April 30, 2001
between FCX and James R. Moffett. Incorporated by reference to
Exhibit 10.35 to the FCX 2001 Second Quarter Form 10-Q.
10.34 Executive Employment Agreement dated April 30, 2001
between FCX and Richard C. Adkerson. Incorporated by reference to
Exhibit 10.36 to the FCX 2001 Second Quarter Form 10-Q.
10.35 Change of Control Agreement dated April 30, 2001
between FCX and James R. Moffett. Incorporated by reference to
Exhibit 10.37 to the FCX 2001 Second Quarter Form 10-Q.
10.36 Change of Control Agreement dated April 30, 2001
between FCX and Richard C. Adkerson. Incorporated by reference to
Exhibit 10.38 to the FCX 2001 Second Quarter Form 10-Q.
15.1 Letter dated July 18, 2002 from Ernst & Young LLP regarding
unaudited interim financial statements.
18.1 Letter from Arthur Andersen LLP regarding change in
accounting. Incorporated by reference to Exhibit 18.1 to
the FCX 2002 First Quarter Form 10-Q.
E-4