FCX 2Q06 Form 10Q
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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
(IRS Employer Identification No.)
incorporation or organization)
  
   
1615 Poydras Street
  
New Orleans, Louisiana
70112
(Address of principal executive offices)
(Zip Code)
 
 
(504) 582-4000
(Registrant's telephone number, including area code)
 
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. R Yes ÿ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer R Accelerated filer ÿ Non-accelerated filer ÿ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ÿ Yes R No

On June 30, 2006, there were issued and outstanding 187,159,910 shares of the registrant’s Class B Common Stock, par value $0.10 per share.

 
 
FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS

   
 
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FREEPORT-McMoRan COPPER & GOLD INC.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

FREEPORT-McMoRan COPPER & GOLD INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

   
June 30,
    
December 31,
  
   
2006
    
2005
  
   
(In Thousands)
  
ASSETS
                
Current assets:
                
Cash and cash equivalents
  
$
357,751
    
$
763,599
  
Accounts receivable
    
685,275
      
687,969
  
Inventories
    
790,942
      
565,019
  
Prepaid expenses and other
    
18,534
      
5,795
  
Total current assets
    
1,852,502
      
2,022,382
  
Property, plant, equipment and development costs, net
    
3,104,806
      
3,088,931
  
Deferred mining costs
    
-
      
285,355
  
Other assets
    
111,661
      
119,999
  
Investment in PT Smelting
    
40,570
      
33,539
  
Total assets
  
$
5,109,539
    
$
5,550,206
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable and accrued liabilities
 
$
581,022
    
$
573,560
  
Accrued income taxes
    
94,563
      
327,041
  
Current portion of long-term debt and short-term borrowings
    
89,683
      
253,350
  
Unearned customer receipts
    
56,900
      
57,184
  
Accrued interest payable
    
29,828
      
32,034
  
Rio Tinto share of joint venture cash flows
    
26,251
      
125,809
  
Total current liabilities
    
878,247
      
1,368,978
  
Long-term debt, less current portion:
                
Senior notes
    
612,900
      
624,365
  
Convertible senior notes
    
307,663
      
323,667
  
Equipment and other loans
    
47,764
      
54,529
  
Atlantic Copper debt
    
13,841
      
37
  
Total long-term debt, less current portion
    
982,168
      
1,002,598
  
Accrued postretirement benefits and other liabilities
    
236,710
      
210,259
  
Deferred income taxes
    
852,209
      
902,386
  
Minority interests
    
218,849
      
222,991
  
Stockholders' equity:
                
Convertible perpetual preferred stock
    
1,100,000
      
1,100,000
  
Class B common stock
    
30,011
      
29,696
  
Capital in excess of par value of common stock
    
2,357,782
      
2,212,246
  
Retained earnings
    
1,202,295
      
1,086,191
  
Accumulated other comprehensive income
    
199
      
10,749
  
Common stock held in treasury
    
(2,748,931
)
    
(2,595,888
)
Total stockholders’ equity
    
1,941,356
      
1,842,994
  
Total liabilities and stockholders’ equity
  
$
5,109,539
    
$
5,550,206
  
                 
The accompanying notes are an integral part of these financial statements.

 
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Table of Contents
FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
   
2006
    
2005
    
2006
    
2005
  
   
(In Thousands, Except Per Share Amounts)
  
Revenues
$
1,426,202
  
$
902,909
  
$
2,512,324
  
$
1,705,974
  
Cost of sales:
                        
Production and delivery
  
605,607
    
390,586
    
1,083,522
    
755,592
  
Depreciation and amortization
  
43,355
    
54,159
    
86,605
    
111,085
  
Total cost of sales
  
648,962
    
444,745
    
1,170,127
    
866,677
  
Exploration expenses
  
2,778
    
2,342
    
5,354
    
4,262
  
General and administrative expenses
  
35,135
    
25,379
    
65,766
    
46,993
  
Total costs and expenses
  
686,875
    
472,466
    
1,241,247
    
917,932
  
Operating income
  
739,327
    
430,443
    
1,271,077
    
788,042
  
Equity in PT Smelting earnings
  
2,006
    
2,562
    
5,565
    
5,158
  
Interest expense, net
  
(21,024
)
  
(35,292
)
  
(43,695
)
  
(72,840
)
(Losses) gains on early extinguishment and
                        
conversion of debt
  
(267
)
  
-
    
(2,240
)
  
37
  
Other income, net
  
14,616
    
8,143
    
19,574
    
16,095
  
Income before income taxes and minority
                        
interests
  
734,658
    
405,856
    
1,250,281
    
736,492
  
Provision for income taxes
  
(310,244
)
  
(188,684
)
  
(531,966
)
  
(352,712
)
Minority interests in net income of
                        
consolidated subsidiaries
  
(42,034
)
  
(26,800
)
  
(69,160
)
  
(47,888
)
Net income
  
382,380
    
190,372
    
649,155
    
335,892
  
Preferred dividends
  
(15,125
)
  
(15,125
)
  
(30,250
)
  
(30,250
)
Net income applicable to common stock
$
367,255
  
$
175,247
  
$
618,905
  
$
305,642
  
                         
Net income per share of common stock:
                        
Basic
  
$1.95
    
$0.98
    
$3.29
    
$1.71
  
Diluted
  
$1.74
    
$0.91
    
$2.97
    
$1.62
  
                         
Average common shares outstanding:
                        
Basic
  
188,506
    
178,324
    
188,211
    
178,822
  
Diluted
  
222,111
    
219,990
    
221,794
    
220,516
  
                         
Dividends paid per share of common stock
  
$1.0625
    
$0.25
    
$1.875
    
$1.00
  
                         
The accompanying notes are an integral part of these financial statements.

 
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FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

   
Six Months Ended June 30,
  
   
2006
    
2005
  
   
(In Thousands)
  
Cash flow from operating activities:
                
Net income
  
$
649,155
    
$
335,892
  
Adjustments to reconcile net income to net cash provided by
      
operating activities:
                
Depreciation and amortization
    
86,605
      
111,085
  
Minority interests' share of net income
    
69,160
      
47,888
  
Deferred income taxes
    
63,295
      
5,327
  
Stock-based compensation
    
24,824
      
1,826
  
Long-term compensation and postretirement benefits
    
10,590
      
9,802
  
Losses (gains) on early extinguishment and conversion of debt
    
2,240
      
(37
)
Equity in PT Smelting earnings
    
(5,565
)
    
(5,158
)
Increase in deferred mining costs
    
-
      
(52,810
)
(Recognition) elimination of profit on PT Freeport Indonesia
                
sales to PT Smelting
    
(12,979
)
    
25
  
Provision for inventory obsolescence
    
3,000
      
3,000
  
Other
    
4,806
      
1,067
  
(Increases) decreases in working capital:
                
Accounts receivable
    
(1,790
)
    
123,278
  
Inventories
    
(218,373
)
    
25,155
  
Prepaid expenses and other
    
(2,845
)
    
(2,406
)
Accounts payable and accrued liabilities
    
29,655
      
(8,100
)
Rio Tinto share of joint venture cash flows
    
(99,558
)
    
(334
)
Accrued income taxes
    
(226,292
)
    
25,011
  
(Increase) decrease in working capital
    
(519,203
)
    
162,604
  
Net cash provided by operating activities
    
375,928
      
620,511
  
                 
Cash flow from investing activities:
                
PT Freeport Indonesia capital expenditures
    
(104,163
)
    
(53,428
)
Atlantic Copper and other capital expenditures
    
(6,182
)
    
(5,863
)
Sale of assets
    
2,887
      
-
  
Investment in PT Smelting and other
    
(1,152
)
    
131
  
Proceeds from insurance settlement
    
-
      
2,016
  
Net cash used in investing activities
    
(108,610
)
    
(57,144
)
                 
Cash flow from financing activities:
                
Proceeds from debt
    
53,135
      
65,647
  
Repayments of debt
    
(223,303
)
    
(235,249
)
Redemption of step-up preferred stock
    
-
      
(215
)
Purchases of FCX common shares
    
(99,783
)
    
(80,227
)
Cash dividends paid:
                
Common stock
    
(352,493
)
    
(179,658
)
Preferred stock
    
(30,250
)
    
(30,251
)
Minority interests
    
(56,802
)
    
(71,425
)
Net proceeds from exercised stock options
    
13,830
      
2,016
  
Excess tax benefit from exercised stock options
    
22,522
      
-
  
Other
    
(22
)
    
(21
)
Net cash used in financing activities
    
(673,166
)
    
(529,383
)
Net (decrease) increase in cash and cash equivalents
    
(405,848
)
    
33,984
  
Cash and cash equivalents at beginning of year
    
763,599
      
551,450
  
Cash and cash equivalents at end of period
  
$
357,751
    
$
585,434
  
                 
The accompanying notes are an integral part of these financial statements.

 
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Table of Contents
FREEPORT-McMoRan COPPER & GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   
GENERAL
The accompanying unaudited consolidated financial statements should be read in conjunction with Freeport-McMoRan Copper & Gold Inc.’s (FCX) consolidated financial statements and notes contained in its 2005 Annual Report on Form 10-K. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods. All such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the six-month period ended June 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 2006 presentation. Changes in the accounting principles applied during 2006 are discussed below in Notes 2 and 3.

2.   
STOCK-BASED COMPENSATION
Accounting for Stock-Based Compensation. As of June 30, 2006, FCX has four stock-based employee compensation plans and two stock-based director compensation plans. Prior to January 1, 2006, FCX accounted for options granted under all of its plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as permitted by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” APB Opinion No. 25 required compensation cost for stock options to be recognized based on the difference on the date of grant, if any, between the quoted market price of the stock and the amount an employee must pay to acquire the stock (i.e., the intrinsic value). Because all the plans require that the option exercise price be at least the market price on the date of grant, FCX recognized no compensation cost on the grant or exercise of its employees’ options through December 31, 2005. Other awards under the plans did result in compensation costs being recognized in earnings based on the intrinsic value on the date of grant for restricted stock units and the intrinsic value on the reporting or exercise date for cash-settled stock appreciation rights (SARs).

Effective January 1, 2006, FCX adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” or “SFAS No. 123R,” using the modified prospective transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation costs for all stock option awards granted to employees prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock option awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. In addition, other stock-based awards charged to expense under SFAS No. 123 continue to be charged to expense under SFAS No. 123R. These include restricted stock units and SARs. Results for prior periods have not been restated. FCX has elected to recognize compensation costs for awards that vest over several years on a straight-line basis over the vesting period. FCX’s stock option awards provide for employees to receive an additional year of vesting after an employee retires. For awards granted after January 1, 2006, to retirement-eligible employees, FCX records one year of amortization of the awards’ value on the date of grant. Certain restricted stock units are performance based awards with accelerated vesting upon retirement. Therefore, in accordance with SFAS No. 123R and consistent with prior years’ accounting, FCX recognizes the compensation cost for restricted stock units granted to retirement-eligible employees in the period during which the employee performs the service related to the grant. The services are performed in the calendar year preceding the date of grant. In addition, prior to adoption of SFAS No. 123R, FCX recognized forfeitures as they occurred in its SFAS No. 123 pro forma disclosures. Beginning January 1, 2006, FCX includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date of the awards.

As a result of adopting SFAS No. 123R on January 1, 2006, FCX’s income before income taxes and minority interests for the three months ended June 30, 2006, was $6.8 million lower and net income was $4.0 million ($0.02 per basic and diluted share) lower, and FCX’s income before income taxes and minority interests for the six months ended June 30, 2006, was $15.9 million lower and net income was
 
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$9.3 million ($0.05 per basic share and $0.04 per diluted share) lower than if it had continued to account for share-based compensation under APB Opinion No. 25.

Prior to the adoption of SFAS No. 123R, FCX presented all tax benefits resulting from the exercise of stock options as operating cash flows in its Consolidated Statements of Cash Flows. SFAS No. 123R requires the cash flows generated by tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $22.5 million excess tax benefit classified as a financing cash inflow in the Consolidated Statements of Cash Flows for the six months ended June 30, 2006, would have been classified as an operating cash inflow if FCX had not adopted SFAS No. 123R.

Stock-Based Compensation Plans. As discussed above, FCX currently has six stock-based compensation plans and all are shareholder approved. As of June 30, 2006, only four of the plans, which are discussed below, have awards available for grant.

FCX’s 1999 Stock Incentive Plan (the 1999 Plan) and 2003 Stock Incentive Plan (the 2003 Plan) provide for the issuance of stock options, SARs, restricted stock units and other stock-based awards. Each plan allows FCX to grant awards for up to 8.0 million common shares to eligible participants. In May 2004, FCX’s shareholders approved the 2004 Director Compensation Plan (the 2004 Plan). The 2004 Plan authorizes awards of options and restricted stock units for up to 1.0 million shares and the one-time grant of 66,882 SARs. In May 2006, FCX’s shareholders approved the 2006 Stock Incentive Plan (the 2006 Plan). The 2006 Plan provides for the issuance of stock options, SARs, restricted stock units and other stock-based awards. The 2006 Plan allows FCX to grant awards for up to 12.0 million common shares to eligible participants.

Awards granted under all of the plans generally expire 10 years after the date of grant and vest in 25 percent annual increments beginning one year from the date of grant. The plans provide for employees to receive the following year’s vesting after retirement and provide for accelerated vesting if there is a change in control (as defined in the plans). Awards for 12.0 million shares under the 2006 Plan, 0.5 million shares under the 2004 Plan, 1.1 million shares under the 2003 Plan and 0.1 million shares under the 1999 Plan were available for new grants as of June 30, 2006.

FCX also has a restricted stock program that allows FCX senior executives to elect to receive restricted stock units under each plan in place of all or part of their cash incentive compensation. Restricted stock unit grants vest over three years and are valued on the date of grant at 50 percent above the cash incentive compensation that the employee elects to replace. Dividends on restricted stock units accrue and are subject to the awards vesting. Stock option and SAR awards do not receive dividends.

Stock-Based Compensation Cost. Compensation cost charged against earnings for stock-based awards is shown below (in thousands). FCX did not capitalize any stock-based compensation costs to fixed assets during the periods presented.

   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
Stock options awarded to employees (including directors)
  
$
6,849
  
$
526
a
$
15,877
  
$
1,034
a
Stock options awarded to nonemployees
    
372
    
268
    
859
    
587
  
Restricted stock units in lieu of cash awards
    
4,351
    
3,042
    
6,829
    
6,063
  
Restricted stock units awarded to directors
    
870
    
57
    
956
    
99
  
Stock appreciation rights
    
(327
)
  
(430
)
  
952
    
99
  
Total stock-based compensation costb
    
12,115
    
3,463
    
25,473
    
7,882
  
Tax benefit
    
(4,038
)
  
(918
)
  
(8,955
)
  
(2,220
)
Minority interest share
    
(595
)
  
(136
)
  
(1,319
)
  
(330
)
Impact on net income
  
$
7,482
  
$
2,409
  
$
15,199
  
$
5,332
  
                           
 
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a.  
Represents amortization of the intrinsic value of FCX’s Class A stock options that were converted to Class B stock options in 2002.
b.  
Amounts are before Rio Tinto’s share of joint venture reimbursements for employee exercises of in-the-money stock options which reduced general and administrative expenses by $2.6 million in the 2006 quarter, $0.1 million in the 2005 quarter, $7.1 million in the 2006 six-month period and $3.0 million in the 2005 six-month period.

The following table illustrates the effect on net income and earnings per share for the three months ended June 30, 2005 and the six months ended June 30, 2005, if FCX had applied the fair value recognition provisions of SFAS No. 123 to stock-based awards granted under FCX’s stock-based compensation plans (in thousands, except per share amounts):

   
Three Months
    
Six Months
  
   
Ended
    
Ended
  
   
June 30, 2005
    
June 30, 2005
  
Net income applicable to common stock, as reported
  
$
175,247
    
$
305,642
  
Add: Stock-based employee compensation expense
                
included in reported net income for stock option
                
conversions, SARs and restricted stock units,
                
net of taxes and minority interests
    
1,898
      
4,457
  
Deduct: Total stock-based employee compensation
                
expense determined under fair value-based method
                
for all awards, net of taxes and minority interests
    
(5,339
)
    
(10,754
)
Pro forma net income applicable to common stock
  
$
171,806
    
$
299,345
  
                 
Earnings per share:
                
Basic - as reported
  
$
0.98
    
$
1.71
  
Basic - pro forma
  
$
0.96
    
$
1.67
  
                 
Diluted - as reported
  
$
0.91
    
$
1.62
  
Diluted - pro forma
  
$
0.89
    
$
1.56
  
                 
For the pro forma computations, the values of option grants were calculated on the dates of grant using the Black-Scholes-Merton option pricing model and amortized to expense on a straight-line basis over the options’ vesting periods. No other discounts or restrictions related to vesting or the likelihood of vesting of stock options were applied. The following table summarizes the calculated average fair values and weighted-average assumptions used to determine the fair value of FCX’s stock option grants under SFAS No. 123 during the 2005 periods presented.

 
Three Months
    
Six Months
  
 
Ended
    
Ended
  
 
June 30, 2005
    
June 30, 2005
  
Fair value per stock option
$
12.90
    
$
13.97
  
Risk-free interest rate
  
3.7
%
    
3.9
%
Expected volatility rate
  
45
%
    
46
%
Expected life of options (in years)
  
6
      
6
  
Assumed annual dividend
$
1.00
    
$
1.00
  

Options and SARs. A summary of options outstanding as of June 30, 2006, including 145,871 SARs, and changes during the six months ended June 30, 2006 follow:


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Weighted
      
         
Average
  
Aggregate
  
     
Weighted
  
Remaining
  
Intrinsic
  
 
Number of
  
Average
  
Contractual
  
Value
  
 
Options
  
Option Price
  
Term (years)
  
($000)
  
Balance at January 1
7,355,612
  
$
31.43
            
Granted
1,116,250
    
62.96
            
Exercised
(2,545,133
)
  
26.62
            
Expired/Forfeited
(61,574
)
  
38.99
            
Balance at June 30
5,865,155
    
39.47
  
8.13
  
$
101,904
  
                     
Vested and exercisable at June 30
567,860
    
22.10
  
7.10
  
$
18,918
  
                     
The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model. The assumptions used to value stock option awards during the six months ended June 30, 2006, are noted in the following table. Expected volatility is based on implied volatilities from traded options on FCX’s stock and historical volatility of FCX’s stock. FCX uses historical data to estimate future option exercises, forfeitures and expected life of the options. When appropriate, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected dividend rate is calculated as the annual dividend (excludes supplemental dividends) at the date of grant divided by the average stock price for the one-year period preceding the grant date. The risk-free interest rate is based on Federal Reserve rates in effect for bonds with maturity dates equal to the expected term of the option at the grant date.

Expected volatility
  
33.3%-42.2
%
  
Weighted average volatility
  
37.7
%
  
Expected life of options (in years)
  
4.0
    
Expected dividend rate
  
2.9
%
  
Risk-free interest rate
  
4.4
%
  

The grant-date fair value of options granted during the three months ended March 31, 2006, was $17.93 per option and during the three months ended June 30, 2006, was $15.25 per option. The total intrinsic value of options exercised during the three months ended June 30, 2006, was $32.2 million and during the six months ended June 30, 2006, was $93.8 million. As of June 30, 2006, FCX had $60.9 million of total unrecognized compensation cost related to unvested stock options expected to be recognized over a weighted average period of 1.3 years.

The following table includes amounts related to exercises of stock options and SARs and vesting of restricted stock units during the periods presented (in millions, except shares tendered for taxes):

 
Three Months Ended
  
Six Months Ended
  
 
June 30,
  
June 30,
  
 
2006
  
2005
  
2006
  
2005
  
FCX shares tendered to pay the exercise price
                        
and/or the minimum required taxesa
  
451,743
    
-
    
809,634
    
524,907
  
Cash received from stock option exercises
$
10.1
  
$
0.5
  
$
35.3
  
$
7.7
  
Actual tax benefit realized for the tax deductions
                        
from stock option exercises
$
10.3
  
$
0.2
  
$
29.9
  
$
6.1
  
Amounts FCX paid for employee taxes related
                        
to stock option exercises
$
7.5
  
$
-
  
$
21.5
  
$
5.7
  
Amounts FCX paid for exercised SARs
$
0.2
  
$
0.1
  
$
2.0
  
$
0.1
  

a.   
Under terms of the related plans, upon exercise of stock options and vesting of restricted stock units, employees may tender FCX shares to FCX to pay the exercise price and/or the minimum required taxes.

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Restricted Stock Units. As discussed above, FCX has a restricted stock program that allows FCX senior executives to elect to receive restricted stock units in place of all or part of their annual cash incentive compensation. The annual cash incentive is a function of FCX’s consolidated operating cash flows for the preceding year. These awards of restricted stock units are considered performance-based awards. To compensate for certain restrictions and the risk of forfeiture, the restricted stock units are awarded at a 50 percent premium to the market value on the date of grant. The awards vest ratably over three years and vesting accelerates upon retirement. For retirement-eligible executives, the fair value of the restricted stock units is estimated based on projected operating cash flows for the year and is charged to expense ratably over the year the cash flows are generated.

FCX grants restricted stock units to its directors under the 2004 Plan. The restricted stock units vest over four years and are valued on the date of grant based on the average high and low price of FCX common stock. The fair value of the restricted stock units is amortized over the four-year vesting period or the period until the director becomes retirement-eligible, whichever is shorter. Upon a director’s retirement, all unvested restricted stock units immediately vest. For retirement-eligible directors, the fair value of restricted stock units is recognized on the date of grant.

FCX granted 20,000 restricted stock units in the three months ended June 30, 2006, 20,000 restricted stock units in the three months ended June 30, 2005, 352,677 restricted stock units in the six months ended June 30, 2006 and 143,044 restricted stock units in the six months ended June 30, 2005. A summary of outstanding unvested restricted stock units as of June 30, 2006, and activity during the six months ended June 30, 2006 is presented below:

     
Weighted
      
     
Average
  
Aggregate
  
 
Number of
  
Remaining
  
Intrinsic
  
 
Restricted
  
Contractual
  
Value
  
 
Stock Units
  
Term (years)
  
($000)
  
Balance at January 1
317,258
            
Granted
352,677
            
Vested
(139,350
)
          
Forfeited
-
            
Balance at June 30
530,585
  
2.55
  
$
29,400
  
               
The grant-date fair value of restricted stock units granted during the three months ended March 31, 2006, was $21.2 million. Because this is a performance-based award and the requisite service period under SFAS No. 123R is considered to be the calendar year prior to the grant date, the entire value of this award on the date of grant was charged to expense during the calendar year prior to the date of grant.

The grant-date fair value of restricted stock units granted during the three months ended June 30, 2006, was $1.1 million. The total intrinsic value of restricted stock units vesting during the three months ended June 30, 2006, was $0.4 million and during the six months ended June 30, 2006, was $8.7 million. As of June 30, 2006, FCX had $1.2 million of total unrecognized compensation cost related to unvested restricted stock units expected to be recognized over a weighted average period of 1.3 years.

3.   
DEFERRED MINING COSTS
On January 1, 2006, FCX adopted Emerging Issues Task Force Issue No. 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry” (EITF 04-6), which requires that stripping costs incurred during production be considered costs of the extracted minerals and included as a component of inventory to be recognized in cost of sales in the same period as the revenue from the sale of inventory. Upon adoption of EITF 04-6, FCX recorded its deferred mining costs asset ($285.4 million) at December 31, 2005, net of taxes, minority interest share and inventory effects ($135.9 million), as a cumulative effect adjustment to reduce its retained earnings on January 1, 2006. In addition, stripping costs incurred in 2006 and later periods are now charged to cost of sales as incurred. As a result of adopting EITF 04-6 on January 1, 2006, FCX’s income before income taxes and minority interests for the three months ended
 
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June 30, 2006, was $5.9 million lower and net income was $3.2 million ($0.02 per basic share and $0.01 per diluted share) lower, and FCX’s income before income taxes and minority interests for the six months ended June 30, 2006, was $38.7 million lower and net income was $20.6 million ($0.11 per basic share and $0.09 per diluted share) lower than if it had not adopted EITF 04-6 and continued to defer stripping costs. Adoption of the new guidance has no impact on FCX’s cash flows.

4.   
EARNINGS PER SHARE
FCX’s 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. The following is a reconciliation of net income and weighted-average common shares outstanding for purposes of calculating diluted net income per share (in thousands, except per share amounts):

   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
Net income before preferred dividends
  
$
382,380
  
$
190,372
  
$
649,155
  
$
335,892
  
Preferred dividends
    
(15,125
)
  
(15,125
)
  
(30,250
)
  
(30,250
)
Net income applicable to common stock
    
367,255
    
175,247
    
618,905
    
305,642
  
Plus income impact of assumed conversion of:
                          
5½% Convertible Perpetual Preferred Stock
    
15,125
    
15,125
    
30,250
    
30,250
  
7% Convertible Senior Notes
    
5,070
    
10,287
    
10,175
    
20,609
  
Diluted net income applicable to common stock
  
$
387,450
  
$
200,659
  
$
659,330
  
$
356,501
  
                           
Weighted average common shares outstanding
    
188,506
    
178,324
    
188,211
    
178,822
  
Add:
                          
Shares issuable upon conversion, exercise or vesting of:
                          
5½% Convertible Perpetual Preferred Stock
    
22,004
    
21,152
    
21,868
    
21,034
  
7% Convertible Senior Notes
    
9,995
    
18,625
    
10,077
    
18,625
  
Dilutive stock options
    
881
    
1,408
    
966
    
1,555
  
Restricted stock
    
725
    
481
    
672
    
480
  
Weighted average common shares outstanding for
                          
purposes of calculating diluted net income per share
    
222,111
    
219,990
    
221,794
    
220,516
  
                           
Diluted net income per share of common stock
  
$
1.74
  
$
0.91
  
$
2.97
  
$
1.62
  
                           
Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period are excluded from the computation of diluted net income per share of common stock. FCX’s convertible instruments are also excluded when including the conversion of these instruments increases reported diluted net income per share. A recap of the excluded amounts follows (in thousands, except exercise prices):

 
Three Months Ended
  
Six Months Ended
  
 
June 30,
  
June 30,
  
 
2006
  
2005
  
2006
  
2005
  
Weighted average options
1,006
  
5,463
  
842
  
2,732
  
Weighted average exercise price
$63.77
  
$36.98
  
$63.77
  
$36.98
  
                 
 
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5.   
INVENTORIES
The components of inventories follow (in thousands):

     
June 30,
  
December 31,
  
     
2006
  
2005
  
PT Freeport Indonesia:
Concentrates and stockpiles -
             
 
Average cost
  
$
30,706
  
$
14,723
  
Atlantic Copper:
Concentrates - First in, first out (FIFO)
    
245,708
    
137,740
  
 
Work in process - FIFO
    
197,892
    
144,951
  
 
Finished goods - FIFO
    
4,602
    
2,975
  
Total product inventories
    
478,908
    
300,389
  
Total materials and supplies, net
    
312,034
    
264,630
  
Total inventories
  
$
790,942
  
$
565,019
  
               
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 $17.2 million at June 30, 2006, and $16.6 million at December 31, 2005.

6.   
DEBT AND EQUITY TRANSACTIONS
As of June 30, 2006, FCX had total outstanding debt of $1.1 billion. Total debt was reduced by a net $184.1 million during the first six months of 2006, including $167.4 million for the mandatory redemption of FCX’s Gold-Denominated Preferred Stock, Series II in February 2006. The mandatory redemption was based on average gold prices at the time of redemption ($548.92 per ounce) and totaled $236.4 million, resulting in a $69.0 million loss recognized in revenues ($36.6 million to net income or $0.17 per share). Other debt reductions during the first six months of 2006 included:

·  
privately negotiated transactions to induce conversion of $16.0 million of 7% Convertible Senior Notes due 2011 into 0.5 million shares of FCX common stock and
·  
purchases in open-market transactions of $11.5 million of 10⅛% Senior Notes due 2010 for $12.6 million.

As a result of the induced conversions and open-market transactions, FCX recorded charges of $2.2 million ($1.5 million to net income, net of related reduction of interest expense, or $0.01 per share) in the first six months of 2006. In July 2006, FCX induced conversion of an additional $14.5 million of 7% Convertible Senior Notes due 2011 into 0.5 million shares of FCX common stock.

In July 2006, FCX and PT Freeport Indonesia entered into an amended credit agreement for a $465 million revolving credit facility compared with its previous $195 million facility that was scheduled to mature in September 2006. The new facility, which can be expanded to up to $500 million with additional lender commitments, matures in 2009 and no amounts are outstanding under the facility.

On August 1, 2006, FCX funded the final scheduled annual redemption payment on its Silver-Denominated Preferred Stock for $25.8 million. The mandatory redemption will result in a $12.5 million decrease in debt and a reduction of revenues of $13.3 million, $7.0 million to net income, in the third quarter of 2006.

7.   
INTEREST COST
Interest expense excludes capitalized interest of $2.3 million in the second quarter of 2006, $1.0 million in the second quarter of 2005, $4.1 million in the first six months of 2006 and $1.9 million in the first six months of 2005.

 
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8.   
EMPLOYEE BENEFITS
The components of net periodic pension benefit cost for the three months ended June 30, 2006 and 2005 follow (in thousands):

 
FCX
  
PT Freeport Indonesia
  
Atlantic Copper
  
 
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
Service cost
$
(17
)
$
165
  
$
958
  
$
900
  
$
-
  
$
-
  
Interest cost
  
463
    
596
    
1,240
    
940
    
1,164
    
1,239
  
Expected return on plan assets
  
39
    
(234
)
  
(617
)
  
(353
)
  
-
    
-
  
Amortization of prior service cost
  
1,051
    
1,019
    
238
    
225
    
-
    
-
  
Amortization of net actuarial loss
  
14
    
-
    
136
    
178
    
230
    
231
  
Net periodic benefit cost
$
1,550
  
$
1,546
  
$
1,955
  
$
1,890
  
$
1,394
  
$
1,470
  
                                     
The components of net periodic pension benefit cost for the six months ended June 30, 2006 and 2005 follow (in thousands):

 
FCX
  
PT Freeport Indonesia
  
Atlantic Copper
  
 
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
Service cost
$
92
  
$
344
  
$
1,904
  
$
1,831
  
$
-
  
$
-
  
Interest cost
  
861
    
1,114
    
2,466
    
1,912
    
2,278
    
2,528
  
Expected return on plan assets
  
379
    
(256
)
  
(1,226
)
  
(718
)
  
-
    
-
  
Amortization of prior service cost
  
2,102
    
1,963
    
472
    
457
    
-
    
-
  
Amortization of net actuarial loss
  
28
    
-
    
270
    
362
    
451
    
472
  
Net periodic benefit cost
$
3,462
  
$
3,165
  
$
3,886
  
$
3,844
  
$
2,729
  
$
3,000
  
                                     
9.   
BUSINESS SEGMENTS
FCX has two operating segments: “mining and exploration” and “smelting and refining.” The mining and exploration segment consists of FCX’s Indonesian activities including PT Freeport Indonesia’s copper and gold mining operations, PT Puncakjaya Power’s power-generating operations (after eliminations with PT Freeport Indonesia) and FCX’s Indonesian exploration activities. The smelting and refining segment includes Atlantic Copper’s operations in Spain and PT Freeport Indonesia’s equity investment in PT Smelting in Gresik, Indonesia. The segment data presented below were prepared on the same basis as FCX’s consolidated financial statements.

   
Mining
and
Exploration
  
Smelting
and Refining
  
Eliminations 
and Other
  
FCX Total
  
   
(In Thousands)
  
Three months ended June 30, 2006:
                          
Revenues
  
$
1,035,168
a
$
593,134
  
$
(202,100
)
$
1,426,202
  
Production and delivery
    
281,308
    
560,375
    
(236,076
)b
  
605,607
  
Depreciation and amortization
    
33,910
    
7,410
    
2,035
    
43,355
  
Exploration expenses
    
2,709
    
-
    
69
    
2,778
  
General and administrative expenses
    
55,689
c
  
3,529
    
(24,083
)c
  
35,135
  
Operating income
  
$
661,552
  
$
21,820
  
$
55,955
  
$
739,327
  
Equity in PT Smelting earnings
  
$
-
  
$
2,006
  
$
-
  
$
2,006
  
Interest expense, net
  
$
1,608
  
$
4,824
  
$
14,592
  
$
21,024
  
Provision for income taxes
  
$
237,001
  
$
-
  
$
73,243
  
$
310,244
  
Capital expenditures
  
$
56,392
  
$
2,669
  
$
(838
)
$
58,223
  
Total assets
  
$
3,890,148
d
$
1,035,415
e
$
183,976
  
$
5,109,539
  
                           

 
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Table of Contents

   
Mining
and Exploration
  
Smelting and Refining
  
Eliminations and Other
  
FCX Total
  
   
(In Thousands)
  
Three months ended June 30, 2005:
                          
Revenues
  
$
678,386
a
$
331,897
  
$
(107,374
)
$
902,909
  
Production and delivery
    
223,355
    
321,909
    
(154,678
)b
  
390,586
  
Depreciation and amortization
    
44,217
    
7,141
    
2,801
    
54,159
  
Exploration expenses
    
2,272
    
-
    
70
    
2,342
  
General and administrative expenses
    
18,425
c
  
2,901
    
4,053
c
  
25,379
  
Operating income (loss)
  
$
390,117
  
$
(54
)
$
40,380
  
$
430,443
  
Equity in PT Smelting earnings
  
$
-
  
$
2,562
  
$
-
  
$
2,562
  
Interest expense, net
  
$
5,897
  
$
4,387
  
$
25,008
  
$
35,292
  
Provision for income taxes
  
$
138,007
  
$
-
  
$
50,677
  
$
188,684
  
Capital expenditures
  
$
29,939
  
$
3,139
  
$
(33
)
$
33,045
  
Total assets
  
$
3,870,969
d
$
717,707
e
$
369,588
  
$
4,958,264
  
                           
Six months ended June 30, 2006:
                          
Revenues
  
$
1,831,951
a
$
1,109,238
  
$
(428,865
)
$
2,512,324
  
Production and delivery
    
567,985
    
1,051,812
    
(536,275
)b
  
1,083,522
  
Depreciation and amortization
    
67,683
    
14,816
    
4,106
    
86,605
  
Exploration expenses
    
5,246
    
-
    
108
    
5,354
  
General and administrative expenses
    
137,995
c
  
7,304
    
(79,533
)c
  
65,766
  
Operating income
  
$
1,053,042
  
$
35,306
  
$
182,729
  
$
1,271,077
  
Equity in PT Smelting earnings
  
$
-
  
$
5,565
  
$
-
  
$
5,565
  
Interest expense, net
  
$
4,881
  
$
10,271
  
$
28,543
  
$
43,695
  
Provision for income taxes
  
$
381,692
  
$
-
  
$
150,274
  
$
531,966
  
Capital expenditures
  
$
105,332
  
$
6,182
  
$
(1,169
)
$
110,345
  
                           
Six months ended June 30, 2005:
                          
Revenues
  
$
1,365,784
a
$
604,013
  
$
(263,823
)
$
1,705,974
  
Production and delivery
    
417,233
    
585,486
    
(247,127
)
  
755,592
  
Depreciation and amortization
    
91,142
    
14,230
    
5,713
    
111,085
  
Exploration expenses
    
4,164
    
-
    
98
    
4,262
  
General and administrative expenses
    
51,607
c
  
5,905
    
(10,519
)c
  
46,993
  
Operating income (loss)
  
$
801,638
  
$
(1,608
)
$
(11,988
)
$
788,042
  
Equity in PT Smelting earnings
  
$
-
  
$
5,158
  
$
-
  
$
5,158
  
Interest expense, net
  
$
11,624
  
$
8,192
  
$
53,024
  
$
72,840
  
Provision for income taxes
  
$
283,326
  
$
-
  
$
69,386
  
$
352,712
  
Capital expenditures
  
$
53,508
  
$
5,863
  
$
(80
)
$
59,291
  
                           
a.  
Includes PT Freeport Indonesia’s sales to PT Smelting totaling $325.4 million in the 2006 quarter, $194.9 million in the 2005 quarter, $607.9 million in the 2006 six-month period and $429.0 million in the 2005 six-month period.
b.  
Includes deferral (recognition) of intercompany profits on 25 percent of PT Freeport Indonesia’s sales to PT Smelting, for which the final sale to third parties has not occurred, totaling $7.8 million in the 2006 quarter, $(2.6) million in the 2005 quarter and $(13.0) million in the 2006 six-month period.
c.  
Includes charges to the mining and exploration segment for the in-the-money value of FCX stock option exercises which are eliminated in consolidation totaling $29.4 million in the 2006 quarter, $0.7 million in the 2005 quarter, $85.5 million in the 2006 six-month period and $17.4 million in the 2005 six-month period.
d.  
Includes PT Freeport Indonesia’s trade receivables with PT Smelting totaling $257.6 million at June 30, 2006, and $71.9 million at June 30, 2005.
e.  
Includes PT Freeport Indonesia’s equity investment in PT Smelting totaling $40.6 million at June 30, 2006, and $52.9 million at June 30, 2005.

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10.    
 COMPREHENSIVE INCOME
A summary of FCX’s comprehensive income is shown below (in thousands).

   
Three Months Ended
 
Six Months Ended
 
   
June 30,
  
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
Net income
  
$
382,380
  
$
190,372
  
$
649,155
  
$
335,892
  
Other comprehensive income (loss):
                          
Change in unrealized derivatives’ fair value, net of taxes
                          
of $1.4 million for the three months ended June 30,
                          
2006, $0.8 million for the three months ended June 30,
                          
2005, $(0.1) million for the six months ended June 30,
                          
2006 and $1.0 million for the six months ended June 30,
                          
2005
    
(12,846
)a
  
(1,047
)
  
(10,805
)
  
(1,345
)
Reclass to earnings, net of taxes of $0.5 million
                          
for the three months ended June 30, 2006, $1.0 million
                          
for the six months ended June 30, 2006 and $0.1 million
                          
for the 2005 periods
    
1,055
    
(192
)
  
340
    
(95
)
Total comprehensive income
  
$
370,589
  
$
189,133
  
$
638,690
  
$
334,452
  
                           
a.   
Relates to unrealized losses on PT Smelting’s hedging contracts to fix a portion of its revenues through 2007. At June 30, 2006, FCX had $10.9 million in accumulated other comprehensive income related to these contracts.

11.   
 RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the first six months of 2006 was 26.5 to 1 compared with 10.7 to 1 for the 2005 period. For this calculation, earnings consist of income from continuing operations before income taxes, minority interests and fixed charges. Fixed charges include interest and that portion of rent deemed representative of interest.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan COPPER & GOLD INC.

We have reviewed the condensed consolidated balance sheet of Freeport-McMoRan Copper & Gold Inc. and its subsidiaries as of June 30, 2006 and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2006 and 2005, and the consolidated statements of cash flows for the six-month periods ended June 30, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Freeport-McMoRan Copper & Gold Inc. as of December 31, 2005, and the related consolidated statements of income, stockholder’s equity, and cash flows for the year then ended (not presented herein), and in our report dated February 24, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


ERNST & YOUNG LLP


New Orleans, Louisiana
August 1, 2006


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

OVERVIEW

In management’s discussion and analysis, “we,” “us” and “our” refer to Freeport-McMoRan Copper & Gold Inc. (FCX) and its consolidated subsidiaries. References to “aggregate” amounts mean the total of our share and Rio Tinto plc’s share as our joint venture partner. You should read this discussion in conjunction with our financial statements, the related discussion and analysis of financial condition and results of operations and the discussion of our “Business and Properties” in our Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission. The results of operations reported and summarized below are not necessarily indicative of future operating results. References to “Notes” are Notes included in our “Notes to Consolidated Financial Statements.” Per share amounts are on a diluted basis unless otherwise noted.

Through our majority-owned subsidiary, PT Freeport Indonesia, we have one of the world’s largest copper and gold mining and production operations in terms of reserves and production. Our principal asset is a majority ownership interest in the Grasberg minerals district, which, based on the latest available data, contains the largest single copper reserve and the largest single gold reserve of any mine in the world.

PT Freeport Indonesia, our principal operating subsidiary, 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 located in Papua, Indonesia. Under the Contract of Work, PT Freeport Indonesia also conducts exploration activities (which are currently suspended, but are under review for resumption) in an approximate 500,000-acre area called Block B in Papua. All of our proven and probable mineral reserves and current mining operations are located in Block A.

We own 90.64 percent of PT Freeport Indonesia, including 9.36 percent owned through our wholly owned subsidiary, PT Indocopper Investama. The Government of Indonesia owns the remaining 9.36 percent of PT Freeport Indonesia. In July 2004, we received a request from the Indonesian Department of Energy and Mineral Resources that we offer to sell shares in PT Indocopper Investama to Indonesian nationals at fair market value. In response to this request and in view of the potential benefits of having additional Indonesian ownership in our project, we have agreed to consider a potential sale of an interest in PT Indocopper Investama at fair market value. Neither our Contract of Work nor Indonesian law requires us to divest any portion of our ownership interest in PT Freeport Indonesia or PT Indocopper Investama.

We also operate through a majority-owned subsidiary, PT Puncakjaya Power (Puncakjaya Power), and through Atlantic Copper, S.A. (Atlantic Copper) and PT Irja Eastern Minerals (Eastern Minerals), our other principal wholly owned subsidiaries. Puncakjaya Power’s sole business is to supply power to PT Freeport Indonesia’s operations. Atlantic Copper’s operations are in Spain and involve the smelting and refining of copper concentrates and the marketing of refined copper and precious metals in slimes. Eastern Minerals conducts mineral exploration activities (which are currently suspended) in Papua, Indonesia. PT Freeport Indonesia owns a 25 percent interest in PT Smelting, an Indonesian company which operates a copper smelter and refinery in Gresik, Indonesia.

In 1996, we established joint ventures with Rio Tinto, 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 future production exceeding specified annual amounts of copper, gold and silver 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 expansion completed in 1998 to (b) total revenues 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.

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Outlook
PT Freeport Indonesia’s share of annual sales in 2006 is currently projected to approximate 1.2 billion pounds of copper and 1.7 million ounces of gold, compared with previous estimates of 1.3 billion pounds and 1.7 million ounces. The reduction in estimated copper sales primarily reflects operational issues experienced in the second quarter and the impact of mine plan revisions to incorporate geotechnical data. Efforts are under way to improve productivity of mining activities, which would increase mining rates and advance timing of metal production. At the Grasberg open-pit mine, the sequencing in mining areas with varying ore grades causes fluctuations in the timing of ore production, resulting in varying quarterly and annual copper and gold sales. During 2006, approximately 63 percent of copper and 55 percent of gold sales are expected in the second half of the year, including 280.0 million pounds of copper and 320,000 ounces of gold in the third quarter and 475.0 million pounds of copper and 610,000 ounces of gold in the fourth quarter of 2006. The achievement of PT Freeport Indonesia’s sales estimates will be dependent, among other factors, on the achievement of targeted mining rates, the successful operation of PT Freeport Indonesia’s production facilities and the impact of weather conditions at the end of fiscal periods on concentrate loading activities.

Our mine plans are based on latest available data and studies, which take into account factors such as mining and milling rates, ore grades and recoveries, economic conditions and geologic/geotechnical considerations. We update these plans to incorporate new data and conditions, with the objective of operating safely, managing risks and maximizing economic values. While ongoing analyses may alter current expectations, we have revised in July 2006 our five-year mine plan as follows:

   
PT Freeport Indonesia’s Share of Sales
  
   
Previous Estimate
  
Current Estimate
  
Year
  
Copper
  
Gold
  
Copper
  
Gold
  
   
(Billion Lbs.)
  
(Million Ozs.)
  
(Billion Lbs.)
  
(Million Ozs.)
  
2006
  
1.3
  
1.7
  
1.2
  
1.7
  
2007
  
1.2
  
2.0
  
1.1
  
1.8
  
2008
  
1.5
  
2.4
  
1.4
  
1.9
  
2009
  
1.2
  
1.6
  
1.2
  
1.8
  
2010
  
1.3
  
1.9
  
1.3
  
2.1
  
Total
  
6.5
  
9.6
  
6.2
  
9.3
  
                   
5-Year Average
  
1.3
  
1.9
  
1.24
  
1.9
  
                   
Percent Change
          
(4.6
)%
(3.1
)%
                   
These revisions include updated estimates for 2006 and design changes to incorporate recent geotechnical data, resulting in deferral of production of certain high-grade ore from 2007 and 2008 into future periods. The revised mine plans also incorporate an anticipated expansion of the Deep Ore Zone (DOZ) underground mine to 80,000 metric tons of ore per day. The preliminary economics of this project appear highly attractive. The mine plan changes affect the timing of metal production and do not impact ultimate recoverable reserves. PT Freeport Indonesia’s initiatives to improve productivity and mining rates are an important factor in the ability to meet or potentially to exceed these plans.

We are also continuing to analyze our longer range mine plans to assess the optimal design of the Grasberg open pit, which may affect the timing of our development of the Grasberg underground block cave ore body. Our previous plan included the transition from the Grasberg open pit to the Grasberg underground block cave ore body in 2015. We expect to complete the current studies on longer range plans by year-end 2006.

Sales volumes may vary from these estimates depending on the areas being mined within the Grasberg open pit. Quarterly variations in sales volumes are expected to be significant. Based on current estimated sales volumes for the remainder of 2006 and copper prices of approximately $3.00 per pound and gold prices of approximately $600 per ounce, we expect to generate operating cash flows approximating $1.6
 
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billion in 2006, with over $1.2 billion in the second half of the year. The impact on our projected 2006 cash flows for each $0.10 per pound change in copper prices in the balance of the year would approximate $38 million, including the effects of price changes on related royalty costs, and for each $25 per ounce change in gold prices in the balance of the year would approximate $12 million.

Copper and Gold Markets
As shown in the graphs below, world metal prices for copper have fluctuated during the period from 1992 through July 2006 with the London Metal Exchange (LME) spot copper price varying from a low of approximately $0.60 per pound in 2001 to a record high of approximately $3.99 per pound on May 12, 2006, and world gold prices have fluctuated during the period from 1998 through July 2006 from a low of approximately $250 per ounce in 1999 to a high of approximately $726 per ounce on May 12, 2006. Current copper and gold prices reflect significantly higher levels of direct investment by commodity investors. This high level of activity can be expected to result in higher levels of volatility in copper and gold prices and in the share prices of FCX and other commodity producers. Copper and gold prices are affected by numerous factors beyond our control as described further in our Form 10-K for the year ended December 31, 2005.


* Excludes Shanghai stocks, producer, consumer and merchant stocks.

The graph above presents LME spot copper prices and reported stocks of copper at the LME and New York Commodity Exchange (COMEX) through July 31, 2006. Since 2003 and through 2005, global demand has exceeded supply, evidenced by the decline in warehouse inventories. LME and COMEX inventories have risen from the 2005 lows in recent months but combined stocks of approximately 100,000 metric tons at June 30, 2006 represent less than two days of global consumption. Copper prices averaged $3.29 per pound in the second quarter of 2006, with prices ranging from $2.52 per pound to a record high of $3.99 per pound. Copper prices have remained strong in July 2006 and the LME spot price closed at $3.56 per pound on July 31, 2006. Disruptions associated with strikes, unrest and other operational issues have resulted in a continuation of low levels of inventory. Future copper prices are expected to continue to be influenced by demand from China, economic performance in the United States (U.S.) and other industrialized countries, the timing of the development of new supplies of copper,
 
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production levels of mines and copper smelters and the level of direct participation by investors. We consider the current underlying supply and demand conditions in the global copper markets to be positive for our company.


The environment for gold continues to be positive with gold prices recently reaching new 25-year highs above $700 per ounce before declining to $600 per ounce. Gold prices continue to be supported by increased investment demand for gold, ongoing geopolitical tensions, a weak U.S. dollar, inflationary pressures, falling production from older mines, limited development of new mines and actions by gold producers to reduce hedge positions. Gold prices averaged $628 per ounce in the second quarter of 2006, with prices ranging from $567 per ounce to $726 per ounce. The London gold price closed at $633 per ounce on July 31, 2006.

CONSOLIDATED RESULTS

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

 
Second Quarter
  
Six Months
  
 
2006
  
2005
  
2006
  
2005
  
Revenues
$
1,426.2
  
$
902.9
  
$
2,512.3
  
$
1,706.0
  
Operating income
  
739.3
    
430.4
    
1,271.1
    
788.0
  
Net income applicable to common stock
  
367.3
    
175.2
    
618.9
    
305.6
  
Diluted net income per share of common stock
  
1.74
    
0.91
    
2.97
    
1.62
  

Consolidated revenues include PT Freeport Indonesia’s sale of copper concentrates, which also contain significant quantities of gold and silver, and the sale by Atlantic Copper of copper anodes, copper cathodes, and gold in anodes and slimes. Consolidated revenues for the second quarter of 2006 and the first six months of 2006 were higher than consolidated revenues for the 2005 periods, reflecting substantially higher copper and gold prices than the 2005 periods, partly offset by lower PT Freeport Indonesia sales volumes. PT Freeport Indonesia mined lower grade ore and reported lower production and sales in the second quarter of 2006 and the first six months of 2006, compared with the 2005 periods.
 
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At June 30, 2006, we had consolidated embedded derivatives on copper sales totaling 185.1 million pounds recorded at an average price of $3.34 per pound. Final prices on these sales will be established over the next several months pursuant to terms of sales contracts. We estimate that a five-cent change in the average price used for these embedded derivatives and realized prices for these sales would have an approximate $9 million impact on our 2006 consolidated revenues and an approximate $5 million impact on our 2006 consolidated net income.

Second-quarter 2006 consolidated revenues included net additions of $146.6 million ($77.7 million to net income or $0.35 per share) primarily for final pricing of concentrates sold in prior quarters, compared with $12.6 million ($6.7 million to net income or $0.03 per share) to second-quarter 2005 revenues. Six-month 2006 consolidated revenues included net additions of $137.9 million ($73.1 million to net income or $0.33 per share) compared with $8.7 million ($4.6 million to net income or $0.02 per share) for the six-month 2005 period, primarily for final pricing of concentrates sold in prior years.

Consolidated revenues and net income vary significantly with fluctuations in the market prices of copper and gold, sales volumes and other factors. Based on PT Freeport Indonesia’s projected share of copper sales for the remainder of 2006 (755.0 million pounds) and assuming an average price of $3.00 per pound of copper, each $0.10 per pound change in the average price realized in the balance of the year would have an approximate $76 million impact on our annual revenues and an approximate $38 million impact on our annual net income. A $25 per ounce change in the average price realized in the balance of the year on PT Freeport Indonesia’s projected share of gold sales for the remainder of 2006 (930,000 ounces) would have an approximate $23 million impact on our annual revenues and an approximate $12 million impact on our annual net income.

We currently have no copper or gold price protection contracts relating to our mine production. We had outstanding gold-denominated and silver-denominated preferred stock with dividends and redemption amounts determined by commodity prices. Our Gold-Denominated Preferred Stock, Series II was redeemed in February 2006, resulting in a $69.0 million reduction in revenues ($36.6 million to net income or $0.17 per share), and the final scheduled redemption of our Silver-Denominated Preferred Stock occurred on August 1, 2006 (see “Capital Resources and Liquidity - Financing Activities”).

Consolidated production and delivery costs were higher for the 2006 periods than the 2005 periods. The increases were primarily because of higher costs of concentrate purchases at Atlantic Copper caused by higher metals prices and higher production costs at PT Freeport Indonesia primarily caused by the adoption of Emerging Issues Task Force Issue No. 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry” (EITF 04-6). See Note 3 and “New Accounting Standards.”

Consolidated depreciation and amortization expense decreased to $43.4 million in the second quarter of 2006 and $86.6 million in the first six months of 2006, compared with $54.2 million in the second quarter of 2005 and $111.1 million in the first six months of 2005, primarily because of lower copper sales volumes at PT Freeport Indonesia during the 2006 periods. Exploration expenses increased to $2.8 million in the second quarter of 2006 and $5.4 million in the first six months of 2006 from $2.3 million in the second quarter of 2005 and $4.3 million in the first six months of 2005 (see “Mining and Exploration - PT Freeport Indonesia Exploration Activities”). Consolidated general and administrative expenses increased to $35.1 million in the second quarter of 2006 and $65.8 million in the first six months of 2006 from $25.4 million in the second quarter of 2005 and $47.0 million in the first six months of 2005 (see “Other Financial Results”).

Net interest expense decreased to $21.0 million in the second quarter of 2006 and $43.7 million in the first six months of 2006 from $35.3 million in the second quarter of 2005 and $72.8 million in the first six months of 2005 primarily because of lower debt levels. In the first six months of 2006, we induced conversion of $16.0 million of 7% Convertible Senior Notes due 2011 into 0.5 million shares of FCX common stock and purchased in open market transactions $11.5 million of 10⅛% Senior Notes due 2010 for $12.6 million. As a result of the induced conversions and open market transactions, we recorded losses on early extinguishment and conversion of debt totaling $2.2 million ($1.5 million to net income, net of related reduction of interest expense, or $0.01 per share) in the first six months of 2006 (see “Capital
 
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Resources and Liquidity - Financing Activities”). We are continuing to assess opportunities to repay debt in advance of scheduled maturities.

Other income includes interest income of $4.8 million in the second quarter of 2006, $3.3 million in the second quarter of 2005, $11.8 million in the first six months of 2006 and $7.0 million in the first six months of 2005. Other income also includes the impact of translating into U.S. dollars Atlantic Copper’s net euro-denominated liabilities, primarily its retiree pension obligations. Changes in the U.S. dollar/euro exchange rate require us to adjust the dollar value of our net euro-denominated liabilities and record the adjustment in earnings. The exchange rate was $1.18 per euro at December 31, 2005, $1.21 per euro at March 31, 2006 and $1.27 per euro at June 30, 2006. Exchange rate effects on our net income from euro-denominated liabilities were gains (losses) of $(0.4) million in the second quarter of 2006, $3.4 million in the second quarter of 2005, $(1.6) million in the first six months of 2006 and $6.3 million in the first six months of 2005. In the second quarter of 2006, Atlantic Copper recorded an $8.6 million ($8.6 million to net income or $0.04 per share) gain to other income for the disposition of land in a transaction with the local Spanish government. In the transaction, the provincial government granted Atlantic Copper development rights estimated to be worth $8.6 million in exchange for property owned by Atlantic Copper. Atlantic Copper expects to sell these development rights and certain non-operating properties in the third quarter of 2006 for an amount in excess of its book value.

PT Freeport Indonesia’s Contract of Work provides for a 35 percent corporate income tax rate. PT Indocopper Investama pays a 30 percent corporate income tax on dividends it receives from its 9.36 percent ownership in PT Freeport Indonesia. In addition, the tax treaty between Indonesia and the U.S. provides for a withholding tax rate of 10 percent on dividends and interest that PT Freeport Indonesia and PT Indocopper Investama pay to their parent company, FCX. We currently record no income taxes 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 we have provided no net financial statement benefit. We receive no consolidated tax benefit from these losses because they cannot be used to offset PT Freeport Indonesia’s profits in Indonesia, but can be utilized to offset Atlantic Copper’s future profits.

Parent company costs consist primarily of interest, depreciation and amortization, and general and administrative expenses. We receive minimal, if any, tax benefit from these costs, including interest expense, primarily because our parent company normally generates no taxable income from U.S. sources. As a result, our provision for income taxes as a percentage of our consolidated income before income taxes and minority interests will vary as PT Freeport Indonesia’s income changes, absent changes in Atlantic Copper and parent company costs. Summaries of the approximate significant components of the calculation of our consolidated provision for income taxes are shown below (in thousands, except percentages).

 
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Three Months Ended
  
Six Months Ended
  
 
June 30,
  
June 30,
  
 
2006
  
2005
  
2006
  
2005
  
Mining and exploration segment operating incomea
$
690,977
  
$
390,780
  
$
1,138,504
  
$
819,087
  
Mining and exploration segment interest expense, net
  
(1,608
)
  
(5,897
)
  
(4,881
)
  
(11,624
)
Intercompany operating profit recognized (deferred)
  
34,208
    
48,350
    
108,419
    
(15,220
)
Income before taxes
  
723,577
    
433,233
    
1,242,042
    
792,243
  
Indonesian corporate income tax rate
  
35
%
  
35
%
  
35
%
  
35
%
Corporate income taxes
  
253,252
    
151,632
    
434,715
    
277,285
  
                         
Approximate PT Freeport Indonesia net income
  
470,325
    
281,601
    
807,327
    
514,958
  
Withholding tax on FCX’s equity share
  
9.064
%
  
9.064
%
  
9.064
%
  
9.064
%
Withholding taxes
  
42,630
    
25,524
    
73,176
    
46,676
  
                         
PT Indocopper Investama corporate income tax
  
11,247
    
6,957
    
16,870
    
21,081
  
Other, net
  
3,115
    
4,571
    
7,205
    
7,670
  
FCX consolidated provision for income taxes
$
310,244
  
$
188,684
  
$
531,966
  
$
352,712
  
                         
FCX consolidated effective tax rate
  
42
%
  
46
%
  
43
%
  
48
%
                         
a.  
Excludes charges for the in-the-money value of FCX stock option exercises, which are eliminated in consolidation, totaling $29.4 million for the 2006 quarter, $0.7 million for the 2005 quarter, $85.5 million for the 2006 six-month period and $17.4 million for the 2005 six-month period.

RESULTS OF OPERATIONS

We have two operating segments: “mining and exploration” and “smelting and refining.” The mining and exploration segment consists of our Indonesian activities including PT Freeport Indonesia’s copper and gold mining operations, Puncakjaya Power’s power generating operations (after eliminations with PT Freeport Indonesia) and our Indonesian exploration activities, including those of Eastern Minerals. The smelting and refining segment includes Atlantic Copper’s operations in Spain and PT Freeport Indonesia’s equity investment in PT Smelting. Summary comparative operating income (loss) data by segment follow (in millions):

 
Second Quarter
  
Six Months
  
 
2006
  
2005
  
2006
  
2005
  
Mining and explorationa
$
661.5
  
$
390.1
  
$
1,053.0
  
$
801.6
  
Smelting and refining
  
21.8
    
(0.1
)
  
35.3
    
(1.6
)
Intercompany eliminations and othera, b
  
56.0
    
40.4
    
182.8
    
(12.0
)
FCX operating income
$
739.3
  
$
430.4
  
$
1,271.1
  
$
788.0
  
                         
a.  
Includes charges to the mining and exploration segment for the in-the-money value of FCX stock option exercises, which are eliminated in consolidation, totaling $29.4 million in the 2006 quarter, $0.7 million in the 2005 quarter, $85.5 million for the 2006 six-month period and $17.4 million for the 2005 six-month period.
b.  
We defer recognizing profits on PT Freeport Indonesia’s sales to Atlantic Copper and on 25 percent of PT Freeport Indonesia’s sales to PT Smelting until their sales of final products to third parties. Changes in the amount of these deferred profits impacted operating income by $34.2 million in the second quarter of 2006, $48.3 million in the second quarter of 2005, $108.4 million in the first six months of 2006 and $(15.2) million in the first six months of 2005. Our consolidated earnings can fluctuate materially depending on the timing and prices of these sales. At June 30, 2006, our deferred profits to be recognized in future periods’ operating income totaled $114.2 million, $60.5 million to net income, after taxes and minority interest sharing.

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MINING AND EXPLORATION

PT Freeport Indonesia Operating Results

     
Second Quarter
  
Six Months
  
     
2006
  
2005
  
2006
  
2005
  
PT Freeport Indonesia Operating Data, Net of Rio Tinto’s Interest
            
Copper (recoverable)
                    
Production (000s of pounds)
    
237,100
  
302,300
  
458,400
  
637,900
  
Production (metric tons)
    
107,500
  
137,100
  
207,900
  
289,300
  
Sales (000s of pounds)
    
220,100
  
313,700
  
445,300
  
641,800
  
Sales (metric tons)
    
99,900
  
142,300
  
202,000
  
291,100
  
Average realized price per pound
    
$3.33
  
$1.53
  
$3.27
  
$1.54
  
Gold (recoverable ounces)
                    
Production
    
307,300
  
591,300
  
769,100
  
1,200,700
  
Sales
    
278,000
  
616,400
  
750,500
  
1,211,700
  
Average realized price per ounce
    
$613.77
  
$428.23
  
$492.73
a
$427.54
  
                     
PT Freeport Indonesia, 100% Aggregate Operating Data
                
Ore milled (metric tons per day)
    
223,700
  
211,800
  
220,200
  
205,600
  
Average ore grade
                    
Copper (percent)
    
0.72
  
0.98
  
0.72
  
1.06
  
Gold (grams per metric ton)
    
0.67
  
1.43
  
0.79
  
1.52
  
Recovery rates (percent)
                    
Copper
    
84.1
  
87.4
  
83.3
  
88.5
  
Gold
    
76.4
  
83.8
  
78.8
  
83.3
  
Copper (recoverable)
                    
Production (000s of pounds)
    
258,800
  
349,200
  
505,400
  
739,500
  
Production (metric tons)
    
117,300
  
158,400
  
229,200
  
335,400
  
Sales (000s of pounds)
    
239,900
  
362,500
  
491,200
  
743,900
  
Sales (metric tons)
    
108,800
  
164,400
  
222,800
  
337,400
  
Gold (recoverable ounces)
                    
Production
    
325,700
  
727,400
  
796,400
  
1,491,300
  
Sales
    
293,800
  
758,600
  
780,100
  
1,501,800
  

a.   
Amount was $585.34 before a loss resulting from redemption of FCX’s Gold-Denominated Preferred Stock, Series II.

PT Freeport Indonesia mined lower grade ore and reported lower production and sales in the second quarter of 2006 and the first six months of 2006, compared with the 2005 periods. PT Freeport Indonesia’s share of second-quarter 2006 production totaled 237.1 million pounds of copper and 307,300 ounces of gold. PT Freeport Indonesia experienced weather-related shipping delays at the end of June, resulting in PT Freeport Indonesia’s share of second-quarter 2006 copper sales of 220.1 million pounds being lower than the previous estimate of 235.0 million pounds announced on June 5, 2006. PT Freeport Indonesia’s share of second-quarter 2006 gold sales of 278,000 ounces slightly exceeded the previous estimate of 275,000 ounces. In May 2006, PT Freeport Indonesia encountered a relatively small section of ore in the “6 North” pushback with abnormally high clay content, which adversely affected ore flow, mill recoveries and concentrate grades. Operations improved during June as PT Freeport Indonesia gained access to better ore types. For the six-month periods, copper and gold sales volumes totaled 445.3 million pounds of copper and 750,500 ounces of gold in 2006, compared with sales of 641.8 million pounds of copper and 1,211,700 ounces of gold in 2005.

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Mill throughput, which varies depending on ore types being processed, averaged 223,700 metric tons of ore per day in the second quarter of 2006, 211,800 metric tons in the second quarter of 2005, 220,200 metric tons in the first six months of 2006 and 205,600 metric tons in the first six months of 2005. Mill rates are expected to average over 220,000 metric tons per day during the second half of 2006. Operations were temporarily suspended for an approximate four-day period in February 2006 when illegal miners (“gold panners”) blocked a road leading to our mill. While this situation was resolved peacefully by Indonesian government authorities, we continue to work with the government to resolve the legal and security concerns presented by the increased presence of gold panners in our area of operations. Approximate average daily throughput processed at our mill facilities from each of our producing mines follows (metric tons of ore per day):

 
Second Quarter
  
Six Months
  
 
2006
  
2005
  
2006
  
2005
  
Grasberg open pit
176,500
  
169,500
  
174,700
  
163,400
  
Deep Ore Zone underground mine
47,200
  
42,300
  
45,500
  
42,200
  
Total mill throughput
223,700
  
211,800
  
220,200
  
205,600
  
                 
In the second quarter of 2006, copper ore grades averaged 0.72 percent and recovery rates averaged 84.1 percent, compared with 0.98 percent and 87.4 percent for the second quarter of 2005. Gold ore grades averaged 0.67 grams per metric ton (g/t) and recovery rates averaged 76.4 percent in the second quarter of 2006, compared with 1.43 g/t and 83.8 percent for the second quarter of 2005. The 2006 ore grades and recoveries for copper and gold reflect the mining of lower grade material compared with the extraordinarily high grades mined in 2005 and abnormally high clay content associated with mining a relatively small section of ore in the “6 North” pushback. Average ore grades are expected to improve in the second half of 2006 with the highest grades expected to be mined in the fourth quarter.

Production from the DOZ underground mine averaged 47,200 metric tons of ore per day in the second quarter of 2006, representing 21 percent of mill throughput. DOZ continues to perform above design capacity of 35,000 metric tons of ore per day. PT Freeport Indonesia is expanding the capacity of the DOZ underground operation to a sustained rate of 50,000 metric tons of ore per day with the installation of a second crusher and additional ventilation, expected to be completed by mid-2007. PT Freeport Indonesia’s share of capital expenditures for the DOZ expansion totaled approximately $8 million in the first six months of 2006 (approximately $27 million incurred through June 30, 2006) and is expected to approximate $37 million through the projected 2007 ramp-up, with approximately $16 million estimated for 2006. PT Freeport Indonesia is completing plans that are anticipated to expand the capacity of the DOZ mine to 80,000 metric tons of ore per day. The DOZ mine, a block cave operation, is one of the world’s largest underground mines.

In 2004, PT Freeport Indonesia commenced its “Common Infrastructure” project, which will provide access to its large undeveloped underground ore bodies located in the Grasberg minerals district through a tunnel system located approximately 400 meters deeper than its existing underground tunnel system. In addition to providing access to our underground ore bodies, the tunnel system will enable PT Freeport Indonesia to conduct future exploration in prospective areas associated with currently identified ore bodies. PT Freeport Indonesia’s share of capital expenditures for its Common Infrastructure project totaled approximately $7 million in the first six months of 2006 and is estimated to total approximately $8 million in 2006. The Common Infrastructure project is progressing according to plan. Work on the Grasberg underground ore body has begun with PT Freeport Indonesia’s share of capital expenditures totaling approximately $3 million in the first six months of 2006. Projected 2006 capital expenditures for the Grasberg underground ore body approximate $23 million.

PT Freeport Indonesia is also proceeding with plans to develop Big Gossan, a high-grade deposit located near the existing milling complex. Our Board of Directors has approved this project and aggregate capital expenditures from 2005 to 2009 for Big Gossan are expected to total approximately $225 million ($195 million net to PT Freeport Indonesia, with approximately $50 million in 2006). PT Freeport Indonesia’s share of capital expenditures for Big Gossan totaled approximately $29 million in the first six months of 2006. Production is expected to ramp up to 7,000 metric tons per day by 2010 (average annual aggregate
 
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incremental production of 135 million pounds of copper and 65,000 ounces of gold, with PT Freeport Indonesia receiving 60 percent of these amounts). The Big Gossan mine is being developed as an open-stope mine with cemented backfill, an established mining methodology expected to be higher-cost than the block-cave method used at the DOZ mine.

PT Freeport Indonesia Revenues

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

 
Second
  
Six
  
 
Quarter
  
Months
  
PT Freeport Indonesia revenues - prior year period
$
678.4
  
$
1,365.8
  
Price realizations:
            
Copper
  
395.7
    
767.3
  
Gold
  
51.6
    
48.9
  
Sales volumes:
            
Copper
  
(143.6
)
  
(303.0
)
Gold
  
(144.9
)
  
(197.2
)
Adjustments, primarily for copper pricing on prior year open sales
  
237.2
    
196.2
  
Treatment charges, royalties and other
  
(39.2
)
  
(46.0
)
PT Freeport Indonesia revenues - current year period
$
1,035.2
  
$
1,832.0
  
             
Realized copper prices more than doubled to an average of $3.33 per pound in the second quarter of 2006 from $1.53 in the second quarter of 2005. Realized gold prices improved by 43 percent to an average of $613.77 per ounce from $428.23 in the second quarter of 2005. Realized copper prices also more than doubled to an average of $3.27 per pound in the first six months of 2006 from $1.54 in the 2005 period. Realized gold prices in the first six months of 2006 averaged $492.73 per ounce; including a reduction of $92.61 per ounce for revenue adjustments associated with the first-quarter 2006 redemption of our Gold-Denominated Preferred Stock, Series II; compared to $427.54 in the first six months of 2005.

As discussed above, PT Freeport Indonesia’s share of second-quarter 2006 copper sales of 220.1 million pounds and gold sales of 278,000 ounces were lower than second-quarter 2005 sales of 313.7 million pounds of copper and 616,400 ounces of gold. For the six-month periods, copper and gold sales volumes totaled 445.3 million pounds of copper and 750,500 ounces of gold in 2006, compared with sales of 641.8 million pounds of copper and 1,211,700 ounces of gold in 2005.

Treatment charges vary with the volume of metals sold and the price of copper, and royalties vary with the volume of metals sold and the prices of copper and gold. Market rates for treatment and refining charge rates began to increase significantly in late 2004. A large part of the increase relates to the price participation component of our concentrate sales agreements. Royalties totaled $22.9 million in the second quarter of 2006 and $42.9 million in the first six months of 2006 compared with $17.7 million in the second quarter of 2005 and $36.5 million in the first six months of 2005, reflecting higher metal prices partly offset by lower sales volumes.

Substantially all of PT Freeport Indonesia’s concentrate sales contracts provide final copper pricing in a specified future period based on prices quoted on the LME. PT Freeport Indonesia records revenues and invoices its customers based on LME prices at the time of shipment. Under accounting rules, these terms create an “embedded derivative” in our concentrate sales contracts which must be adjusted to fair value through earnings each period until the date of final copper pricing. PT Freeport Indonesia’s second-quarter 2006 revenues include net additions of $269.2 million for adjustments to the fair value of embedded copper derivatives in concentrate sales contracts, compared with $11.5 million in the second quarter of 2005. PT Freeport Indonesia’s six-month 2006 revenues included net additions of $452.1 million for adjustments to the fair value of embedded derivatives in concentrate sales contracts, compared with $37.2 million in the 2005 period.

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PT Freeport Indonesia has long-term contracts 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. Under the PT Smelting contract, 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 specified minimum rates, subject to renegotiation in 2008. The rate was $0.23 per pound during the period from the commencement of PT Smelting’s operations in 1998 until April 2004, when it declined to a minimum of $0.21 per pound. PT Smelting’s rates for 2006 are expected to exceed the minimum $0.21 per pound (see “Smelting and Refining”). Current rates are substantially higher than the minimum rate.

PT Freeport Indonesia Costs

Gross Profit per Pound of Copper/per Ounce of Gold and Silver
  
   
Three Months Ended June 30, 2006
                        
Pounds of copper sold (000s)
  
220,100
    
220,100
              
Ounces of gold sold
              
278,000
        
Ounces of silver sold
                    
835,200
  
             
   
By-Product
    
Co-Product Method
  
   
Method
    
Copper
    
Gold
    
Silver
  
Revenues, after adjustments shown below
  
$3.33
    
$3.33
    
$613.77
    
$11.74
  
                         
Site production and delivery, before net non-
                        
cash and nonrecurring costs shown below
  
1.23
    
0.98
    
184.56
    
3.76
  
Gold and silver credits
  
(0.85
)
  
-
    
-
    
-
  
Treatment charges
  
0.49
a
  
0.39
b
  
73.03
b
  
1.49
b
Royalty on metals
  
0.11
    
0.09
    
15.62
    
0.32
  
Unit net cash costsc
  
0.98
    
1.46
    
273.21
    
5.57
  
Depreciation and amortization
  
0.15
    
0.12
    
23.10
    
0.47
  
Noncash and nonrecurring costs, net
  
0.05
    
0.04
    
7.09
    
0.14
  
Total unit costs
  
1.18
    
1.62
    
303.40
    
6.18
  
Revenue adjustments, primarily for pricing on
                        
prior period open sales
  
1.12
    
1.12
    
18.47
    
1.14
  
PT Smelting intercompany profit elimination
  
(0.03
)
  
(0.03
)
  
(5.35
)
  
(0.11
)
Gross profit per pound/ounce
  
$3.24
    
$2.80
    
$323.49
    
$6.59
  
                         
a.  
Includes $14.4 million or $0.07 per pound for adjustments to prior quarters’ concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since March 31, 2006.
b.  
Includes $11.5 million or $0.05 per pound for copper, $2.7 million or $9.84 per ounce for gold and $0.2 million or $0.20 per ounce for silver for adjustments to prior quarters’ concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since March 31, 2006.
c.  
For a reconciliation of unit net cash costs to production and delivery costs applicable to sales reported in FCX’s consolidated financial statements refer to “Product Revenues and Production Costs.”

 
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Three Months Ended June 30, 2005
                        
Pounds of copper sold (000s)
  
313,700
    
313,700
              
Ounces of gold sold
              
616,400
        
Ounces of silver sold
                    
1,057,700
  
             
   
By-Product