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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 __

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No __

On June 30, 2003, there were issued and outstanding 146,640,225 shares of the registrant’s Class B Common Stock, par value $0.10 per share.

FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS

FREEPORT-McMoRan COPPER & GOLD INC.

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements.

FREEPORT-McMoRan COPPER & GOLD INC.

BALANCE SHEETS (Unaudited)

The accompanying notes are an integral part of these financial statements.

FREEPORT-McMoRan COPPER & GOLD INC.

STATEMENTS OF INCOME (Unaudited)

The accompanying notes are an integral part of these financial statements.

FREEPORT-McMoRan COPPER & GOLD INC.

STATEMENTS OF CASH FLOWS (Unaudited)

The accompanying notes are an integral part of these financial statements.

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.  The following is a reconciliation of net income and weighted average common shares outstanding for purposes of calculating diluted net income per share (in thousands, except per share amounts):

Outstanding stock 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. In addition, FCX’s convertible preferred stock and convertible senior notes are excluded for certain periods because including the conversion of these instruments would have increased reported diluted net income per share. A recap of the excluded amounts follows (in thousands, except exercise prices):

a.

Included in diluted calculation.

b.

FCX’s 7% Convertible Senior Notes were issued on February 11, 2003, and are convertible into 18.6 million shares of common stock (see Note 4).

Stock-Based Compensation Plans.  As of March 31, 2003, FCX had three stock-based employee compensation plans and one stock-based director compensation plan, which are more fully described in Note 7 of FCX’s 2002 Annual Report on Form 10-K.  At FCX’s annual meeting of stockholders on May 1, 2003, stockholders approved a proposal to adopt FCX’s 2003 Stock Incentive Plan.  The 2003 Stock Incentive Plan provides for the issuance of stock options, stock appreciation rights, restricted stock and other stock-based awards for up to 8.0 million shares to eligible participants.  FCX accounts for all of its plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, which require compensation cost for stock-based employee compensation plans to be recognized based on the difference on the date of grant, if any, between the quoted market p rice of the stock and the amount an employee must pay to acquire the stock. The following table illustrates the effect on net income and earnings per share if FCX had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” which requires compensation cost for all stock-based employee compensation plans to be recognized based on the use of a fair value method (in thousands, except per share amounts):

For the pro forma computations, the values of option grants were calculated on the dates of grant using the Black-Scholes option-pricing model.  The weighted average fair value for stock option grants was $10.04 per option in the first six months of 2003 and $7.88 per option for the first six months of 2002.  The weighted average assumptions used include a risk-free interest rate of 3.7 percent in the first six months of 2003 and 5.0 percent in 2002; expected volatility of 47 percent in the first six months of 2003 and 2002; no annual dividends; and expected lives of 7 years.  No other discounts or restrictions related to vesting or the likelihood of vesting of stock options were applied.

2.

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE

Effective January 1, 2003, FCX adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires recording the fair value of an asset retirement obligation associated with tangible long-lived assets in the period incurred.  Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which there is a legal obligation to settle under existing or enacted law, statute, written or oral contract or by legal construction.  

In 2002, FCX engaged an independent environmental consulting and auditing firm to assist in estimating PT Freeport Indonesia’s asset retirement obligations, and FCX engaged other consultants to assist in estimating Atlantic Copper’s and PT Smelting’s asset retirement obligations.  FCX estimated these obligations using an expected cash flow approach, in which multiple cash flow scenarios were used to reflect a range of possible outcomes.  FCX estimated these aggregate undiscounted obligations to be approximately $120 million for PT Freeport Indonesia, $17 million for Atlantic Copper and $11 million for PT Smelting.  To calculate the fair value of these obligations, FCX applied an estimated long-term inflation rate of 2.5 percent, except for Indonesian rupiah-denominated labor costs with respect to PT Freeport Indonesia’s and PT Smelting’s obligations, for which an estimated inflation rate of 9 percent was applied.  The projec ted cash flows were discounted at FCX’s estimated credit-adjusted, risk-free interest rates which ranged from 9.4 percent to 12.6 percent for the corresponding time periods over which these costs would be incurred.  After discounting the projected cash flows, a market risk premium of 10 percent was applied to the total to reflect what a third party might require to assume these asset retirement obligations.  The market risk premium was based on estimates of rates that a third party would have to pay to insure its exposure to possible future increases in the value of these obligations.  

At January 1, 2003, FCX estimated the fair value of its total asset retirement obligations to be $28.5 million.   FCX recorded the fair value of these obligations and the related additional assets as of January 1, 2003.  The net difference between FCX’s previously recorded reclamation and closure cost liability and the amounts estimated under SFAS No. 143, after taxes and minority interest, resulted in a gain of $9.1 million (after reduction by $8.5 million for taxes and minority interest sharing), $0.05 per share on a diluted basis, which was recognized as a cumulative effect adjustment for a change in accounting principle.  As a result of adopting SFAS No. 143, FCX expects future depreciation and amortization expense to be lower and production costs to be higher, with no significant net impact on net income during the near term.

Prior to adoption of SFAS No. 143, estimated future reclamation and mine closure costs for PT Freeport Indonesia’s current mining operations in Indonesia were accrued and charged to income over the estimated life of the mine by the unit-of-production method based on estimated recoverable proven and probable copper reserves.  Estimated future closure costs for Atlantic Copper’s and PT Smelting’s operations were not considered material and no accruals were made.  

The effect of adopting SFAS No. 143 was to increase net income by approximately $0.2 million, less than $0.01 per share in the second quarter of 2003 and $0.5 million, less than $0.01 per share in the first six months of 2003.  Presented below are FCX’s reported results and pro forma amounts that would have been reported in FCX’s Statements of Income had those statements been adjusted for the retroactive application of this change in accounting principle (in thousands, except per share amounts):

Effective January 1, 2002, FCX changed its method of computing depreciation for 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 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 costs, which are significant, to develop PT Freeport Indonesia’s undeveloped ore bodies 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 revised its depreciation methodology prospectively.  Effective January 1, 2002, depreciation for the mining and milling life-of-mine assets excludes consideration of future development costs.  Under the new methodology, PT Freeport Indonesia depreciates the capitalized costs of individual producing mines over the related proven and probable copper reserves.  Infrastructure and other common costs 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 $4.0 million, $0.03 per share, in the first six months of 2002.  

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.

a.     Includes PT Freeport Indonesia sales to PT Smelting totaling $154.6 million in the second quarter of 2003, $38.9 million  in the second quarter of 2002, $275.9

        million in the first six months of 2003 and $138.1 million in the first six months of 2002.
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 $6.5 million in the second quarter of  2003, $(0.5) million in the second quarter of 2002, $4.4 million in the first six months of 2003 and  $(1.1) million in the first six months of 2002.

c.     Includes PT Freeport Indonesia’s trade receivables with PT Smelting totaling $49.5 million at June 30, 2003 and $16.1 million at June 30, 2002.  
 

d.     Includes PT Freeport Indonesia’s equity investment in PT Smelting totaling $43.1 million at June 30, 2003 and $54.9 million at June 30, 2002.

4.  

  SENIOR NOTE OFFERINGS AND TENDER OFFERS

On January 29, 2003, FCX sold $500 million of 10⅛% Senior Notes due 2010 for net proceeds of approximately $487 million.  Interest on the notes is payable semiannually on February 1 and August 1 of each year, beginning August 1, 2003.  FCX may redeem some or all of the notes at its option at a make-whole redemption price prior to February 1, 2007, and afterwards at stated redemption prices.  The indenture governing the notes contains restrictions on incurring debt, creating liens, entering into sale leaseback transactions, taking actions to limit distributions from certain subsidiaries, selling assets, entering into certain transactions with affiliates, paying cash dividends on common stock, repurchasing or redeeming common or preferred equity, prepaying subordinated debt and making investments.   The notes are unsecured.

On February 11, 2003, FCX sold $575.0 million of 7% Convertible Senior Notes due 2011 for net proceeds of approximately $559 million.  Interest on the notes is payable semiannually on March 1 and September 1 of each year, beginning September 1, 2003.  The notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of FCX’s common stock at a conversion price of $30.87 per share, which is equal to a conversion rate of approximately 32.39 shares of common stock per $1,000 principal amount of notes.  The notes are unsecured.  

FCX used a portion of the net proceeds from the offerings to repay all its outstanding bank debt, which totaled $279.0 million at December 31, 2002.  In March 2003, FCX and PT Freeport Indonesia terminated their lending commitments and established an interim credit facility totaling $150 million with JP Morgan.  The interim credit facility represents an amendment to the previous facility and requires the companies to provide $100 million of cash security, unless the availability is reduced.  The restrictive covenants in the previous credit facilities have been terminated.  This facility is expected to remain undrawn and FCX and PT Freeport Indonesia are discussing a possible new facility with potential lenders ..  At June 30, 2003, FCX and PT Freeport Indonesia had deferred financing costs related to the bank facilities totaling $10.1 million, which may be adjusted upon entering into a new facility.

In April 2003, FCX concluded tender offers for its 7.20% Senior Notes due 2026 and its 7.50% Senior Notes due 2006.  Of the total $450 million outstanding at March 31, 2003, notes with a face amount of $234.0 million were tendered for $239.0 million cash.  FCX recorded a charge to other expenses of $6.6 million ($4.8 million to net income) in the second quarter of 2003 associated with these early extinguishments of debt.   In July 2003, FCX purchased an additional $76.0 million face amount of its 7.20% Senior Notes for $77.2 million, and will record a charge to other expenses of $1.3 million ($0.9 million to net income) in the third quarter of 2003.   FCX currently is considering repaying other outstanding debt, which could result in the recognition of losses and gains in future periods.  Depending on the timing and structure of a new credit facility and repayments of other outstanding debt, certain of FCX’s and PT Freeport Indonesia’s deferred financing costs in addition to scheduled amortization may be charged to 2003 earnings.

5.

INTEREST COST

Interest expense excludes capitalized interest of $0.8 million in the second quarter of 2003, $3.5 million in the second quarter of 2002, $1.5 million in the first six months of 2003 and $6.6 million in the first six months of 2002.

6.

RATIO OF EARNINGS TO FIXED CHARGES

The ratio of earnings to fixed charges for the first six months of 2003 and 2002 was 3.8 to 1 and 2.1 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.

  COMPREHENSIVE INCOME

A summary of FCX’s comprehensive income is shown below (in thousands).

8.        NEW ACCOUNTING STANDARD AND INTERPRETATION NO. 46

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  The new standard is effective July 1, 2003, and will require FCX to reclassify its redeemable preferred stock as debt and classify future dividend payments on these instruments as interest expense.  Prior period financial statements are not permitted to be restated to reflect the changes in classification.  

In January 2003, the FASB issued interpretation No. 46, “Consolidation of Variable Interest Entities,” which addresses consolidation of variable interest entities.  This interpretation is effective for the third quarter of 2003 for variable interest entities acquired before February 1, 2003.   FCX is reviewing the provisions of Interpretations No. 46 and currently does not expect it to have an impact on its consolidated financial statements.

9.

OTHER MATTERS AND SUBSEQUENT EVENT

In May 2003, PT Freeport Indonesia received a U.S. federal grand jury subpoena for the production of documents in connection with an anti-trust investigation of the copper concentrate industry.  PT Freeport Indonesia has not been identified as a target and is cooperating fully with the investigation.

In July 2003, FCX acquired the 85.7 percent ownership interest in PT Puncakjaya Power (PJP) owned by affiliates of Duke Energy Corporation for $78 million cash.  PJP is the owner of assets supplying power to PT Freeport Indonesia’s operations, including the 3x65 megawatt coal-fired power facilities, diesel generating capacity and other project assets.  PT Freeport Indonesia purchases power from PJP under infrastructure asset financing arrangements.  At June 30, 2003, PT Freeport Indonesia had infrastructure asset financing obligations to PJP totaling $312.8 million.  As a result of this transaction, FCX’s consolidated balance sheet will no longer reflect PT Freeport Indonesia’s obligation to PJP, but instead will reflect the $258.8 million of PJP bank debt at June 30, 2003, a $54.0 million reduction in FCX’s consolidated debt.  

----------------------

Remarks

The information furnished herein should be read in conjunction with FCX's financial statements contained in its 2002 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.  

INDEPENDENT ACCOUNTANT ’ S REVIEW REPORT

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, 2003, the related statements of income for the three-month and six-month periods ended June 30, 2003 and 2002, and the statements of cash flows for the six months ended June 30, 2003 and 2002.  These financial statements are the responsibility of the Company’s management.  

We conducted our reviews 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 reviews, we are not aware of any material modifications that should be made to the accompanying financial statements as of June 30, 2003 and 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.

We have previously audited in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Freeport-McMoRan Copper & Gold Inc. as of December 31, 2002, and the related consolidated statements of income, stockholder’s equity, and cash flows for the year then ended (not presented herein) and in our report dated January 16, 2003 (except for Note 15, as to which the date is March 6, 2003), we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

ERNST & YOUNG LLP

New Orleans, Louisiana

July 17, 2003

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

In management’s discussion and analysis, “we,” “us” and “our” refer to Freeport-McMoRan Copper & Gold Inc. (FCX) and its consolidated subsidiaries.  References to “aggregate” amounts mean the total of our share and Rio Tinto plc’s share as our joint venture partner.  You should read our financial statements, the related discussion and analysis of financial condition and results of operations and our discussion of our “Business and Properties” in our Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission.  The results of operations reported and summarized below are not necessarily indicative of future operating results.

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 owns a 25 percent interest in PT Smelting, an Indonesian company which 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, Indonesia, pursuant to joint venture and other arrangements. Our field exploration activities outside of our current mining operations area in Block A have been temporarily suspended (see “Exploration Activities”).  

CONSOLIDATED RESULTS

Summary comparative results for the second-quarter and six-month periods follow (in millions, except per share amounts):

Consolidated revenues include PT Freeport Indonesia’s sale of copper concentrates, which also contain significant amounts of gold and silver, 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. On limited past occasions, in response to market conditions, we have entered into copper and gold price protection contracts for a 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 2003 copper sales (1.4 billion pounds), a $0.01 per pou nd change in the average price realized would have an approximate $14 million impact on annual revenues and an approximate $7 million impact on annual net income.  A $5 per ounce change in the average price realized on PT Freeport Indonesia’s share of projected 2003 gold sales (2.6 million ounces) would have an approximate $13 million impact on annual revenues and an approximate $7 million impact on annual net income.  

Consolidated revenues for the second quarter and first six months of 2003 reflect higher copper and gold revenues at PT Freeport Indonesia and at Atlantic Copper, compared with the same periods in 2002.  Higher revenues from PT Freeport Indonesia during the second quarter and first six months of 2003 resulted primarily from increases in sales volumes caused by the mining of higher grade ore and higher gold prices.  Atlantic Copper’s revenues improved compared with the second quarter and first six months of 2002 mainly because of higher gold sales volumes and prices.

Second-quarter 2003 consolidated revenues include net reductions of $0.6 million ($0.3 million to net income or less than $0.01 per share) primarily for metal volume adjustments based on final assays and final pricing of concentrates sold in prior quarters, compared with a decrease of $5.9 million ($3.0 million to net income or $0.02 per share) to second-quarter 2002 revenues.  Six-month 2003 consolidated revenues included net additions of $11.0 million ($5.7 million to net income or $0.03 per share), compared with net additions of $5.4 million ($2.8 million to net income or $0.02 per share) in the first six months of 2002, primarily for final pricing of concentrates sold in prior years.

Consolidated cost of sales for the 2003 periods were higher compared with the 2002 periods largely because of higher unit costs and sales volumes.  Exploration expenses increased to $1.8 million in the second quarter of 2003 and $3.3 million in the first six months of 2003, from $0.8 million and $1.6 million, respectively, in the 2002 periods reflecting increased drilling in Block A during 2003.  General and administrative expenses increased to $20.7 million in the second quarter of 2003 from $16.4 million in the second quarter of 2002, and to $37.2 million in the first six months of 2003 from $32.8 million in the first six months of 2002.  The increases reflect charges for stock appreciation rights caused by a higher FCX stock price and several other smaller items.

Consolidated net interest expense increased to $55.5 million in the second quarter of 2003 from $43.5 million in the second quarter of 2002, and to $108.0 million in the first six months of 2003 from $87.8 million in the first six months of 2002 primarily because of the two FCX senior notes issued in the first quarter of 2003 (see Note 4 and “Capital Resources and Liquidity – Financing Activities”).  

Other expenses include 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 net euro-denominated liabilities and record the adjustment in earnings.  The exchange rate was $1.05 per euro at December 31, 2002, $1.09 per euro at March 31, 2003 and $1.14 per euro at June 30, 2003.  Exchange rate effects on net income from euro-denominated liabilities were charges of $3.8 million in the second quarter of 2003, $9.3 million in the second quarter of 2002, $6.3 million in the first six months of 2003 and $8.7 million in the first six months of 2002.  Other expenses for the second quarter of 2003 and the first six months of 2003 also include a $6.6 million ($4.8 million to net income) charge associated with the early extinguishment of debt (see Note 4).

The provision for income taxes for the second quarter and first six months of 2003 represented 55 percent of consolidated income before income taxes and minority interests compared with 69 percent for the second quarter of 2002 and 68 percent for the first six months of 2002.  The lower percentage for the 2003 periods primarily reflects the impact of higher income at PT Freeport Indonesia (see “Other Financial Results”).  

Effective January 1, 2003, we adopted Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” which requires recording liabilities related to the legal obligations associated with the retirement of tangible long-lived assets at fair values in the periods in which the obligations are incurred (typically when the assets are acquired, constructed or installed).  When the liabilities for asset retirement obligations are initially recorded, capital costs of the related assets are increased by equal corresponding amounts.  The fair values of the liabilities are determined by estimating the asset retirement obligations, including consideration of inflation and a present value discount rate.  The fair values of the liabilities are also increased for a market risk premium to reflect what a third party would be expected to require to assume the liabilities.  Over time, changes in the fair values of the liabilities from revised estimates of the amount or timing of cash flows required to settle the future liability will be recognized by increasing or decreasing the liability and the related long-lived assets.  Changes resulting from the passage of time will be recognized as an increase in the liability and charged to expense. The capitalized asset costs will be depreciated over the related useful lives.

At January 1, 2003, we estimated the fair value of our asset retirement obligations to be $28.5 million.  We recorded the estimated fair value of these liabilities and increased assets and accumulated depreciation as of January 1, 2003.  Prior to the adoption of SFAS No. 143, estimated future reclamation and mine closure costs for our mining operations were accrued and charged to income over the estimated life of the mine using the unit-of-production method based on estimated recoverable proven and probable copper reserves.  The difference between our previously recorded estimated future reclamation and closure costs and the liabilities and net assets recorded under SFAS No. 143, after taxes and minority interest, resulted in a gain of approximately $9.1 million ($0.05 per share), which was recognized as a cumulative effect adjustment for a change in accounting principle.  As a result of adopting SFAS No. 143, we expect for the near term future depr eciation and amortization expense to be lower and production costs to be higher with no significant impact on earnings (see Note 2).

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 follows (in millions):

a.

We defer recognizing profits on PT Freeport Indonesia’s sales to Atlantic Copper and on 25 percent of PT Freeport Indonesia’s sales to PT Smelting until the final sale to third parties has occurred.  Changes in the amount of these deferred profits reduced operating income by $33.9 million in the second quarter of 2003, $6.1 million in the second quarter of 2002 and $35.9 million in the first six months of 2003, and increased operating income by $2.9 million in the first six months of 2002.  Our consolidated quarterly earnings fluctuate depending on the timing and prices of these sales.

MINING AND EXPLORATION

A summary of changes in PT Freeport Indonesia revenues between the periods follows (in millions):

PT Freeport Indonesia’s revenues for both the second quarter and first six months of 2003 benefited from higher copper and gold sales volumes because of higher grade material mined compared with the 2002 periods.  Copper sales volumes totaled 395.2 million pounds in the second quarter of 2003, 13 percent higher than the 350.4 million pounds in the second quarter of 2002.   Gold sales volumes totaled 849,200 ounces in the second quarter of 2003, 116 percent higher than the 393,700 ounces in the second quarter of 2002.  Second-quarter 2003 copper and gold sales exceeded previous quarterly estimates primarily because of the timing of mining material previously forecasted to be mined in the second half of 2003.  For the six month periods, copper sales volumes totaled 787.2 million pounds in 2003, 22 percent higher than the 646.5 million pounds in 2002, and gold sales volumes totaled 1,433,100 ounces, 96 percent higher than the 730,300 ounces in 2002.  Copper price realizations were only slightly higher in the 2003 periods.  Gold price realizations of $347.69 in the second quarter of 2003 were nearly $39 per ounce higher than second-quarter 2002 realizations, and realizations in the first six months of 2003 of $345.14 were nearly $45 per ounce higher than the prior year period. Treatment charges and royalties in total were higher in the 2003 periods primarily because of the higher sales volumes and higher gold prices.  Royalties totaled $9.8 million in the second quarter of 2003, $4.1 million in the second quarter of 2002, $16.7 million in the first six months of 2003 and $7.3 million in the first six months of 2002.

Substantially all of PT Freeport Indonesia’s concentrate sales contracts provide final copper pricing in a specified future period based on 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 which must be adjusted to fair value through earnings each period until the date of final copper pricing.  PT Freeport Indonesia’s second-quarter 2003 revenues include net additions of $7.6 million for adjustments to the fair value of embedded derivatives in concentrate sales contracts, compared with $4.1 million to second-quarter 2002 revenues.  PT Freeport Indonesia’s six-month 2003 revenues included net additions of $2.6 million for adjustments to the fair value of embedded derivatives in concentrate sales cont racts, compared with $14.4 million in the first six months of 2002.

At June 30, 2003, embedded derivatives on consolidated copper sales totaling 144.0 million pounds were recorded at an average price of $0.75 per pound. All of these sales are expected to be finally priced during the third quarter of 2003.  A one-cent movement in the average price used for these embedded derivatives will have an approximate $0.7 million impact on 2003 consolidated net income.

On limited occasions PT Freeport Indonesia has entered into derivative contracts to manage certain risks resulting from fluctuations in commodity prices.  During 2002 and the first six months of 2003, and as of June 30, 2003, PT Freeport Indonesia did not have any contracts in place for its copper and gold sales.  As conditions warrant, PT Freeport Indonesia may enter into new contracts for its future sales; however, it has no plans to do so in the foreseeable future.  

PT Freeport Indonesia has commitments from various parties, including Atlantic Copper and PT Smelting, to purchase all of its estimated remaining 2003 production.  Net of Rio Tinto’s interest, PT Freeport Indonesia’s share of sales for the third quarter of 2003 is projected to approximate 320 million pounds of copper and 640,000 ounces of gold. PT Freeport Indonesia’s share of sales for 2003 is projected to approximate 1.4 billion pounds of copper and 2.6 million ounces of gold, reflecting the expectation in 2003 of slightly lower copper ore grades and higher gold ore grades compared with 2002.

PT Freeport Indonesia Operating Results

a.

Net of deferred mining costs totaling $14.4 million (3.6 cents per pound) in the second quarter of 2003, $7.7 million (2.2 cents per pound) in the second quarter of 2002, $21.7 million (2.8 cents per pound) in the first six months of 2003 and $12.4 million (1.9 cents per pound) in the first six months of 2002.  

Net cash production costs per pound of copper is a measure intended to provide investors with information about the cash generating capacity of our mining operations in Indonesia.  This measure is presented by other copper and gold mining companies, although our measures may not be comparable to similarly titled measures reported by other companies.

We calculate gross profit per pound of copper under a “by-product” method, while the copper, gold and silver contained within our concentrates are treated as co-products in our financial statements.  We use the by-product method in the presentation of gross profit per pound because (1) the majority of our revenues are copper revenues, (2) we produce and sell one product, concentrates, which contains all three metals and (3) it is not possible to specifically assign our costs to revenues from the copper, gold and silver we produce in concentrates.  In the co-product method presentation below, costs are allocated to the different products based on their relative revenue values.  Presentations under both methods are shown below along with a reconciliation to amounts reported in the consolidated financial statements.