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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _______
COMMISSION FILE NUMBER 1-9916
FREEPORT-MCMORAN COPPER & Gold Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2480931
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1615 POYDRAS STREET
NEW ORLEANS, LOUISIANA 70112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (504) 582-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Class A Common Stock, par value $0.10 per share New York Stock Exchange Class B
Common Stock, par value $0.10 per share New York Stock Exchange Depositary
Shares representing 0.05 shares of Step-Up Convertible New York Stock Exchange
Preferred Stock, par value $0.10 per share
Depositary Shares representing 0.05 shares of New York Stock Exchange
Gold-Denominated Preferred Stock, par value $0.10 per share
Depositary Shares, Series II, representing 0.05 shares of Gold- New York Stock Exchange
Denominated Preferred Stock, Series II, par value $0.10 per share
Depositary Shares representing 0.015625 shares of Silver- New York Stock Exchange
Denominated Preferred Stock, par value $0.10 per share
8-1/4% Convertible Senior Notes due 2006 of the registrant and None
FCX Investment Ltd.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of classes of common stock held by
non-affiliates of the registrant on February 26, 2002 was approximately
$1,079,000,000.
On February 26, 2002, there were issued and outstanding 55,567,714 shares
of Class A Common Stock and 88,584,099 shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for our 2002 Annual Meeting to be held on
May 2, 2002 are incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
Page
Part I
Items 1. and 2. Business and Properties..................................... 1
Item 3. Legal Proceedings........................................... 27
Item 4. Submission of Matters to a Vote of Security Holders......... 28
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................. 29
Item 6. Selected Financial Data..................................... 30
Items 7. and 7A. Management's Discussion and Analysis of
Financial Condition and Results of Operations and
Quantitative and Qualitative Disclosures About Market Risk.. 33
Item 8. Financial Statements and Supplementary Data................. 50
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 76
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 76
Item 11. Executive Compensation...................................... 76
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 76
Item 13. Certain Relationships and Related Transactions.............. 76
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K..................................... 76
Signatures................................................................... S-1
Index to Financial Statements................................................ F-1
Report of Independent Public Accountants..................................... F-1
Exhibit Index................................................................ E-1
i
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.
GENERAL
We are one of the world's largest copper and gold mining companies in
terms of reserves and production. We believe we are the lowest cost copper
producer in the world, after taking into account customary credits for related
gold and silver production.
Our principal operating subsidiary is PT Freeport Indonesia, a limited
liability company organized under the laws of the Republic of Indonesia and
domesticated in Delaware. PT Freeport Indonesia explores for, develops, mines
and processes ore containing copper, gold and silver. Our operations are located
in the remote rugged highlands of the Sudirman Mountain Range in the province of
Papua (formerly Irian Jaya), Indonesia, which is located on the western half of
the island of New Guinea. PT Freeport Indonesia markets its concentrates
containing copper, gold and silver worldwide. As of December 31, 2001, we had an
85.86 percent ownership interest in this subsidiary and the Government of
Indonesia had a 9.36 percent interest; PT Nusamba Mineral Industri (Nusamba), an
Indonesian company, had most of the remaining ownership interest in PT Freeport
Indonesia. See the discussion under "Nusamba Loan Guarantee" about our guarantee
and repayment of certain Nusamba debt on February 27, 2002. After repayment of
the Nusamba debt and the acquisition of Nusamba's interest in PT Indocopper
Investama, we have an approximate 90.6 percent ownership interest in PT Freeport
Indonesia.
PT Freeport Indonesia's operations are conducted pursuant to an agreement,
called a Contract of Work, with the Government of Indonesia. The Contract of
Work allows us to conduct exploration, mining and production activities in a
24,700-acre area that we call Block A. In 1988, we discovered our largest mine,
Grasberg, in Block A. Grasberg contains the largest single gold reserve and one
of the largest copper reserves of any mine in the world. The Contract of Work
also allows us to explore for minerals in a 0.5 million-acre area that we call
Block B. All of our current proven and probable reserves are located in Block A
(see "Ore Reserves").
PT Freeport Indonesia's Contract of Work governs our rights and
obligations relating to taxes, exchange controls, royalties, repatriation and
other matters (see "Contracts of Work"). The Contract of Work provides a 35
percent corporate income tax rate for PT Freeport Indonesia 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. The
Contract of Work also provides for royalties on the metals PT Freeport Indonesia
sells.
Another of our operating subsidiaries, PT Irja Eastern Minerals, which we
refer to as Eastern Minerals, holds an additional Contract of Work in Papua
covering approximately 1.25 million acres and is conducting exploration
activities under this Contract of Work. As of December 31, 2001, we had a 94.9
percent ownership interest in Eastern Minerals, but after acquiring Nusamba's
interest in PT Indocopper Investama discussed in "Nusamba Loan Guarantee" we
have a 100 percent ownership interest.
In 1996, we established joint ventures with Rio Tinto plc, an
international mining company with headquarters in London, England. One joint
venture covers PT Freeport Indonesia's mining operations in Block A. This joint
venture gives Rio Tinto, through 2021, a 40 percent interest in certain assets
and in production above specified levels from operations in Block A and, after
2021, a 40 percent interest in all production in Block A. Under our joint
venture arrangements, Rio Tinto also has a 40 percent interest in future
development and exploration projects under PT Freeport Indonesia's Contract of
Work and Eastern Minerals' Contract of Work. In addition, Rio Tinto has the
option to participate in 40 percent of any of our other future exploration
projects in Papua.
Under another joint venture agreement through PT Nabire Bakti Mining, we
conduct exploration activities in an area covering approximately 0.5 million
acres in five parcels contiguous to PT Freeport Indonesia's Block B and one of
Eastern Minerals' blocks. Rio Tinto has elected to participate in 40 percent of
our interest and cost in the venture.
1
Field exploration activities outside of our current mining operations in
Block A have been temporarily suspended 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 forest
preservation areas.
We also smelt and refine copper concentrates in Spain and market the
refined copper products, through our wholly owned subsidiary, Atlantic Copper,
S.A. In addition, PT Freeport Indonesia has a 25 percent interest in PT
Smelting, an Indonesian company that operates a copper smelter and refinery in
Gresik, Indonesia.
Three maps appear here indicating the location of the Papua province in
which we operate; the location of our Contracts of Work areas within the Papua
province; and the infrastructure of our Contracts of Work project area.
[MAP INDICATING THE PAPUA PROVINCE IN WE WHICH WE OPERATE]
2
Three maps appear here indicating the location of the Papua province in
which we operate; the location of our Contracts of Work areas within the Papua
province; and the infrastructure of our Contracts of Work project area.
[MAP INDICATING THE LOCATION OF OUR CONTRACTS OF WORK AREAS WITHIN THE PAPUA
PROVINCE]
3
Three maps appear here indicating the location of the Papua province in
which we operate; the location of our Contracts of Work areas within the Papua
province; and the infrastructure of our Contracts of Work project area.
[MAP INDICATING THE INFRASTRUCTURE OF OUR CONTRACTS OF WORK PROJECT AREA]
4
NUSAMBA LOAN GUARANTEE
In 1997, we guaranteed a $253.4 million loan from a syndicate of
commercial banks, including JPMorgan Chase Bank as agent, to PT Nusamba Mineral
Industri. Nusamba, an Indonesian company, used the loan proceeds plus $61.6
million of cash, for a total of $315.0 million, to purchase stock in PT
Indocopper Investama, a company whose only significant assets are its 9.36
percent of PT Freeport Indonesia's stock and its 10.0 percent of Eastern
Minerals' stock. Nusamba owned approximately 51 percent of PT Indocopper
Investama's stock and we owned approximately 49 percent. We guaranteed the
Nusamba loan for the purpose of continuing minority Indonesian ownership in our
principal operating subsidiary, PT Freeport Indonesia. Nusamba acquired the
ownership interest from our previous Indonesian partner to whom we sold the
interest in 1991 to satisfy the Indonesian ownership requirements in our
Contract of Work. Those requirements were relaxed in 1997, but, at the time of
the Nusamba transaction, we believed that it was prudent and in our best
interests to facilitate the continuation of Indonesian ownership, although no
longer legally required.
The loan was secured by a pledge of the PT Indocopper Investama stock
owned by Nusamba and was to be due in March 2002. We had also agreed to lend
Nusamba any amounts necessary to cover shortfalls between the interest payments
on the loan and dividends received by Nusamba on the PT Indocopper Investama
stock. This loan was also to be due in March 2002. Except for Nusamba's indirect
ownership of PT Freeport Indonesia stock, our guarantee of Nusamba's bank loan
and our loans to Nusamba, we had no ownership interest in, or contractual
relationships with, Nusamba.
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,
which obligated us to pay the bank loan. On February 27, 2002, we repaid
Nusamba's bank loan as provided for under the terms of our amended credit
facilities and acquired Nusamba's ownership in PT Indocopper Investama. As a
result of our payment of the Nusamba bank loan, on our year-end 2001 balance
sheet we have:
- recorded an additional liability of $253.4 million to reflect the
payment of the Nusamba bank loan;
- reduced our "other assets" by $61.6 million to reflect the
nonpayment of our loan to Nusamba;
- increased deferred income taxes by $4.2 million to reflect tax
liabilities relating to our increased equity ownership in PT
Freeport Indonesia;
- reduced minority interests by $52.0 million to reflect our increased
equity ownership in PT Freeport Indonesia; and
- increased property, plant and equipment by $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.
REPUBLIC OF INDONESIA
The Republic of Indonesia consists of more than 17,000 islands stretching
3,000 miles along the equator from Malaysia to Australia and is the fourth most
populous nation in the world with over 200 million people. Following many years
of Dutch colonial rule, Indonesia gained independence in 1945 and now has a
presidential republic system of government.
Maintaining a good working relationship with the Government of Indonesia
is of particular importance to us because all of our mining operations are
located in Indonesia. Our mining complex was Indonesia's first copper mining
project and was the first major foreign investment in Indonesia following the
economic development program instituted by the Government of Indonesia in 1967.
We work closely with the central, provincial and local governments in
development efforts in the area surrounding our operations.
In May 1998, President Suharto, Indonesia's political leader for more than
30 years, resigned in the wake of an economic crisis in Indonesia and other
parts of Southeast Asia and in the face of growing social unrest. Vice
5
President B.J. Habibie succeeded Suharto. In June 1999, Indonesia held a new
parliamentary election on a generally peaceful basis as the first step in the
process of electing a new president. In October 1999, in accordance with the
Indonesian constitution, the country's highest political institution (the
People's Consultative Assembly), composed of the newly elected national
parliament along with additional provincial and other representatives, elected
Abdurrahman Wahid as president and Megawati Sukarnoputri as vice president.
There were repeated challenges to the political leadership of President
Wahid since his election in October 1999. In July 2001, the People's
Consultative Assembly voted to immediately remove President Wahid, and elected
Vice President Megawati Sukarnoputri as the new president. The international
community, including the United States, expressed support for the newly elected
president and cabinet.
Economic and political conditions remain challenging in Indonesia. The
Indonesian economy grew by an estimated 3 percent in 2001 after growing by an
estimated 5 percent in 2000 and remaining flat in 1999. Indonesia is Asia's
second largest exporter of oil and has benefited from higher oil prices in
recent years. Progress on reforming the nation's failed banking system and
raising capital from the sale of bank-related assets has been slow. As a result,
the country remains heavily reliant on foreign aid to balance its budget and the
national currency, the rupiah, declined approximately 10 percent in value during
2001.
Despite gradual improvements on the economic front, Indonesia's recovery
remains vulnerable to ongoing political and social tensions. Incidents of
violence and separatist pressures continue to add to political instability
within the country as the Sukarnoputri administration works to address the
country's economic and social issues. Although incidents of violence continue to
be reported in Papua, no incidents of separatist violence were reported 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 the uncertainties of the autonomy process have created concern among
foreign investors, the Indonesian government has repeatedly assured investors
that existing contracts would be honored. The president of Indonesia and several
cabinet members have publicly stated that the Government of Indonesia will honor
previously existing contracts and that they have no intention of revoking or
unilaterally amending such contracts, specifically including PT Freeport
Indonesia's Contract of Work. Our belief that our Contracts of Work will
continue to be honored is further supported by U.S. laws, which prohibit U.S.
aid to countries that nationalize property owned by, or take steps to nullify a
contract with, a U.S. citizen or company at least 50 percent owned by U.S.
citizens if the foreign country does not within a reasonable time take
appropriate steps to provide full value compensation or other relief under
international law.
Pro-independence movements in certain areas continue to be prominent,
especially in the province of Aceh, and to a lesser extent in Papua. The area
surrounding our mining development is sparsely populated by local people and
former residents of more populous areas of Indonesia, some of whom have
resettled in Papua under the Government of Indonesia's transmigration program. A
segment of the local population is opposing Indonesian rule over Papua, and
several separatist groups have sought political independence for the province.
In Papua, there have been sporadic attacks on civilians by separatists and
sporadic but highly publicized conflicts between separatists and the Indonesian
military.
We have a board-approved policy statement on social, employment and human
rights, and have comprehensive and extensive social, cultural and community
development programs, to which we have committed significant financial and
managerial resources. These policies and programs are designed to address the
impact of our operations on the local villages and people and to provide
assistance for the development of the local people. While we believe these
efforts should serve to avoid damage to and disruptions of our mining
operations, our operations could be damaged or disrupted by social, economic and
political forces beyond our control. For example, in March 1996, local people
engaged in acts of vandalism that caused approximately $3 million in damages to
our property and caused us to close the Grasberg mine and mill for three days as
a precautionary measure, although our concentrate shipments were not
interrupted. See "Risk Factors."
6
CONTRACTS OF WORK
PT Freeport Indonesia and Eastern Minerals conduct their current
exploration operations and PT Freeport Indonesia conducts its mining operations
in Indonesia by virtue of their Contracts of Work. Both Contracts of Work govern
our rights and obligations relating to taxes, exchange controls, royalties,
repatriation and other matters. Both Contracts of Work were concluded pursuant
to the 1967 Foreign Capital Investment Law, which expresses Indonesia's foreign
investment policy and provides basic guarantees of remittance rights and
protection against nationalization, a framework for economic incentives and
basic rules regarding other rights and obligations of foreign investors. Any
disputes regarding the provisions of the Contracts of Work are subject to
international arbitration.
PT Freeport Indonesia's Contract of Work covers both Block A, which was
first included in a 1967 Contract of Work that was replaced by a new Contract of
Work in 1991, and Block B, to which we gained rights in 1991. The initial term
of our Contract of Work expires in December 2021, but we can extend it for two
10-year periods subject to Indonesian government approval, which cannot be
withheld or delayed unreasonably. We originally had the rights to explore 6.5
million acres in Block B, but pursuant to the Contract of Work we have only
retained the rights to 0.5 million acres, which we believe, following
significant geological assessment, contain the most promising exploration
opportunities.
Eastern Minerals signed its Contract of Work in August 1994. The Contract
of Work originally covered approximately 2.5 million acres. Eastern Minerals'
Contract of Work provides for a four-to-seven year exploratory term and a
30-year term for mining operations, which we can extend for two 10-year periods
subject to Indonesian government approval which cannot be withheld or delayed
unreasonably. In 2001, because of 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 forest preservation areas, we
requested and received from the Government of Indonesia formal temporary
suspensions of our obligations under the Contracts of Work in all areas outside
of Block A. These suspensions were granted for one-year periods ending February
26, 2002 for Block B, March 31, 2002 for PT Nabire Mining and November 15, 2002
for Eastern Minerals. We are currently seeking a renewal of the Block B
suspension and expect to seek suspension renewals for the other areas in 2002
for one or more additional one-year periods by written request to the Government
of Indonesia.
Like the PT Freeport Indonesia contract, the Eastern Minerals Contract of
Work requires us to relinquish our rights to 25 percent of the original 2.5
million-acre Contract of Work area at the end of each of three specified
periods. As of December 31, 2001, we had relinquished approximately 1.25 million
acres, and within three months of resuming exploratory activity under the
Contract of Work we must relinquish approximately 0.6 million additional acres.
PT Freeport Indonesia pays a copper royalty under its Contact of Work that
varies from 1.5 percent of copper net revenue at a copper price of $0.90 or less
per pound to 3.5 percent at a copper price of $1.10 or more per pound. The
Contract of Work royalty rate for gold and silver sales is 1.0 percent.
A large part of the mineral royalties under Government of Indonesia
regulations are designated to the provinces from which the minerals are
extracted. In connection with our "fourth concentrator mill expansion," PT
Freeport Indonesia agreed to pay the Government of Indonesia voluntary
additional royalties, that is, royalties not required by our Contract of Work,
to provide further support to the local governments and the people of Papua. The
additional royalties are paid on metal from production above 200,000 metric tons
of ore per day. The additional royalty for copper equals the Contract of Work
royalty rate and for gold and silver equals twice the Contract of Work royalty
rates. Therefore, our royalty rate on copper net revenues from production above
200,000 metric tons of ore per day is double the Contract of Work royalty rate,
and our royalty rates on gold and silver sales from production above 200,000
metric tons of ore per day are triple the Contract of Work royalty rates.
The combined royalties, including the voluntary additional royalties which
became effective January 1, 1999, totaled $24.3 million in 2001, $20.2 million
in 2000 and $23.0 million in 1999.
7
ORE RESERVES
During 2001, additions to the aggregate proven and probable reserves at
the Grasberg mining complex totaled approximately 156 million metric tons of ore
representing increases of 3.2 billion recoverable pounds of copper and 4.3
million recoverable ounces of gold. Year-end aggregate proven and probable
recoverable reserves, net of 2001 production, were 2.6 billion metric tons of
ore averaging 1.13 percent copper, 1.05 grams of gold per metric ton and 3.72
grams of silver per metric ton representing 52.5 billion pounds of copper, 64.5
million ounces of gold and 151.6 million ounces of silver. Additions were made
to the Dom open pit, the Grasberg block cave, the Deep Ore Zone block cave and
at Kucing Liar. Improvements to gold recovery at the Grasberg open pit offset
reductions to gold recovery expectations at Kucing Liar.
Pursuant to joint venture arrangements between PT Freeport Indonesia and
Rio Tinto, Rio Tinto has a 40 percent interest in future production from
reserves above those reported at December 31, 1994. Net of Rio Tinto's share, PT
Freeport Indonesia's share of proven and probable recoverable copper, gold and
silver reserves was 39.4 billion pounds of copper, 50.2 million ounces of gold
and 114.5 million ounces of silver as of December 31, 2001. FCX's equity
interest in proven and probable recoverable reserves as of December 31, 2001,
including Nusamba's interest that we acquired subsequent to year end, was 35.7
billion pounds of copper, 45.5 million ounces of gold and 103.8 million ounces
of silver. We estimated recoverable reserves using an average copper price of
$0.87 per pound and an average gold price of $285 per ounce. Using a copper
price of $0.75 per pound and a gold price of $270 per ounce would have resulted
in less than a one percent reduction in our estimated recoverable copper and
gold reserves.
All of our proven and probable reserves lie within Block A. The Grasberg
deposit contains the largest single gold reserve and is one of the largest
copper reserves of any mine in the world. Aggregate Grasberg open pit and
underground proven and probable ore reserves as of December 31, 2001, are shown
below along with those of our other deposits. Reserve calculations were prepared
by our employees under the supervision of George MacDonald, Vice President of
Exploration for Freeport-McMoRan Copper & Gold Inc. (FCX), and were verified by
Independent Mining Consultants, Inc., experts in mining, geology and reserve
determination. See "Risk Factors." Our current mine plan has been developed and
our operations are based on completing the mining of all of our currently
designated recoverable reserves before 2041, which would be the expiration of
our Contract of Work including two 10-year extensions. Prior to the expiration
of the initial term of our Contract of Work in December 2021, under our current
mine plan we expect to mine approximately 63 percent of aggregate proven and
probable ore, representing approximately 71 percent of PT Freeport Indonesia's
share of recoverable copper reserves and approximately 77 percent of PT Freeport
Indonesia's share of recoverable gold reserves.
Proven Probable
--------------------------------------- ----------------------------------------- Total
Metric Metric Metric
Tons Tons Tons
of Ore Average Ore Grade of Ore Average Ore Grade of Ore
(000s) -------------------------- (000s) --------------------------- (000s)
(a) Copper Gold Silver (2) Copper Gold Silver (a)
------- ------ ----- ------ --------- ------ ---- ------ -------
(%) (g/t) (g/t) (%) (g/t) (g/t)
Developed and producing:
Grasberg open pit 242,954 1.14 1.59 2.67 703,925 0.99 1.11 2.38 946,879
Deep Ore Zone 72,196 1.03 0.75 5.65 96,684 0.93 0.68 5.00 168,880
Intermediate Ore Zone 2,597 1.27 0.25 8.93 1,052 1.18 0.25 6.80 3,649
Undeveloped:
Grasberg block cave 119,605 1.24 1.23 2.92 662,850 1.13 0.85 2.90 782,455
Kucing Liar 161,170 1.32 1.05 5.25 261,786 1.34 1.32 6.53 422,956
Mill Level Zone 23,826 1.53 1.07 6.90 26,507 1.28 1.01 3.06 50,333
Big Gossan - - - - 37,349 2.69 1.02 16.42 37,349
Ertsberg Stockwork Zone 21,469 0.58 0.84 1.84 79,262 0.55 0.80 1.73 100,731
Dom block cave 11,894 1.18 0.31 6.40 31,757 1.07 0.31 5.76 43,651
Dom open pit 6,882 1.87 0.46 9.88 20,118 1.78 0.42 9.50 27,000
------- --------- ---------
Total 662,593 1.19 1.22 3.96 1,921,290 1.11 0.99 3.65 2,583,883
======= ========= =========
8
Proven and Probable
Mill Recoveries (%) Recoverable Reserves(b)
---------------------------- ---------------------------------
Copper Gold Silver Copper Gold Silver
(Billions (Millions (Millions
of Lbs.) of Ozs.) of Ozs.)
Developed and producing:
Grasberg open pit 85.0 83.7 63.8 17.6 30.7 37.3
Deep Ore Zone 85.0 79.1 63.8 3.0 3.0 14.3
Intermediate Ore Zone 85.0 79.1 63.8 0.1 - 0.5
Undeveloped:
Grasberg block cave 85.0 79.1 63.8 16.3 17.6 36.5
Kucing Liar 82.8 53.1 59.5 9.9 8.5 38.4
Mill Level Zone 85.0 79.1 63.8 1.3 1.3 3.9
Big Gossan 85.0 79.1 63.8 1.8 0.9 9.9
Ertsberg Stockwork Zone 85.0 79.1 63.8 1.0 2.0 2.8
Dom block cave 82.6 75.2 62.0 0.8 0.3 4.1
Dom open pit 69.0 68.0 59.0 0.7 0.2 3.9
---- ---- -----
Total 52.5 64.5 151.6
==== ==== =====
PT Freeport Indonesia's share 39.4 50.2 114.5
==== ==== =====
FCX's equity share(c) 35.7 45.5 103.8
==== ==== =====
a. Ore reserve tonnage estimates are after application of applicable mining
recovery factors.
b. Recoverable reserves represent estimated payable metal after application
of estimated mill recovery rates and smelter recovery rates of 96.5
percent for copper, 97.0 percent for gold and 78.5 percent for silver. The
term "recoverable reserve" means that part of a mineral deposit which we
estimate can be economically and legally extracted or produced at the time
of the reserve determination.
c. Reflects our 90.6 percent ownership interest after repayment of the
Nusamba debt and acquisition of Nusamba's interest in PT Freeport
Indonesia in February 2002. See "Nusamba Loan Guarantee."
The following table sets forth the average drill hole spacing for each of
our ore bodies. The average drill hole spacing within each ore body has been
calculated using the distance from the center of each block in the resource
model to the nearest drill hole composite. The averages of these values were
calculated within the volume of each ore body and are reported under the column
entitled "Average Distance: To Nearest Sample." This value represents at least
one-half of the average drill hole spacing within each deposit. The value under
the column entitled "Average Distance: Between Drill Holes" was calculated by
multiplying the average minimum distance value by two, and represents the
maximum average drill hole spacing.
Spacing Average Distance
(in meters) (in meters)
----------------------- ------------------------
Surface Underground Between
Drilling (& Surface) Drilling To Nearest Drill Holes
Deposit Mining Unit Grids Drill Fans Method Sample (less than)
----------------------- ------------- -------- ----------- -------- ---------- -----------
Grasberg Open Pit 50 75 core 45 89
Grasberg Block Cave - 100 core 46 92
Deep Ore Zone Block Cave - 50 core 13 25
Intermediate Ore Zone Block Cave - 50 core 13 25
Ertsberg Stockwork Zone Block Cave 100 50 core 26 52
Mill Level Zone Sublevel Cave - 50 core 20 40
Kucing Liar Block Cave - 75 core 36 72
Big Gossan Open Stope 100 50 core 22 45
Dom Open Pit - 50 core 25 50
Dom Block Cave - 50 core 26 52
9
MINING OPERATIONS
We and our predecessors have conducted exploration and mining operations
in Block A since 1967 and have been the only operator of those operations.
Following are descriptions of ore mines in production, ore mines in development
and our ore bodies.
Mines in Production. We currently have three mines in operation: the
Grasberg open pit, the Intermediate Ore Zone and the Deep Ore Zone. As of
December 31, 2001, our capital expenditures incurred to date for our mining
operations in Indonesia totaled $4.6 billion. Our mine development, expansion
and infrastructure capital expenditures totaled $83.7 million in 2001, $61.0
million in 2000 and $56.8 million in 1999. These expenditures primarily related
to development of the Deep Ore Zone ore body. We began open-pit mining of the
Grasberg ore body in January 1990. Production is at the 3,520- to 4,250-meter
elevation level and totaled 78.2 million metric tons of ore in 2001, which
provided 89 percent of our mill feed. The underground Grasberg reserves will be
mined near the end of open-pit mining, which is expected to continue until
approximately 2015.
The Intermediate Ore Zone is an underground block-cave operation that
began production in the first half of 1994. Production is at the 3,475-meter
elevation level and totaled 7.6 million metric tons of ore in 2001. We expect to
fully deplete the Intermediate Ore Zone by 2003.
The Deep Ore Zone ore body lies vertically below the Intermediate Ore
Zone. We began production from the Deep Ore Zone ore body in 1989, but we
suspended production in 1991 in favor of production from the Grasberg deposit.
Production using the block-cave method at the Deep Ore Zone officially restarted
in September 2000. Production is at the 3,150-meter elevation level and totaled
2.0 million metric tons of ore in 2001. The Deep Ore Zone is expected to ramp up
from its approximately 14,000 metric tons of ore per day rate at December 31,
2001, to a full production rate of 25,000 metric tons of ore per day by
mid-2002, well ahead of original projections. We are conducting a feasibility
study to assess increasing the Deep Ore Zone mine production rate to 35,000
metric tons of ore per day.
Our principal source of power for all our operations is a coal-fired power
plant that was built in conjunction with our fourth concentrator expansion (see
"Infrastructure Improvements"). Peaking and backup power is supplied by
medium-speed diesel generators. Water for our operations is provided by a
combination of naturally occurring mountain streams and water derived from our
underground operations. The average annual rainfall in the project area is 180
inches.
Mines in Development. Four other significant ore bodies, referred to as
the Dom, Big Gossan, Kucing Liar and the newly discovered Ertsberg Stockwork
Zone are located in Block A. These ore bodies are at various stages of
development, and are included in our proven and probable reserves. We incurred
$8.4 million for mine development, expansion and infrastructure capital
expenditures related to these ore bodies during the last three years. See "Risk
Factors."
The Dom ore body lies approximately 1,500 meters southeast of the depleted
Ertsberg open-pit deposit. We completed pre-production development at the Dom
including all maintenance, warehouse and service facilities just as Grasberg
began open-pit production in 1990. We have deferred production at the Dom ore
body and may not begin until after completion of open-pit mining.
The Big Gossan ore body is located approximately 1,000 meters southwest of
the original Ertsberg open-pit deposit. We began the initial underground
development of the ore body in 1993 when we drove tunnels from the mill area
into the ore zone at the 3,000-meter elevation level. We expect to use a variety
of stoping methods to mine the deposit, and plan to complete a detailed
feasibility study in 2002 to determine when to begin production.
The Kucing Liar ore body lies on the southern flank of and underneath the
southern portion of the Grasberg open pit at the 2,500- to 3,100-meter elevation
level. We are reviewing development plans for Kucing Liar.
10
The Ertsberg Stockwork Zone ore body extends off the southwest side of the
Deep Ore Zone ore body at the 3,150- to 3,750-meter elevation level. Drilling
efforts continue to determine the extent of this ore body, which we expect to
mine using a block-cave method after we complete mining at the Deep Ore Zone ore
body.
The projected aggregate capital expenditures required to reach full
production capacity for each of our undeveloped ore bodies based on our current
mine plans and our proven and probable reserves as of December 31, 2001, are
shown below (in millions). Actual costs could differ materially from these
estimates as most of the expenditures will not be incurred for several years. In
addition, these costs will be shared with Rio Tinto in accordance with our joint
venture agreement.
Grasberg block cave $ 950
Kucing Liar block cave 700
Dom block cave 200
Big Gossan 150
Ertsberg Stockwork Zone block cave 100
Dom open pit 40
Mill Level Zone sublevel cave 30
------
Total $2,170
======
Description of Ore Bodies. Our ore bodies cluster within and around two
main igneous intrusions, the Grasberg Monzo diorite and the Ertsberg diorite.
The host rocks of these ore bodies include both carbonate and clastic rocks that
form the ridge crests and upper flanks of the Sudirman Range, and the igneous
rocks of monzonitic to dioritic composition that intrude them. The
igneous-hosted ore bodies (the Grasberg pit and block cave and the Ertsberg
Stockwork Zone block cave) occur as vein stockworks and disseminations of copper
sulphides, dominated by chalcopyrite and, to a much lesser extent, bornite. The
sedimentary-rock hosted ore bodies occur as `magnetite-rich, calcium/magnesian
skarn' replacements, whose location and orientation are strongly influenced by
major faults and by the chemistry of the carbonate rocks along the margins of
the intrusions.
The copper mineralization in these skarn deposits is also dominated by
chalcopyrite, but higher bornite concentrations are common. Moreover, gold
occurs in significant concentrations in all of the district's ore bodies, though
rarely visible to the naked eye. These gold concentrations usually occur as
inclusions within the copper sulphide minerals, though, in some deposits, can
also be strongly associated with pyrite.
Map appears here which encompasses an area of approximately 42 square
kilometers (approximately 16 square miles), indicates the relative positions and
sizes of our reported reserve ore bodies and their locations.
11
Map appears here which encompasses an area of approximately 42 square
kilometers (approximately 16 square miles), indicates the relative positions and
sizes of our reported reserve ore bodies and their locations.
[MAP APPEARS HERE WHICH ENCOMPASSES AN AREA OF
APPROXIMATELY 42 SQUARE KILOMETERS]
12
Diagram appears here indicating the relative elevations (in meters) of our
reported reserve ore bodies.
[DIAGRAM APPEARS HERE INDICATING THE RELATIVE ELEVATIONS OF RESERVE ORE BODIES]
The following chart illustrates our current plans for sequencing and
producing each of our ore bodies and the years in which we currently expect that
production of each ore body will begin and end. Our mine plan is subject to
change based on a number of factors including the results of our exploration
efforts.
[CHART APPEARS HERE WITH THE FOLLOWING DATA POINTS]
PRODUCTION SEQUENCING
Reserves as of December 31, 2001
YEAR START YEAR END
---------- --------
Grasberg open pit 2002 2014
Intermediate Ore Zone 2002 2002
Deep Ore Zone 2002 2015
Big Gossan 2004 2021
Kucing Liar 2009 2033
Grasberg block cave 2010 2036
Dom open pit 2014 2016
Mill Level Zone 2015 2035
Ertsberg Stockwork Zone 2015 2031
Dom block cave 2016 2026
Contract of Work Term
(including extensions) 2002 2041
During 2001, we mined an average of 684,800 metric tons of material per
day, including ore and overburden. We expect to mine approximately 786,000
metric tons of material per day in 2002 and do not require any additional
approvals for higher rates. The following chart illustrates our current
aggregate mill capacity; our aggregate permitted mill capacity; and our
projected milling rates. The decline in milling rates in 2015 reflects the
expected completion date of open-pit mining at the Grasberg ore body. We are
continuing to develop mine plans to optimize production levels and to offset the
anticipated decline in 2015.
13
[CHART APPEARS HERE WITH THE FOLLOWING DATA POINTS]
PROJECTED MILL RATES & Mill Capacities
December 31, 2001 Reserves--Production Plan
Mill Rate (000S OF METRIC TONS PER DAY)
YEAR
2002 2003 2004 2005 2006 2007 2008 2009 2010
---- ---- ---- ---- ---- ---- ---- ---- ----
PERMITTED MILL CAPACITY 300.0 300.0 300.0 300.0 300.0 300.0 300.0 300.0 300.0
CURRENT MILL CAPACITY 245.0 245.0 245.0 245.0 245.0 245.0 245.0 245.0 245.0
PROJECTED MILL RATE 237.2 233.8 243.2 242.3 243.0 245.0 245.7 244.3 245.0
YEAR
2011 2012 2013 2014 2015 2016 2017 2018 2019
---- ---- ---- ---- ---- ---- ---- ---- ----
PERMITTED MILL CAPACITY 300.0 300.0 300.0 300.0 300.0 300.0 300.0 300.0 300.0
CURRENT MILL CAPACITY 245.0 245.0 245.0 245.0 245.0 245.0 245.0 245.0 245.0
PROJECTED MILL RATE 245.0 245.7 244.3 253.7 129.5 154.9 149.9 188.5 207.8
YEAR
2020 2021 2022 2023 2024 2025 2026 2027 2028
---- ---- ---- ---- ---- ---- ---- ---- ----
PERMITTED MILL CAPACITY 300.0 300.0 300.0 300.0 300.0 300.0 300.0 300.0 300.0
CURRENT MILL CAPACITY 245.0 245.0 245.0 245.0 245.0 245.0 245.0 245.0 245.0
PROJECTED MILL RATE 218.0 221.4 217.5 215.3 210.5 206.6 203.6 200.3 200.2
YEAR
2029 2030 2031 2032 2033 2034 2035 2036
---- ---- ---- ---- ---- ---- ---- ----
PERMITTED MILL CAPACITY 300.0 300.0 300.0 300.0 300.0 300.0 300.0 300.0
CURRENT MILL CAPACITY 245.0 245.0 245.0 245.0 245.0 245.0 245.0 245.0
PROJECTED MILL RATE 199.5 200.0 186.7 180.0 159.5 120.3 117.1 19.1
EXPLORATION
As a result of our joint venture arrangements, Rio Tinto pays for 40
percent of our exploration and drilling costs in Papua. The joint ventures
incurred total exploration costs of $14.4 million in 2001 and the joint
ventures' exploration budget for 2002 totals approximately $4 million. As a
result of continuing low commodity prices, we have reduced our exploration
program for 2002 to focus largely on available exploration data. Limited
drilling during 2002 will be directed towards delineation of reserves adjacent
to our Deep Ore Zone.
In June 1998, we entered into a joint venture agreement to conduct
exploration activities in PT Nabire Bakti Mining's Contract of Work area
covering approximately 1.0 million acres in several blocks contiguous to PT
Freeport Indonesia's Block B and one of Eastern Minerals' blocks in Papua. Rio
Tinto shares in 40 percent of our interest and costs in this exploration joint
venture. We and Rio Tinto can earn up to a 62 percent interest in the PT Nabirie
Bakti Mining Contract of Work by spending up to $21 million on exploration and
other activities in the joint venture areas. We have spent $15.7 million through
December 31, 2001.
Field exploration activities in Block B, which includes the Wabu Ridge
gold prospect, as well as in the other Contract of Work areas of Eastern
Minerals and PT Nabire Bakti Mining have been temporarily suspended. The
suspensions are 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 the Contracts of Work and an Indonesian law enacted in 1999
prohibiting open-pit mining in forest preservation areas. All of these areas are
outside of our current mining operations area.
MILLING AND PRODUCTION
The ore from our mines moves by a conveyor system to a series of ore
passes through which it drops to our milling and concentrating complex located
approximately 2,900 meters above sea level. At the mill, the ore is crushed and
ground and mixed in tanks with water and small amounts of flotation reagents
where it is continuously agitated with air. During this physical separation
process, copper-, gold- and silver-bearing particles rise to the top
14
of the tanks and are collected and thickened into a concentrate. The concentrate
leaves the mill complex as a slurry, consisting of approximately 65 percent
solids by weight, and is pumped through three parallel 115 kilometer pipelines
to our coastal port site facility at Amamapare where it is filtered, dried and
stored for shipping. Ships are loaded at dock facilities at the port until they
draw their maximum water, then move to deeper water, where loading is completed
from shuttling barges.
In early 1998, PT Freeport Indonesia completed construction on the fourth
concentrator mill expansion. Pursuant to the expansion joint venture agreement,
in addition to funding its 40 percent share of all expansion costs including the
fourth concentrator mill expansion, Rio Tinto provided a $450 million
nonrecourse loan to PT Freeport Indonesia for PT Freeport Indonesia's share of
the cost of the expansion. In less than two and one-half years beginning in
1998, PT Freeport Indonesia repaid the $450 million loan, plus interest, from
its share of incremental cash flow attributable to the expansion. Operating,
nonexpansion capital and administrative costs are shared proportionately between
PT Freeport Indonesia and Rio Tinto based on the ratio of (a) the incremental
revenues from production from the expansion and (b) total revenues from
production from Block A, including production from PT Freeport Indonesia's
previously existing reserves. PT Freeport Indonesia receives 100 percent of the
cash flow from specified annual amounts of copper, gold and silver production
through 2021 and will receive 60 percent of all remaining cash flow thereafter.
Our production results for the last three years are as follows:
Years Ended December 31, Percentage Change
---------------------------------- ----------------------------
2001 2000 1999 2000 to 2001 1999 to 2000
--------- -------- -------- ------------ ------------
Mill throughput (metric tons of ore
per day) 237,800 223,500 220,700 6% 1%
Copper production, net to PT Freeport
Indonesia (000 pounds) 1,393,400 1,388,100 1,428,100 -- (3)%
Gold production, net to PT Freeport
Indonesia (ounces) 2,634,900 1,899,500 2,379,100 39% (20)%
Average net cash production costs per
pound of copper(a) $0.07 $0.23 $0.09 (70)% 156%
----------
a. Includes site production and delivery costs, smelting and refining costs,
and royalties, less credits for gold and silver sales.
Mill throughput averaged a record 237,800 metric tons of ore per day
during 2001. In May 2000, PT Freeport Indonesia, in consultation with the
Government of Indonesia, voluntarily agreed to temporarily limit Grasberg
open-pit production because of an incident at its Wanagon overburden stockpile.
Normal overburden placement at the Wanagon overburden stockpile resumed and the
restriction on production from the Grasberg open pit was lifted at the end of
2000 (see "Wanagon Overburden Stockpile Slippage").
Copper production remained relatively unchanged over the past three years
as the record throughput rates were offset by lower ore grades. Gold production
has fluctuated primarily because of variances in ore grades, and is expected to
decline in 2002 because of lower projected ore grades than those mined in 2001.
Average net cash production costs per pound of copper were a record-low $0.07
per pound in 2001 primarily because of higher credits from gold sales and
because of lower site production costs. For more information regarding our
operating and financial results, see "Item 6. Selected Financial Data" and
"Items 7. and 7A. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Quantitative and Qualitative Disclosures About
Market Risk."
INFRASTRUCTURE IMPROVEMENTS
The location of our mining operations in a remote area requires that our
operations be virtually self-sufficient. In addition to the mining facilities
described above, in the course of the development of our project we
15
have constructed ourselves or participated with others in the construction of an
airport, a port, a 119 kilometer road, an aerial tramway, a hospital and related
medical facilities, and two town sites with housing, schools and other
facilities sufficient to support more than 17,000 persons.
In 1996, we completed a significant infrastructure program, which includes
various residential, community and commercial facilities. We designed the
program to provide the infrastructure needed for our operations, to enhance the
living conditions of our employees, and to develop and promote the growth of
local and other third party activities and enterprises in Papua. We have
developed the facilities through joint ventures or direct ownership involving
local Indonesian interests and other investors.
From December 1993 to March 1997, PT Freeport Indonesia sold $270.0
million of infrastructure assets to joint ventures owned one-third by PT
Freeport Indonesia and two-thirds by PT ALatieF Nusakarya Corporation (ALatieF),
an Indonesian investor. Funding for the purchases consisted of $90.0 million in
equity contributions by the joint venture partners, a $60.0 million bank loan
and FCX's 9 3/4% senior notes, which were repaid in 2001. PT Freeport Indonesia
subsequently sold its one-third interest in the joint ventures to ALatieF in
March 1997. In September 1998, PT Freeport Indonesia reacquired for $30 million
an aggregate one-third interest in the joint ventures. During 2000, PT Freeport
Indonesia purchased the remaining interest in the joint ventures for $25.9
million cash and the assumption of $34.1 million of bank debt.
In December 1997, we sold the new coal-fired power plant facilities
associated with the fourth concentrator mill expansion for $366.4 million to the
joint venture that owns the power plants that already provided electricity to
us. The purchase price included $123.2 million for Rio Tinto's share of the new
power plant facilities. Asset sales to the power joint venture totaled $581.4
million through 1997, including $458.2 million of assets we owned. We
subsequently sold our 30 percent interest in the joint venture to the other
partners and we purchase power under infrastructure asset financing arrangements
pursuant to a power sales agreement.
MARKETING
PT Freeport Indonesia sells its copper concentrates, which contain
significant quantities of gold and silver, under United States
dollar-denominated sales agreements, mostly to companies in Asia and Europe and
to international trading companies. We sell substantially all of our budgeted
production of copper concentrates under long-term contracts with the selling
price based on world metals prices (generally the London Metal Exchange
settlement prices for Grade A copper). Under these contracts, initial billing
occurs at the time of shipment and final settlement on the copper portion is
generally based on average prices for a specified future period. Gold generally
is sold at the average London Bullion Market Association price for a specified
month near the month of shipment.
Revenues from concentrate sales are recorded net of royalties (see
"Contracts of Work"), treatment and all refining charges (including
participation charges, if applicable, based on the market prices of metals), and
the impact of derivative financial instruments, if any, used to hedge against
risks from metals price fluctuations. Moreover, because a portion of the metals
contained in copper concentrates is unrecoverable as a result of the smelting
process, our revenues from concentrate sales are also recorded net of allowances
based on the quantity and value of these unrecoverable metals. These allowances
are a negotiated term of our contracts and vary by customer. Treatment and
refining charges represent payments to smelters and refiners and are either
fixed or in certain cases vary with the price of copper. We sell some copper
concentrates in the spot market. See "Risk Factors."
We have commitments, including commitments from Atlantic Copper and PT
Smelting, for essentially all of our estimated 2002 production at market prices.
We expect our share of sales for 2002 to approximate 1.5 billion pounds of
copper and 2.1 million ounces of gold. Projected 2002 copper and gold sales
reflect the expectation of higher average mill throughput rates than in 2001 and
lower gold grades. See "Risk Factors."
PT Freeport Indonesia has a long-term contract through 2007 to provide
Atlantic Copper with approximately 60 percent of its copper concentrate
requirements at market prices. PT Freeport Indonesia's agreement with PT
Smelting provides for the supply of 100 percent of the copper concentrate
requirements necessary to reach the Gresik smelter's design capacity and
substantially all of any incremental copper concentrate requirements that may be
needed in excess of that amount. For the first 15 years of PT Smelting's
operations beginning in December 1998, the treatment and refining charges on the
majority of the concentrate PT Freeport
16
Indonesia supplies will not fall below a specified minimum rate, currently $0.23
per pound, which has been the rate since commencement of operations in 1998 and
is the expected rate for 2002. We anticipate that PT Freeport Indonesia will
sell approximately 50 percent of its annual concentrate production to Atlantic
Copper and PT Smelting. A recap of PT Freeport Indonesia's aggregate percentage
concentrate sales to its affiliates and to other parties for the last three
years follows:
2001 2000 1999
------ ------ ------
PT Smelting 28% 25% 17%
Atlantic Copper 23% 22% 23%
Other parties 49% 53% 60%
------ ------ ------
100% 100% 100%
====== ====== ======
INVESTMENT IN SMELTERS
Our investment in smelters (Atlantic Copper and PT Smelting) serves 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. For example,
while low smelting and refining charges will adversely affect the operating
results of Atlantic Copper and PT Smelting, low charges will benefit the
operating results to 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, S.A.
We own 100 percent of Atlantic Copper. Atlantic Copper completed the last
expansion of its production capacity in 1997 and its smelter currently has a
design capacity of 290,000 metric tons of copper per year. During 2001, Atlantic
Copper treated 891,100 metric tons of concentrate and produced 280,000 metric
tons of new copper anodes. Production for 2001 was negatively impacted by a
scheduled 27-day major maintenance turnaround in April 2001. The next scheduled
major maintenance turnaround is not anticipated for three years. Atlantic Copper
purchased approximately 63 percent of its 2001 concentrate requirements from PT
Freeport Indonesia at market prices. We have no present plans to expand Atlantic
Copper's production capacity. Atlantic Copper has experienced no material
operating problems, and we are not aware of any potential material environmental
liabilities at Atlantic Copper.
We contributed $7.6 million to Atlantic Copper during 2001, $32.4 million
in 2000 and $40.0 million in 1999. The funds are intended to strengthen Atlantic
Copper's financial structure during this period of extremely low treatment and
refining charge rates. Our total investment in Atlantic Copper through December
31, 2001, totaled $219.9 million.
PT SMELTING
PT Freeport Indonesia owns 25 percent of PT Smelting. During 2001, PT
Smelting treated 702,900 metric tons of concentrate and produced 217,500 metric
tons of new copper anodes. PT Smelting has no present plans to expand its
treatment capacity and has experienced no material operating problems. We are
not aware of any potential material environmental liabilities at PT Smelting.
17
PT Smelting is a joint venture among PT Freeport Indonesia, Mitsubishi
Materials Corporation, Mitsubishi Corporation and Nippon Mining & Metals Co.,
Ltd., which own 25 percent, 60.5 percent, 9.5 percent and 5 percent,
respectively, of the outstanding PT Smelting common stock. PT Freeport Indonesia
is providing nearly all of PT Smelting's copper concentrate requirements. PT
Freeport Indonesia agreed to assign its earnings in PT Smelting to support a 13
percent cumulative annual return to the other owners for the first 20 years of
operations. PT Freeport Indonesia's total investment in PT Smelting through
December 31, 2001, totaled $96.4 million.
COMPETITION
We compete with other mining companies in the sale of our mineral
concentrates and the recruitment and retention of qualified personnel. Some
competing companies possess financial resources equal to or greater than ours
and possess multiple mining assets less geographically concentrated in a single
area than ours. We believe, however, that we are the lowest cost copper producer
in the world, taking into account customary credits for related gold and silver
production, which we believe gives us a significant competitive advantage.
SOCIAL DEVELOPMENT, EMPLOYMENT AND HUMAN RIGHTS
We have a social, employment and human rights policy to ensure that we
operate in compliance with the laws in the areas of our operations, and in a
manner that respects basic human rights and the culture of the people who are
indigenous to the area. We continue to incur significant costs on social and
cultural activities, primarily in Papua. These activities include:
- comprehensive job training programs
- basic education programs
- several public health programs, including extensive malaria control
- agricultural assistance programs
- a business incubator program to encourage the local people to
establish their own small scale businesses
- cultural preservation programs
- charitable donations
In 1996, PT Freeport Indonesia agreed to commit at least one percent of
its revenues for the following 10 years to the Freeport Fund for Irian Jaya
Development to support village-based health, education, economic and social
development programs in its area of operations. This commitment replaced our
community development programs in which we spent a similar amount of money each
year. We contributed $14.1 million in 2001, $14.1 million in 2000 and $14.7
million in 1999 to the Freeport Fund for Irian Jaya Development.
Lembaga Pengembangan Masyarakat-Irian Jaya, or the People's Development
Foundation-Irian Jaya, oversees disbursement of the funds we contribute to the
Freeport Fund for Irian Jaya Development. The foundation's board of directors is
made up of the head of the local government, currently a Kamoro; a leader of the
Amungme people; a leader of the Kamoro people and leaders of the three local
churches.
We believe that our social and economic development programs are
responsive to the issues raised by the local villages and people and should help
us to avoid disruptions of mining operations. Nevertheless, social and political
instability in the area may adversely impact our mining operations. See "Risk
Factors."
In December 2000, we endorsed the joint U.S. State Department-British
Foreign Office Voluntary Principles on Human Rights and Security. Several major
natural resources companies and important human rights organizations also
endorsed the Voluntary Principles. We participated in drafting these principles
with all of the parties involved and incorporated them into our social and human
rights policy.
ENVIRONMENTAL MATTERS
We have an environmental policy that commits us not only to compliance
with applicable federal, state and local environmental statutes and regulations,
but also to continuous improvement of our environmental performance
18
at every operational site. We believe that we conduct our Indonesian operations
pursuant to all necessary permits and are in compliance in all material respects
with applicable Indonesian environmental laws, rules and regulations.
Mining operations on the scale of our operations in Papua involve
significant environmental challenges, primarily related to the disposition of
tailings, which are the crushed and ground rock material resulting from the
physical separation of commercially valuable minerals from the ore. We have
comprehensive, ongoing environmental monitoring and management plans for the
disposal of tailings resulting from our milling operations, which have been
approved by the Government of Indonesia. Pursuant to these plans, we manage and
monitor the impact of our tailings disposal on the ecosystem of the Ajkwa River
and the ecosystems of adjoining water bodies and the surrounding coastal areas.
In 1997, we completed an engineered levee system to minimize the impact of the
tailings through a controlled deposition area located on a portion of the flood
plain on the Ajkwa River. We will revegetate and reclaim the deposition area
when our mining operations are completed.
In furtherance of our commitments to the Indonesian government pursuant to
our tailings plan, we monitor the acid-neutralizing capacity of tailings on a
daily basis to ensure the discharge of non-acid generating tailings into our
tailings deposition area. The net acid-neutralizing capacity of our tailings
discharge is maintained through a managed program of blending underground ore
with ore from the open pit, the addition of supplemental limestone (or lime) to
the ore blend, and the addition of lime for control of the pH levels in the
flotation system. Daily samples are collected and tested and this data is
communicated to our mill operations so that adjustments in ore blending and
lime/limestone addition can be made as appropriate.
With respect to waste rock, acid rock drainage is our primary
environmental issue. Our approaches to this issue include the mitigation of acid
rock drainage generation, the control of acid rock drainage migration, and the
capture and treatment of acid rock drainage emanating from the stockpile. In
addition, tests have shown the feasibility of revegetating the stockpile and, as
a result, we have engaged in stockpile reclamation as an additional means of
mitigating acid rock drainage.
We have made significant capital expenditures with respect to the capture
and treatment of acid rock drainage and additional capital expenditures are
currently in progress. In addition, we are in the process of developing and
implementing technology for the treatment of captured acid rock drainage. In the
interim, acid rock drainage collected by boreholes near the base of the
stockpile is neutralized.
We have committed to independent external environmental audits of our
Papua operations by qualified experts every three years, with the results to be
made public. The second such audit was completed in 1999. The second audit
reported that we continue to be in material compliance with Indonesian
environmental laws and regulations and that we had fulfilled the recommendations
in the 1996 audit report. The 1999 external audit report made some additional
environmental management recommendations that are being implemented. The report
concluded that our environmental management systems achieve the standard of
practice for world-class mines. The auditors also found our environmental
management systems to be exemplary and a showcase for the mining industry. We
also are continuing our annual internal audits, through the life of our mining
operations, so that our environmental management and monitoring programs will
remain sound and our operations will remain in material compliance with local
laws.
We have environmental approvals from the Government of Indonesia to expand
our milling rate up to a maximum of 300,000 metric tons of ore per day. In 2001,
we averaged 237,800 metric tons of ore per day and we expect to average 245,000
metric tons of ore per day in 2002.
The costs of complying with environmental laws is a fundamental cost of
our business. We incurred aggregate environmental capital expenditures and other
environmental costs totaling $78.2 million in 2001, $106.1 million in 2000 and
$73.3 million in 1999, including tailings management levee maintenance and mine
reclamation. In 2002, we expect to incur approximately $11 million of
environmental capital expenditures and $40 million of other environmental costs.
These environmental capital expenditures are part of our $170 million overall
2002 capital expenditure budget.
Upon the completion of our mining operations, we will fulfill the
remaining commitments we made to the Indonesian government in connection with
our tailings management plan. Our options for revegetation of affected
19
areas of the deposition area will include forage crops and grasses, fruits,
grains and vegetables, and other traditional food and medicinal crops. Decisions
on these options will be made after consultation with local and regional
government and local residents. In addition to the revegetation and reclamation
of the deposition area, we will continue to operate our wastewater treatment
plants as long as necessary. We will also monitor and test the water discharged
from our mine and the pH, sulfate and electrical conductivity levels of ground
water in the deposition area. In addition, we will provide flood protection to
surrounding areas by diverting the Ajkwa and Otomona Rivers and enhancing levee
embankments. The stability of our levees will be ensured through periodic visual
inspection, revegetation of the levee embankments, and the transfer of our levee
roads for public use. Moreover, we will submit an annual written report to the
Indonesian government regarding our reclamation activities.
Our ultimate reclamation and closure activities will be determined after
consultation with the Indonesian government, affected local residents and other
affected parties. Thus, we cannot currently project with precision the ultimate
amount of reclamation and closure costs we will incur. Our best estimate at this
time is that PT Freeport Indonesia's total reclamation and closure costs may
require in excess of $100 million but are not expected to exceed $150 million.
Estimates of reclamation and closure costs involve complex issues requiring
integrated assessments over a period of many years and are subject to revision
over time as we perform more complete studies. Some reclamation costs will be
incurred during mining activities, while most closure costs and the remaining
reclamation costs will be incurred at the end of mining activities, which are
currently estimated to continue for more than 30 years.
Moreover, we cannot predict with any certainty the ultimate future uses of
the deposition area once our mining operations are completed. In addition to
forage crop and grass planting and food and medicinal crop production, possible
future uses of the deposition area include rainforest production, production of
timber, fuel woods, fruits and nuts and other economic forestry, and the
cultivation of fish, shellfish and other aquaculture. The ultimate future uses
of the deposition area will be determined after consultation with local and
regional government and local residents.
In 1996, we began contributing approximately $0.6 million annually to a
cash fund ($3.3 million balance at December 31, 2001) designed to accumulate at
least $100 million by the end of our Indonesian mining activities. We plan to
use this fund, including accrued interest, to pay for mine closure and
reclamation costs. Any incremental costs in excess of the $100 million fund are
expected to be incurred throughout the life of the mine and would be funded by
operational cash flow or the sale of assets, as needed. An increasing emphasis
on environmental issues and future changes in regulations could require us to
incur additional costs that would be charged against future operations.
Estimates involving environmental matters are by their nature imprecise and
changes in government regulations, operations, technology and inflation could
require us to revise them over time.
In 1998, a court in Huelva, Spain found an employee of Atlantic Copper
guilty of a criminal offense against the environment in connection with Atlantic
Copper's transportation and use of weak acid and spent electrolyte at a facility
owned and operated by Minas de Rio Tinto, S.A.L. The court fined the employee
approximately $48,000. The Huelva court ruling, which is currently on appeal,
did not prohibit Atlantic Copper's Huelva complex from continuing to engage in
these operations. Moreover, Atlantic Copper's weak acid and spent electrolyte
transport and use operations have been authorized by Spanish environmental
regulators. In response to the Huelva court decision, Atlantic Copper has
voluntarily constructed an on-site plant for the treatment of weak acid and
recycling of spent electrolyte. Since June 2001, no weak acid or spent
electrolyte has been sent to the Minas de Rio Tinto facilities.
We believe that Atlantic Copper's facilities and operations are in
compliance in all material respects with all applicable Spanish environmental
laws, rules and regulations. During 1999, Atlantic Copper achieved ISO 14001
certification for its two remaining uncertified facilities. In addition,
environmental management systems at all of Atlantic Copper's facilities have
been validated as being in compliance with the European Union Regulation on
Environmental Eco-Management and Eco-Auditing.
The Indonesian and Spanish governments may periodically revise their
environmental laws and regulations or adopt new ones, and we cannot predict the
effects on our operations of new or revised regulations. We have expended
significant resources, both financial and managerial, to comply with
environmental regulations and permitting and approval requirements, and we
anticipate that we will continue to do so in the future. There can be
20
no assurance that we will not incur additional significant costs and liabilities
to comply with such current and future regulations or that such regulations will
not have a material effect on our operations. See "Risk Factors."
WANAGON OVERBURDEN STOCKPILE SLIPPAGE
In May 2000, a slippage occurred in the overburden waste stockpile at the
Wanagon basin following a period of excessive rainfall, causing a wave of water
and material to overflow from the basin. Four employees of a contractor to PT
Freeport Indonesia were working in the area and perished. Contained within the
mud were the treatment solids from the lime precipitation of acid rock drainage,
which then entered the tailings river system near the village of Banti. PT
Freeport Indonesia charged $2.9 million to its 2000 production costs, primarily
for assets lost as a result of the incident. In addition, we incurred
environmental costs for overburden disposition, stockpile stabilization,
laboratory testing and consulting studies relating to the Wanagon overburden
waste stockpile.
Sampling and monitoring were initiated at a number of stations covering
the entire tailings system between the mine and estuary. A specific risk
analysis was conducted as a result of this event and was based on the monitoring
program. No long-term environmental effects were found from the direct
monitoring nor predicted by the risk assessment. The slippage caused a flow of
sediments containing elevated levels of precipitated copper. As a result, water
quality in the river was temporarily diminished due to higher levels of total
suspended solids. According to water quality tests, the pre-slippage water
quality in the river was substantially reestablished by the following day and
was fully reestablished within 22 days after the incident.
PT Freeport Indonesia engaged international experts and outside
consultants led by a team from the Institute of Technology of Bandung
(Indonesia) to conduct a comprehensive study of the cause of the slippage and to
recommend a future course of action. Working with the close cooperation of the
Indonesian Department of Energy and Natural Resources and also BAPEDAL (the
Indonesian environmental protection agency), the company initiated a stockpile
stabilization program and voluntarily agreed to a temporary limitation on
average production from the Grasberg open pit of 200,000 tons per day.
Underground ore production was not affected. A safe-zone based on engineering
calculations was subsequently identified along the Wanagon River and within the
village of Banti. The residents within this zone were temporarily moved to
Tembagapura, our original mining town site, and the houses were removed. These
families were relocated to new housing designed according to their wishes and
located on higher ground in Banti.
After successful completion of the stabilization program and consultation
with affected local residents, and with the approval of the Indonesian
government, normal overburden placement at the Wanagon stockpile resumed and the
restriction on production from the Grasberg open pit was lifted at the end of
2000.
EMPLOYEES AND RELATIONSHIP WITH FM SERVICES COMPANY
As of December 31, 2001, PT Freeport Indonesia had 7,488 employees
(approximately 98 percent Indonesian). In addition, as of December 31, 2001, PT
Freeport Indonesia had 1,672 contract workers, the vast majority of whom were
Indonesian. Approximately 46 percent of our Indonesian employees are members of
the All Indonesia Workers' Union, which operates under Government of Indonesia
supervision. PT Freeport Indonesia has a labor agreement covering its
hourly-paid Indonesian employees, the key provisions of which are renegotiated
biannually. PT Freeport Indonesia's labor agreement was scheduled to expire on
September 30, 2001. In June 2001, PT Freeport Indonesia and its workers agreed
to terms for a new labor agreement that expires September 30, 2003. PT Freeport
Indonesia's relations with the workers' union have generally been positive.
As of December 31, 2001, Atlantic Copper had 731 employees, of which
approximately 76 percent are covered by a union contract that expires December
31, 2002. Atlantic Copper experienced no work stoppages in 2001 and relations
with these unions have also generally been good.
FM Services Company, a Delaware corporation 50 percent owned by us as of
December 31, 2001, has furnished executive, administrative, financial,
accounting, legal, tax and similar services to us. We reimburse FM Services at
its cost, including allocated overhead, for these services on a monthly basis.
As of December 31, 2001,
21
FCX had 16 employees and FM Services had 142 employees. FM Services employees
also provide services to two other publicly traded companies.
RISK FACTORS
This report contains "forward-looking statements" within the meaning of the
federal securities laws. Forward-looking statements are all statements other
than statements of historical facts, such as statements regarding anticipated
production volumes, sales volumes, ore grades, commodity prices, development and
capital expenditures, mine production and development plans, environmental
reclamation and closure cost and plans, reserve estimates, political, economic
and social conditions in our areas of operations, and exploration efforts and
results. Except for our ongoing obligations under the federal securities laws,
we do not intend, and we undertake no obligation, to update or revise any
forward-looking statements. Readers are cautioned that forward-looking
statements are not guarantees of future performance and actual results may
differ materially from those projected, anticipated or assumed in the
forward-looking statements. Important factors that could cause our actual
results to differ materially from those anticipated in the forward-looking
statements include the following:
THE TERRORIST ATTACKS IN THE UNITED STATES ON SEPTEMBER 11, 2001, AS WELL AS THE
UNITED STATES-LED RESPONSE AND THE POTENTIAL FOR ADDITIONAL FUTURE TERRORIST
ACTS, HAVE CREATED ECONOMIC AND POLITICAL UNCERTAINTIES THAT COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND THE PRICES OF OUR SECURITIES.
The terrorist attacks that took place in the United States on September
11, 2001, as well as the United States-led response to such attacks and the
potential for additional future terrorist acts, have caused uncertainty in the
world's financial and insurance markets and may significantly increase
political, economic and social instability in the geographic areas in which we
operate, including the Republic of Indonesia where our primary operating assets
are located. Moreover, there have been anti-American demonstrations in certain
sections of Indonesia reportedly led by radical Islamic activists. Radical
activists have also threatened to attack foreign assets and have called for the
expulsion of United States and British citizens and companies from Indonesia.
It is possible that further acts of terrorism may be directed against the
United States domestically or abroad, and such acts of terrorism could be
directed against properties and personnel of companies such as ours. The attacks
and the resulting economic and political uncertainties, including the potential
for further terrorist acts, may cause the premiums charged for our insurance
coverages to increase dramatically and may cause some coverages to be
unavailable altogether. These developments may materially and adversely affect
our business and profitability and the prices of our securities in ways we
cannot predict at this time.
BECAUSE OUR PRIMARY OPERATING ASSETS ARE LOCATED IN THE REPUBLIC OF INDONESIA,
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY INDONESIAN POLITICAL, ECONOMIC AND
SOCIAL UNCERTAINTIES BEYOND OUR CONTROL, IN ADDITION TO THE USUAL RISKS
ASSOCIATED WITH CONDUCTING BUSINESS IN A FOREIGN COUNTRY.
Maintaining a good working relationship with the Indonesian government is
important to us because all of our mining operations are located in Indonesia
and are conducted pursuant to Contracts of Work with the Indonesian government.
For a discussion of the risks relating to our Contracts of Work, see the risk
factor below.
Indonesia continues to face political and economic uncertainties,
including separatist movements and civil and religious strife in a number of
provinces. In particular, social, economic and political instability in the
province of Papua, where our mining operations are located, could have a
material adverse impact on us if this instability results in damage to our
property or interruption of our activities.
With the approval of the Indonesian government, we have temporarily
suspended our field exploration activities outside of Block A 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 the Contracts
of Work and an Indonesian law enacted in 1999 prohibiting open-pit mining in
forest preservation areas.
In August 1998, we suspended operations for three days at our Grasberg
mine in response to a wildcat work stoppage (not authorized by the workers'
union) by a group of workers, a majority of whom were employees of our
contractors. The workers cited employment issues as the reasons for their work
stoppage. In March 1996, local
22
people engaged in acts of vandalism that caused approximately $3 million of
damages to our property and caused us to close the Grasberg mine and mill for
three days as a precautionary measure.
Several separatist groups are opposing Indonesian rule over Papua and have
sought political independence for the province. In response to the demands for
political independence from Indonesia, new regional autonomy laws became
effective January 1, 2001. However, the manner in which these new autonomy laws
will be implemented and the degree of political and economic autonomy that is
being provided to individual provinces, including Papua, is uncertain and is a
current issue in Indonesian politics.
In Papua, there have been sporadic attacks on civilians by separatists and
sporadic but highly publicized conflicts between separatists and the Indonesian
military. For example, on September 29, 2001, a group of separatists set fire to
facilities and took over an airfield in Ilaga, Papua, which is approximately 50
miles northeast of our mining operations and separated by a rugged, 14,000-foot
mountain range through which there are no roads. The separatists occupied the
airfield for three days, after which Indonesian security forces successfully
reclaimed the airfield.
We are also subject to the usual risks associated with conducting business
in a foreign country, including the risk of forced modification of existing
contracts, changes in the country's laws or policies, including laws or policies
relating to taxation, royalties, imports, exports and currency, and the risk of
having to submit to the jurisdiction of a foreign court or having to enforce the
judgment of a foreign court or arbitration panel against a sovereign nation
within its own territory. In addition, we are subject to the risk of
expropriation and our insurance policies do not provide coverage for losses
caused by expropriation.
OUR CONTRACTS OF WORK ARE SUBJECT TO TERMINATION IF WE DO NOT COMPLY WITH OUR
CONTRACTUAL OBLIGATIONS AND, IF A DISPUTE ARISES, WE MAY HAVE TO SUBMIT TO THE
JURISDICTION OF A FOREIGN COURT OR PANEL. IN ADDITION, UNLESS THE INDONESIAN
GOVERNMENT PERMITS US TO SUSPEND ACTIVITIES UNDER OUR CONTRACTS OF WORK, WE ARE
REQUIRED TO CONTINUE THOSE ACTIVITIES OR POTENTIALLY BE DECLARED IN DEFAULT.
PT Freeport Indonesia's and Eastern Minerals' Contracts of Work were
entered into under Indonesia's 1967 Foreign Capital Investment Law, which
provides guarantees of remittance rights and protection against nationalization.
Our Contracts of Work can be terminated by the Government of Indonesia if we do
not satisfy our contractual obligations, which include the payment of royalties
and taxes to the government and the satisfaction of certain mining,
environmental, safety and health requirements. Indonesian government officials
have periodically raised questions regarding our compliance with Indonesian
environmental laws and regulations and the terms of the Contracts of Work. In
order to address these questions, the Government of Indonesia formed a
fact-finding team in 2000 that reviewed our compliance with all aspects of PT
Freeport Indonesia's Contract of Work. It is uncertain if or when the Indonesian
government will release its report on its investigation. In addition, we cannot
assure you that the Indonesian government's report, if and when released, will
conclude that we are in compliance with all of the provisions of PT Freeport
Indonesia's Contract of Work.
Moreover, in recent years, certain government officials and others in
Indonesia have called into question the validity of contracts entered into by
the Government of Indonesia prior to October 1999, including PT Freeport
Indonesia's Contract of Work, which was signed in December 1991. We cannot
assure you that the validity of, or our compliance with the terms of, the
Contracts of Work will not be challenged for political or other reasons. PT
Freeport Indonesia's and Eastern Minerals' Contracts of Work require that
disputes with the Indonesian government be submitted to international
arbitration. Notwithstanding the international arbitration provision, if a
dispute arises under the Contracts of Work, we face the risk of having to submit
to the jurisdiction of a foreign court or having to enforce the judgment of a
foreign court or arbitration panel against Indonesia within its own territory.
In addition, our Contracts of Work permit us to suspend activities under
the contracts for a period of one year by making a written request to the
Indonesian government. These suspension requests are subject to the approval of
the Indonesian government and are renewable annually. If we do not request a
suspension or are denied a suspension, then we are required to continue our
activities under the Contract of Work or potentially be declared in default.
Moreover, if a suspension continues for more than one year for reasons other
than force majeure and the Indonesian government has not approved such
continuation, then the Indonesian government would be entitled to declare a
default under the Contract of Work.
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SERVICING OUR DEBT WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH, AND OUR ABILITY TO
GENERATE SUFFICIENT CASH DEPENDS ON MANY FACTORS, SOME OF WHICH ARE BEYOND OUR
CONTROL.
Our ability to make payments on and to refinance our debt depends on our
ability to generate sufficient cash flow. This, to a significant extent, is
subject to commodity prices and general economic, financial, regulatory,
political and other factors that are beyond our control. In addition, our
ability to borrow funds in the future to service our debt will depend on our
meeting the financial covenants in our amended bank credit facilities and other
debt agreements we may have in the future. Future borrowings may not be
available to us under our amended bank credit facilities or otherwise in amounts
sufficient to enable us to pay our debt or to fund other liquidity needs. As a
result, we may need to refinance all or a portion of our debt on or before
maturity. Any inability to generate sufficient cash flow or refinance our debt
on favorable terms could have a material adverse effect on our financial
condition.
Political and economic conditions in Indonesia have had a negative effect
on our credit ratings. The major credit rating agencies have generally had a
policy of limiting the credit ratings of companies with operations limited to a
particular country to the credit rating for the sovereign debt of that country.
The current sovereign credit ratings of Indonesia are B3 by Moody's Investors
Service and CCC by Standard & Poor's and our credit ratings on our senior
unsecured debt are currently B3 by Moody's Investors Service and CCC by Standard
& Poor's.
Our current credit ratings have an impact on the availability and cost of
capital to us. As a result, in connection with our amended bank credit
facilities, we have agreed to apply our future cash flows, after servicing
scheduled payments of other debt, funding permitted capital expenditures and
paying operating and other costs, to reducing amounts owed to the banks.
Although our amended credit facilities do not restrict our ability to use
funds for exploration and will not preclude us from funding our anticipated
exploration budget, the amended facilities do impose annual limitations on our
capital expenditures that limit the amount of funds we can use to develop new
projects. These annual limitations are approximately $171 million for 2002, $188
million for 2003, $128 million for 2004 and $136 million 2005. If our capital
expenditures in any year are less than 80% of the annual limitation for the
year, then the unused amount for the year below 80% may be carried forward to
the next two succeeding years, provided that the unused amount may only be used
for deferred mining projects. While our currently anticipated capital
requirements do not exceed those limitations, funding significant new projects
would require us to seek alternate sources of capital. The availability and cost
of capital for projects in Indonesia is uncertain because of global financial
markets' assessment of Indonesia's political and economic conditions.
COVENANTS IN OUR AMENDED CREDIT FACILITIES IMPOSE RESTRICTIONS ON US.
Our amended bank credit facilities:
- prohibit the repurchase of, and payment of dividends on, our common
stock;
- limit, among other things, our ability to:
- redeem and pay dividends on our preferred stock in certain
circumstances;
- make investments;
- engage in transactions with affiliates; and
- create liens on our assets;
and
- require us to maintain specified financial ratios and satisfy
financial condition tests.
Events beyond our control, including changes in general economic and
business conditions, may affect our ability to satisfy these covenants, which
could result in a default under our amended bank credit facilities. If an event
of default under our amended credit facilities occurs, the banks could elect to
declare all amounts outstanding thereunder, together with accrued interest, to
be immediately due and payable. An event of default under our
24
amended bank credit facilities may also give rise to an event of default under
our existing and future debt agreements.
WE HAVE PLEDGED SUBSTANTIALLY ALL OF OUR ASSETS TO SECURE THE REPAYMENT OF OUR
AMENDED CREDIT FACILITIES AND OTHER OBLIGATIONS.
The repayment of our amended credit facilities is secured by a lien on
over 80% of PT Freeport Indonesia's assets and by our pledge of 50.1% and 100%
of the outstanding capital stock of PT Freeport Indonesia and PT Indocopper
Investama, respectively. PT Freeport Indonesia's remaining assets secure other
of our obligations. In addition, PT Freeport Indonesia has pledged it rights
under its Contract of Work to secure its obligations under the amended credit
facilities.
If we are unable to generate sufficient cash flow to satisfy our repayment
obligations, our lenders could elect to foreclose on our pledged assets, which
would have a material adverse effect on our business and profitability.
OUR MINING OPERATIONS CREATE DIFFICULT AND COSTLY ENVIRONMENTAL CHALLENGES, AND
FUTURE CHANGES IN ENVIRONMENTAL LAWS, OR UNANTICIPATED ENVIRONMENTAL IMPACTS
FROM OUR OPERATIONS, COULD REQUIRE US TO INCUR INCREASED COSTS.
Mining operations on the scale of our operations in Papua involve
significant environmental challenges. Our primary challenge is to dispose of the
large amount of crushed and ground rock material, called tailings, that results
from the process by which we physically separate the copper, gold and silver
from the ore that we mine. Under our tailings management plan, the river system
near our mine transports the tailings to the lowlands where deposits of the
tailings and natural sediments are controlled through a levee system for future
revegetation and reclamation. We incurred costs of $9.7 million in 2001, $8.2
million in 2000 and $11.7 million in 1999 for our tailings management plan.
Another of our major environmental challenges is managing overburden,
which is the rock that must be moved aside in order to reach the ore in the
mining process. In the presence of air, water and naturally occurring bacteria,
some overburden can cause acid rock drainage, or acidic water containing
dissolved metals which, if not properly managed, can have a negative impact on
the environment.
Certain Indonesian governmental officials have from time to time raised
issues with respect to our tailings management plan and overburden management
plan, including a suggestion that a pipeline system rather than our current
system be implemented for tailings disposal. Our ongoing assessment of tailings
management has identified significant unresolved technical, environmental and
economic issues associated with a pipeline system. Because our mining operations
are remotely located in steep mountainous terrain and in an active seismic area,
a pipeline system would be costly, difficult to construct and maintain, and more
prone to catastrophic failure. For these reasons, we do not believe that a
pipeline system is practical.
We anticipate that we will continue to spend significant financial and
managerial resources on environmental compliance. In addition, changes in
Indonesian environmental laws or unanticipated environmental impacts from our
operations could require us to incur significant additional costs.
THE VOLUME AND GRADE OF THE RESERVES WE RECOVER AND OUR RATES OF PRODUCTION MAY
BE MORE OR LESS THAN ANTICIPATED. IN ADDITION, WE DO NOT ANTICIPATE THE MINING
OF ALL OF OUR RESERVES PRIOR TO THE EXPIRATION OF THE INITIAL TERM OF OUR
CONTRACT OF WORK.
Our reserve amounts are determined in accordance with established mining
industry practices and standards, but are only estimates of the mineral deposits
that can be economically and legally recovered. In addition, our mines may not
conform to standard geological expectations. Because ore bodies do not contain
uniform grades of minerals, our metal recovery rates will vary from time to
time, which will result in variations in the volumes of minerals that we can
sell from period to period. Some of our reserves may become unprofitable to
develop if there are unfavorable long-term market price fluctuations in copper
and gold, or if there are significant
25
increases in our operating and capital costs. In addition, our exploration
programs may not result in the discovery of additional mineral deposits that we
can mine profitably.
All of our current proven and probable reserves, including the Grasberg
deposit, are located in Block A. The initial term of our Contract of Work
covering Block A expires at the end of 2021. We can extend this term for two
successive 10-year periods, subject to the approval of the Indonesian
government, which cannot be withheld or delayed unreasonably. Our reserve
amounts reflect our estimates of the reserves that can be recovered before 2041
(the expiration of the two 10-year extensions). Our current mine plan has been
developed and our operations are based on our receiving the two 10-year
extensions. As a result, we do not anticipate the mining of all of our reserves
prior to the end of 2021 based on our current mine plan, and there can be no
assurance that the Indonesian government will approve the extensions. Prior to
the end of 2021, we expect to mine approximately 63 percent of aggregate proven
and probable ore, representing approximately 71 percent of PT Freeport
Indonesia's recoverable copper reserves and approximately 77 percent of PT
Freeport Indonesia's recoverable gold reserves.
OUR NET INCOME CAN VARY SIGNIFICANTLY WITH FLUCTUATIONS IN THE MARKET PRICES OF
COPPER AND GOLD.
Our revenues are derived primarily from the sale of copper concentrates,
which also contain significant amounts of gold, and from the sale of copper
cathodes, copper wire rod and copper wire. Most of our copper concentrates are
sold under long-term contracts, but the selling price is based on world metal
prices at or near the time of shipment and delivery.
Copper and gold prices fluctuated widely in 2001, primarily due to the
slowdown in global economic activity and the economic and political
uncertainties created by the terrorist attacks in the United States on September
11, 2001. During 2001, the daily closing price for copper on the London spot
market ranged from 60 cents per pound to 83 cents per pound and the daily
closing price for gold on the London spot market ranged from $256 per ounce to
$293 per ounce.
World metal prices for copper have historically fluctuated widely and are
affected by numerous factors beyond our control, including:
- the strength of the United States economy and the economies of other
industrialized and developing nations;
- available supplies of copper from mine production and inventories;
- sales by holders and producers of copper;
- demand for industrial products containing copper; and
- speculation.
World gold prices have also historically fluctuated widely and are
affected by numerous factors beyond our control, including:
- the strength of the United States economy and the economies of other
industrialized and developing nations;
- global or regional political or economic crises;
- the relative strength of the United States dollar and other
currencies;
- expectations with respect to the rate of inflation;
- interest rates;
- sales of gold by central banks and other holders;
- demand for jewelry containing gold; and
- speculation.
Any material decrease in market prices of copper or gold would have a
material adverse impact on our results of operations and financial condition.
26
IN ADDITION TO THE USUAL RISKS ENCOUNTERED IN THE MINING INDUSTRY, WE FACE
ADDITIONAL RISKS BECAUSE OUR OPERATIONS ARE LOCATED ON DIFFICULT TERRAIN IN A
VERY REMOTE AREA OF THE WORLD.
Our mining operations are located in steeply mountainous terrain in a very
remote area in Indonesia. These conditions have required us to overcome special
engineering difficulties and to develop extensive infrastructure facilities. In
addition, the area receives considerable rainfall, which has led to periodic
floods and mud slides. The mine site is also in an active seismic area and has
experienced earth tremors from time to time. In addition to these special risks,
we are also subject to the usual risks associated with the mining industry, such
as the risk of encountering unexpected geological conditions that may result in
cave-ins and flooding of mine areas. Our insurance coverages may not be
sufficient to cover an unexpected natural or operating disaster. Our insurance
policies do not provide coverage for damages and losses caused by war. Moreover,
while our property and business interruption insurance policy currently provides
coverage for damages to insured property directly caused by terrorism, this
policy in the future may, in view of the events of September 11, 2001, exclude
such coverage.
MOVEMENTS IN FOREIGN CURRENCY EXCHANGE RATES OR INTEREST RATES COULD HAVE A
NEGATIVE EFFECT ON OUR OPERATING RESULTS.
All of our revenues are denominated in U.S. dollars. However, some of our
costs and some of our assets and liabilities are denominated in Indonesian
rupiah, Australian dollars or euros. As a result, our profitability is generally
adversely affected when the U.S. dollar weakens against these foreign
currencies.
The Indonesian rupiah/U.S. dollar exchange rate was volatile during 2001.
The rupiah/U.S. dollar daily closing exchange rate ranged from 8,470 rupiahs per
U.S. dollar to 11,980 rupiahs per U.S. dollar during 2001, and on December 31,
2001, the closing exchange rate was 10,160 rupiahs per U.S. dollar. The
Australian dollar/U.S. dollar and euro/U.S. dollar exchange rates also
fluctuated substantially in 2001. During 2001, the Australian dollar/U.S. dollar
daily closing exchange rate ranged from $0.48 per Australian dollar to $0.57 per
Australian dollar and the euro/U.S. dollar daily closing exchange rate ranged
from $0.84 per euro to $0.96 per euro. On December 31, 2001, the closing
exchange rates were $0.51 per Australian dollar and $0.88 per euro.
From time to time we have in the past and may in the future implement
currency hedges intended to reduce our exposure to changes in foreign currency
exchange rates. However, our hedging strategies may not be successful, and any
of our unhedged foreign exchange payment requirements will continue to be
subject to market fluctuations. In addition, our amended bank credit facilities
are based on fluctuating interest rates. Accordingly, an increase in interest
rates could have an adverse impact on our results of operations and financial
condition.
BECAUSE WE ARE PRIMARILY A HOLDING COMPANY, OUR ABILITY TO PAY OUR DEBTS DEPENDS
UPON THE ABILITY OF OUR SUBSIDIARIES TO PAY US DIVIDENDS AND TO ADVANCE US
FUNDS. IN ADDITION, OUR ABILITY TO PARTICIPATE IN ANY DISTRIBUTION OF OUR
SUBSIDIARIES' ASSETS IS GENERALLY SUBJECT TO THE PRIOR CLAIMS OF THE
SUBSIDIARIES' CREDITORS.
Because we conduct business primarily through PT Freeport Indonesia, our
major subsidiary, and other subsidiaries, our ability to pay our debts depends
upon the earnings and cash flow of PT Freeport Indonesia and our other
subsidiaries and their ability to pay us dividends and to advance us funds.
Contractual and legal restrictions applicable to our subsidiaries could also
limit our ability to obtain cash from them. Our rights to participate in any
distribution of our subsidiaries' assets upon their liquidation, reorganization
or insolvency would generally be subject to the prior claims of the
subsidiaries' creditors, including trade creditors and preferred stockholders,
if any.
ITEM 3. 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 seeks 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.
27
In addition to the foregoing proceeding, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information as of February 26, 2002 about our executive officers,
including their position or office with FCX, PT Freeport Indonesia and Atlantic
Copper, is set forth in the following table and accompanying text:
Name Age Position or Office
---- --- ------------------
Richard C. Adkerson 55 President and Chief Financial Officer of FCX.
Director and Executive Vice President of PT
Freeport Indonesia. Chairman of the Board
of Directors of Atlantic Copper.
Adrianto Machribie 60 President Director of PT Freeport Indonesia.
James R. Moffett 63 Director, Chairman of the Board and
Chief Executive Officer of FCX.
President Commissioner of PT Freeport Indonesia.
Richard C. Adkerson has served as FCX's President since April 1997 and Chief
Financial Officer since October 2000. Mr. Adkerson is also Executive Vice
President and a director of PT Freeport Indonesia, Chairman of the Board of
Directors of Atlantic Copper, and Co-Chairman of the Board, President and Chief
Executive Officer of McMoRan Exploration Co. (McMoRan). From April 1994 to
November 1998 he was Co-Chairman of the Board and Chief Executive Officer of
McMoRan Oil & Gas Co. (McMoRan Oil & Gas), and from November 1997 to November
1998 he was Vice Chairman of the Board of Freeport-McMoRan Sulphur Inc.
(Freeport Sulphur). Mr. Adkerson served as Executive Vice President of FCX from
July 1995 to April 1997, and as Chief Financial Officer from July 1995 to
November 1998. He also served as Chairman of the Board of Stratus Properties
Inc., a real estate development company, from March 1992 to August 1998, and as
Chief Executive Officer from August 1995 to May 1998. Mr. Adkerson served as
Vice Chairman of the Board of Freeport-McMoRan Inc. from August 1995 until
December 1997 and as Senior Vice President.
Adrianto Machribie has served as President Director of PT Freeport Indonesia
since March 1996. From September 1992 to March 1996, Mr. Machribie was a
director and Executive Vice President of PT Freeport Indonesia.
James R. Moffett has served as Chairman of the Board and Chief Executive Officer
of FCX since July 1995 and has served as Chairman of the Board of FCX since May
1992. He is also President Commissioner of PT Freeport Indonesia and Co-Chairman
of the Board of McMoRan. From April 1994 to November 1998 he was Co-Chairman of
the Board of McMoRan Oil & Gas and from November 1997 to November 1998 he was
Co-Chairman of the Board of Freeport Sulphur. Mr. Moffett served as Chairman of
the Board of Freeport-McMoRan Inc. from September 1984 to December 1997.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
CLASS A COMMON SHARES
Our Class A common shares trade on the New York Stock Exchange (NYSE)
under the symbol "FCX.A." The FCX.A share price is reported daily in the
financial press under "FMCGA" in most listings of NYSE securities. At year-end
2001, the number of holders of record of Class A common shares was 5,802. NYSE
composite tape Class A common share price ranges during 2001 and 2000:
2001 2000
------------------------ -------------------------
High Low High Low
-------- --------- --------- ---------
First Quarter $ 13.200 $ 8.000 $ 18.625 $ 11.000
Second Quarter 15.400 10.030 11.750 8.438
Third Quarter 11.530 9.060 9.875 8.000
Fourth Quarter 13.500 8.750 8.813 6.750
CLASS B COMMON SHARES
Our Class B common shares trade on the NYSE under the symbol "FCX." The
FCX share price is reported daily in the financial press under "FMCG" in most
listings of NYSE securities. At year-end 2001, the number of holders of record
of our Class B common shares was 9,803. NYSE composite tape Class B common share
price ranges during 2001 and 2000:
2001 2000
------------------------ -------------------------
High Low High Low
-------- --------- --------- ---------
First Quarter $ 14.690 $ 8.313 $ 21.438 $ 12.063
Second Quarter 17.150 11,050 12.750 8.813
Third Quarter 12.980 10.230 10.625 8.188
Fourth Quarter 14.240 9.400 9.375 6.750
As of February 26, 2002, there were 5,734 and 9,681 holders of record of our
Class A and Class B common stock, respectively.
COMMON SHARE DIVIDENDS
There were no cash dividends paid on our common stock during 2000 and
2001.
RECLASSIFICATION OF CLASS A AND CLASS B COMMON SHARES
On February 28, 2002, FCX's Board of Directors authorized and recommended
to its stockholders a proposal to reclassify its Class A and Class B common
stock into a single class of common stock on a one share-for-one share basis.
The reclassification proposal will require the affirmative vote of the holders
of a majority of each class of common stock, voting as separate classes, and
will be presented at the upcoming annual meeting of stockholders on May 2, 2002.
The reclassification is intended to simplify the company's capital structure,
enhance the company's ability to structure and execute equity-based
transactions, increase the trading liquidity of the company's common stock, and
generate administrative cost savings.
29
ITEM 6. SELECTED FINANCIAL DATA.
FREEPORT-MCMORAN COPPER & GOLD INC.
SELECTED FINANCIAL AND OPERATING DATA
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Financial Data in Thousands, Except Per Share Amounts)
FCX CONSOLIDATED FINANCIAL DATA
Years Ended December 31:
Revenues $1,838,866 $1,868,610 $1,887,328 $1,757,132 $2,000,904
Operating Income 542,926(a) 492,293(b) 578,316(c) 579,585(d) 659,262(e)
N(e)t in(c)om(e) appli(c)a(b)l(e) to (c)ommon sto(c)k 76,496(a) 39,500(b) 100,787(c) 118,317(d) 208,541(e)
(b)asi(c) n(e)t in(c)om(e) p(e)r (c)ommon shar(e) .53(a) .26(b) .62(c) .67(d) 1.06(e)
(d)ilut(e)(d) n(e)t in(c)om(e) p(e)r (c)ommon shar(e) .53(a) .26(b) .61(c) .67(d) 1.06(e)
Dividends paid per common share -- -- -- .20 .90
Basic average shares outstanding 143,952 153,997 163,613 175,353 196,392
Diluted average shares outstanding 144,938 154,519 164,567 175,354 197,653
At December 31:
Property, plant and equipment, net 3,457,277 3,248,710 3,381,465 3,504,221 3,558,736
Total assets 4,211,929 3,950,741 4,082,916 4,192,634 4,152,209
Long-term debt, including current portion
and short-term borrowings 2,338,600 2,190,025 2,148,259 2,456,793 2,388,982
Redeemable preferred stock 462,504 475,005 487,507 500,007 500,007
Stockholders' equity 104,444 37,931 196,880 103,416 278,892
PT FREEPORT INDONESIA OPERATING DATA, NET OF RIO TINTO'S
INTEREST
Copper
Production (000s of recoverable pounds) 1,393,400 1,388,100 1,428,100 1,427,300 1,166,500
Production (metric tons) 632,000 629,600 647,800 647,400 529,100
Sales (000s of recoverable pounds) 1,399,100 1,393,700 1,441,000 1,419,500 1,188,600
Sales (metric tons) 634,600 632,200 653,600 643,900 539,100
Average realized price per pound $ .69 $ .82 $ .75 $ .73 $.94(f)
Gold
Production (recoverable ounces) 2,634,900 1,899,500 2,379,100 2,227,700 1,798,300
Sales (recoverable ounces) 2,644,800 1,921,400 2,423,900 2,190,300 1,888,100
Average realized price per ounce $ 269.24 $ 276.06 $ 276.53 $ 290.57 $346.14(f)
Silver
Production (recoverable ounces) 3,771,500 3,542,400 3,444,500 3,421,200 2,568,700
Sales (recoverable ounces) 3,782,600 3,542,300 3,479,600 3,412,300 2,724,300
Average realized price per ounce $ 4.80 $ 4.98 $ 5.21 $ 5.29 $ 4.68
ATLANTIC COPPER OPERATING DATA
Concentrate treated (metric tons) 891,100 916,300 949,400 973,900 929,700
Anodes
Production (000s of pounds) 617,300 639,100 647,100 642,400 639,800
Production (metric tons) 280,000 289,900 293,500 291,400 290,200
Sales (000s of pounds) 87,500 80,600 84,300 96,900 133,500
Sales (metric tons) 39,700 36,600 38,200 44,000 60,600
Cathodes
Production (000s of pounds) 518,700 567,900 556,600 544,800 505,600
Production (metric tons) 235,300 257,600 252,500 247,100 229,300
Sales (including wire rod and wire)
(000s of pounds) 549,800 562,300 558,500 544,300 505,300
(metric tons) 249,400 255,100 253,300 246,900 229,200
Gold sales in anodes and slimes (ounces) 831,300 605,700 792,700 678,700 532,900
Cathode cash production cost per pound
before hedging $ .14 $ .11 $ .13 $ .13 $ .12
30
FREEPORT-MCMORAN COPPER & GOLD INC
SELECTED FINANCIAL AND OPERATING DATA
2001 2000 1999 1998 1997
--------------- -------------- --------------- --------------- ---------------
PT SMELTING OPERATING DATA(G)
Concentrate treated (metric tons) 702,900 582,200 436,000 --
Anodes
Production (000s of pounds) 479,400 383,200 279,400 --
Production (metric tons) 217,500 173,800 126,700 --
Sales (000s of pounds) 10,100 33,100 50,300 --
Sales (metric tons) 4,600 15,000 22,800 --
Cathodes
Production (000s of pounds) 468,400 349,200 200,100 --
Production (metric tons) 212,500 158,400 90,800 --
Sales (000s of pounds) 468,800 349,700 193,800 --
Sales (metric tons) 212,600 158,600 87,900 --
Cathode cash production cost per pound $.12 $.13 $.12 --
PT FREEPORT INDONESIA, 100% OPERATING DATA
Ore milled (metric tons per day) 237,800 223,500 220,700 196,400 128,600
Average ore grade
Copper (percent) 1.00 1.07 1.12 1.30 1.37
Gold (grams per metric ton) 1.41 1.10 1.37 1.49 1.51
Gold (ounce per metric ton) .045 .035 .044 .048 .049
Silver (grams per metric ton) 3.20 2.97 2.78 3.17 3.11
Silver (ounce per metric ton) .103 .095 .089 .102 .100
Recovery rates (percent)
Copper 86.9 88.2 84.6 86.9 85.4
Gold 89.5 84.3 83.7 85.3 81.4
Silver 59.0 60.0 63.4 71.8 65.6
Copper
Production (000s of recoverable pounds) 1,594,200 1,636,700 1,630,700 1,721,300 1,166,500
Production (metric tons) 723,100 742,400 739,700 780,800 529,100
Sales (000s of recoverable pounds) 1,600,900 1,643,500 1,647,800 1,706,700 1,188,600
Sales (metric tons) 726,200 745,500 747,400 774,100 539,100
Gold (recoverable ounces)
Production 3,488,100 2,362,600 2,993,100 2,839,700 1,798,300
Sales 3,498,300 2,387,300 3,047,100 2,774,700 1,888,100
Silver (recoverable ounces)
Production 4,264,300 3,833,200 3,781,300 4,040,600 2,568,700
Sales 4,280,400 3,847,700 3,829,400 4,008,000 2,724,300
31
NOTES
a. Includes net charges totaling $7.2 million ($6.1 million to net income or
$0.04 per share) consisting of a net $5.0 million charge primarily for
past service costs for an Atlantic Copper employee benefit plan and a $2.2
million charge for initial funding of a trust established for voluntary
special recognition of tribal communities' traditional land rights in the
PT Freeport Indonesia operations area.
b. Includes net charges totaling $12.4 million ($8.0 million to net income or
$0.05 per share) consisting of $6.0 million for contribution commitments
to support small business development programs within Papua (formerly
Irian Jaya) and $7.9 million for personnel severance costs, partly offset
by a $1.5 million gain for the reversal of stock appreciation rights and
related costs caused by the decline in FCX's common stock price.
c. Includes charges totaling $8.8 million ($5.7 million to net income or
$0.03 per share) consisting of $3.6 million for an early retirement
program, $1.4 million for costs of stock appreciation rights caused by the
increase in FCX's common stock price and $3.8 million primarily for bank
advisory fees.
d. Includes net charges totaling $9.1 million ($4.4 million to net income or
$0.03 per share) associated with the sale of corporate aircraft.
e. Includes a $25.3 million gain ($12.3 million to net income or $0.06 per
share) for the reversal of stock appreciation rights and related costs
caused by the decline in FCX's common stock price.
f. Amounts were $0.90 for copper and $326.08 for gold before hedging
adjustments.
g. PT Smelting is 25 percent owned by PT Freeport Indonesia and began
operations in the fourth quarter of 1998. Amounts were insignificant for
1998.
32
Our ratio of earnings to fixed charges was as follows for the years
presented.
Years Ended December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Ratio of earnings to fixed charges 2.9x 2.3x 2.9x 2.5x 3.8x
Ratio of earnings to fixed charges and
preferred stock dividends 2.1x 1.7x 2.2x 1.9x 2.8x
For the ratio of earnings to fixed charges 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. For the ratio of earnings to fixed charges and
preferred stock dividends calculation, we assumed that our preferred stock
dividend requirements were equal to the pre-tax earnings that would be required
to cover those dividend requirements. We computed those pre-tax earnings using
actual tax rates for each year.
ITEMS 7. AND 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
FREEPORT-MCMORAN COPPER & GOLD INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The results of operations we are reporting do not necessarily represent
what our future results may be. The following discussion should be read together
with our financial statements and the related notes.
We operate through our majority-owned subsidiary, PT Freeport Indonesia,
and through PT Irja Eastern Minerals and Atlantic Copper, S.A., our wholly owned
subsidiaries. PT Freeport Indonesia's operations involve mineral exploration and
development, mining and milling of ore containing copper, gold and silver in
Papua (formerly Irian Jaya), Indonesia, and the worldwide marketing of
concentrates containing those metals. PT Freeport Indonesia also has a 25
percent interest in PT Smelting, an Indonesian company which operates a copper
smelter and refinery in Gresik, Indonesia. Eastern Minerals conducts mineral
exploration activities in Papua. Atlantic Copper's operations are located in
Spain and involve the smelting and refining of copper concentrates, and the
marketing of refined copper products and precious metals in slimes.
PT Freeport Indonesia operates under an agreement, called a Contract of
Work, with the Government of Indonesia. The Contract of Work allows us to
conduct exploration, mining and production activities in a 24,700-acre area
called Block A. The Contract of Work also allows us to explore for minerals in a
0.5 million-acre area called Block B. All of our proven and probable mineral
reserves and current mining operations are located in Block A. Eastern Minerals
holds an additional Contract of Work originally covering a 2.5 million-acre
area. Under the terms of the Eastern Minerals Contract of Work, we have already
relinquished 1.25 million acres and must relinquish an additional 0.6 million
acres. In addition to the PT Freeport Indonesia and Eastern Minerals exploration
acreage, we have the right to conduct other mineral exploration activities in
Papua pursuant to a joint venture through PT Nabire Bakti Mining. Field
exploration activities outside of our current mining operations in Block A have
been temporarily suspended 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 forest preservation areas.
Increased Ownership in PT Freeport Indonesia
We guarantee a $253.4 million bank loan to PT Nusamba Mineral Industri
(Nusamba), which was to mature in March 2002. In 1997, Nusamba used the loan
proceeds plus $61.6 million of cash, for a total of $315.0 million, to purchase
stock of PT Indocopper Investama, an Indonesian company whose only significant
assets are its 9.36 percent of PT Freeport Indonesia's common stock and its 10.0
percent of Eastern Minerals' stock. We guaranteed the Nusamba loan for the
purpose of continuing minority Indonesian ownership in PT Freeport Indonesia.
We also agreed to lend Nusamba any amounts necessary to cover shortfalls between
the interest payments on the loan and dividends received by Nusamba on the PT
Indocopper Investama stock. We loaned Nusamba $12.8 million in 2001, $12.4
million in 2000 and $18.3 million in 1999 to cover shortfalls on interest
payments. In 2001, we charged $7.3 million of the loans to Nusamba to Other
Expense because the total of the guaranteed loan and the amounts we had
subsequently loaned to Nusamba had exceeded the original purchase price ($315
million) of Nusamba's acquisition of its interest in 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, which would obligate us to pay the bank loan. 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, on our December
31, 2001, balance sheet we have:
- recorded an additional liability of $253.4 million to reflect the
payment of the Nusamba bank loan,
- reduced our "other assets" by $61.6 million to reflect the
nonpayment of our loan to Nusamba,
- increased deferred income taxes by $4.2 million to reflect tax
liabilities relating to our increased equity ownership in PT
Freeport Indonesia,
- reduced minority interests by $52.0 million to reflect our increased
equity ownership in PT Freeport Indonesia, and
- increased property, plant and equipment by $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.
33
The pro forma impact had we been obligated to perform under the guarantee
on January 1, 2001, would have been an approximately $6 million ($0.04 per
share) reduction in our 2001 net income. For 2002, our earnings will reflect an
increased ownership interest in PT Freeport Indonesia, increased interest costs
related to the $253.4 million term loan under our bank credit facilities and
additional depreciation and amortization expense for the increase in property,
plant and equipment.
Joint Ventures with Rio Tinto
In 1996, we established joint ventures with Rio Tinto plc, an
international mining company with headquarters in London, England. One joint
venture covers PT Freeport Indonesia's mining operations in Block A and gives
Rio Tinto, through 2021, a 40 percent interest in certain assets and in
production above specified levels from operations in Block A and, after 2021, a
40 percent interest in all production from Block A.
Operating, nonexpansion capital and administrative costs are shared
proportionately between PT Freeport Indonesia and Rio Tinto based on the ratio
of (a) the incremental revenues from production from our most recent expansion
and (b) total revenues from production from Block A, including production from
PT Freeport Indonesia's previously existing reserves. PT Freeport Indonesia
receives 100 percent of the cash flow from specified annual amounts of copper,
gold and silver through 2021 calculated by reference to its proven and probable
reserves as of December 31, 1994, and 60 percent of all remaining cash flow.
Under our joint venture arrangements, Rio Tinto has a 40 percent interest
in PT Freeport Indonesia's Contract of Work and Eastern Minerals' Contract of
Work. Rio Tinto also has the option to participate in 40 percent of any of our
other future exploration projects in Papua. Rio Tinto has elected to participate
in 40 percent of our interest and cost in the PT Nabire Bakti exploration joint
venture covering approximately 0.5 million acres contiguous to Block B and one
of Eastern Minerals' blocks.
Reserves
During 2001, additions to the aggregate proven and probable reserves of
the Grasberg and other Block A ore bodies totaled approximately 156 million
metric tons of ore representing increases of 3.2 billion recoverable pounds of
copper, 4.3 million recoverable ounces of gold and 16.3 million recoverable
ounces of silver (see "Exploration"). Net of Rio Tinto's share, PT Freeport
Indonesia's share of proven and probable recoverable reserves as of December 31,
2001, was 39.4 billion pounds of copper, 50.2 million ounces of gold and 114.5
million ounces of silver. FCX's equity interest in proven and probable
recoverable reserves as of December 31, 2001, including Nusamba's interest in PT
Freeport Indonesia that we acquired subsequent to year end, was 35.7 billion
pounds of copper, 45.5 million ounces of gold and 103.8 million ounces of silver
(see "Note 13. Supplementary Mineral Reserve Information (Unaudited)"). PT
Freeport Indonesia's share of reserve additions replaced approximately 137
percent of its 2001 copper production, 97 percent of 2001 gold production and
259 percent of 2001 silver production. Estimated recoverable reserves were
assessed using an average copper price of $0.87 per pound and an average gold
price of $285 per ounce. Using a copper price of $0.75 per pound and a gold
price of $270 per ounce would have resulted in less than a one percent reduction
in our estimated recoverable copper and gold reserves.
CONSOLIDATED RESULTS OF OPERATIONS
Our consolidated revenues, which include PT Freeport Indonesia and
Atlantic Copper revenues after eliminating intercompany revenues, have declined
slightly over the past three years primarily because of variances in PT Freeport
Indonesia's gold sales volumes and copper price realizations. Revenues in 2001
benefited from higher gold sales volumes, offset by lower copper price
realizations when compared with 2000. Revenues in 2000 benefited from higher
copper price realizations offset by lower gold sales volumes when compared with
1999. PT Freeport Indonesia's copper sales volumes were relatively unchanged
over the past four years.
Consolidated production and delivery costs were lower in 2001 compared
with 2000, primarily because of (1) a change in our estimated average ratio of
waste rock to ore over the life of the mine, (2) significant mark-to-market
losses on foreign currency contracts in 2000 and (3) improved efficiencies. The
change in our estimated average ratio of waste rock to ore benefited 2001
production costs by approximately $39 million compared with 2000. Losses on our
foreign currency contracts, which are designed to hedge anticipated future
operating costs, charged to production costs totaled $3.7 million in 2001, $21.7
million in 2000 and $11.8 million in 1999. Beginning in 2001, new accounting
rules resulted in our deferring unrealized gains/losses on our foreign currency
contracts that meet new hedging criteria (see "New Accounting Standards"). The
higher production and delivery costs in 2000 also reflect higher mine
maintenance costs associated with our larger heavy equipment fleet, including
our mine haul trucks and electric shovels, and higher energy costs associated
with a significant increase in diesel fuel costs.
34
Our joint ventures with Rio Tinto incurred exploration costs of $14.4
million in 2001, $13.3 million in 2000 and $17.7 million in 1999. Our share of
joint venture and other exploration costs totaled $9.2 million in 2001, $8.8
million in 2000 and $10.6 million in 1999. Our exploration efforts reflect a
change beginning in 1999 to focus primarily on those areas with near-term
exploitation opportunities and a reduction in field activities outside of Block
A. All exploration costs in the joint venture areas with Rio Tinto are shared 60
percent by us and 40 percent by Rio Tinto. The FCX/Rio Tinto joint ventures'
2002 exploration budgets total approximately $4 million, reflecting efforts to
reduce costs during periods of continued low commodity prices.
General and administrative expenses declined by $11.6 million to $59.4
million in 2001 from $71.0 million in 2000, mostly because of certain charges
incurred in 2000. Estimated general and administrative expenses for 2002 are
expected to increase by approximately 8 percent compared with 2001 and efforts
are ongoing to reduce our overall costs, including general and administrative
expenses. General and administrative expenses were basically unchanged in 2000
when compared with 1999. The 2000 amount includes charges totaling $6.0 million
associated with contribution commitments to support small business development
programs within Papua over a two-year period and $2.6 million for personnel
severance costs, partly offset by a $1.5 million reversal of costs for stock
appreciation rights caused by a decrease in FCX's common stock price. The 1999
amount includes charges totaling $5.5 million for costs of stock appreciation
rights caused by the increase in FCX's common stock price and for bank advisory
fees. As a percentage of revenues, general and administrative expenses were 3.2
percent in 2001, 3.8 percent in 2000 and 3.7 percent in 1999.
Our total interest cost (before capitalization) was $183.0 million in
2001, $212.6 million in 2000 and $197.9 million in 1999. The lower interest
levels in 2001 reflect lower average debt levels and interest rates, while the
higher interest cost in 2000 compared with 1999 primarily reflected higher
interest rates. Capitalized interest totaled $9.4 million in 2001, $7.2 million
in 2000 and $3.8 million in 1999.
FCX's effective tax rate was 57 percent in 2001, 58 percent in 2000 and 51
percent in 1999 (see "Note 8. Income Taxes"). 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 increase in minority interest charges in 2001 compared with 2000
primarily reflects higher net income at PT Freeport Indonesia. The decrease in
minority interest charges in 2000 compared with 1999 primarily reflects changes
in ownership of certain consolidated PT Freeport Indonesia infrastructure joint
ventures (see "Capital Resources and Liquidity").
We have two operating segments: "mining and exploration" and "smelting and
refining." Our mining and exploration segment includes PT Freeport Indonesia's
copper and gold mining operations in Indonesia and our Indonesian exploration
activities. Our smelting and refining segment includes Atlantic Copper's
operations in Spain. Summary operating income (loss) data by segment follows (in
millions):
Years Ended December 31,
------------------------------------
2001 2000 1999
--------- --------- ---------
Mining and exploration $ 563.5 $ 490.0 $ 609.6
Smelting and refining (16.0) (1.7) 1.6
Intercompany eliminations and other (4.6) 4.0 (32.9)
--------- --------- ---------
Operating income(a) $ 542.9 $ 492.3 $ 578.3
========= ========= =========
a. Profits on PT Freeport Indonesia's sales to Atlantic Copper and on 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 $11.8 million in 2001,
$18.9 million in 2000 and $(17.2) million in 1999. Our consolidated
earnings fluctuate depending on the timing and prices of these sales.
35
MINING AND EXPLORATION OPERATIONS
A summary of changes in PT Freeport Indonesia revenues follows (in
millions):
2001 2000
---------- ----------
Revenues - prior year $ 1,413.1 $ 1,464.8
Sales volumes:
Copper 4.4 (35.3)
Gold 199.7 (139.0)
Price realizations:
Copper (176.3) 96.2
Gold (18.0) (0.9)
Adjustments, primarily for copper
pricing on prior year open sales (3.9) 7.8
Treatment charges, royalties and other (4.9) 19.5
---------- ----------
Revenues - current year $ 1,414.1 $ 1,413.1
========== ==========
Gross Profit Per Pound of Copper (cents)
Years Ended December 31,
-------------------------------
2001 2000 1999
------- ------- -------
Average realized price 69.0 81.6 74.7
------- ------- -------
Production costs:
Site production and delivery 38.8 42.7 36.5
Gold and silver credits (51.9) (39.3) (47.8)
Treatment charges 18.2 18.2 18.9
Royalty on metals 1.7 1.4 1.6
------- ------- -------
Cash production costs 6.8 23.0 9.2
Depreciation and amortization 18.0 18.0 18.0
------- ------- -------
Total production costs 24.8 41.0 27.2
------- ------- -------
Adjustments, primarily for copper pricing
on prior year open sales 0.1 0.1 (0.5)
------- ------- -------
Gross profit per pound of copper 44.3 40.7 47.0
======= ======= =======
PT Freeport Indonesia Operating Results - 2001 Compared with 2000
PT Freeport Indonesia's 2001 revenues benefited from significant increases
in gold sales volumes compared to the 2000 period, partly offset by lower copper
and gold average realized prices (see "Selected Financial and Operating Data").
When compared to 2000, gold sales volumes improved by 38 percent to an annual
record 2.6 million ounces while copper prices declined throughout 2001,
resulting in a $0.13 per pound or 16 percent decline in the 2001 average
realized price compared with 2000. Treatment charges were essentially unchanged
year-to-year, but royalties were higher in 2001 primarily because of
significantly higher gold sales volumes. Royalties totaled $24.3 million in 2001
and $20.2 million in 2000. A portion of treatment charges varies with the price
of copper and royalties vary with volumes and prices of copper and gold.
PT Freeport Indonesia's 2001 production benefited from higher mill
throughput rates, gold ore grades and gold recovery rates when compared with
2000. Mill throughput averaged a record 237,800 metric tons of ore per day, 6
percent higher than the 223,500 metric tons per day reported in 2000. Gold ore
grades of 1.41 grams per ton in 2001 were 28 percent higher than the 1.10 grams
per ton in 2000. Recovery rates for gold were a record-high 89.5 percent in 2001
reflecting high-recovery ore processed during the year and results of various
enhanced recovery initiatives achieved at the mill. Ore grades to be mined in
the early part of 2002, particularly for gold, are expected to be lower than the
higher grade material mined throughout most of 2001. We expect to return to
higher grade ore in the second half of 2002. Because of the nature of the
Grasberg ore body, there are periods when the sequencing of mining results in
production that is economical, but lower than average in grade.
Mill throughput rates will vary based on the characteristics of the ore
being processed as we manage our operations to optimize metal production. In May
2000, PT Freeport Indonesia, in consultation with the Government of Indonesia,
voluntarily agreed to temporarily limit Grasberg open-pit production because of
an incident at its Wanagon overburden stockpile (see "Environmental Matters").
In January 2001, PT Freeport Indonesia resumed normal mining operations at
Grasberg after receiving governmental approval.
36
At the Deep Ore Zone underground mine, initial production of ore commenced
in September 2000. Production averaged 5,500 metric tons of ore per day in 2001
and 2,700 metric tons of ore per day during the fourth quarter of 2000. Full
production of 25,000 metric tons of ore per day is expected in the second half
of 2002, ahead of original projections. We are currently studying plans to
increase production rates to as much as 35,000 metric tons of ore per day.
Average unit net cash production costs, including gold and silver credits,
were a record-low 6.8 cents per pound in 2001 compared with 23.0 cents per pound
in 2000. Unit site production and delivery costs in 2001 averaged 38.8 cents per
pound of copper, 3.9 cents per pound lower than the 42.7 cents reported in 2000,
primarily because of the previously reported change in the estimated ratio of
waste rock to ore over the life of the mine (see "PT Freeport Indonesia
Operating Results-2000 Compared with 1999") and the effect of weaker foreign
currencies. The change in the estimated ratio of waste rock to ore benefited
2001 unit costs by approximately 2.8 cents per pound compared with 2000. As of
December 31, 2001, deferred mining costs included in property, plant and
equipment totaled $47.6 million. Gold credits of 51.9 cents per pound in 2001
were higher when compared with the 2000 level of 39.3 cents per pound primarily
because of record annual gold sales resulting from higher gold ore grades and
record recovery rates.
For 2001, PT Freeport Indonesia changed the estimated depreciable lives of
certain of its straight-line assets, primarily its power generation assets,
which decreased depreciation expense for 2001, and had increased estimates of
future development costs related to its undeveloped ore bodies, which increased
depreciation expense for 2001. These mostly offsetting changes resulted from a
review of recent operating history and current maintenance practices, and from
our updated comprehensive mine development plan. PT Freeport Indonesia's
depreciation rate of 18.0 cents per pound for 2001 remained unchanged from 2000,
but is expected to be approximately 15 cents per pound for 2002 primarily
because of a change in its depreciation methodology (see "Note 1. Summary of
Significant Accounting Policies").
For 2002, unit production and delivery costs are expected to be lower than
in 2001, primarily because of higher volumes of copper. Unit net cash production
costs, including gold and silver credits, for 2002 are expected to average less
than 18 cents per pound of copper, assuming gold prices of $270 per ounce. In
the first half of 2002, unit costs are expected to be higher than the average
for 2002 and in the second half of 2002 unit costs are expected to be lower than
the average, as both ore grade and production are expected to increase during
the year.
In September 2001, we established a trust for the benefit of those tribal
communities in villages closest to PT Freeport Indonesia's operations for
voluntary special recognition of their traditional land rights in the Grasberg
mining area, as part of an agreement first outlined with these tribes in 1996.
Under the agreement, PT Freeport Indonesia will fund $0.5 million per year to
the trust, as long as certain conditions are met, and has provided $2.5 million
representing funding for mid-1996 through mid-2001. PT Freeport Indonesia
recorded a $2.2 million charge to 2001 production costs for its share of the
initial commitment.
PT Freeport Indonesia has a labor agreement covering its hourly paid
Indonesian employees, the key provisions of which are renegotiated biannually.
PT Freeport Indonesia's labor agreement was scheduled to expire on September 30,
2001. In June 2001, PT Freeport Indonesia and its workers agreed to terms for a
new labor agreement that expires September 30, 2003. PT Freeport Indonesia's
relations with the workers' union have generally been positive.
PT Freeport Indonesia Operating Results - 2000 Compared with 1999
PT Freeport Indonesia's 2000 revenues benefited from a 9 percent increase
in copper price realizations, offset by a 21 percent decline in gold sales
volumes and a 3 percent decline in copper sales volumes compared to 1999. Lower
ore grades, partly offset by improved recovery rates, resulted in lower 2000
sales volumes. Treatment charges in total were lower in 2000 primarily because
of lower treatment rates and copper sales.
PT Freeport Indonesia's mill throughput averaged 223,500 metric tons of
ore per day compared with 220,700 metric tons of ore per day for 1999. Lower ore
grades during 2000, partly offset by higher recovery rates at the mill, resulted
in lower gold production compared with 1999. As discussed in "Environmental
Matters," in May 2000 PT Freeport Indonesia voluntarily agreed to temporarily
limit Grasberg open-pit production because of an incident at its Wanagon
overburden stockpile.
Site production and delivery costs in 2000 averaged 42.7 cents per pound
of copper, 6.2 cents per pound higher than the 36.5 cents per pound reported in
1999. Higher mine maintenance costs associated with our larger heavy equipment
fleet, including our mine haul trucks and electric shovels, and higher energy
costs associated with a significant increase in diesel fuel costs during the
year contributed to the higher unit costs. Gold credits in 2000 declined to 39.3
cents per pound as compared with 47.8 cents per pound in 1999 because of lower
gold sales. Unit treatment charges were lower in 2000 than in 1999 because of
market conditions. Unit royalty costs were lower in 2000 compared with 1999
because of lower gold sales. Royalties totaled $20.2 million in 2000 and $23.0
million in 1999.
A portion of PT Freeport Indonesia's surface mining costs associated with
waste rock removal at the Grasberg open-pit mine are initially deferred and
subsequently charged to operating costs on the basis of the average ratio of
waste rock to ore over the life of the mine. Because of the nature of the
Grasberg deposit,
37
mining costs associated with waste rock removal are significantly higher in the
early years of the mine's life than in the later years. As a result, waste rock
removal costs that relate to future production are deferred in the early years
of the mine's life. Prior to 2000, 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 estimated waste rock required to be removed over the Grasberg pit's life. As
a result, PT Freeport Indonesia's deferral of waste rock removal costs was
determined using waste-to-ore ratios excluding the years near the end of the
productive life of the Grasberg pit, and had not varied significantly. 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 waste rock tonnage in its 2001 mine plan in the
determination of its deferred waste rock removal costs at the Grasberg open-pit
mine.
In the fourth quarter of 2000, PT Freeport Indonesia changed its
life-of-mine waste-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. The
change in total deferred mining costs for the year 2000 was less than $0.1
million. As of December 31, 2000, deferred mining costs included in property,
plant and equipment totaled $18.1 million. In 1999 PT Freeport Indonesia
amortized to production costs $11.6 million of previously deferred mining costs.
The life-of-mine waste-to-ore ratio and the remaining life of the surface mine
are reassessed at least annually by PT Freeport Indonesia, and any changes in
estimates are reflected prospectively in the determination of deferred waste
rock removal costs. The Grasberg open-pit mine is currently our only open-pit
mine.
PT Freeport Indonesia Sales Outlook
PT Freeport Indonesia's copper concentrates are sold primarily under
long-term sales agreements that are denominated in U.S. dollars, mostly to
companies in Asia and Europe and to international trading companies. PT Freeport
Indonesia has commitments from various parties, including its affiliates
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 2002 is expected to approximate 1.5 billion
pounds of copper and 2.1 million ounces of gold. Projected 2002 copper and gold
sales reflect the expectation of mining ore with higher copper grades and lower
gold grades than the 2001 grades.
PT Freeport Indonesia has a long-term contract to provide approximately 60
percent of Atlantic Copper's copper concentrate requirements at market prices
and nearly all of PT Smelting's copper concentrate requirements. For the first
15 years of PT Smelting's operations beginning December 1998, the treatment and
refining charges on the majority of the concentrate PT Freeport Indonesia
provides will not fall below a specified minimum rate, currently $0.23 per
pound, which was the rate for 2001 and is the expected rate for 2002. We
anticipate that PT Freeport Indonesia will sell approximately 50 percent of its
concentrate production annually to Atlantic Copper and PT Smelting.
Exploration
Drilling on all exploration projects in Block A was concluded in the
fourth quarter of 2001. Our exploration and mine planning efforts resulted in
the addition of approximately 156 million metric tons of ore to our December 31,
2001 reserves (see "Note 13. Supplementary Mineral Reserve Information
(Unaudited)"). Additions were made to the Dom open pit, the Grasberg block cave,
the Deep Ore Zone block cave and at Kucing Liar. Improvements to gold recovery
at the Grasberg open pit offset reduced gold recovery expectations at Kucing
Liar. As a result of continuing low commodity prices, we have reduced our
exploration program for 2002 to focus largely on available exploration data.
Limited drilling during 2002 will be directed towards delineation of reserves
adjacent to our Deep Ore Zone mine.
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 forest preservation areas. These suspensions were
granted for one-year periods ending February 26, 2002, for Block B, March 31,
2002, for PT Nabire Bakti Mining and November 15, 2002, for Eastern Minerals. We
are currently seeking a renewal of the Block B suspension and expect to seek
suspension renewals for the other areas in 2002 for additional one-year periods
by written request to the Government of Indonesia.
SMELTING AND REFINING OPERATIONS
Our investment in smelters serves 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
38
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. For example, 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
Years Ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Cash margin (in millions) $ 25.7 $ 52.6 $ 57.5
Operating income (loss) (in millions) $ (16.0) $ (1.7) $ 1.6
Concentrate treated (metric tons) 891,100 916,300 949,400
Anode production (000s of pounds) 617,300 639,100 647,100
Cathode, wire rod and wire sales (000s of pounds) 549,800 562,300 558,500
Gold sales in anodes and slimes (ounces) 831,300 605,700 792,700
Atlantic Copper Operating Results - 2001 Compared with 2000
Atlantic Copper's cash margin, revenues less production costs, was $26.9
million lower in 2001 compared with 2000 primarily because of lower sales
volumes and higher unit costs for refined copper cathodes resulting from a
scheduled 27-day major maintenance turnaround in April 2001. The major
maintenance turnaround was completed on schedule and had a total impact on cash
margin of approximately $15 million (approximately $9 million of direct costs
and $6 million related to lower sales volumes). Atlantic Copper's cathode cash
production costs per pound of copper, before currency hedging, averaged $0.14 in
2001 and $0.11 in 2000. The increase in unit costs in 2001 primarily reflects
the effects of lower production volumes and the costs resulting from the
turnaround. The next scheduled major maintenance turnaround is not anticipated
for three years. Atlantic Copper's treatment rates (including price
participation) averaged $0.17 per pound in 2001 and 2000, which represent
historically low levels.
Atlantic Copper recorded an operating loss of $16.0 million in 2001,
compared with $1.7 million in 2000. Atlantic Copper recorded net charges to
operating results totaling $5.0 million in 2001 primarily for past service costs
for an employee benefit plan. Atlantic Copper's operating results also include a
$3.0 million charge in 2001 on currency hedging contracts maturing during the
year compared to a $16.4 million charge in 2000 for changes in market value of
all outstanding currency hedging contracts. As part of refinancing its debt in
June 2000, Atlantic Copper was required to significantly expand its program to
hedge its anticipated euro-denominated operating costs. Under new accounting
standards that we adopted effective January 1, 2001 (see "New Accounting
Standards" and "Note 1. Summary of Significant Accounting Policies"), Atlantic
Copper recorded net charges to Other Comprehensive Income totaling $10.1 million
in 2001 for its outstanding currency hedging contracts at December 31, 2001.
Atlantic Copper Operating Results - 2000 Compared with 1999
Atlantic Copper's cash margin was $52.6 million in 2000 compared with
$57.5 million in 1999. The $4.9 million decline in the cash margin primarily
reflects lower treatment rates of $0.17 per pound in 2000 compared with $0.20
per pound in 1999. Excess smelter capacity, combined with limited copper
concentrate availability, have caused long-term treatment and refining rates to
decline since early 1998. Operating income included charges totaling $16.4
million in 2000 and $14.9 million in 1999 for the mark-to-market effect of
Atlantic Copper's euro currency hedging contracts.
PT Smelting Operating Results (in millions)
Years Ended December 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Equity in PT Smelting losses $ 5.1 $ 13.6 $ 10.1
PT Freeport Indonesia profits (recognized) deferred $ (6.2) $ 2.0 $ 8.0
PT Freeport Indonesia sales to PT Smelting $ 374.1 $ 343.3 $ 252.6
39
PT Smelting Operating Results - 2001 Compared with 2000
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 (see "Note 9. Transactions with Affiliates and Employee
Benefits"). PT Smelting operated at 109 percent of its full design capacity of
200,000 metric tons of copper per year during 2001 and at 87 percent of its full
design capacity during 2000. Concentrate treated during 2001 totaled 702,900
metric tons, 21 percent above the year-ago period. Anode production was 25
percent higher and cathode production was 34 percent higher in 2001 compared
with 2000. PT Smelting's cathode cash production costs per pound of copper
totaled $0.12 in 2001, compared with $0.13 in 2000. PT Smelting shut down the
smelter, as planned, at the end of March 2000 for the tie-in of a new third
anode furnace as well as for planned maintenance. The smelter restarted at the
end of April 2000.
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 profits
totaling $6.2 million in 2001 and the deferral of profits totaling $2.0 million
in 2000.
PT Smelting Operating Results - 2000 Compared with 1999
As discussed above, PT Smelting temporarily shut down its smelter in 2000
for the tie-in of a new third anode furnace as well as for planned maintenance.
During the third quarter of 2000, PT Smelting reached full design capacity of
200,000 metric tons of copper per year. PT Smelting produced 173,800 metric tons
of copper in 2000 compared with 126,700 metric tons of copper during 1999.
Cathode cash production costs per pound totaled $0.13 in 2000 compared with
$0.12 in 1999. The increase in 2000 reflects the shutdown discussed above.
CAPITAL RESOURCES AND LIQUIDITY
Operating Activities
Our operating cash flow exceeded $500 million for the last three years and
totaled $509.0 million in 2001, compared with $516.0 million reported in the
year-ago period. FCX will continue initiatives in 2002 that are intended to
minimize cash expenditures to mitigate the impact of continued low copper prices
and expected lower gold sales volumes. Working capital, excluding cash,
decreased $22.5 million in 2001 primarily because of the timing of collections
of accounts receivable and inventory levels, partly offset by the timing of
payments to Rio Tinto for its share of joint venture cash flows.
Operating cash flow decreased 9 percent or $52.8 million in 2000 compared
with 1999, primarily because of lower net income partly offset by working
capital changes. Working capital, excluding cash, decreased $41.2 million in
2000 primarily because of the timing of payments for accounts payable and
accrued liabilities and Rio Tinto's share of joint venture cash flows, partly
offset by increases in product inventory and income taxes paid. Working capital
increased $11.3 million in 1999 primarily because of an increase in inventories
partly offset by a reduction in accounts receivable.
Investing Activities
As part of our 2001 refinancing transactions discussed below, we sold
$603.8 million of 8 1/4% Convertible Senior Notes due January 2006. The terms of
these notes required that we use $139.8 million of the proceeds to purchase a
portfolio of U.S. government securities, which secure and will be used to pay
for the first six scheduled interest payments on the notes. The notes are
otherwise unsecured.
Our total 2001 capital expenditures were slightly lower compared to 2000.
Capital expenditures included our share of development costs for the Deep Ore
Zone mine totaling approximately $37 million in 2001 and approximately $33
million in 2000. Our capital expenditures for 2002 are expected to total
approximately $170 million, including approximately $36 million for final
development of the Deep Ore Zone mine, 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. Capital expenditure funding is expected to be provided by
operating cash flows.
Financing Activities
In August 2001, we sold $603.8 million of 8 1/4% Convertible Senior Notes
due January 2006 (Convertible Notes) for net proceeds of $582.6 million. The net
proceeds after purchasing the portfolio of U.S. government securities discussed
above were used to repay outstanding amounts under our bank credit facilities.
Including the net proceeds from the sale of the Convertible Notes, our net
repayments of debt and partial redemptions of preferred stock totaled $136.0
million in 2001, $29.9 million in 2000 and $330.2 million in 1999. Repayments of
debt included payments to acquire full ownership in certain infrastructure asset
joint ventures owned by PT ALatieF Nusakarya Corporation, an Indonesian
investor, totaling $25.9 million in 2000 and $12.5
40
million in 1999. PT Freeport Indonesia now owns 100 percent of these joint
ventures. PT Freeport Indonesia's increased ownership in the joint ventures
benefited net income because it eliminated PT Freeport Indonesia's obligation to
pay a guaranteed 15 percent after-tax return to the previous owners. Repayments
to Rio Tinto totaled $60.6 million in 2000 and $241.1 million in 1999 from PT
Freeport Indonesia's share of incremental cash flow attributable to the fourth
concentrator mill expansion. In less than two and one-half years, PT Freeport
Indonesia fully repaid the $450 million loan from Rio Tinto, which funded PT
Freeport Indonesia's share of the fourth concentrator mill expansion cost.
In June 2000, our Board of Directors authorized a 20-million-share
increase in our open market share purchase program, bringing the total shares
approved for purchase under this program to 80 million. During 2001, we
purchased 0.2 million of our shares (all during the first quarter) for $1.6
million, $8.35 per share. During 2000, we acquired 19.5 million of our shares
for $201.8 million (an average of $10.35 per share). During 1999, we purchased
0.8 million shares for $7.8 million (an average of $9.20 per share). From
inception of these programs in July 1995 through 2001, we have purchased a total
of 70.7 million shares for $1.24 billion (an average of $17.53 per share) and
approximately 9.3 million shares remain available under the program. The timing
of future purchases is dependent upon many factors, including the price of our
common shares, our business and financial position, and general economic and
market conditions. Our amended bank credit facilities also include prohibitions
on common stock repurchases. See "Amended Bank Credit Facilities" below.
Our annual mandatory partial redemptions of our Silver-Denominated
Preferred Stock totaled $10.4 million in 2001, $11.9 million in 2000 and $11.9
million in 1999. Five annual redemption payments remain and will vary with the
price of silver. Cash dividends to minority interests owners vary with the level
of PT Freeport Indonesia dividends and totaled $6.8 million in 2001, $51.9
million in 2000 and $13.7 million in 1999.
Amended Bank Credit Facilities
In October 2001, we amended our bank credit facilities to extend the
maturities and to provide a term loan for financing any obligations we may have
resulting from our guarantee of the commercial bank loan to Nusamba. 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 February 27, 2002, totaled $143.0
million for PT Freeport Indonesia and $361.0 million for FCX.
- 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 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.
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 for the year below 80
percent may be carried forward to the next two succeeding years, provided that
the unused amount may only be used for deferred mining projects.
41
- 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.
- Interest Rates. Interest rates on all loans under the amended credit
facilities, including the amounts used to fund our obligations under the Nusamba
guarantee, are LIBOR plus 4.0 percent with annual increases of 0.125 percent on
each anniversary of the closing of the amended facilities. As of December 31,
2001, the interest rate on the amended facilities was 5.9 percent based on a
LIBOR rate of 1.9 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.
- 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, including the Nusamba loan
that we repaid in February 2002, based on loan balances as of December 31, 2001,
and gold and silver prices (which determine the preferred stock redemption
amounts) as of December 31, 2001 (in millions):
42
2002 2003 2004 2005 2006 Thereafter
------ ------ ------ ------ -------- ----------
Amended bank credit facilities $ -- $ -- $ -- $222.0 $ -- $ --
Nusamba loan(a) -- -- -- 253.4 -- --
Infrastructure financings and
equipment loans 113.6 57.7 63.1 46.0 48.3 190.4
7.20% Senior Notes due 2026(b) -- 250.0 -- -- -- --
7.50% Senior Notes due 2006(c) -- -- -- -- 200.0 --
Convertible Notes -- -- -- -- 603.8 --
Atlantic Copper facilities and other 91.8 20.1 10.1 24.1 24.1 120.1
------ ------ ----- ------ -------- ------
Total debt maturities 205.4 327.8 73.2 545.5 876.2 310.5
Redeemable preferred stock(d) 10.8 176.7 10.8 10.8 129.7 --
------ ------ ----- ------ -------- ------
Total maturities $216.2 $504.5 $84.0 $556.3 $1,005.9 $310.5
====== ====== ===== ====== ======== ======
a. We repaid the Nusamba loan on February 27, 2002, as provided for under our
amended bank credit facilities.
b. Although due in 2026, the holders of the 7.20% senior notes may, and are
expected to, elect early repayment in November 2003.
c. Due November 15, 2006.
d. Represents $10.8 million each year for our Silver-Denominated Preferred
Stock, $165.9 million in August 2003 for our Gold-Denominated Preferred
Stock, and $118.9 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.
Other Contractual Obligations
In addition to our debt and redeemable preferred stock maturities, we have
other long-term contractual obligations and commitments which we expect to fund
with projected operating cash flows, available credit facilities or future
financing transactions, if necessary. These obligations and commitments include
PT Freeport Indonesia's commitment to provide one percent of its annual revenue
through mid-2006 for development of the local people through the Freeport Fund
for Irian Jaya Development. In addition, Atlantic Copper has an unfunded
contractual obligation denominated in euros to supplement amounts paid to
retired employees, as well as dollar-denominated contracts to purchase
concentrates from third parties. 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.
Atlantic Copper also has contracts with third parties to purchase concentrates
totaling 296,000 metric tons in 2002, 220,000 metric tons in 2003, 134,000
metric tons in 2004, 140,000 metric tons in 2005 and 20,000 metric tons in 2006,
at market prices.
Environmental Matters
We believe that our Indonesian operations are being conducted pursuant to
applicable permits and are in compliance in all material respects with
applicable Indonesian environmental laws, rules and regulations. An independent
environmental audit completed in 1999 by Montgomery Watson, an internationally
recognized environmental consulting and auditing firm, verified our compliance.
Our ultimate reclamation and closure activities will be determined after
consultation with the Indonesian government, affected local residents and other
affected parties. Thus, we cannot currently project with precision the ultimate
amount of reclamation and closure costs we will incur. Our best estimate at this
time is that PT Freeport Indonesia's total reclamation and closure costs may
require in excess of $100 million but are not expected to exceed $150 million.
Estimates of reclamation and closure costs involve complex issues requiring
integrated assessments over a period of many years and are subject to revision
over time as we perform more complete studies. Some reclamation costs will be
incurred during mining activities, while most closure costs and the remaining
reclamation costs will be incurred at the end of mining activities, which are
currently estimated to continue for more than 30 years. Included in other
liabilities at December 31, 2001, is $24.1 million accrued on a
unit-of-production basis for mine closure and reclamation costs. Our accounting
for mine closure and reclamation costs will change in 2003 based on a new
accounting standard (see "New Accounting Standards") and we are working on a
study of our retirement obligations that will be used to assess the impact of
adopting the new standard.
In 1996, we began contributing to a cash fund ($3.3 million balance at
December 31, 2001) designed to accumulate at least $100 million by the end of
our Indonesian mining activities. We plan to use this fund, including accrued
interest, to pay for mine closure and reclamation. Any incremental costs in
excess of the $100 million fund are expected to be incurred throughout the life
of the mine and would be funded by operational cash flow or the sale of assets,
as needed. An increasing emphasis on environmental issues and future changes in
regulations could require us to incur additional costs which would be charged
against future
43
operations. Estimates involving environmental matters are by their nature
imprecise and can be expected to be revised over time because of changes in
government regulations, operations, technology and inflation.
The cost of complying with environmental laws is a fundamental cost of our
business. We incurred aggregate environmental capital expenditures and other
environmental costs totaling $78.2 million in 2001, $106.1 million in 2000 and
$73.3 million in 1999, including tailings management levee maintenance and mine
reclamation. In 2002, we expect to incur approximately $11 million of
environmental capital expenditures and $40 million of other environmental costs.
These environmental expenditures are part of our overall 2002 operating budget.
In May 2000, a slippage occurred in the overburden waste stockpile at the
Wanagon basin following a period of excessive rainfall, causing a wave of water
and material to overflow from the basin. Four employees of a contractor to PT
Freeport Indonesia were working in the area and perished. Contained within the
mud were the treatment solids from the lime precipitation of acid rock drainage,
which then entered the tailings river system near the village of Banti. PT
Freeport Indonesia charged $2.9 million to its 2000 production costs, primarily
for assets lost as a result of the incident. In addition, we incurred
environmental costs for overburden disposition, stockpile stabilization,
laboratory testing and consulting studies relating to the Wanagon overburden
waste stockpile.
Sampling and monitoring were initiated at a number of stations covering
the entire tailings system between the mine and estuary. A specific risk
analysis was conducted as a result of this event and was based on the monitoring
program. No long-term environmental effects were found from the direct
monitoring nor predicted by the risk assessment. The slippage caused a flow of
sediments containing elevated levels of precipitated copper. As a result, water
quality in the river was temporarily diminished due to higher levels of total
suspended solids. According to water quality tests, the pre-slippage water
quality in the river was substantially reestablished by the following day and
was fully reestablished within 22 days after the incident.
PT Freeport Indonesia engaged international experts and outside
consultants led by a team from the Institute of Technology of Bandung
(Indonesia) to conduct a comprehensive study of the cause of the slippage and to
recommend a future course of action. Working with the close cooperation of the
Indonesian Department of Energy and Natural Resources and also BAPEDAL (the
Indonesian environmental protection agency), PT Freeport Indonesia initiated a
stockpile stabilization program and voluntarily agreed to a temporary limitation
on average production from the Grasberg open pit of 200,000 metric tons per day.
Underground ore production was not affected. A safe-zone based on engineering
calculations was subsequently identified along the Wanagon River and within the
village of Banti. The residents within this zone were temporarily moved to
Tembagapura, our original mining town site, and the houses were removed. These
families were relocated to new housing designed according to their wishes and
located on higher ground in Banti. After successful completion of the
stabilization program and consultation with the Indonesian government and
affected local residents, normal overburden placement at the Wanagon stockpile
resumed and the restriction on production from the Grasberg open pit was lifted
at the end of 2000.
DISCLOSURES ABOUT MARKET RISKS
Commodity Price Risk
Our revenues include PT Freeport Indonesia's sale of copper concentrates,
which also contain significant amounts of gold, and Atlantic Copper's sale of
copper anodes, cathodes, wire rod, wire and precious metals in slimes. Our
revenues and net income vary significantly with fluctuations in the market
prices of copper and gold and other factors. A change of $0.01 in the average
price per pound of copper would have an approximate $14 million impact on our
revenues and an approximate $7 million impact on our net income, assuming
approximately 1.4 billion pounds of annual PT Freeport Indonesia copper sales. A
change of $10 in the average price per ounce of gold would have an approximate
$20 million impact on our revenues and an approximate $10 million impact on our
net income, assuming approximately 2 million ounces of annual PT Freeport
Indonesia gold sales.
At 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
other than our gold-denominated preferred stock discussed below.
PT Freeport Indonesia's concentrate sales agreements, with regard to
copper, provide for provisional billings at the time of shipment with final
pricing settlement generally based on the average London Metal Exchange (LME)
price for a specified future period. Under Statement of Financial Accounting
Standards No. 133 (SFAS 133), PT Freeport Indonesia's sales based on a
provisional sales price contain an embedded derivative which is required to be
bifurcated from the host contract (see "New Accounting Standards"). The
44
host contract is the sale of the concentrates at the current spot LME price. The
embedded derivative, which does not qualify for hedge accounting, is
marked-to-market through earnings each period. At December 31, 2001, we had
consolidated embedded copper derivatives on 144.8 million pounds recorded at an
average price of $0.65 per pound remaining to be finally priced. Nearly all of
these embedded derivatives are expected to be finally priced during the first
quarter of 2002. A one-cent movement in the average price used for these
embedded derivatives will have an approximate $0.7 million impact on our 2002
net income.
In late 1999, PT Freeport Indonesia began a program using copper forward
contracts to fix the prices of a portion of its quarter-end open pounds when
market conditions are favorable. PT Freeport Indonesia entered into contracts to
hedge its open pounds at the end of the first two quarters of 2000 and the third
and fourth quarters of 1999, and recorded additional revenues of $1.7 million in
2000 and $0.8 million in 1999 from these forward sales. PT Freeport Indonesia
has not entered into any contracts for its open pounds since mid-2000.
We have outstanding three issues of redeemable preferred stock indexed to
gold and silver prices. We account for these securities as a hedge of future
production and carry them on our balance sheets at their original issue value
less redemptions. As redemption payments occur, differences between the carrying
value and the redemption payment, which is based on commodity prices at the time
of redemption, are recorded as an adjustment to revenues (see Notes 1, 6 and 11
of "Notes to Financial Statements"). Future redemption payments denominated in
ounces and equivalent value in dollars, as well as dollar-equivalent dividend
payments, based on December 31, 2001, gold and silver prices, follow (dollars in
millions):
Gold Silver
--------------------------------------------------- -----------------------------------------------------
Redemption Redemption
----------------------- Carrying Dividend ------------------------- Carrying Dividend
Ounces Amount Value Amount Ounces Amount Value Amount
----------- ---------- ---------- ----------- ------------ ---------- ----------- -----------
2002 -- $ -- $ -- $ 9.7 2,380,000 $ 10.8 $ 12.5 $ 2.1
2003 600,000 165.9 232.6 8.2 2,380,000 10.8 12.5 1.7
2004 -- -- -- 3.9 2,380,000 10.8 12.5 1.2
2005 -- -- -- 3.9 2,380,000 10.8 12.5 0.8
2006 430,000 118.9 167.4 1.0 2,380,000 10.8 12.5 0.3
---------- ---------- ---------- -----------
$ 284.8 $ 400.0 $ 54.0 $ 62.5
========== ========== ========== ===========
The fair values of the redeemable preferred stock based on December 31,
2001, quoted market prices were $213.7 million for the preferred stock indexed
to gold prices and $40.5 million for the preferred stock indexed to silver
prices. As discussed above, we intend to refinance or restructure our 2003 gold
redemption obligation as to at least 80 percent of the outstanding amount. We
expect that refinancing or restructuring our 2003 gold redemption obligation
likely will require us to change our accounting for these instruments to
bifurcate the embedded gold derivatives and reflect changes in the derivatives'
fair values in current period earnings.
Atlantic Copper's purchases of copper concentrate are priced at
approximately the same time as its sales of the refined copper, thereby
protecting Atlantic Copper from most copper price risk. Atlantic Copper enters
into futures contracts to hedge its price risk whenever its physical purchases
and sales pricing periods do not match. At December 31, 2001, Atlantic Copper
had contracts, with a fair value of $0.1 million, to sell 10.9 million pounds at
an average price of $0.66 per pound through January 2002.
Foreign Currency Exchange Risk
The majority of our operations are in Indonesia and Spain, where our
functional currency is the U.S. dollar. All 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 10,160 rupiahs at December 31, 2001,
9,215 rupiahs at December 31, 2000, and 6,970 rupiahs at December 31, 1999. PT
Freeport Indonesia recorded losses to production costs totaling $1.2 million in
2001, $0.2 million in 2000 and $1.2 million in 1999 related to its
rupiah-denominated net monetary assets/liabilities. At December 31, 2001, net
liabilities totaled $1.8 million at an exchange rate of 10,160 rupiahs to one
U.S. dollar.
Operationally, PT Freeport Indonesia has benefited from a weakened
Indonesian rupiah, primarily through lower labor costs. At estimated annual
aggregate rupiah payments of 900 billion and a December 31, 2001, exchange rate
of 10,160 rupiahs to one U.S. dollar, a one-thousand-rupiah increase in the
exchange rate
45
would result in an approximate $8 million decrease in annual operating costs. A
one-thousand-rupiah decrease in the exchange rate would result in an approximate
$10 million increase in annual operating 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 December 31, 2001, PT Freeport Indonesia had
foreign currency contracts to hedge 479.8 billion of rupiah payments, or
approximately 50 percent of aggregate projected 2002 rupiah payments at an
average exchange rate of 12,643 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 $3.5 million. We recorded net gains
(losses) to production costs for PT Freeport Indonesia's foreign currency
contracts totaling $(0.7) million in 2001, $(5.3) million in 2000 and $3.1
million in 1999. Under a new accounting standard that became effective January
1, 2001, gains or losses on qualifying hedging contracts are recognized in
earnings as the contracts are settled, with changes in the fair value of
outstanding contracts reflected in Other Comprehensive Income, a component of
stockholders' equity, until realized (see "New Accounting Standards"). We
recorded net gains of $2.0 million to Other Comprehensive Income in 2001 for PT
Freeport Indonesia's outstanding currency hedging contracts at December 31,
2001.
A portion of Atlantic Copper's operating costs and certain of its asset
and liability accounts are denominated in euros. Atlantic Copper had
euro-denominated net monetary liabilities at December 31, 2001, totaling $68.2
million recorded at an exchange rate of $0.88 per euro. The euro exchange rate
was $0.88 per euro at December 31, 2001, $0.93 per euro at December 31, 2000,
and $1.00 per euro at December 31, 1999. Adjustments to Atlantic Copper's
euro-denominated net liabilities to reflect changes in the exchange rate are
recorded in other income and totaled gains of $2.4 million in 2001, $4.4 million
in 2000 and $10.9 million in 1999.
At estimated annual euro payments of 90 million euros and a December 31,
2001, exchange rate of $0.88 per euro, a $0.05 increase or decrease in the
exchange rate would result in an approximate $4.5 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 December 31, 2001, Atlantic Copper had contracts to purchase
126.2 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 2002 and 2003 euro disbursements. Losses related to
Atlantic Copper's forward currency contracts are included in production costs
and totaled $3.0 million in 2001, $16.4 million in 2000 and $14.9 million in
1999. Each $0.01 change in the US$/euro exchange rate impacts the market value
of these contracts by approximately $1 million. Under a new accounting standard
that became effective January 1, 2001, gains or losses on qualifying hedging
contracts are recognized in earnings as the contracts are settled, with changes
in the fair value of outstanding contracts reflected in Other Comprehensive
Income, a component of stockholders' equity, until realized (see "New Accounting
Standards"). We recorded net charges of $10.1 million to Other Comprehensive
Income in 2001 for Atlantic Copper's outstanding currency hedging contracts at
December 31, 2001.
Interest Rate Risk
The table below presents our scheduled maturities of principal for
outstanding debt including the amounts we funded under our Nusamba guarantee,
and notional amounts for interest rate swaps at December 31, 2001, and fair
value at December 31, 2001 (dollars in millions). Atlantic Copper has interest
rate swap contracts to fix interest rates on a portion of its variable-rate debt
through March 2004. The costs associated with these contracts are an adjustment
to interest expense over the terms of the agreements (see Notes 5 and 11 of
"Notes to Financial Statements").
2002 2003 2004 2005 2006 Thereafter Fair Value
-------- --------- -------- ------- --------- ---------- -----------
Long-term debt:
Fixed rate $ 6.5 $ 259.3 $ 11.7 $ -- $ 803.8 $ -- $ 1,103.8
Average interest rate 10.0% 7.3% 10.0% -- 8.1% -- 7.9%
Variable rate $ 198.9 $ 68.5 $ 61.5 $ 545.5 $ 72.4 $ 310.5 $ 1,257.3
Average interest rate 7.0% 9.3% 9.9% 6.5% 8.5% 9.9% 7.9%
Interest rate swaps:
Amount $ 59.6 $ 51.5 $ 41.5 $ -- $ -- $ -- $ (3.3)
Average interest rate 7.3% 5.7% 6.0% -- -- -- 6.6%
NEW ACCOUNTING STANDARDS
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
46
the period incurred. The standard is effective for fiscal years beginning after
June 15, 2002, with earlier application permitted. Upon adoption of the
standard, we are 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. We have begun work on identifying and quantifying our asset
retirement obligations in accordance with the new standard, but currently do not
expect to adopt the new rules before January 1, 2003.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. We adopted SFAS 133 effective January 1, 2001. SFAS
133, as subsequently amended, allows us to report changes in the fair value of
financial instruments that qualify as cash flow hedges, including foreign
currency contracts and interest rate swaps, in other comprehensive income, a
component of stockholders' equity, until realized. We elected to continue our
current accounting for our redeemable preferred stock indexed to commodities
under the provisions of SFAS 133 that allow such instruments issued before
January 1, 1998, to be excluded from those instruments required to be adjusted
for changes in their fair values (see "Note 1. Summary of Significant Accounting
Policies").
The most significant impact on our financial statements of adopting SFAS
133 is on our accounting for rupiah, Australian dollar and euro foreign currency
contracts. Changes in the fair values of these open foreign currency contracts
that hedge anticipated future operating costs are reflected in other
comprehensive income and do not affect earnings until the contracts mature.
Before January 1, 2001, the changes in the market values of our foreign currency
contracts that are intended to cover anticipated future operating costs were
recorded in earnings. On January 1, 2001, we recorded a $0.8 million gain to
other income for the difference between the recorded values of our outstanding
foreign currency contracts at December 31, 2000, and their fair values as
calculated under SFAS 133.
DEVELOPMENTS IN INDONESIA
Indonesia's economic recovery remains vulnerable to ongoing political and
social tensions. In July 2001, Indonesia's highest political institution, the
People's Consultative Assembly, elected then Vice President Megawati
Sukarnoputri as the new President. The international community, including the
United States, has expressed support for the newly elected President. In late
September 2001, President Sukarnoputri visited the United States for nine days
and met with U.S. President George W. Bush and other U.S. government officials.
President Sukarnoputri announced Indonesia's strong support for the U.S. war
against terrorism and won U.S. support for Indonesia's territorial integrity and
for renewed ties with Indonesia's military. The U.S. also announced a new
assistance package for Indonesia, including funds for judicial reform, police
training, refugee aid, trade and finance initiatives as well as the granting of
duty-free status to additional Indonesian exports. President Sukarnoputri's
comments in public and in private with U.S. business and financial groups
provided strong reassurance that the Indonesian government would honor all of
its contracts and commitments and take steps to strengthen order and certainty.
Since the September 11 attacks in New York and Washington, D.C., the
Sukarnoputri government has been criticized by certain political and religious
sects for its support of the U.S. Indonesia is the world's most populous Muslim
country and there have been anti-American protests in Jakarta, the capital city
of Indonesia. Most observers agree that the demonstrations do not reflect a
change for Indonesia's overwhelmingly moderate Muslims, but rather are being
orchestrated by a small group of radical Muslims. These demonstrations did not
have broad public support and stopped by November.
In Papua, where Christianity is the predominant religion of the local
population, there have been sporadic conflicts between separatists and the
Indonesian military. President Sukarnoputri's government advanced implementation
of special autonomy rules, which provide greater revenues and control to the
province, and passed a law to change Irian Jaya's name to Papua. Our mining
operations have continued to operate normally. Although incidents of violence
continue to be reported in Papua, no 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.
PT Freeport Indonesia's and Eastern Minerals' operations, all of which are
in Indonesia, are conducted through the PT Freeport Indonesia and Eastern
Minerals Contracts of Work. Both Contracts of Work have 30-year terms, provide
for two 10-year extensions under certain conditions, and govern PT Freeport
Indonesia's and Eastern Minerals' rights and obligations relating to taxes,
exchange controls, repatriation and other matters. Both Contracts of Work were
concluded pursuant to the 1967 Foreign Capital Investment Law, which expresses
Indonesia's foreign investment policy and provides basic guarantees of
remittance rights and
47
protection against nationalization, a framework for economic incentives and
basic rules regarding other rights and obligations of foreign investors.
Specifically, the Contracts of Work provide that the Government of Indonesia
will not nationalize or expropriate PT Freeport Indonesia's or Eastern Minerals'
mining operations. Any disputes regarding the provisions of the Contracts of
Work are subject to international arbitration. Our belief that our Contracts of
Work will continue to be honored is further supported by U.S. laws, which
prohibit U.S. aid to countries that nationalize property owned by, or take steps
to nullify a contract with, a U.S. citizen or company at least 50 percent owned
by U.S. citizens if the foreign country does not within a reasonable time take
appropriate steps to provide full value compensation or other relief under
international law.
We have had positive relations with the Government of Indonesia since we
commenced business activities in Indonesia in 1967, and we contribute
significantly to both the local economy of Papua as well as the overall
Indonesian economy. We are one of the largest taxpayers in Indonesia and are a
significant employer in a remote and undeveloped area of the country. We intend
to continue to maintain positive working relationships with the central,
provincial and local branches of the Government of Indonesia.
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 our anticipated sales volumes, ore grades, general and
administrative expense, unit net cash costs, capital expenditures, future
environmental costs, debt repayments and refinancing, political, economic and
social conditions in our areas of operations, treatment charge rates,
depreciation rates, exploration efforts and results and the availability of
financing. 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 other adverse financial market conditions,
Indonesian political risks and other factors described in more detail under the
heading "Risk Factors" in our Form 10-K for the year ended December 31, 2001.
48
REPORT OF MANAGEMENT
Freeport-McMoRan Copper & Gold Inc. (the Company) is responsible for the
preparation of the financial statements and all other information contained in
this Annual Report. The financial statements have been prepared in conformity
with accounting principles generally accepted in the United States and include
amounts that are based on management's informed judgments and estimates.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance at reasonable costs that assets are safeguarded
against loss or unauthorized use, that transactions are executed in accordance
with management's authorization and that transactions are recorded and
summarized properly. The system is tested and evaluated on a regular basis by
the Company's internal auditors, PricewaterhouseCoopers LLP. In accordance with
auditing standards generally accepted in the United States, the Company's
independent public accountants, Arthur Andersen LLP, have developed an overall
understanding of our accounting and financial controls and have conducted other
tests as they consider necessary to support their opinion on the financial
statements.
The Board of Directors, through its Audit Committee composed solely of
non-employee directors, is responsible for overseeing the integrity and
reliability of the Company's accounting and financial reporting practices and
the effectiveness of its system of internal controls. Arthur Andersen LLP and
PricewaterhouseCoopers LLP meet regularly with, and have access to, this
committee, with and without management present, to discuss the results of their
audit work.
/s/ James R. Moffett /s/ Richard C. Adkerson
James R. Moffett Richard C. Adkerson
Chairman of the Board and President and
Chief Executive Officer Chief Financial Officer
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FREEPORT-MCMORAN COPPER & GOLD INC.
STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(In Thousands, Except Per Share Amounts)
Revenues $ 1,838,866 $ 1,868,610 $ 1,887,328
Cost of sales:
Production and delivery 943,439 1,012,962 934,549
Depreciation and amortization 283,889 283,556 293,213
----------- ----------- -----------
Total cost of sales 1,227,328 1,296,518 1,227,762
Exploration expenses 9,190 8,849 10,626
General and administrative expenses 59,422 70,950 70,624
----------- ----------- -----------
Total costs and expenses 1,295,940 1,376,317 1,309,012
----------- ----------- -----------
Operating income 542,926 492,293 578,316
Equity in PT Smelting losses (5,137) (13,593) (10,074)
Interest expense, net (173,595) (205,346) (194,069)
Other income (expense), net (5,418) (114) 6,661
----------- ----------- -----------
Income before income taxes and minority interests 358,776 273,240 380,834
Provision for income taxes (202,979) (159,573) (195,653)
Minority interests in net income of consolidated subsidiaries (42,772) (36,680) (48,714)
----------- ----------- -----------
Net income 113,025 76,987 136,467
Preferred dividends (36,529) (37,487) (35,680)
----------- ----------- -----------
Net income applicable to common stock $ 76,496 $ 39,500 $ 100,787
=========== =========== ===========
Net income per share of common stock:
Basic $ .53 $ .26 $ .62
=========== =========== ===========
Diluted $ .53 $ .26 $ .61
=========== =========== ===========
Average common shares outstanding:
Basic 143,952 153,997 163,613
=========== =========== ===========
Diluted 144,938 154,519 164,567
=========== =========== ===========
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
50
FREEPORT-MCMORAN COPPER & GOLD INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(In Thousands)
Cash flow from operating activities:
Net income $ 113,025 $ 76,987 $ 136,467
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 283,889 283,556 293,213
Deferred income taxes 67,086 49,154 60,104
Minority interests' share of net income 42,772 36,680 48,714
Equity in PT Smelting losses 5,137 13,593 10,074
Change in deferred mining costs (29,444) 28 11,597
Provision for inventory obsolescence 6,000 6,000 1,500
Other (1,977) 8,812 18,387
Decreases (increases) in working capital:
Accounts receivable 31,750 17,955 42,062
Inventories 20,844 (39,624) (52,854)
Prepaid expenses and other 8,355 5,407 (6,757)
Accounts payable and accrued liabilities (5,289) 57,830 (15,606)
Rio Tinto share of joint venture cash flows (37,743) 34,342 138
Accrued income taxes 4,578 (34,700) 21,745
--------- --------- ---------
Decrease (increase) in working capital 22,495 41,210 (11,272)
--------- --------- ---------
Net cash provided by operating activities 508,983 516,020 568,784
--------- --------- ---------
Cash flow from investing activities:
Purchase of restricted investments (139,762) -- --
PT Freeport Indonesia capital expenditures (156,373) (156,199) (151,015)
Atlantic Copper capital expenditures (10,599) (14,760) (6,423)
Investment in PT Smelting -- (5,717) (3,384)
Other 5,930 (4,538) 796
--------- --------- ---------
Net cash used in investing activities (300,804) (181,214) (160,026)
--------- --------- ---------
Cash flow from financing activities:
Net proceeds from sale of convertible senior notes 582,619 -- --
Proceeds from other debt 112,953 354,634 513,241
Repayments of debt (821,218) (372,681) (831,453)
Purchases of FCX common shares (3,436) (199,945) (7,921)
Partial redemption of preferred stock (10,386) (11,893) (11,946)
Cash dividends paid:
Preferred stock (36,612) (37,713) (38,019)
Minority interests (6,786) (51,923) (13,674)
Loans to Nusamba (5,548) (12,379) (18,263)
Amended bank credit facilities fees (20,743) -- --
Other 597 (1,636) 98
--------- --------- ---------
Net cash used in financing activities (208,560) (333,536) (407,937)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (381) 1,270 821
Cash and cash equivalents at beginning of year 7,968 6,698 5,877
--------- --------- ---------
---------
Cash and cash equivalents at end of year $ 7,587 $ 7,968 $ 6,698
========= ========= =========
Interest paid $ 160,128 $ 211,352 $ 194,546
========= ========= =========
Income taxes paid $ 139,448 $ 136,984 $ 113,804
========= ========= =========
The accompanying Notes to Financial Statements, which include information in
Notes 1, 2, 5, 6 and 11 regarding noncash transactions, are an integral part of
these financial statements.
51
FREEPORT-MCMORAN COPPER & GOLD INC.
BALANCE SHEETS
December 31,
--------------------------
2001 2000
----------- -----------
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,587 $ 7,968
Restricted investments 49,809 --
Accounts receivable:
Customers 103,235 128,198
Other 15,376 20,887
Inventories:
Product 132,821 158,868
Materials and supplies 236,367 241,739
Prepaid expenses and other 3,075 11,462
----------- -----------
Total current assets 548,270 569,122
Property, plant and equipment, net 3,457,277 3,248,710
Restricted investments 92,079 --
Investment in PT Smelting 57,194 56,154
Other assets 57,109 76,755
----------- -----------
Total assets $ 4,211,929 $ 3,950,741
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 307,526 $ 301,639
Current portion of long-term debt and short-term borrowings 205,420 202,294
Rio Tinto share of joint venture cash flows 33,646 78,706
Unearned customer receipts 33,422 28,688
Accrued interest payable 31,394 11,569
Accrued income taxes 17,019 11,016
----------- -----------
Total current liabilities 628,427 633,912
Long-term debt, less current portion 2,133,180 1,987,731
Accrued postretirement benefits and other liabilities 119,404 112,831
Deferred income taxes 671,015 599,536
Minority interests 92,955 103,795
Redeemable preferred stock 462,504 475,005
Stockholders' equity:
Step-up convertible preferred stock 349,990 349,990
Class A common stock, par value $0.10, 97,146,428 shares
and 97,071,944 shares issued and outstanding, respectively 9,715 9,707
Class B common stock, par value $0.10, 121,744,654 shares
and 121,687,529 shares issued and outstanding, respectively 12,174 12,169
Capital in excess of par value of common stock 660,329 657,239
Retained earnings 407,397 330,901
Accumulated other comprehensive income (loss) (1,184) 10,244
Common stock held in treasury - 74,915,457 shares and
74,718,076 shares, at cost, respectively (1,333,977) (1,332,319)
----------- -----------
Total stockholders' equity 104,444 37,931
----------- -----------
Total liabilities and stockholders' equity $ 4,211,929 $ 3,950,741
=========== ===========
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
52
FREEPORT-MCMORAN COPPER & GOLD INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------ ----------- -----------
(In Thousands)
Step-up convertible preferred stock:
Representing 13,999,600 shares $ 349,990 $ 349,990 $ 349,990
------------ ----------- -----------
Class A common stock:
Balance at beginning of year representing 97,071,944 shares 9,707 9,707 9,707
Issued restricted stock representing 74,484 shares 8 -- --
------------ ----------- -----------
Balance at end of year representing 97,146,428 shares in 2001 and
97,071,944 shares in 2000 and 1999 9,715 9,707 9,707
------------ ----------- -----------
Class B common stock:
Balance at beginning of year representing 121,687,529 shares in
2001, 121,540,842 shares in 2000 and 121,453,497 shares in 1999 12,169 12,154 12,145
Exercised stock options representing 57,125 shares in 2001, 146,687
shares in 2000 and 87,345 shares in 1999 5 15 9
------------ ----------- -----------
Balance at end of year representing 121,744,654 shares in 2001,
121,687,529 shares in 2000 and 121,540,842 shares in 1999 12,174 12,169 12,154
------------ ----------- -----------
Capital in excess of par value of common stock:
Balance at beginning of year 657,239 652,100 650,746
Exercised stock options 899 2,199 1,354
Restricted stock grants 2,191 2,940 --
------------ ----------- -----------
Balance at end of year 660,329 657,239 652,100
------------ ----------- -----------
Retained earnings:
Balance at beginning of year 330,901 291,401 190,614
Net income 113,025 76,987 136,467
Dividends on preferred stock (36,529) (37,487) (35,680)
------------ ----------- -----------
Balance at end of year 407,397 330,901 291,401
------------ ----------- -----------
Accumulated other comprehensive income (loss):
Balance at beginning of year 10,244 10,244 10,244
Other comprehensive income (loss), net of taxes:
Cumulative effect of change in accounting for derivatives (982) -- --
Change in unrealized derivatives' fair value (14,920) -- --
Reclass to earnings of net realized derivative losses 4,474 -- --
------------ ----------- -----------
Balance at end of year (1,184) 10,244 10,244
------------ ----------- -----------
Common stock held in treasury:
Balance at beginning of year representing 74,718,076 shares in 2001,
55,115,819 shares in 2000 and 54,217,541 shares in 1999 (1,332,319) (1,128,716) (1,120,030)
Shares purchased representing 194,000 shares in 2001, 19,493,300
shares in 2000 and 844,200 shares in 1999 (1,620) (201,761) (7,765)
Tender of 3,381 shares in 2001, 108,957 shares in 2000, and 54,078
shares in 1999 to FCX to exercise stock options (38) (1,842) (921)
------------ ----------- -----------
Balance at end of year representing 74,915,457 shares in 2001,
74,718,076 shares in 2000 and 55,115,819 shares in 1999 (1,333,977) (1,332,319) (1,128,716)
------------ ----------- -----------
Total stockholders' equity $ 104,444 $ 37,931 $ 196,880
============ =========== ===========
The accompanying Notes to Financial Statements are an integral part of these
financial statement.
53
FREEPORT-MCMORAN COPPER & GOLD INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements of Freeport-McMoRan
Copper & Gold Inc. (FCX) include the accounts of those subsidiaries where FCX
directly or indirectly has more than 50 percent of the voting rights and has the
right to control significant management decisions. FCX consolidates PT Freeport
Indonesia, including certain joint ventures involving PT Freeport Indonesia
(Note 5), as well as its wholly owned subsidiaries, PT Irja Eastern Minerals and
Atlantic Copper, S.A. FCX's unincorporated joint ventures with Rio Tinto plc are
reflected using the proportionate consolidation method (Note 2). PT Freeport
Indonesia's investment in PT Smelting is accounted for under the equity method
(Note 9). All significant intercompany transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
USE OF ESTIMATES. The preparation of FCX's financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. The more significant areas
requiring the use of management estimates include useful asset lives for
depreciation and amortization, the estimated average ratio of waste rock to ore
over the life of the open-pit mine, allowances for obsolete inventory,
reclamation and environmental obligations, postretirement and other employee
benefits, deferred taxes and valuation allowances, future cash flow associated
with assets and proven and probable reserves. Actual results could differ from
those estimates.
CASH EQUIVALENTS. Highly liquid investments purchased with maturities of three
months or less are considered cash equivalents.
ACCOUNTS RECEIVABLE. Customer accounts receivable include amounts due from PT
Smelting totaling $17.4 million at December 31, 2001, and $22.6 million at
December 31, 2000. Other accounts receivable include refundable value-added
taxes, net of the allowance for estimated uncollectible amounts, totaling $2.1
million at December 31, 2001, and $15.2 million at December 31, 2000. The
allowance for estimated uncollectible amounts totaled less than $0.1 million at
December 31, 2001, and $0.3 million at December 31, 2000.
INVENTORIES. Inventories are stated at the lower of cost or market. PT Freeport
Indonesia uses the average cost method and Atlantic Copper uses the first-in,
first-out (FIFO) cost method.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are carried at
cost. Mineral exploration costs are expensed as incurred, except in the year
when proven and probable reserves have been established for a given property, in
which case all exploration costs for that property incurred since the beginning
of that year are capitalized. Refer to Note 13 for the definition of proven and
probable reserves. No exploration costs were capitalized during the years
presented. Development costs are capitalized beginning after proven and probable
reserves have been established. Additionally, interest expense allocable to the
cost of developing mining properties and to constructing new facilities is
capitalized until assets are ready for their intended use. Expenditures for
replacements and improvements are capitalized. Costs related to periodic
scheduled maintenance (turnarounds) are expensed as incurred. Depreciation for
mining and milling life-of-mine assets is determined using the
unit-of-production method based on estimated recoverable proven and probable
copper reserves. Other assets are depreciated on a straight-line basis over
estimated useful lives of 15 to 20 years for buildings and 3 to 25 years for
machinery and equipment.
For 2001, PT Freeport Indonesia changed the estimated depreciable lives
of certain of its assets, primarily its power generation assets, which
decreased depreciation expense for 2001 by $25.6 million, $12.5 million to net
income ($0.09 per share), and had increased estimates of future development
costs related to its undeveloped ore bodies, which increased depreciation
expense for 2001 by $39.8 million, $19.4 million to net income ($0.13 per
share). These changes resulted from a review of recent operating history and
current maintenance practices, and from our updated comprehensive mine
development plan.
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 mining and milling life-of-mine assets. Prior to
January 1, 2002, PT Freeport Indonesia's 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 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, 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 Freeport
54
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, is not expected to be material, although the pro
forma effect of the change on historical 2001 and 2000 results, as well as the
effect on future years' results, likely will be significant.
ASSET IMPAIRMENT. FCX reviews and evaluates its long-lived assets for impairment
when events or changes in circumstances indicate that the related carrying
amounts may not be recoverable. An impairment loss is measured as the amount by
which asset carrying value exceeds its fair value. Fair value is generally
determined using valuation techniques such as estimated future cash flows. An
impairment is considered to exist if total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the asset. An impairment
loss is measured and recorded based on discounted estimated future cash flows.
Future cash flows for our mining assets, which are considered one asset group,
include estimates of recoverable pounds and ounces, metal prices (considering
current and historical prices, price trends and related factors), production
rates and costs, capital and reclamation costs as appropriate, all based on
detailed engineering life-of-mine plans. Future cash flows for our smelting
assets include estimates of treatment and refining rates (considering current
and historical prices, price trends and related factors), production rates and
costs, capital and reclamation costs as appropriate, all based on operating
projections. Assumptions underlying future cash flow estimates are subject to
risks and uncertainties. No impairment losses were recorded during the periods
presented.
DEFERRED MINING COSTS. In general, mining costs are charged to operations as
incurred. However, because of the configuration and location of the Grasberg ore
body and the location and extent of surrounding waste rock, the ratio of waste
rock to ore is much higher in the initial mining of the pit than in later years.
As a result, surface mining costs associated with waste rock removal at PT
Freeport Indonesia's open-pit mine that relate to future production are
initially deferred and subsequently charged to operating costs when the ratio of
actual waste rock removed to ore mined falls below the estimated average ratio
of waste rock to ore over the life of the Grasberg open pit. PT Freeport
Indonesia evaluates the recoverability of these deferred mining costs in
conjunction with its evaluation of the recoverability of its mining assets as
described in FCX's "Asset Impairment" accounting policy.
PT Freeport Indonesia's geologists and engineers reassess the waste rock
to ore ratio and the remaining life of its open-pit mine at least annually, and
any changes in estimates are reflected prospectively beginning in the quarter of
change. During the fourth quarter of 2001, PT Freeport Indonesia changed its
estimated average ratio of waste rock to ore over the life of the mine in its
deferred mining costs calculation to 1.8 to 1 from 1.6 to 1 and during the
fourth quarter of 2000 the average ratio changed to 1.6 to 1 from 2.4 to 1. For
1999 the estimated average ratio of waste rock to ore was 2.1 to 1. The change
during the fourth quarter of 2000 reflects PT Freeport Indonesia's finalization
of its overall open-pit mine plan after reviewing various alternative pit
designs during its previous mining and milling expansions. The fourth-quarter
2000 impact of the change was a $9.9 million deferral of mining costs and for
the full year the net deferral was not significant.
INCOME TAXES. FCX accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Deferred
income taxes are provided to reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their reported amounts in
the financial statements.
RECLAMATION AND MINE CLOSURE. Estimated future reclamation and mine closure
costs for PT Freeport Indonesia's current mining operations in Indonesia are
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 reclamation and mine closure costs are based
on management's best estimate of the undiscounted costs expected to be incurred.
Changes in estimates are charged to earnings prospectively over future periods.
Expenditures resulting from the remediation of conditions caused by past
operations are charged to expense.
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 does not expect to adopt the new
rules before January 1, 2003.
55
DERIVATIVE FINANCIAL INSTRUMENTS. At times FCX and its subsidiaries have entered
into derivative contracts to manage certain risks resulting from fluctuations in
commodity prices (primarily copper and gold), foreign currency exchange rates
and interest rates by creating offsetting market exposures. Effective January 1,
2001, FCX adopted SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133, as subsequently amended, establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
accounting for changes in the fair value of a derivative instrument depends on
the intended use of the derivative and the resulting designation.
Upon adoption of SFAS 133 on January 1, 2001, FCX recorded immaterial
cumulative gain adjustments totaling $0.8 million to other income and net income
to adjust the recorded values of PT Freeport Indonesia's and Atlantic Copper's
foreign currency forward contracts to fair value and $0.8 million to revenues
($0.4 million to net income) to adjust the embedded derivatives in PT Freeport
Indonesia's provisionally priced copper sales to fair value, as calculated under
SFAS 133. In addition, FCX recorded a cumulative effect net loss adjustment to
other comprehensive income totaling $1.0 million for the fair value of Atlantic
Copper's interest rate swaps on January 1, 2001. FCX elected to continue its
historical accounting for its redeemable preferred stock indexed to commodities
under the provisions of SFAS 133 which allow such instruments issued before
January 1, 1998, to be excluded from those instruments required to be adjusted
for changes in their fair values. Redeemable preferred stock indexed to
commodities is treated as a hedge of future production and is carried at its
original issue value. As redemption payments occur, differences between the
carrying value and the payment are recorded as an adjustment to revenues. FCX
expects to refinance or restructure certain of its redeemable preferred stock
prior to its mandatory redemption date in August 2003 (Note 6), which likely
will require FCX to change its accounting for these instruments to bifurcate the
embedded gold derivatives and reflect changes in the derivatives' fair values in
current period earnings.
FCX and its subsidiaries have entered into derivative contracts in limited
instances to achieve specific objectives. Currently, the objectives principally
relate to managing risks associated with foreign currency, commodity price and
interest rate risks with Atlantic Copper's smelting operations, where certain
derivative contracts are required under financing agreements. In addition, in
response to volatility in the Indonesian rupiah and Australian dollar
currencies, FCX has sought to manage certain foreign currency risks with PT
Freeport Indonesia's mining operations. In the past, FCX entered into derivative
contracts related to PT Freeport Indonesia's exposure to copper and gold prices,
but activities in this regard since 1997 have been limited to establishing fixed
prices for open copper sales under PT Freeport Indonesia's concentrate sales
contracts. FCX does not enter into derivative contracts for speculative
purposes. See Note 11 for a summary of FCX's outstanding derivative instruments
at December 31, 2001, and a discussion of FCX's risk management strategies for
those designated as hedges.
REVENUE RECOGNITION. PT Freeport Indonesia's sales of copper concentrates, which
also contain significant amounts of gold, are recognized in revenues when the
title to the concentrates is transferred to the buyer (which coincides with the
transfer of the risk of loss) at the point the concentrates are moved over the
vessel's rail at PT Freeport Indonesia's port facility.
Revenues from PT Freeport Indonesia's concentrate sales are recorded based
on either 100 percent of a provisional sales price or a final sales price
calculated in accordance with the terms specified in the relevant sales
contract. Revenues from concentrate sales are recorded net of royalties,
treatment and all refining charges (including price participation, if
applicable) and the impact of commodity contracts (Note 11). Moreover, because a
portion of the metals contained in copper concentrates is unrecoverable as a
result of the smelting process, our revenues from concentrate sales are also
recorded net of allowances based on the quantity and value of these
unrecoverable metals. These allowances are a negotiated term of our contracts
and vary by customer. Treatment and refining charges represent payments to
smelters and refiners and are either fixed or in certain cases vary with the
price of copper.
PT Freeport Indonesia's concentrate sales agreements, including its sales
to Atlantic Copper and PT Smelting, that provide for provisional billings are
based on world metals prices when shipped, primarily using then-current prices
on the London Metal Exchange (LME). Final settlement on the copper portion is
generally based on the average LME price for a specified future period generally
three months after the month of arrival at the customer's facility. Final
delivery to customers in Asia generally takes up to 18 days and to customers in
Europe generally takes up to 60 days.
56
Under SFAS 133, PT Freeport Indonesia's sales based on a provisional sales
price contain an embedded derivative which is required to be bifurcated from the
host contract. The host contract is the sale of the concentrates at the current
spot LME price. The embedded derivative, which does not qualify for hedge
accounting, is marked-to-market through earnings each period. At December 31,
2001, FCX had consolidated embedded copper derivatives on 144.8 million pounds
recorded at an average price of $0.65 per pound. Nearly all of these derivatives
are expected to be finally priced during the first quarter of 2002. A one-cent
movement in the average price used for these derivatives will have an
approximate $0.7 million impact on FCX's 2002 net income. Gold sales are priced
according to individual contract terms, generally the average London Bullion
Market Association price for a specified month near the month of shipment. For
2001, 2000 and 1999, the maximum net price adjustment after initial recognition
of revenues was 5 percent for copper and 1 percent for gold.
PT Freeport Indonesia pays royalties under a Contract of Work (see Note
10). The copper royalty rate payable by PT Freeport Indonesia under its Contract
of Work varies from 1.5 percent of copper net revenue at a copper price of $0.90
or less per pound to 3.5 percent at a copper price of $1.10 or more per pound.
The Contract of Work royalty rate for gold and silver sales is 1.0 percent.
A large part of the mineral royalties under Government of Indonesia
regulations are designated to the provinces from which the minerals are
extracted. In connection with its fourth concentrator mill expansion, PT
Freeport Indonesia agreed to pay the Government of Indonesia voluntary
additional royalties (royalties not required by the Contract of Work) to provide
further support to the local governments and the people of Papua (formerly Irian
Jaya). The additional royalties are paid on metal from production above 200,000
metric tons of ore per day. The additional royalty for copper equals the
Contract of Work royalty rate, and for gold and silver equals twice the Contract
of Work royalty rates. Therefore, PT Freeport Indonesia's royalty rate on copper
net revenues from production above 200,000 metric tons of ore per day is double
the Contract of Work royalty rate, and the royalty rates on gold and silver
sales from production above 200,000 metric tons of ore per day are triple the
Contract of Work royalty rates. The combined royalties, including the voluntary
additional royalties which became effective January 1, 1999, totaled $24.3
million in 2001, $20.2 million in 2000 and $23.0 million in 1999.
FOREIGN CURRENCIES. Transaction gains and losses associated with Atlantic
Copper's euro-denominated and PT Freeport Indonesia's rupiah-denominated
monetary assets and liabilities are included in net income. Atlantic Copper's
euro-denominated net monetary liabilities totaled $68.2 million at December 31,
2001, based on an exchange rate of $0.88 per euro. Excluding hedging amounts,
net Atlantic Copper foreign currency transaction gains totaled $2.4 million in
2001, $4.4 million in 2000 and $10.9 million in 1999. PT Freeport Indonesia's
rupiah-denominated net monetary liabilities totaled $1.8 million at December 31,
2001, based on an exchange rate of 10,160 rupiahs to one U.S. dollar. Excluding
hedging amounts, net PT Freeport Indonesia foreign currency transaction losses
totaled $1.2 million in 2001, $0.2 million in 2000 and $1.2 million in 1999.
COMPREHENSIVE INCOME. FCX follows SFAS 130, "Reporting Comprehensive Income,"
for the reporting and display of comprehensive income (net income plus other
comprehensive income, or all other changes in net assets from nonowner sources)
and its components. FCX had no items of other comprehensive income in 1999 or
2000. FCX's comprehensive income for 2001 is summarized below (in thousands).
Net income $ 113,025
Other comprehensive income (loss):
Cumulative effect of change in accounting for
derivatives, no tax effect (982)
Change in unrealized derivatives' fair value
(net of taxes of $1.2 million) (14,920)
Reclass to earnings (net of taxes of $0.3 million) 4,474
---------
Total comprehensive income $ 101,597
=========
Effective January 1996, Atlantic Copper changed its functional currency
from the peseta to the U.S. dollar. This change resulted from significant
changes in Atlantic Copper's operations related to a large expansion of its
smelting and refining operations financed with U.S. dollar borrowings and the
sale of its mining operations that incurred significant peseta operating costs.
Accumulated Other Comprehensive Income reported in the Statements of
Stockholders' Equity before 2001 consisted solely of the cumulative foreign
currency translation adjustment at Atlantic Copper prior to changing its
functional currency, for which there is no tax effect. In accordance with SFAS
52, the currency translation adjustment became fixed upon the change in
functional currency and will only be adjusted in the event of a full or partial
sale of FCX's investment in Atlantic Copper.
57
EARNINGS PER SHARE. 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 year. 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 year plus
the net effect of dilutive stock options and unvested restricted stock. Dilutive
stock options represented 0.7 million shares in 2001, 0.3 million shares in 2000
and 1.0 million shares in 1999. Dilutive restricted stock totaled 0.3 million
shares in 2001 and 0.2 million shares in 2000.
Options with exercise prices greater than the average market price of the
common stock during the year were excluded from the computation of diluted net
income per share of common stock. This amounted to options for 11.0 million
shares in 2001, 11.4 million shares in 2000 and 11.0 million shares in 1999 at
average exercise prices of $22 per share. FCX's Step-Up Convertible Preferred
Stock and its 8 1/4% Convertible Senior Notes issued in August 2001 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 net
income per share of common stock. The preferred stock was convertible into 11.7
million shares of common stock and accrued dividends totaled $24.5 million in
2001, $24.5 million in 2000 and $22.2 million in 1999. The senior notes were
convertible into a weighted average 17.0 million shares of common stock and
accrued interest totaled $20.3 million for 2001.
NOTE 2. OWNERSHIP IN SUBSIDIARIES AND JOINT VENTURES WITH RIO TINTO
OWNERSHIP IN SUBSIDIARIES. FCX's direct ownership in PT Freeport Indonesia
totaled 81.3 percent at December 31, 2001 and 2000. FCX also owns 49 percent of
PT Indocopper Investama, a 9.4 percent owner of PT Freeport Indonesia, bringing
FCX's total ownership in PT Freeport Indonesia to 85.9 percent at December 31,
2001 and 2000. FCX acquired the remaining approximate 51 percent ownership in PT
Indocopper Investama on February 27, 2002, as discussed below, bringing FCX's
total ownership in PT Freeport Indonesia to 90.6 percent. At December 31, 2001,
PT Freeport Indonesia's net assets totaled $1.1 billion, including $873.9
million of retained earnings. FCX has various intercompany loans to PT Freeport
Indonesia totaling $569.8 million at December 31, 2001.
Substantially all of PT Freeport Indonesia's assets are located in
Indonesia. Indonesia's economic recovery remains vulnerable to ongoing political
and social tensions. In July 2001, Indonesia's highest political institution,
the People's Consultative Assembly, elected then Vice President Megawati
Sukarnoputri as the new President. The international community, including the
United States, has expressed support for the newly elected President. In late
September 2001, President Sukarnoputri visited the United States for nine days
and met with U.S. President George W. Bush and other U.S. government officials.
President Sukarnoputri announced Indonesia's strong support for the U.S. war
against terrorism and won U.S. support for Indonesia's territorial integrity and
for renewed ties with Indonesia's military. The U.S. also announced a new
assistance package for Indonesia, including funds for judicial reform, police
training, refugee aid, trade and finance initiatives as well as the granting of
duty-free status to additional Indonesian exports.
In Papua, where Christianity is the predominant religion of the local
population, there have been sporadic conflicts between separatists and the
Indonesian military. President Sukarnoputri's government advanced implementation
of special autonomy rules, which provide greater revenues and control to the
province, and passed a law to change Irian Jaya's name to Papua. Our mining
operations have continued to operate normally. Although incidents of violence
continue to be reported in Papua, no 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.
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.
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 JPMorgan Chase Bank as agent, which was to mature in
March 2002. FCX guaranteed the Nusamba loan for the purpose of continuing
minority Indonesian ownership of PT Freeport Indonesia. FCX 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. FCX charged $7.3 million to expense for amounts loaned to Nusamba to
cover interest shortfalls funded during 2001 above the $61.6 million that
Nusamba originally paid for its investment in PT Indocopper Investama.
In discussions subsequent to December 31, 2001, Nusamba informed FCX that
it did not expect to be able to repay the bank loan or FCX's loan at maturity,
which would obligate FCX to pay the bank loan. On February 27, 2002, FCX repaid
the bank loan as provided for under the terms of its amended credit facilities
and acquired
58
Nusamba's ownership in PT Indocopper Investama. As a result of FCX's payment of
the Nusamba bank loan, on its December 31, 2001, balance sheet FCX has:
- recorded an additional liability of $253.4 million to reflect
the payment of the Nusamba bank loan,
- reduced "other assets" by $61.6 million to reflect the
nonpayment of its loan to Nusamba,
- increased deferred income taxes by $4.2 million to reflect tax
liabilities relating to the increased equity ownership in PT
Freeport Indonesia,
- reduced minority interests by $52.0 million to reflect the
increased equity ownership in PT Freeport Indonesia, and
- increased property, plant and equipment by $267.3 million to
reflect the cost of the acquisition in excess of the book
value of the equity ownership in PT Freeport Indonesia FCX
acquired.
The pro forma impact had FCX been obligated to perform under the guarantee
on January 1, 2001, would have been an approximately $6 million ($0.04 per
share) reduction in FCX's 2001 net income.
FCX's direct ownership in Eastern Minerals totaled 90 percent at December
31, 2001 and 2000. PT Indocopper Investama owns the remaining 10 percent of
Eastern Minerals, bringing FCX's total ownership in Eastern Minerals to 100
percent at December 31, 2001, after considering FCX's acquisition of the
remaining 51 percent ownership of PT Indocopper Investama discussed above.
FCX owns 100 percent of the outstanding Atlantic Copper common stock. At
December 31, 2001, Atlantic Copper's net assets totaled $51.1 million and FCX
had no outstanding advances to Atlantic Copper. Atlantic Copper is not expected
to pay dividends in the near future. Under the terms of its concentrate sales
agreements with Atlantic Copper, PT Freeport Indonesia had outstanding trade
receivables from Atlantic Copper totaling $101.2 million at December 31, 2001.
FCX made cash contributions to Atlantic Copper totaling $7.6 million in 2001,
$32.4 million in 2000 and $40.0 million in 1999. In addition to the
contributions, FCX forgave $24.2 million of outstanding advances in 1999. These
transactions had no impact on FCX's consolidated financial statements.
JOINT VENTURES WITH RIO TINTO. Rio Tinto owns 23.9 million shares of FCX Class A
common stock (approximately 16.6 percent of the December 31, 2001, total
outstanding common stock of FCX). In addition, FCX and Rio Tinto have
established joint ventures. Under the joint venture arrangements, Rio Tinto has
a 40 percent interest in PT Freeport Indonesia's Contract of Work and Eastern
Minerals' Contract of Work, and the option to participate in 40 percent of any
other future exploration projects in Papua. Under the arrangements, Rio Tinto
funded $100 million in 1996 for approved exploration costs in the areas covered
by the PT Freeport Indonesia and Eastern Minerals Contracts of Work. All
exploration costs in the joint venture areas are now being shared 60 percent by
FCX and 40 percent by Rio Tinto.
Pursuant to the joint venture agreement, Rio Tinto has a 40 percent
interest in certain assets and future production exceeding specified annual
amounts of copper, gold and silver through 2021 in Block A of PT Freeport
Indonesia's Contract of Work, and, after 2021, a 40 percent interest in all
production from Block A. Operating, nonexpansion capital and administrative
costs are shared proportionately between PT Freeport Indonesia and Rio Tinto
based on the ratio of (a) the incremental revenues from production from the
expansion and (b) total revenues from production from Block A, including
production from PT Freeport Indonesia's previously existing reserves. PT
Freeport Indonesia will continue to receive 100 percent of the cash flow from
specified annual amounts of copper, gold and silver through 2021 calculated by
reference to its proven and probable reserves as of December 31, 1994, and 60
percent of all remaining cash flow.
PT Freeport Indonesia completed an expansion of its mining and milling
facilities in early 1998. In addition to funding its 40 percent share of all
expansion capital, including the fourth concentrator mill expansion, Rio Tinto
provided a $450 million nonrecourse loan to PT Freeport Indonesia for PT
Freeport Indonesia's share of the cost of the expansion. PT Freeport Indonesia
and Rio Tinto began sharing incremental cash flow attributable to the expansion
effective January 1, 1998, on the basis of 60 percent to PT Freeport Indonesia
and 40 percent to Rio Tinto. PT Freeport Indonesia paid its share of incremental
cash flow to Rio Tinto until Rio Tinto received an amount equal to the funds
loaned to PT Freeport Indonesia, plus interest based on Rio Tinto's cost of
borrowing. PT Freeport Indonesia's share of
59
incremental cash flow through the final payment in May 2000 totaled $502.6
million, of which $61.7 million was paid to RioTinto in 2000, $252.3 million in
1999 and $188.6 million in 1998.
NOTE 3. INVENTORIES
The components of product inventories follow (in thousands):
December 31,
-------------------------
2001 2000
---------- ----------
PT Freeport Indonesia: Concentrates - Average Cost $ 6,562 $ 7,779
Atlantic Copper: Concentrates - FIFO 63,469 110,591
Work in process - FIFO 59,929 33,938
Finished goods - FIFO 2,861 6,560
---------- ----------
Total product inventories $ 132,821 $ 158,868
========== ==========
The average cost method was used to determine the cost of essentially all
materials and supplies inventory. Materials and supplies inventory is net of
obsolescence reserves totaling $17.1 million at December 31, 2001, and $16.8
million at December 31, 2000.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT, NET
The components of net property, plant and equipment follow (in thousands):
December 31,
----------------------------
2001 2000
----------- -----------
Exploration, development and other $ 1,263,722 $ 968,246
Buildings and infrastructure 1,228,034 1,206,404
Machinery and equipment 1,709,629 1,669,552
Mobile equipment 516,686 508,788
Infrastructure assets 570,441 572,884
Construction in progress 244,239 183,583
----------- -----------
Property, plant and equipment 5,532,751 5,109,457
Accumulated depreciation and amortization (2,123,064) (1,878,893)
Deferred mining costs 47,590 18,146
----------- -----------
Property, plant and equipment, net $ 3,457,277 $ 3,248,710
=========== ===========
Exploration, development and other includes excess costs related to
investments in consolidated subsidiaries. Excess costs consist of $69.5 million
related to FCX's purchase in December 1992 of 49 percent of the capital stock of
PT Indocopper Investama, $34.5 million related to PT Freeport Indonesia's
issuance of its shares to FCX in 1993 and 1994 to settle a convertible loan due
to FCX and $267.3 million related to FCX's acquisition of the remaining
approximate 51 percent of the capital stock of PT Indocopper Investama in
February 2002 (see Note 2). These costs are amortized using the
unit-of-production method based on estimated recoverable proven and probable
copper reserves. Additionally, excess costs include $20.8 million related to
FCX's acquisition of Atlantic Copper in 1993. These costs are amortized using
the straight-line method based on the estimated life of Atlantic Copper's
smelter assets.
NOTE 5. LONG-TERM DEBT
December 31,
--------------------
2001 2000
-------- --------
(In Thousands)
Notes Payable:
FCX and PT Freeport Indonesia credit
facilities, average rate 6.6%
in 2001 and 8.2% in 2000 $222,000 $760,000
Nusamba loan (Note 2) 253,371 --
Atlantic Copper facility, average rate 6.4%
in 2001 and 8.3% in 2000 182,805 194,824
Atlantic Copper working capital revolver,
average rate 4.8% in 2001 and 7.2% in 2000 40,000 38,900
Atlantic Copper deferral loan,
average rate 6.6% in 2001 and 9.0% in 2000 30,000 25,000
Equipment loans 61,194 65,656
Other notes payable and short-term borrowings 37,810 24,637
60
Senior Notes:
8 1/4% Convertible Senior Notes due 2006 603,750 --
7.50% Senior Notes due 2006 200,000 200,000
7.20% Senior Notes due 2026 250,000 250,000
9 3/4% Senior Notes due 2001 -- 120,000
Infrastructure asset financings, average rate 10.5%
in 2001 and 12.1% in 2000 457,670 511,008
---------- ----------
2,338,600 2,190,025
Less current portion and short-term borrowings 205,420 202,294
---------- ----------
$2,133,180 $1,987,731
========== ==========
NOTES PAYABLE. In October 2001, FCX and PT Freeport Indonesia amended their bank
credit facilities to extend the maturities to December 2005. Aggregate
commitments under the credit facilities total $734.0 million, including $253.4
million for FCX's guarantee of a loan of Nusamba (see Note 2). As of December
31, 2001, $64.6 million is available to FCX and $258.6 million is available to
PT Freeport Indonesia.
Borrowings under the credit facilities as of December 31, 2001, totaled
$126.0 million for PT Freeport Indonesia and $96.0 million for FCX. Amounts
borrowed are available on a revolving basis until December 2003, at which time
all borrowed amounts will convert to term loans, except for a $150.0 million
revolving loan which will remain available for working capital purposes. The
initial interest rate on all borrowings is LIBOR plus 4.0 percent with annual
increases of 0.125 percent. The LIBOR rate was 1.9 percent at December 31, 2001.
The credit facilities require that all available cash flow after scheduled
debt payments, permitted capital expenditures and payment of operating and other
costs be used to reduce outstanding amounts under the credit facilities. 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. Amounts available under the credit facilities may be used to
repay $250.0 million for FCX's 7.20% Senior Notes in November 2003 to the extent
necessary. However, the credit facilities impose limitations on the amount of
preferred stock FCX may redeem (see Note 6).
The credit facilities also include prohibitions on common stock dividends
and common stock purchases, limitations on capital expenditures to specified
budgets, limitations on investments, limitations on liens and limitations on
transactions with affiliates, and require that certain financial ratios be
maintained. Security for obligations outstanding under the credit facilities
includes over 80 percent of PT Freeport Indonesia's assets, 50.1 percent of the
outstanding stock of PT Freeport Indonesia, the outstanding stock of PT
Indocopper Investama owned by FCX, and a pledge of PT Freeport Indonesia's
rights under its Contract of Work. PT Freeport Indonesia also guarantees FCX's
obligations under the credit facilities.
In June 2000, Atlantic Copper refinanced its variable-rate project loan
(the Atlantic Copper facility). As of December 31, 2001, the variable-rate
project loan, nonrecourse to FCX, consisted of a $118.0 million term loan being
repaid with variable quarterly installments through December 2007 ($3.75 million
a quarter in 2002) and a $65.0 million working capital revolver ($64.8 million
outstanding at December 31, 2001) that matures December 2007. The Atlantic
Copper facility requires certain hedging arrangements, restricts other
borrowings and specifies certain minimum coverage ratios. Borrowings under the
Atlantic Copper facility are secured by 100 percent of Atlantic Copper's capital
stock, its smelter and refinery assets, and certain receivables and inventory.
Atlantic Copper has a variable-rate $40 million working capital revolving
credit facility ($40.0 million outstanding at December 31, 2001) that is secured
by certain shipments of copper concentrate, and has access to additional lines
of credit, which are generally unsecured, with various financial institutions.
The revolver matures December 2002 and Atlantic Copper is working to refinance
this obligation.
Atlantic Copper has $30.0 million outstanding as of December 31, 2001,
under a deferral loan with the same security as the Atlantic Copper facility.
Interest is variable and the loan matures January 2008.
FCX and PT Freeport Indonesia have equipment loans secured by certain PT
Freeport Indonesia assets with a vendor. The FCX loan had a $21.0 million
balance at December 31, 2001. Interest accrued at a fixed rate of 8.1 percent
until December 2001, when the rate became variable. Principal payments total
$7.0 million annually. PT Freeport Indonesia has two variable-rate equipment
loans with the same vendor ($40.2 million outstanding at December 31, 2001). The
weighted average interest rate on the loans was 7.0 percent
61
for 2001 and 9.0 percent for 2000. Principal payments total $4.9 million
annually through 2006 then $0.7 million through 2008. Balloon payments total
$12.5 million in December 2006 and $2.0 million in December 2008.
SENIOR NOTES. In August 2001, FCX sold $603.8 million of 8 1/4% Convertible
Senior Notes due January 2006 for net proceeds of $582.6 million. Interest on
the notes is payable semiannually on January 31 and July 31 of each year. FCX
may redeem some or all of the notes at any time after July 31, 2004, at
specified redemption prices. A portion of the net proceeds was used to purchase
$139.8 million of U.S. government securities, which secure and will be used to
pay for the first six scheduled interest payments on the notes. The notes are
otherwise unsecured. The remaining net proceeds were used to repay outstanding
amounts under the FCX/PT Freeport Indonesia bank credit facilities.
The 8 1/4% Convertible Senior Notes are convertible, at the option of the
holder, at any time on or prior to maturity into, at the option of the holder,
shares of class A or class B common stock of FCX at a conversion price of $14.30
per share, which is equal to a conversion rate of approximately 69.9301 shares
of class A or class B common stock per $1,000 principal amount of notes.
The 7.50% and 7.20% Senior Notes are redeemable at the option of FCX at
the greater of (a) their principal amount or (b) the remaining scheduled
payments of principal and interest discounted to the date of redemption on a
semiannual basis at the applicable treasury rate plus 30 basis points, together
with, in either case, accrued interest to the date of redemption. Each holder of
the 7.20% Senior Notes may elect early repayment in November 2003.
INFRASTRUCTURE ASSET FINANCINGS. Through 1997 PT Freeport Indonesia sold assets
for $458.2 million to a power joint venture, in which it previously had a 30
percent interest, and is purchasing power under infrastructure asset financing
arrangements. The infrastructure asset financing obligations pursuant to the
power sales agreement totaled $359.5 million at December 31, 2001, and $387.0
million at December 31, 2000.
In 1995, PT Freeport Indonesia sold certain of its port, marine, logistics
and construction equipment assets and facilities for $100.0 million to an
unrelated joint venture and sold $48.0 million of its aviation assets to a joint
venture, 25 percent owned by PT Freeport Indonesia. PT Freeport Indonesia
guarantees a bank loan totaling $27.9 million at December 31, 2001, associated
with these sales. PT Freeport Indonesia is leasing these assets under
infrastructure asset financing arrangements. The obligations under these
infrastructure asset financings totaled $40.0 million at December 31, 2001, and
$56.2 million at December 31, 2000.
From December 1993 to March 1997, PT Freeport Indonesia sold $270.0
million of infrastructure assets to joint ventures owned one-third by PT
Freeport Indonesia and two-thirds by PT ALatieF Nusakarya Corporation (ALatieF),
an Indonesian investor. Funding for the purchases consisted of $90.0 million in
equity contributions by the joint venture partners, a $60.0 million bank loan
and FCX's 9 3/4% Senior Notes, which were repaid in 2001. PT Freeport Indonesia
subsequently sold its one-third interest in the joint ventures to ALatieF in
March 1997. In September 1998, PT Freeport Indonesia reacquired for $30 million
an aggregate one-third interest in the joint ventures. During 2000, PT Freeport
Indonesia purchased the remaining interest in the joint ventures for $25.9
million cash and the assumption of $34.1 million of bank debt. The balance of
the original $60.0 million bank loan totaled $30.8 million at December 31, 2001,
and $35.1 million at December 31, 2000, and the balance of the bank debt assumed
during 2000 totaled $27.4 million at December 31, 2001, and $32.7 million at
December 31, 2000.
MATURITIES AND CAPITALIZED INTEREST. Maturities of debt instruments and
infrastructure asset financings based on the amounts and terms outstanding at
December 31, 2001, totaled $205.4 million in 2002, $327.8 million in 2003, $73.2
million in 2004, $545.5 million in 2005, $876.2 million in 2006 and $310.5
million thereafter. Capitalized interest totaled $9.4 million in 2001, $7.2
million in 2000 and $3.8 million in 1999.
NOTE 6. REDEEMABLE PREFERRED STOCK
FCX has outstanding 6.0 million depositary shares representing 300,000
shares of its Gold-Denominated Preferred Stock totaling $232.6 million. Each
depositary share has a cumulative quarterly cash dividend equal to the value of
0.000875 ounce of gold and is mandatorily redeemable in August 2003 for the cash
value of 0.1 ounce of gold. Under its amended credit facilities, FCX has
limitations on the amount of preferred stock it may redeem and, if by August
2003 it has not extended the maturity of at least 80 percent of the
Gold-Denominated Preferred Stock beyond 2005, FCX will not thereafter be
permitted to redeem or pay dividends on any of its preferred stock. FCX intends
to refinance or restructure its redemption obligation as to at least 80 percent
of the outstanding 6.0 million depositary shares prior to the August 2003
mandatory redemption date.
62
FCX has outstanding 4.3 million depositary shares representing 215,279
shares of its Gold-Denominated Preferred Stock, Series II totaling $167.4
million. Each depositary share has a cumulative quarterly cash dividend equal to
the value of 0.0008125 ounce of gold and is mandatorily redeemable in February
2006 for the cash value of 0.1 ounce of gold.
FCX has outstanding 4.8 million depositary shares representing 74,375
shares of its Silver-Denominated Preferred Stock totaling $62.5 million at
December 31, 2001, and 89,250 shares totaling $75.0 million at December 31,
2000. As of December 31, 2001, each depositary share has a cumulative quarterly
cash dividend equal to the value of 0.0257813 ounce of silver, which declines
after each redemption payment. FCX made annual mandatory partial redemption
payments on the underlying Silver-Denominated Preferred Stock in August of 2001,
2000 and 1999. For each of the partial redemptions, the difference between FCX's
carrying amount of $12.5 million and the actual redemption payments was credited
to revenues. The credits to revenues totaled $2.1 million in 2001, $0.6 million
in 2000 and $0.6 million in 1999. Five annual redemption payments remain and
will vary with the price of silver.
NOTE 7. STOCKHOLDERS' EQUITY
COMMON STOCK. FCX has 473.6 million authorized shares of capital stock
consisting of 423.6 million shares of common stock and 50.0 million shares of
preferred stock. FCX has two classes of common stock, which differ only as to
their voting rights for the directors of FCX. Holders of Class B common stock
elect 80 percent of the FCX board of directors while holders of Class A common
stock and holders of preferred stock (discussed below) elect 20 percent.
PREFERRED STOCK. FCX has outstanding 14.0 million depositary shares representing
700,000 shares of its Step-Up Convertible Preferred Stock. Each depositary share
has a cumulative $1.75 annual cash dividend (payable quarterly) and a $25
liquidation preference, and is convertible at the option of the holder into
0.835 shares of FCX Class A common stock. FCX may redeem these depositary shares
at $25 per share (payable in FCX Class A common stock, cash or a combination of
both, at FCX's option) plus accrued and unpaid dividends.
STOCK AWARD PLANS. FCX's Adjusted Stock Award Plan provided for the issuance of
certain stock awards to employees, officers and directors of Freeport-McMoRan
Inc. (FTX), the former parent of FCX, in connection with FTX's distribution of
FCX shares to its shareholders in 1995. Under this plan, FCX made a one-time
grant of awards to purchase up to 10.7 million Class B common shares, including
stock appreciation rights (SARs), at prices equivalent to the original FTX price
at date of grant as adjusted for the proportionate market value of FCX shares at
the time of the distribution. All options granted under this plan expire 10
years from the original FTX date of grant.
FCX's 1995 Stock Option Plan (the 1995 Plan) provides for the issuance of
stock options and other stock-based awards (including SARs) for up to 10 million
Class B common shares at no less than market value at the time of grant. FCX's
1995 Stock Option Plan for Non-Employee Directors (the Director Plan) authorizes
FCX to grant options to purchase up to 2 million shares. Options granted under
the Director Plan are exercisable in 25 percent annual increments beginning one
year from the date of grant. For options granted under the Director Plan, FCX
will pay cash to the option holder equal to an amount based on the maximum
individual federal income tax rate in effect at the time of exercise.
FCX's 1999 Stock Incentive Plan (the 1999 Plan) provides for the issuance
of stock options, restricted stock and other stock-based awards. The 1999 Plan
allows FCX to grant awards for up to 8 million common shares (3.2 million Class
A common shares and 4.8 million Class B common shares) to eligible participants.
FCX granted 0.2 million shares of restricted stock in 2001 and 0.2 million
shares in 2000 that vest ratably over three years.
Awards granted under all of the plans generally expire 10 years after the
date of grant. Awards for 4.6 million shares under the 1999 Plan, 1.3 million
shares under the Director Plan and no shares under the 1995 Plan were available
for new grants as of December 31, 2001. A summary of stock options outstanding,
including 0.6 million SARs, follows:
63
2001 2000 1999
---------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
Of Option of Option of Option
Options Price Options Price Options Price
---------- --------- ---------- --------- ---------- ---------
Balance at January 1 15,066,702 $ 19.14 14,060,224 $ 19.23 11,430,582 $ 21.98
Granted 1,384,228 11.42 1,967,054 17.57 3,965,500 11.48
Exercised (57,125) 10.46 (146,687) 14.78 (87,345) 15.28
Expired/Forfeited (682,109) 17.91 (813,889) 17.69 (1,248,513) 20.08
---------- ---------- ----------
Balance at December 31 15,711,696 18.55 15,066,702 19.14 14,060,224 19.23
========== ========== ==========
In 1998, two FCX executive officers were granted stock options under
the 1995 Plan to purchase a total of 2.6 million shares of FCX stock at $19.03
per share. The options may be exercised at any time through March 2006 and were
granted in return for a five-year cap on their cash incentive compensation.
Summary information of stock options outstanding at December 31, 2001, excluding
SARs, follows:
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Of Remaining Option Of Option
Range of Exercise Prices Options Life Price Options Price
------------------------------------------ ---------- ---------- ------------ ----------
$9.09 to $12.66 4,131,625 8 years $ 10.30 1,598,125 $ 9.93
$13.78 to $20.48 8,556,096 7 years 18.49 7,317,146 18.78
$20.76 to $30.44 899,281 5 years 27.89 899,281 27.89
$32.06 to $35.50 1,545,875 4 years 35.21 1,545,875 35.21
----------- ------------
15,132,877 11,360,427
=========== ============
FCX has adopted the disclosure-only provisions of SFAS 123, "Accounting
for Stock-Based Compensation" and continues to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans. FCX recognized a $0.2 million
charge in 2001, a $1.5 million gain in 2000 and a $1.4 million charge in 1999
for its outstanding SARs and grants under the Director Plan, which have the same
accounting treatment as SARs, because of fluctuations in FCX's common stock
price. Had compensation cost for FCX's stock option grants, excluding SARs, been
determined based on the value at the grant dates for awards under those plans
pursuant to the requirements of SFAS 123, FCX's net income would have been
reduced by $6.0 million to $70.5 million ($0.49 per share) in 2001, by $7.3
million to $32.2 million ($0.21 per share) in 2000 and by $6.0 million to $94.7
million ($0.58 per share) in 1999.
For the pro forma computations, the values of the 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 $6.30 per option in
2001, $9.44 per option in 2000 and $5.96 per option in 1999. The weighted
average assumptions used include a risk-free interest rate of 5.2 percent in
2001, 6.7 percent in 2000 and 5.1 percent in 1999; expected volatility of 47
percent in 2001, 44 percent in 2000 and 41 percent in 1999; no annual dividends;
and expected lives of 7 years. The pro forma effects on net income are not
representative of future years because of the potential changes in the factors
used in calculating the Black-Scholes valuation and the number and timing of
option grants. No other discounts or restrictions related to vesting or the
likelihood of vesting of stock options were applied.
64
NOTE 8. INCOME TAXES
The components of FCX's deferred taxes follow (in thousands):
December 31,
----------------------------------
2001 2000
--------- ---------
Deferred tax asset:
Foreign tax credits $ 286,130 $ 255,500
U.S. alternative minimum tax credits 70,644 65,294
Atlantic Copper net operating loss carryforwards 84,492 72,702
Intercompany profit elimination 11,085 15,644
Valuation allowance (441,266) (393,496)
--------- ---------
Total deferred tax asset 11,085 15,644
--------- ---------
Deferred tax liability:
Property, plant and equipment (587,143) (552,869)
Undistributed earnings in PT Freeport Indonesia (60,700) (35,375)
Other (34,257) (26,936)
--------- ---------
Total deferred tax liability (682,100) (615,180)
--------- ---------
Net deferred tax liability $(671,015) $(599,536)
========= =========
FCX has provided a valuation allowance equal to its tax credit
carryforwards ($356.8 million at December 31, 2001 and $320.8 million at
December 31, 2000) as these would only be used should FCX be required to pay
regular U.S. tax, which is considered unlikely for the foreseeable future and
the foreign tax credits expire after five years. Atlantic Copper is subject to
taxation in Spain and has not generated significant taxable income in recent
years. FCX has provided a valuation allowance equal to the future tax benefits
resulting from Atlantic Copper net operating losses totaling $241.4 million at
December 31, 2001, and $207.7 million at December 31, 2000, which expire through
the year 2016.
PT Freeport Indonesia's Indonesian income tax returns have been audited
through 1994 and the 1997 and 1998 returns are currently under examination.
FCX's provision for income taxes consists of the following (in thousands):
2001 2000 1999
-------- -------- --------
Current income taxes:
Indonesian $129,962 $106,587 $127,828
United States and other 5,931 3,832 7,721
-------- -------- --------
135,893 110,419 135,549
Deferred Indonesian taxes 67,086 49,154 60,104
-------- -------- --------
$202,979 $159,573 $195,653
======== ======== ========
Differences between income taxes computed at the contractual Indonesian
tax rate and income taxes recorded follow (dollars in thousands):
2001 2000 1999
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
Income taxes computed at the $ 125,572 35% $ 95,634 35% $ 133,292 35%
contractual Indonesian tax rate
Indonesian withholding tax on:
Earnings/dividends 25,652 7 18,095 6 23,878 6
Interest 1,899 1 2,776 1 2,829 --
Increase (decrease) attributable to:
Intercompany interest expense (6,153) (2) (7,168) (3) (11,444) (3)
Parent company costs 32,083 9 28,981 11 37,568 10
U.S. alternative minimum tax 5,800 2 4,600 2 7,400 2
Atlantic Copper net loss (income) 15,075 4 10,467 4 (1,836) --
Other, net 3,051 1 6,188 2 3,966 1
--------- -- --------- -- --------- --
Provision for income taxes $ 202,979 57% $ 159,573 58% $ 195,653 51%
========= == ========= == ========= ==
NOTE 9. TRANSACTIONS WITH AFFILIATES AND EMPLOYEE BENEFITS
65
MANAGEMENT SERVICES AGREEMENT. FM Services Company, owned 50 percent by FCX,
provides certain administrative, financial and other services on a
cost-reimbursement basis under a management services agreement. These costs,
which include related overhead, totaled $24.3 million in 2001, $27.6 million in
2000 and $25.8 million in 1999. Management believes these costs do not differ
materially from the costs that would have been incurred had the relevant
personnel providing these services been employed directly by FCX.
PT SMELTING. PT Smelting, an Indonesian company, operates a smelter/refinery in
Gresik, Indonesia, with a stated production capacity of 200,000 metric tons of
copper metal per year. PT Freeport Indonesia, Mitsubishi Materials Corporation
(Mitsubishi Materials), Mitsubishi Corporation (Mitsubishi) and Nippon Mining &
Metals Co., Ltd. (Nippon) own 25 percent, 60.5 percent, 9.5 percent and 5
percent, respectively, of the outstanding PT Smelting common stock. PT Freeport
Indonesia provides nearly all of PT Smelting's copper concentrate requirements.
For the first 15 years of PT Smelting's operations beginning December 1998, the
treatment and refining charges on the majority of the concentrate PT Freeport
Indonesia supplies will not fall below a specified minimum rate, currently $0.23
per pound, which has been the rate since the commencement of operations in 1998
and is the expected rate for 2002. PT Freeport Indonesia has also agreed to
assign its earnings in PT Smelting to support a 13 percent cumulative annual
return to Mitsubishi Materials, Mitsubishi and Nippon for the first 20 years of
commercial operations, which began in December 1998.
PENSION PLANS AND OTHER BENEFITS. During 2000, FCX decided to terminate its
defined benefit pension plan covering substantially all U.S. and certain
overseas employees and replace this plan with a defined contribution plan, as
further discussed below. All participants' account balances in the plan were
fully vested on June 30, 2000, and interest credits will continue to accrue
under the plan until the assets are finally liquidated. The final distribution
will occur once approved by the Internal Revenue Service and the Pension Benefit
Guaranty Corporation. FCX also provides certain health care and life insurance
benefits (Other Benefits) for retired employees. FCX has the right to modify or
terminate these benefits.
PT Freeport Indonesia has a defined benefit pension plan denominated in
Indonesian rupiahs covering substantially all of its Indonesian national
employees. PT Freeport Indonesia funds the plan in accordance with Indonesian
pension guidelines. The pension obligation was valued at an exchange rate of
10,160 rupiahs to one U.S. dollar on December 31, 2001, and 9,215 rupiahs to one
U.S. dollar on December 31, 2000. New labor laws in Indonesia require that
companies provide a minimum level of benefits to employees upon employment
termination based on the reason for termination and the employee's years of
service. PT Freeport Indonesia's pension benefit disclosures for 2001, as shown
below, include the impact of the new law as a plan amendment. Information on the
FCX and PT Freeport Indonesia plans follows (dollars in thousands):
Pension Benefits Other Benefits
---------------------------------------------- -----------------
PT Freeport
FCX Plan Indonesia Plan FCX
-------------------- -------------------- -----------------
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- ------- ------
Change in benefit obligation:
Benefit obligation at beginning of year $(17,718) $(13,581) $(12,720) $(14,056) $ (842) $(860)
Service cost -- (301) (1,072) (1,056) (71) (15)
Interest cost (756) (896) (1,237) (1,070) (105) (30)
Plan amendment 616 -- (2,590) -- -- --
Curtailment loss -- (1,000)(a) -- -- -- --
Actuarial gains (losses) -- (2,979) (2,563) (1,078) (821) 7
Foreign exchange gain -- -- 1,154 3,640 -- --
Participant contributions -- -- -- -- (40) --
Benefits paid 722 1,039 494 900 125 56
-------- -------- -------- -------- ------- -----
Benefit obligation at end of year (17,136) (17,718) (18,534) (12,720) (1,754) (842)
66
Change in plan assets:
Fair value of plan assets at
beginning of year 10,189 10,704 7,279 6,920 -- --
Actual return on plan assets 279 524 1,194 673 -- --
Employer/participant contributions 3,000 -- 1,957 2,491 125 56
Foreign exchange loss -- -- (680) (1,905) -- --
Benefits paid (722) (1,039) (494) (900) (125) (56)
------- ------- ------- ------- ------- -------
Fair value of plan assets at end of year 12,746 10,189 9,256 7,279 -- --
------- ------- ------- ------- ------- -------
Funded status (4,390) (7,529) (9,278) (5,441) (1,754) (842)
Unrecognized net actuarial (gain) loss -- -- 4,089 2,080 (361) (1,239)
Unrecognized prior service cost -- -- 4,120 1,937 (249) (291)
Minimum liability adjustment -- -- (741) -- -- --
------- ------- ------- ------- ------- -------
Accrued benefit cost $(4,390) $(7,529) $(1,810) $(1,424) $(2,364) $(2,372)
------- ------- ------- ------- ------- -------
Weighted-average assumptions (percent):
Discount rate N/A(a) N/A(a) 11.00 11.00 7.25 7.50
Expected return on plan assets N/A(a) N/A(a) 12.00 12.00 -- --
Rate of compensation increase N/A(a) N/A(a) 9.00 9.00 -- --
a. As discussed above, FCX has elected to terminate its defined benefit
pension plan, resulting in a $1.0 million curtailment loss, and
ceased accruing benefits on June 30, 2000.
The initial health care cost trend rate used for the other benefits was 11
percent for 2002, decreasing ratably each year until reaching 5 percent in 2008.
A one-percentage-point increase or decrease in assumed health care cost trend
rates would not have a significant impact on total service or interest cost. The
components of net periodic benefit cost for FCX's plans follow (in thousands):
Pension Benefits Other Benefits
-------------------------- -----------------------
2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------
Service cost $ -- $ 301 $ 852 $ 71 $ 15 $ 42
Interest cost 756 896 905 105 30 60
Curtailment loss -- 1,000 -- -- -- --
Expected return on plan assets (279) (884) (672) -- -- --
Amortization of prior service cost -- (633) (147) (42) (42) (47)
Amortization of net actuarial gain -- (109) (227) (56) (15) (147)
Amortization of transition asset -- (29) (58) -- -- --
----- ------- ----- ----- ---- -----
Net periodic benefit cost $ 477 $ 542 $ 653 $ 78 $(12) $ (92)
===== ======= ===== ===== ==== =====
The components of net periodic benefit cost for PT Freeport Indonesia's
plan follow (in thousands):
2001 2000 1999
------- ------- -------
Service cost $ 1,072 $ 1,056 $ 1,061
Interest cost 1,237 1,070 2,688
Expected return on plan assets (887) (810) (1,199)
Amortization of prior service cost 237 291 315
Amortization of net actuarial loss 63 -- --
------- ------- -------
Net periodic benefit cost $ 1,722 $ 1,607 $ 2,865
======= ======= =======
Atlantic Copper has an unfunded contractual obligation denominated in
euros to supplement amounts paid to retired employees. The accrued liability was
based on corresponding exchange rates of $0.88 per euro at December 31, 2001,
and $0.93 per euro at December 31, 2000. Amended Spanish legislation requires
that Atlantic Copper begin funding this obligation through a third party in
November 2002. The actuarial valuation of this obligation was $69.5 million at
December 31, 2001, and $73.1 million at December 31, 2000, based on a discount
rate of 6 percent. Other information on the Atlantic Copper obligation follows
(in thousands):
67
2001 2000 1999
-------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 60,599 $ 63,788 $ 72,300
Interest cost 4,932 6,883 7,102
Foreign exchange gain (2,559) (4,104) (8,840)
Benefits paid (5,739) (5,968) (6,774)
-------- -------- --------
Benefit obligation at end of year $ 57,233 $ 60,599 $ 63,788
======== ======== ========
FCX has an employee savings plan under Section 401(k) of the Internal
Revenue Code that generally allows eligible employees to contribute up to 50
percent of their pre-tax compensation, but no more than $11,000. FCX matches 100
percent of the first 5 percent of the employees' contribution. As a result of
FCX's decision to terminate its defined benefit pension plan effective July 1,
2000, FCX fully vested its matching contributions for all active Section 401(k)
plan participants on June 30, 2000. Subsequently, all new plan participants vest
in FCX's matching contributions upon three years of service with FCX.
During 2000, FCX also established an additional defined contribution plan
for substantially all its employees following its decision to terminate its
defined benefit pension plan. Under this plan, FCX contributes amounts to
individual accounts totaling either 4 percent or 10 percent of each employee's
pay, depending on a combination of each employee's age and years of service with
FCX. The costs charged to operations for FCX's employee savings plan and defined
contribution plan totaled $1.0 million in 2001, $0.8 million in 2000 and $0.7
million in 1999. FCX has other employee benefit plans, certain of which are
related to FCX's performance, which costs are recognized currently in general
and administrative expense. Atlantic Copper adopted a defined contribution
employee plan in 2001 and recorded charges totaling $7.0 million in 2001 for
past service costs related to this plan.
NOTE 10. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL, RECLAMATION AND MINE CLOSURE. FCX has an environmental policy
committing it not only to compliance with federal, state and local environmental
statutes and regulations, but also to continuous improvement of its
environmental performance at every operational site. FCX believes that its
operations are being conducted pursuant to applicable permits and are in
compliance in all material respects with applicable environmental laws, rules
and regulations. FCX incurred environmental capital expenditures and other
environmental costs totaling $78.2 million in 2001, $106.1 million in 2000 and
$73.3 million in 1999.
The ultimate amount of reclamation and closure costs to be incurred at PT
Freeport Indonesia's operations will be determined after consultation with the
Indonesian government, affected local residents and other affected parties and
thus cannot currently be projected with precision. 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. Estimates
of reclamation and closure costs involve complex issues requiring integrated
assessments over a period of many years and are subject to revision over time as
more complete studies are performed. Some reclamation costs will be incurred
during mining activities, while most closure costs and the remaining reclamation
costs will be incurred at the end of mining activities, which are currently
estimated to continue for more than 30 years. Included in other liabilities at
December 31, 2001, PT Freeport Indonesia had $24.1 million accrued on a
unit-of-production basis for mine closure and reclamation costs. FCX's
accounting for mine closure and reclamation costs will change in 2003 based on
SFAS 143, "Accounting for Asset Retirement Obligations" issued in July 2001. PT
Freeport Indonesia is working on a study of its retirement obligations that will
be used to assess the impact of adopting SFAS 143.
In 1996, PT Freeport Indonesia began contributing to a cash fund ($3.3
million balance at December 31, 2001) designed to accumulate at least $100
million by the end of its Indonesian mining activities. PT Freeport Indonesia
plans to use this fund, including accrued interest, to pay for the
above-mentioned mine closure and reclamation costs. Any incremental costs in
excess of the $100 million fund are expected to be incurred throughout the life
of the mine and would be funded by operational cash flow or the sale of assets,
as needed. An increasing emphasis on environmental issues and future changes in
regulations could require FCX to incur additional costs that would be charged
against future operations. Estimates involving environmental matters are by
their nature imprecise and can be expected to be revised over time because of
changes in government regulations, operations, technology and inflation.
CONTRACT OF WORK. FCX is entitled to mine under the "Contract of Work" between
PT Freeport Indonesia and the Government of Indonesia. The original Contract of
Work was entered into in 1967 and was superceded by a new Contract of Work in
1991. The initial term of the current Contract of Work expires in 2021, but can
be extended by PT Freeport Indonesia for two 10-year periods, subject to
Indonesian government approval, which cannot be withheld or delayed
unreasonably. Given the importance of
68
contracts of work under the Indonesian legal system and PT Freeport Indonesia's
30 years of working with the Indonesian government, which included entering into
the Contract of Work in 1991 before the expiration of the 1967 Contract of Work,
PT Freeport Indonesia fully expects that the government will approve the
extensions as long as it continues to comply with the terms of the Contract of
Work.
SOCIAL AND ECONOMIC DEVELOPMENT PROGRAMS. FCX has a comprehensive social,
employment and human rights policy to ensure that its operations are conducted
in a manner respecting basic human rights, the laws and regulations of the host
country, and the culture of the people who are indigenous to the areas in which
FCX operates. In 1996, PT Freeport Indonesia established the Freeport Fund for
Irian Jaya Development (FFIJD), through which PT Freeport Indonesia has made
available funding and expertise to support the economic and social development
of the area. PT Freeport Indonesia has committed to provide one percent of its
annual revenue for ten years beginning in mid-1996 for the development of the
local people through the FFIJD. PT Freeport Indonesia charged $14.1 million in
2001, $14.1 million in 2000 and $14.7 million in 1999 to production costs for
this commitment.
LONG-TERM CONTRACTS. Atlantic Copper has contracts with parties other than PT
Freeport Indonesia to purchase concentrate totaling 296,000 metric tons in 2002,
220,000 metric tons in 2003, 134,000 metric tons in 2004, 140,000 metric tons in
2005 and 20,000 metric tons in 2006, at market prices.
SHARE PURCHASE PROGRAM. In June 2000, FCX's Board of Directors authorized a
20-million-share increase in FCX's open market share purchase program, bringing
the total shares approved for purchase under this program to 80 million. From
inception of this program in July 1995 through December 31, 2001, FCX has
purchased a total of 70.7 million shares for $1.24 billion (an average of $17.53
per share) and 9.3 million shares remained available under the program. FCX's
amended credit facilities prohibit common stock purchases (see Note 5).
NOTE 11. FINANCIAL INSTRUMENTS
Summarized below are financial instruments whose carrying amounts are not equal
to their fair value and unmatured derivative financial instruments at December
31, 2001, and 2000 (in thousands). Fair values are based on quoted market prices
and other available market information.
2001 2000
-------------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- --------- -----------
Commodity contracts:
Open contracts in asset position $ 94 $ 94 $ -- $ 85
Redeemable preferred stock (Note 6) (462,504) (254,219) (475,005) (201,910)
Concentrate sales contracts-embedded
derivatives 1,154 1,154 -- --
Foreign exchange contracts:
$U.S./euro (14,832) (14,832) (11,514) (11,514)
$U.S./Australian dollar -- -- (2,244) (2,244)
$U.S./Indonesian rupiah 4,754 4,754 27 27
Long-term debt (Note 5) (2,338,600) (2,361,077) (2,190,025) (2,076,672)
Interest rate swap contracts (3,259) (3,259) -- (982)
FCX and its subsidiaries adopted SFAS 133 on January 1, 2001; therefore,
amounts reported in 2001 earnings for derivative financial instruments are based
on different accounting treatment than the amounts reported for 2000 and 1999.
Prior to 2001, changes in the market value of foreign currency exchange
contracts were included in current earnings. Beginning in 2001, changes in the
fair value of unrealized derivative contracts, including foreign currency
exchange contracts that qualify as hedges, are not reported in current earnings,
but are included in other comprehensive income (see Note 1). A recap of gains
(losses) charged to earnings for redeemable preferred stock redemptions,
derivative contracts and embedded derivatives follows (in millions):
2001 2000 1999
------- ------- -------
FCX:
Silver-Denominated preferred stock $ 2.1 $ 0.6 $ 0.6
PT Freeport Indonesia:
Foreign currency exchange contracts (0.7) (5.3) 3.1
Forward copper contracts -- 1.7 0.8
69
Concentrate sales contracts embedded derivatives (36.4) --(a) --(a)
Interest rate contracts -- -- (0.3)
Atlantic Copper:
Foreign currency exchange contracts (3.0) (16.4) (14.9)
Forward copper contracts 4.7 0.1 (2.4)
Interest rate contracts (1.1) 0.9 (0.8)
a. Embedded derivatives in PT Freeport Indonesia's concentrate sales
contracts did not require separate accounting before 2001; instead,
revenues were adjusted to current prices on provisionally priced open
pounds.
COMMODITY CONTRACTS. From time to time, PT Freeport Indonesia has entered into
forward and option contracts to hedge the market risk associated with
fluctuations in the prices of commodities it sells. The primary objective of
these contracts has been to set a minimum price and the secondary objective is
to retain market upside, if available at a reasonable cost. As of December 31,
2001, FCX had no price protection contracts relating to its mine production. FCX
has outstanding gold- and silver-denominated redeemable preferred stock with
dividends and redemption amounts determined by commodity prices. FCX elected to
continue its historical accounting for its redeemable preferred stock indexed to
commodities under the provisions of SFAS 133 which allow such instruments issued
before January 1, 1998, to be excluded from those instruments required to be
adjusted for changes in their fair values. Therefore, FCX's redeemable preferred
stock is recorded at its original issue value less redemptions, and totaled
$462.5 million at December 31, 2001. FCX expects to refinance or restructure
certain of its redeemable preferred stock, which likely will require FCX to
change its accounting (see Notes 1 and 6).
Certain of PT Freeport Indonesia's concentrate sales contracts allow for
final pricing in future periods. Under SFAS 133, these pricing terms cause a
portion of the contracts to be considered embedded derivatives which must be
recorded at fair value. Prior to January 1, 2001, PT Freeport Indonesia adjusted
the revenues from these embedded derivatives based on then-current spot prices
on or near each reporting date. Effective January 1, 2001, PT Freeport Indonesia
began adjusting the revenues from these embedded derivatives to reflect fair
value based on forward prices for the final pricing periods on each reporting
date. Changes in the fair value of these embedded derivatives are recorded in
current period revenues.
Atlantic Copper enters into forward copper contracts designed to hedge its
copper price risk whenever its physical purchases and sales pricing periods do
not match. Although these contracts are intended to hedge against changes in
copper prices, they do not qualify for hedge accounting treatment under SFAS 133
because Atlantic Copper bases its hedging contracts on its net sales/purchases
position and contracts to hedge a net position do not qualify for hedge
accounting under SFAS 133. At December 31, 2001, Atlantic Copper held forward
copper sales contracts for 10.9 million pounds at an average price of $0.66 per
pound through January 2002.
FOREIGN CURRENCY EXCHANGE CONTRACTS. PT Freeport Indonesia and Atlantic Copper
enter into foreign currency forward contracts to hedge the market risks of their
forecasted costs denominated in a currency other than the U.S. dollar, their
functional currency. The primary objective of these contracts is either to
lock-in an exchange rate or to minimize the impact of adverse exchange rate
changes.
As of December 31, 2001, PT Freeport Indonesia had foreign currency
forward contracts to hedge 479.8 billion of rupiah payments, or approximately 50
percent of its aggregate projected 2002 rupiah payments at an average exchange
rate of 12,643 rupiahs to one U.S. dollar. Atlantic Copper had foreign currency
forward contracts to hedge 126.2 million of euro payments, or approximately 60
percent of its projected 2002 and 2003 euro payments at an average exchange rate
of $1.01 per euro. PT Freeport Indonesia and Atlantic Copper have designated
their foreign currency forward contracts as cash flow hedges. As of December 31,
2001, FCX expects to reclass $2.3 million of losses to 2002 earnings related to
its outstanding foreign currency forward contracts. There was no hedge
ineffectiveness for the outstanding contracts at December 31, 2001.
DEBT AND INTEREST RATE CONTRACTS. FCX, PT Freeport Indonesia and Atlantic Copper
entered into interest rate swaps to manage exposure to interest rate changes on
a portion of their variable-rate debt. The primary objective of these contracts
is to lock-in an interest rate considered to be favorable. PT Freeport
Indonesia's contracts matured in December 1999 and FCX's contracts matured in
January 2000. Under the terms of its swaps, Atlantic Copper pays an average of
6.6 percent on $59.6 million of financing at December 31, 2001, reducing
quarterly through March 2004. Atlantic Copper will pay an average of 7.3 percent
on an average of $56.4 million in 2002, 5.7 percent on an average of $47.8
million in 2003 and 6.0 percent on $41.5 million in the first quarter of 2004.
Interest on comparable floating rate debt averaged 4.5 percent in 2001, 6.5
percent in
70
2000 and 5.4 percent in 1999, resulting in additional interest costs totaling
$1.1 million in 2001, a $0.9 million reduction in 2000 and additional interest
costs of $1.1 million in 1999. Atlantic Copper has designated its interest rate
swap contracts as cash flow hedges and no ineffectiveness is expected from these
hedges. As of December 31, 2001, FCX expects to reclass $2.7 million of losses
to 2002 earnings related to its outstanding interest rate swap contracts.
At December 31, 2001, FCX had an outstanding letter of credit totaling
$104.4 million related to its guarantee of the Nusamba loan (Note 2). Atlantic
Copper is a party to letters of credit totaling $9.5 million at December 31,
2001. Fair value of these letters of credit approximates their face value at
December 31, 2001.
NOTE 12. SEGMENT INFORMATION
FCX follows SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information" which requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and measuring
their performance. FCX has 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. 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 (in thousands)
were prepared on the same basis as the consolidated FCX financial statements.
Mining Smelting
and And Eliminations FCX
Exploration Refining and Other Total
-------------- ---------- ------------- ------------
(In Thousands)
2001
Revenues $ 1,414,114(a) $ 758,282 $ (333,530) $ 1,838,866
Production and delivery 545,858 738,618 (341,037)(b) 943,439
Depreciation and amortization 251,835 27,262 4,792 283,889
Exploration expenses 8,496 - 694 9,190
General and administrative expenses 44,470 8,384 6,568 59,422
-------------- ---------- ------------- ------------
Operating income (loss) $ 563,455 $ (15,982) $ (4,547) $ 542,926
============== ========== ============= ============
Interest expense, net $ 95,238 $ 25,279 $ 53,078 $ 173,595
============== ========== ============= ============
Provision for income taxes $ 170,013 $ - $ 32,966 $ 202,979
============== ========== ============= ============
Capital expenditures $ 154,396 $ 10,599 $ 1,977 $ 166,972
============== ========== ============= ============
Total assets $ 3,191,053 $ 649,422(c) $ 371,454 $ 4,211,929
============== ========== ============= ============
2000
Revenues $ 1,413,099(a) $ 768,814 $ (313,303) $ 1,868,610
Production and delivery 608,107 734,083 (329,228)(b) 1,012,962
Depreciation and amortization 250,864 27,989 4,703 283,556
Exploration expenses 7,318 - 1,531 8,849
General and administrative expenses 56,779 8,426 5,745 70,950
-------------- ---------- ------------- ------------
Operating income (loss) $ 490,031 $ (1,684) $ 3,946 $ 492,293
============== ========== ============= ============
Interest expense, net $ 133,804 $ 25,411 $ 46,131 $ 205,346
============== ========== ============= ============
Provision for income taxes $ 131,442 $ - $ 28,131 $ 159,573
============== ========== ============= ============
Capital expenditures $ 155,187 $ 20,477 $ 1,012 $ 176,676
============== ========== ============= ============
Total assets $ 3,290,026 $ 677,851(c) $ (17,136) $ 3,950,741
============== ========== ============= ============
71
1999
Revenues $1,464,811(a) $ 764,466 $(341,949) $1,887,328
Production and delivery 534,119 723,966 (323,536)(b) 934,549
Depreciation and amortization 259,372 29,373 4,468 293,213
Exploration expenses 9,330 -- 1,296 10,626
General and administrative expenses 52,410 9,572 8,642 70,624
---------- ---------- --------- ----------
Operating income (loss) $ 609,580 $ 1,555 $ (32,819) $ 578,316
========== ========== ========= ==========
Interest expense, net $ 137,787 $ 27,020 $ 29,262 $ 194,069
========== ========== ========= ==========
Provision for income taxes $ 175,581 $ -- $ 20,072 $ 195,653
========== ========== ========= ==========
Capital expenditures $ 150,596 $ 9,807 $ 419 $ 160,822
========== ========== ========= ==========
Total assets $3,432,068 $ 709,432(c ) $ (58,584) $4,082,916
========== ========== ========= ==========
a. Includes PT Freeport Indonesia sales to PT Smelting totaling $374.1
million in 2001, $343.3 million in 2000 and $252.6 million in 1999.
b. Includes (recognition) deferrals of intercompany profits on 25 percent of
PT Freeport Indonesia's sales to PT Smelting, for which the final sale has
not occurred, totaling $(6.2) million in 2001, $2.0 million in 2000 and
$8.0 million in 1999.
c. Includes PT Freeport Indonesia's equity investment in PT Smelting totaling
$57.2 million at December 31, 2001, $56.2 million at December 31, 2000 and
$66.1 million at December 31, 1999 .
Through its operating subsidiaries, FCX markets its products worldwide primarily
pursuant to the terms of long-term contracts. As a percentage of consolidated
revenues, revenues under long-term contracts totaled 91 percent in 2001, 94
percent in 2000 and 89 percent in 1999. The only customers under long-term
contracts with over ten percent of revenues in at least one of the past three
years are a group of Japanese smelting companies with 11 percent in 2000 and
1999, and PT Smelting with 20 percent in 2001, 19 percent in 2000 and 13 percent
in 1999. Beginning in 2001 PT Freeport Indonesia began marketing its product
through individual agreements with the various Japanese smelting companies. None
of these agreements individually account for over ten percent of FCX's
consolidated revenues. There are several other long-term agreements in place,
each representing less than ten percent of FCX consolidated sales. Certain terms
of these long-term contracts are negotiated annually.
FCX revenues attributable to various countries based on the location of
the customer follow (in thousands):
2001 2000 1999
---------- ---------- ----------
Indonesia (PT Smelting) $ 374,050 $ 343,293 $ 252,586
Spain 357,865 371,665 328,720
Japan 283,577 302,040 358,556
Switzerland 221,865 199,419 219,250
United States 146,338 92,411 187,731
Others 455,171 559,782 540,485
---------- ---------- ----------
Total $1,838,866 $1,868,610 $1,887,328
========== ========== ==========
FCX revenues attributable to the products it produces follow (in
thousands):
2001 2000 1999
----------- ----------- -----------
Copper in concentrates(a) $ 548,821 $ 682,347 $ 618,229
Gold in concentrates 544,694 413,581 504,417
Silver in concentrates 14,207 13,544 14,336
Refined copper products 544,889 599,685 548,365
Gold and silver in slimes 189,142 153,420 196,217
Royalties (24,302) (20,162) (20,502)
Other 21,415 26,195 26,266
----------- ----------- -----------
$ 1,838,866 $ 1,868,610 $ 1,887,328
=========== =========== ===========
Amounts are net of treatment and refining charges totaling $200.3 million for
2001, $202.0 million for 2000 and $214.1 million for 1999.
72
NOTE 13. SUPPLEMENTARY MINERAL RESERVE INFORMATION (UNAUDITED)
Proven and probable reserves were determined by the use of mapping, drilling,
sampling, assaying and evaluation methods generally applied in the mining
industry, as more fully discussed below. The term "reserve," as used in our
reserve data presented here, means that part of a mineral deposit which can be
economically and legally extracted or produced at the time of the reserve
determination. The term "proven reserves" means reserves for which (a) quantity
is computed from dimensions revealed in outcrops, trenches, workings or drill
holes; (b) grade and/or quality are computed from the result of detailed
sampling and (c) the sites for inspection, sampling and measurements are spaced
so closely and the geologic character is sufficiently defined that size, shape,
depth and mineral content of reserves are well established. The term "probable
reserves" means reserves for which quantity and grade are computed from
information similar to that used for proven reserves but the sites for sampling
are farther apart or are otherwise less adequately spaced. The degree of
assurance, although lower than that for proven reserves, is high enough to
assume continuity between points of observation.
All of PT Freeport Indonesia's current aggregate proven and probable
reserves, shown below, are located in Block A of PT Freeport Indonesia's
Contract of Work. The initial term of the Contract of Work covering Block A
expires at the end of 2021. PT Freeport Indonesia can extend this term for two
successive 10-year periods, subject to the approval of the Indonesian
government, which cannot be withheld or delayed unreasonably. PT Freeport
Indonesia's reserve amounts reflect its estimates of the reserves that can be
recovered before 2041 (the expiration of the two 10-year extensions). PT
Freeport Indonesia's current mine plan has been developed and its operations are
based on receiving the two 10-year extensions. As a result, PT Freeport
Indonesia does not anticipate the mining of all of its reserves prior to the end
of 2021 based on its current mine plan, and there can be no assurance that the
Indonesian government will approve the extensions. Prior to the end of 2021,
under its current mine plan PT Freeport Indonesia expects to mine approximately
63 percent of aggregate proven and probable ore, representing approximately 71
percent of its share of recoverable copper reserves and approximately 77 percent
of its share of recoverable gold reserves.
Proven and Probable
Average Ore Grade Per Metric Ton Recoverable Reserves
------------------------------------------------ -------------------------------
Year-End Ore Copper Gold Silver Copper Gold Silver
----------------- --------- ------ ----------------- ----------------- --------- --------- ---------
(Thousand (%) (Grams) (Ounces) (Grams) (Ounces) (Billions (Millions (Millions
Metric Tons) of Lbs.) of Ozs.) of Ozs.)
1997 2,166,212 1.20 1.20 .039 3.95 .127 47.1 62.7 138.4
1998 2,475,478 1.13 1.05 .034 3.83 .123 51.3 64.2 153.1
1999 2,395,175 1.13 1.05 .034 3.85 .124 49.9 61.6 148.8
2000 2,514,532 1.10 1.04 .033 3.40 .109 50.9 63.7 139.6
2001 2,583,883 1.13 1.05 .034 3.72 .120 52.5 64.5 151.6
By ore body at
December 31, 2001:
Developed and
producing:
Grasberg open pit 946,878 1.03 1.24 .040 2.45 .079 17.6 30.7 37.3
Deep Ore Zone 168,881 0.97 0.71 .023 5.28 .170 3.0 3.0 14.3
Intermediate
Ore Zone 3,649 1.24 0.24 .008 8.33 .268 0.1 -- 0.5
Undeveloped:
Grasberg block
cave 782,455 1.15 0.91 .029 2.90 .093 16.3 17.6 36.5
Kucing Liar 422,956 1.33 1.22 .039 6.04 .194 9.9 8.5 38.4
Erstsberg
Stockwork Zone 100,731 0.55 0.80 .026 1.75 .056 1.0 2.0 2.8
Mill Level Zone 50,333 1.40 1.04 .033 4.88 .157 1.3 1.3 3.9
Big Gossan 37,349 2.69 1.02 .033 16.42 .528 1.8 0.9 9.9
Dom Block Cave 43,651 1.10 0.31 .010 5.94 .191 0.8 0.3 4.1
Dom open pit 27,000 1.80 0.43 .014 9.60 .309 0.7 0.2 3.9
--------- ------- ------- -------
Total 2,583,883 1.13 1.05 .034 3.72 .120 52.5 64.5 151.6
========= ======= ======= =======
PT Freeport
Indonesia's share 39.4 50.2 114.5
======= ======= =======
FCX's equity share(a) 35.7 45.5 103.8
======= ======= =======
a. Reflects FCX's 90.6 percent ownership interest (see Note 2).
73
Estimated recoverable reserves were assessed using an average copper price
of $0.87 per pound, an average gold price of $285 per ounce and a silver price
of $5.00 per ounce. Using a copper price of $0.75 per pound and a gold price of
$270 per ounce would have resulted in less than a one percent reduction in
estimated recoverable copper and gold reserves.
Incremental cash flow attributable to the fourth concentrator mill
expansion is shared 60 percent PT Freeport Indonesia and 40 percent Rio Tinto
(Note 2). Incremental cash flow consists of amounts generated from production in
excess of specified annual amounts based on the December 31, 1994, reserves and
mine plan. The incremental revenues from production from the expansion and total
revenues from production from Block A, including production from PT Freeport
Indonesia's previously existing operations, share proportionately in operating,
nonexpansion capital and administrative costs. PT Freeport Indonesia receives
100 percent of cash flow from its existing pre-expansion production facilities
as specified by the contractual arrangements. PT Freeport Indonesia's estimated
net share of recoverable reserves and FCX's equity interest follow:
PT Freeport Indonesia FCX
-------------------------------------- -------------------------------------
Year-End Copper Gold Silver Copper Gold Silver
------------- --------- --------- --------- --------- --------- ---------
(Billions (Millions (Millions (Billions (Millions (Millions
of Lbs.) of Ozs.) of Ozs.) of Lbs.) of Ozs.) of Ozs.)
1997 37.8 51.3 111.3 32.5 44.0 95.6
1998 40.0 51.6 119.1 34.3 44.3 102.3
1999 38.7 49.5 115.3 33.2 42.5 99.0
2000 38.9 50.3 108.5 33.4 43.2 93.2
2001 39.4 50.2 114.5 35.7(a) 45.5(a) 103.8(a)
a. Reflects FCX's 90.6 percent ownership interest (see Note 2).
NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Net Income
Net Income (Loss) (Loss) Per Share
Operating Applicable to -------------------------
Revenues Income Common Stock Basic Diluted
------------- ------------- ----------------- ---------- ----------
(In Thousands, Except Per Share Amounts)
2001
1st Quarter $ 447,087 $ 166,884 $ 38,039 $ .26 $ .26
2nd Quarter 538,259 175,675 36,292 .25 .25
3rd Quarter 441,238 110,913 4,248 .03 .03
4th Quarter 412,282 89,454(a) (2,083)(a) (.01)(a) (.01)(a)
------------ ------------ ----------
$ 1,838,866 $ 542,926 $ 76,496 .53 .53
============ ============ ==========
2000
1st Quarter $ 467,592 $ 119,410(b) $ 9,241(b) $ .06(b) $ .06(b)
2nd Quarter 397,348 72,090 (18,613) (.12) (.12)
3rd Quarter 473,837 93,727(c) (9,192)(c) (.06)(c) (.06)(c)
4th Quarter 529,833 207,066 58,064 .40 .40
------------ ------------ ----------
$ 1,868,610 $ 492,293 $ 39,500 .26 .26
============ ============ ==========
a. Includes net charges to operating and net income totaling $4.0 million
($0.03 per share) primarily for past service costs for an Atlantic Copper
employee benefit plan.
b. Includes net charges totaling $5.0 million ($4.4 million to net income or
$0.03 per share) consisting of $6.0 million for contribution commitments
to support small business development programs within Papua and $0.5
million for personnel severance costs, partly offset by a $1.5 million
reversal of costs for stock appreciation rights.
c. Includes charges totaling $5.6 million ($2.8 million to net income or
$0.02 per share) for personnel severance costs.
74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
FREEPORT-McMoRan COPPER & GOLD INC.:
We have audited the accompanying balance sheets of Freeport-McMoRan Copper
& Gold Inc. (the Company), a Delaware Corporation, as of December 31, 2001 and
2000, and the related statements of income, cash flows and stockholders' equity
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2001 and 2000 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
As explained in Note 1 to the financial statements, effective January 1,
2001, the Company adopted Statement of Financial Accounting Standards No. 133,
as amended, "Accounting for Derivative Instruments and Hedging Activities."
Arthur Andersen LLP
New Orleans, Louisiana,
February 8, 2002 (except with respect to the payment
of the Nusamba loan discussed in Note 2, as to which
the date is February 27, 2002)
75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the caption "Information About Nominees
and Directors" of our definitive Proxy Statement to be filed with the Securities
and Exchange Commission (the "Commission") in connection with our 2002 Annual
Meeting to be held on May 2, 2002 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Director Compensation" and
"Executive Officer Compensation" of our definitive Proxy Statement to be filed
with the Commission in connection with our 2002 Annual Meeting to be held on May
2, 2002 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Stock Ownership of Directors
and Executive Officers" and "Stock Ownership of Certain Beneficial Owners" of
our definitive Proxy Statement to be filed with the Commission in connection
with our 2002 Annual Meeting to be held on May 2, 2002 is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Transactions" of our
definitive Proxy Statement to be filed with the Commission in connection with
our 2002 Annual Meeting to be held on May 2, 2002 is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1). Financial Statements.
Reference is made to the Index to Financial Statements appearing on page
F-1 hereof.
(a)(2). Financial Statement Schedules.
Reference is made to the Index to Financial Statements appearing on
page F-1 hereof.
(a)(3). Exhibits.
Reference is made to the Exhibit Index beginning on page E-1 hereof.
(b). Reports on Form 8-K.
During the last quarter of the period covered by this report, we filed
one Current Report on Form 8-K dated December 13, 2001 reporting
information under Item 5.
76
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 8, 2002.
FREEPORT-MCMORAN COPPER & GOLD INC.
By: /s/ JAMES R. MOFFETT
-------------------------------------
James R. Moffett
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities indicated on March 8, 2002.
/s/ JAMES R. MOFFETT Chairman of the Board, Chief Executive Officer and
--------------------------- Director (Principal Executive Officer)
James R. Moffett
* Vice Chairman of the Board and Director
---------------------------
B. M. Rankin, Jr.
President and Chief Financial Officer (Principal
--------------------------- Financial Officer)
Richard C. Adkerson
* Vice President and Controller - Financial
--------------------------- Reporting (Principal Accounting Officer)
C. Donald Whitmire, Jr.
* Director
---------------------------
Robert J. Allison, Jr.
* Director
---------------------------
Robert W. Bruce III
* Director
---------------------------
R. Leigh Clifford
* Director
---------------------------
Robert A. Day
* Director
---------------------------
Gerald J. Ford
* Director
---------------------------
H. Devon Graham, Jr.
S-1
* Director
----------------------------
Steven J. Green
* Director
----------------------------
Oscar Y. L. Groeneveld
* Director
----------------------------
J. Bennett Johnston
* Director
----------------------------
Bobby Lee Lackey
* Director
----------------------------
Gabrielle K. McDonald
* Director
----------------------------
J. Stapleton Roy
* Director
----------------------------
J. Taylor Wharton
*By: /s/ RICHARD C. ADKERSON
------------------------
Richard C. Adkerson
Attorney-in-Fact
S-2
FREEPORT-McMoRan COPPER & GOLD INC.
INDEX TO FINANCIAL STATEMENTS
Our financial statements and the notes, and the report of Arthur Andersen
LLP included elsewhere in this Form 10-K are incorporated herein by reference.
The financial statements in schedule I listed below should be read in
conjunction with our financial statements included elsewhere in this Form 10-K.
Page
Report of Independent Public Accountants F-1
Schedule I-Condensed Financial Information of Registrant F-2
Schedule II-Valuation and Qualifying Accounts F-4
Schedules other than the ones listed above have been omitted since they are
either not required, not applicable or the required information is included in
the financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements as of December 31, 2001 and 2000 and for
each of the three years in the period ended December 31, 2001 included in
Freeport-McMoRan Copper & Gold Inc.'s Annual Report to stockholders included
elsewhere in this Form 10-K, and have issued our report thereon dated February
8, 2002 (except with respect to the payment of the Nusamba loan discussed in
Note 2, as to which the date is February 27, 2002). Our report on the financial
statements includes an explanatory paragraph with respect to the change in the
method of accounting for derivative instruments and hedging activities effective
January 1, 2001, as discussed in Note 1 to the financial statements. Our audits
were made for the purpose of forming an opinion on those statements taken as a
whole. The schedules listed in the index above are the responsibility of the
Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
New Orleans, Louisiana,
February 8, 2002
F-1
FREEPORT-McMoRan COPPER & GOLD INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31,
-------------------------
2001 2000
---------- ----------
(In Thousands)
Assets:
Cash and cash equivalents $ 652 $ 1,161
Restricted investments 141,888 --
Interest receivable 2,066 4,968
Due from affiliates 4,630 20,147
Notes receivable from PT Freeport Indonesia 569,805 602,306
Note receivable from Nusamba -- 56,081
Investment in PT Freeport Indonesia
and PT Indocopper Investama 1,273,354 742,832
Investment in Atlantic Copper 80,406(a) 123,124(a)
Other assets 66,807 43,821
---------- ----------
Total assets $2,139,608 $1,594,440
========== ==========
Liabilities and Stockholders' Equity:
Accounts payable and accrued liabilities $ 35,943 $ 20,016
Long-term debt, including current portion 1,449,173 999,694
Other long-term liabilities 26,637 26,419
Deferred income taxes 60,907 35,375
Redeemable preferred stock 462,504 475,005
Stockholders' equity 104,444 37,931
---------- ----------
Total liabilities and stockholders' equity $2,139,608 $1,594,440
========== ==========
STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In Thousands)
Income from investment in PT Freeport Indonesia
and PT
Indocopper Investama, net of PT Freeport Indonesia
tax provision $255,247 $178,026 $237,606
Net loss from investment in Atlantic Copper (43,071) (29,906) (18,982)
Intercompany charges and eliminations 2,752 10,200 (4,457)
Exploration expenses (877) (2,428) (7,055)
General and administrative expenses (6,568) (5,744) (8,643)
Depreciation and amortization (5,510) (4,704) (4,468)
Interest expense, net (77,492) (82,321) (76,246)
Interest income on PT Freeport Indonesia notes
receivable:
Promissory notes 6,102 17,423 28,461
Gold and silver production payment loans 15,331 16,395 17,568
Other income (expense), net (4,607) 46 (379)
Provision for income taxes (28,282) (20,000) (26,938)
-------- -------- --------
Net income 113,025 76,987 136,467
Preferred dividends (36,529) (37,487) (35,680)
-------- -------- --------
$ 76,496 $ 39,500 $100,787
======== ======== ========
a. Includes additional support payments and commitments to Atlantic Copper
totaling $16.1 million during 2001 and $55.5 million during 2000.
The footnotes to the consolidated financial statements of FCX contained in FCX's
2001 Annual Report to stockholders included elsewhere herein are an integral
part of these statements.
F-2
FREEPORT-McMoRan COPPER & GOLD INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOW
Years Ended December 31,
-----------------------------------------
2001 2000 1999
--------- --------- ---------
(In Thousands)
Cash flow from operating activities:
Net income $ 113,025 $ 76,987 $ 136,467
Adjustments to reconcile net income to net cash provided by operating
activities:
Income from investment in PT Freeport Indonesia and (255,247) (178,026) (237,606)
PT Indocopper Investama
Deferred income taxes 21,139 (8,684) 21,976
Net loss from investment in Atlantic Copper 43,071 29,906 18,982
Elimination of intercompany profit (2,752) (10,200) 4,457
Dividends received from PT Freeport Indonesia and PT Indocopper
Investama 45,805 268,670 18,361
Depreciation and amortization 5,510 4,704 4,468
Decrease in interest receivable and due from affiliates 4,343 2,527 2,888
Increase (decrease) in accounts payable and accrued liabilities 15,313 (4,202) 2,320
Other (5,164)(a) (29,550)(a) 752
--------- --------- ---------
Net cash provided by (used in) operating activities (14,957) 152,132 (26,935)
--------- --------- ---------
Cash flow from investing activities:
Purchase of restricted investments (139,762) -- --
Investment in Atlantic Copper -- (3,000) (40,000)
Other (3,971) (3,559) (2,403)
--------- --------- ---------
Net cash used in investing activities (143,733) (6,559) (42,403)
--------- --------- ---------
Cash flow from financing activities Cash dividends paid:
Step-up convertible preferred stock (24,500) (24,500) (24,500)
Mandatory redeemable preferred stock (12,113) (13,213) (13,520)
Net proceeds from sale of convertible senior notes 582,619 -- --
Proceeds from other debt 4,059 9,532 104,673
Repayment of debt (411,701) (70,249) (11,514)
Partial redemption of preferred stock (10,386) (11,893) (11,946)
Repayment from PT Freeport Indonesia 30,386 177,077 51,946
Loans to Nusamba (5,548) (12,379) (18,264)
Purchases of FCX common shares (3,436) (199,945) (7,921)
Other 8,801 326 414
--------- --------- ---------
Net cash provided by (used in) financing activities 158,181 (145,244) 69,368
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (509) 329 30
Cash and cash equivalents at beginning of year 1,161 832 802
--------- --------- ---------
Cash and cash equivalents at end of year $ 652 $ 1,161 $ 832
========= ========= =========
Interest paid $ 62,386 $ 85,190 $ 76,804
========= ========= =========
Taxes paid $ 7,625 $ 29,736 $ 5,281
========= ========= =========
a. Includes support payments to Atlantic Copper totaling $7.6 million in 2001
and $29.4 million in 2000.
The footnotes to the consolidated financial statements of FCX contained in FCX's
2001 Annual Report to stockholders included elsewhere herein are an integral
part of these statements.
F-3
FREEPORT-McMoRan COPPER & GOLD INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E
-------------------------------- ------------ --------------------- -------- ----------
Additions
---------------------
Balance at Charged to Charged to Other Balance at
Beginning of Costs and Other Add End of
Period Expense Accounts (Deduct) Period
------------ ---------- -------- -------- ----------
(In Thousands)
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET ACCOUNTS:
2001
Materials and supplies
reserves $ 16,808 $ 6,000 $ -- $ (5,664)(a) $ 17,144
Allowance for uncollectible
value-added taxes 300 -- -- (292) 8
Allowance for uncollectible
accounts receivable 2,500 -- -- (1,559)(b) 941
2000
Materials and supplies
reserves $ 18,751 $ 6,000 $ -- $ (7,943)(a) $ 16,808
Allowance for uncollectible
value-added taxes 5,491 -- -- (5,191)(c) 300
Allowance for uncollectible
accounts receivable -- 2,500 -- -- 2,500
1999
Materials and supplies
reserves 24,633 1,500 -- (7,382)(a) 18,751
Allowance for uncollectible
value-added taxes 5,491 -- -- -- 5,491
RECLAMATION AND MINE
SHUTDOWN RESERVES:
2001
PT Freeport Indonesia 19,220 4,877 -- -- 24,097
2000
PT Freeport Indonesia 14,085 5,135 -- -- 19,220
1999
PT Freeport Indonesia 9,229 4,856 -- -- 14,085
a. Primarily represents write-offs of obsolete materials and supplies
inventories.
b. Represents amounts collected.
c. Represents a reversal of previously accrued amounts based on an updated
analysis of historical refunds of value-added tax payments.
F-4
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 Composite copy of the Certificate of Incorporation of FCX.
Incorporated by reference to Exhibit 3.1 to the FCX November 5, 2001
Form S-3.
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 Certificate of Designations of the Step-Up Convertible Preferred
Stock of FCX.
4.2 Deposit Agreement dated as of July 1, 1993 among FCX, ChaseMellon
Shareholder Services, L.L.C. (ChaseMellon), 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.
Incorporated by reference to Exhibit 4.5 to the Annual Report on
Form 10-K of FCX for the fiscal year ended December 31, 1993 (the
FCX 1993 Form 10-K).
4.3 Form of Step-Up Depositary Receipt. Incorporated by reference to
Exhibit 4.6 to the FCX 1993 Form 10-K.
4.4 Certificate of Designations of the Gold-Denominated Preferred Stock
of FCX.
4.5 Deposit Agreement dated as of August 12, 1993 among FCX,
ChaseMellon, 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. Incorporated by reference to
Exhibit 4.8 to the FCX 1993 Form 10-K.
4.6 Form of Gold-Denominated Depositary Receipt. Incorporated by
reference to Exhibit 4.9 to the FCX 1993 Form 10-K.
4.7 Certificate of Designations of the Gold-Denominated Preferred Stock,
Series II (the Gold-Denominated Preferred Stock II) of FCX.
4.8 Deposit Agreement dated as of January 15, 1994, among FCX,
ChaseMellon, 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. Incorporated by reference to
Exhibit 4.2 to the Quarterly Report on Form 10-Q of FCX for the
quarter ended March 31, 1994 (the FCX 1994 First Quarter Form 10-Q).
4.9 Form of Gold-Denominated II Depositary Receipt. Incorporated by
reference to Exhibit 4.3 to the FCX 1994 First Quarter Form 10-Q.
E-1
Freeport-McMoRan Copper & Gold Inc.
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
4.10 Certificate of Designations of the Silver-Denominated Preferred
Stock of FCX.
4.11 Deposit Agreement dated as of July 25, 1994 among FCX, ChaseMellon,
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. Incorporated by
reference to Exhibit 4.2 to the Form 8-A of FCX dated July 15, 1994
(the FCX July 1994 Form 8-A).
4.12 Form of Silver-Denominated Depositary Receipt. Incorporated by
reference to Exhibit 4.1 to the FCX July 1994 Form 8-A.
4.13 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.
4.14 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.
4.15 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.
4.16 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.
4.17 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.
4.18 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.
4.19 Certificate of Designations of Series A Participating Cumulative
Preferred stock of FCX. Incorporated by reference to Exhibit 4.25 to
the Quarterly Report on Form 10-Q of FCX for the quarter ended March
31, 2000 (the FCX 2000 First Quarter Form 10-Q).
4.20 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.
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.
E-2
Freeport-McMoRan Copper & Gold Inc.
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
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.
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 Put and Guaranty Agreement dated as of March 21, 1997 between FCX
and The Chase Manhattan Bank. Incorporated by reference to Exhibit
10.7 to the Annual Report of FCX on Form 10-K for the year ended
December 31, 1997 (the FCX 1997 Form 10-K).
10.8 Subordinated Loan Agreement dated as of March 21, 1997 between FCX
and PT Nusamba Mineral Industri. Incorporated by reference to
Exhibit 10.8 to the FCX 1997 Form 10-K.
10.9 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.
10.10 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 10.11
through 10.33)
10.11 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.
10.12 1995 Long-Term Performance Incentive Plan of FCX. Incorporated by
reference to Exhibit 10.6 to the FCX November 5, 2001 Form S-3.
10.13 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.
10.14 FCX President's Award Program. Incorporated by reference to Exhibit
10.7 to the FCX November 5, 2001 Form S-3.
10.15 FCX Adjusted Stock Award Plan, as amended. Incorporated by reference
to Exhibit 10.15 to the 1997 FCX Form 10-K.
E-3
Freeport-McMoRan Copper & Gold Inc.
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.16 FCX 1995 Stock Option Plan. Incorporated by reference to Exhibit
10.8 to the FCX November 5, 2001 Form S-3.
10.17 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.
10.18 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.
10.19 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).
10.20 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).
10.21 Financial Counseling and Tax Return Preparation and Certification
Program of FCX.
10.22 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.
10.23 FM Services Company Financial Counseling and Tax Return Preparation
and Certification Program.
10.24 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.
10.25 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.
10.26 Letter Agreement dated January 27, 1997 among Kissinger Associates,
Kent Associates, FTX, FCX and FMS.
10.27 Agreement for Consulting Services between FTX and B. M. Rankin, Jr.
effective as of January 1, 1991 (assigned to FMS as of January 1,
1996). Incorporated by reference to Exhibit 10.24 to the FCX 1997
Form 10-K.
10.28 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.
10.29 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.
10.30 Supplemental Agreement between FMS and B. M. Rankin, Jr. dated
February 5, 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).
10.31 Letter Agreement effective as of January 7, 1997 between Senator J.
Bennett Johnston, Jr. and FMS.
10.32 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.
E-4
Freeport-McMoRan Copper & Gold Inc.
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.33 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.
10.34 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.
10.35 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.
10.36 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.
10.37 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.
10.38 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.
12.1 FCX Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of FCX. Incorporated by reference to Exhibit 21.1 to
the FCX 2000 Form 10-K.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Independent Mining Consultants, Inc.
24.1 Certified resolution of the Board of Directors of FCX authorizing
this report to be signed on behalf of any officer or director
pursuant to a Power of Attorney.
24.2 Powers of Attorney pursuant to which this report has been signed on
behalf of certain officers and directors of FCX.
E-5