Edgar Filing: FREEPORT MCMORAN COPPER & GOLD INC

FCX 1Q07 Form 10-Q



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 March 31, 2007
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)

One North Central Avenue
Phoenix, AZ	85004-4414
(Address of principal executive offices)	(Zip Code)


(602) 366-8100
(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 o 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 o Non-accelerated filer oÿ

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

On April 30, 2007, there were issued and outstanding 381,139,775 shares of the registrant’s Common Stock, par value $0.10 per share.

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FREEPORT-McMoRan COPPER & GOLD INC.

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	Page
Part I. Financial Information	3

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets (Unaudited)	3

Consolidated Statements of Income (Unaudited)	4

Consolidated Statements of Cash Flows (Unaudited)	5

Consolidated Statement of Stockholders’ Equity (Unaudited)	6

Notes to Consolidated Financial Statements (Unaudited)	7

Report of Independent Registered Public Accounting Firm	29

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations	30

Item 3. Quantitative and Qualitative Disclosures about Market Risk	71

Item 4. Controls and Procedures	71

Part II. Other Information	72

Item 1. Legal Proceedings	72

Item 1A. Risk Factors	76

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	88

Item 4. Submission of Matters to a Vote of Security Holders	88

Item 6. Exhibits	89

Signature	90

Exhibit Index	E-1

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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)

	March 31,			December 31,
	2007			2006
	(In Millions)
ASSETS
Current assets:
Cash and cash equivalents	$	3,126.5		$	907.5
Accounts receivable		2,254.4			485.8
Inventories		2,590.9			724.2
Mill and leach stockpiles		340.4			-
Prepaid expenses, restricted cash and other		241.7			33.5
Total current assets		8,553.9			2,151.0
Property, plant, equipment and development costs, net		23,730.1			3,098.5
Other assets		716.1			140.3
Trust assets		623.2			-
Long-term mill and leach stockpiles		431.7			-
Goodwill		7,379.0			-
Total assets	$	41,434.0		$	5,389.8

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	2,641.5		$	789.0
Accrued income taxes		785.1			164.4
Current portion of long-term debt and short-term borrowings		199.2			19.1
Total current liabilities		3,625.8			972.5
Long-term debt, less current portion:
Senior notes		7,230.0			620.0
Term loan		4,382.0			-
Project financing, equipment loans and other		224.9			41.0
Total long-term debt, less current portion		11,836.9			661.0
Accrued postretirement benefits and other liabilities		1,206.1			297.9
Deferred income taxes		6,992.8			800.3
Total liabilities		23,661.6			2,731.7
Minority interests		1,473.7			213.0
Stockholders’ equity:
5½% Convertible perpetual preferred stock		1,100.0			1,100.0
6¾% Mandatory convertible preferred stock		2,875.0			-
Common stock		49.5			31.0
Capital in excess of par value		13,266.5			2,668.1
Retained earnings		1,833.5			1,414.8
Accumulated other comprehensive loss		(3.0	)		(19.9	)
Common stock held in treasury		(2,822.8	)		(2,748.9	)
Total stockholders’ equity		16,298.7			2,445.1
Total liabilities and stockholders’ equity	$	41,434.0		$	5,389.8

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

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FREEPORT-McMoRan COPPER & GOLD INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended March 31,
	2007			2006
	(In Millions, Except Per Share Amounts)
Revenues	$	2,302.9		$	1,086.1
Cost of sales:
Production and delivery		952.1			477.9
Depreciation, depletion and amortization		116.3			43.3
Total cost of sales		1,068.4			521.2
Exploration and research expenses		6.5			2.6
Selling, general and administrative expenses		48.9			30.6
Total costs and expenses		1,123.8			554.4
Operating income		1,179.1			531.7
Interest expense, net		(51.9	)		(22.7	)
Losses on early extinguishment and conversion of debt, net		(87.8	)		(2.0	)
Other income, net		23.6			5.0
Equity in affiliated companies’ net earnings		4.5			3.6
Income before income taxes and minority interests		1,067.5			515.6
Provision for income taxes		(460.2	)		(221.7	)
Minority interests in net income of consolidated subsidiaries		(114.4	)		(27.1	)
Net income		492.9			266.8
Preferred dividends		(16.7	)		(15.1	)
Net income applicable to common stock	$	476.2		$	251.7

Net income per share of common stock:
Basic		$2.20			$1.34
Diluted		$2.02			$1.23

Average common shares outstanding:
Basic		216.8			187.9
Diluted		244.0			221.5

Dividends paid per share of common stock		$0.3125			$0.8125

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

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FREEPORT-McMoRan COPPER & GOLD INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended
	March 31,
	2007			2006
	(In Millions)
Cash flow from operating activities:
Net income	$	492.9		$	266.8
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Unrealized losses on copper collars and copper put options		38.1			-
Depreciation, depletion and amortization		116.3			43.3
Minority interests' in net income of consolidated subsidiaries		114.4			27.1
Noncash compensation and benefits		25.5			17.0
Losses on early extinguishment and conversion of debt, net		87.8			2.0
Deferred income taxes		(46.0	)		41.9
Elimination (recognition) of profit on PT Freeport Indonesia sales
to PT Smelting		35.7			(20.8	)
Other		6.4			-
(Increases) decreases in working capital, excluding amounts
acquired from Phelps Dodge:
Accounts receivable		(398.0	)		65.2
Inventories		80.7			(40.3	)
Prepaid expenses, restricted cash and other		0.8			(7.3	)
Accounts payable and accrued liabilities		(30.0	)		(250.4	)
Accrued income taxes		144.3			(268.3	)
Increase in working capital		(202.2	)		(501.1	)
Net cash provided by (used in) operating activities		668.9			(123.8	)

Cash flow from investing activities:
Acquisition of Phelps Dodge, net of cash acquired		(13,888.1	)		-
PT Freeport Indonesia capital expenditures		(74.0	)		(48.6	)
Phelps Dodge capital expenditures		(60.9	)		-
Other capital expenditures		(7.5	)		(3.5	)
Sale of assets and other		1.0			1.7
Net cash used in investing activities		(14,029.5	)		(50.4	)

Cash flow from financing activities:
Proceeds from term loans under bank credit facility		10,000.0			-
Repayments of term loans under bank credit facility		(5,618.0	)		-
Net proceeds from sales of senior notes		5,880.0			-
Net proceeds from sale of 6¾% mandatory convertible preferred stock		2,803.1			-
Net proceeds from sale of common stock		2,815.7			-
Proceeds from other debt		100.9			55.5
Repayments of other debt		(48.3	)		(201.0	)
Cash dividends paid:
Common stock		(62.9	)		(153.2	)
Preferred stock		(15.1	)		(15.1	)
Minority interests		(47.0	)		(18.7	)
Net (payments for) proceeds from exercised stock options		(44.9	)		11.1
Excess tax benefit from exercised stock options		1.1			16.1
Bank credit facilities fees and other		(185.0	)		-
Net cash provided by (used in) financing activities		15,579.6			(305.3	)

Net increase (decrease) in cash and cash equivalents		2,219.0			(479.5	)
Cash and cash equivalents at beginning of year		907.5			763.6
Cash and cash equivalents at end of period	$	3,126.5		$	284.1

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

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FREEPORT-McMoRan COPPER & GOLD INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

																		Accumulated
	Convertible Perpetual			Mandatory Convertible														Other			Common Stock
	Preferred Stock			Preferred Stock				Common Stock										Compre-			Held in Treasury
	Number			Number				Number				Capital in						hensive			Number
	of	At Par		of		At Par		of		At Par		Excess of			Retained			Income			of		At			Stockholders’
	Shares	Value		Shares		Value		Shares		Value		Par Value			Earnings			(Loss)			Shares		Cost			Equity
	(In Millions)
Balance at December 31, 2006	1.1	$	1,100.0		-	$	-		309.9	$	31.0	$	2,668.1		$	1,414.8		$	(19.9	)		113.0	$	(2,748.9	)	$	2,445.1
Sale of 6¾% mandatory
convertible preferred stock	-		-		28.8		2,875.0		-		-		(71.9	)		-			-			-		-			2,803.1
Common stock issued
to acquire Phelps Dodge	-		-		-		-		136.9		13.7		7,767.5			-			-			-		-			7,781.2
Sale of common stock	-		-		-		-		47.2		4.7		2,811.0			-			-			-		-			2,815.7
Exercised stock options, issued
restricted stock and other	-		-		-		-		1.2		0.1		52.6			-			-			-		-			52.7
Stock-based compensation costs	-		-		-		-		-		-		36.1			-			-			-		-			36.1
Tax benefit for stock
option exercises	-		-		-		-		-		-		3.1			-			-			-		-			3.1
Tender of shares for exercised
stock options and restricted
stock	-		-		-		-		-		-		-			-			-			1.2		(73.9	)		(73.9	)
Adjustment to initially
apply FIN 48	-		-		-		-		-		-		-			4.3			-			-		-			4.3
Dividends on common stock	-		-		-		-		-		-		-			(61.8	)		-			-		-			(61.8	)
Dividends on preferred stock	-		-		-		-		-		-		-			(16.7	)		-			-		-			(16.7	)
Comprehensive income (loss):
Net income	-		-		-		-		-		-		-			492.9			-			-		-			492.9
Other comprehensive income
(loss), net of taxes:
Investment adjustment	-		-		-		-		-		-		-			-			12.8			-		-			12.8
Translation adjustment	-		-		-		-		-		-		-			-			0.5			-		-			0.5
Change in unrealized
derivatives fair value	-		-		-		-		-		-		-			-			0.7			-		-			0.7
Reclass to earnings	-		-		-		-		-		-		-			-			1.3			-		-			1.3
Change in unrecognized
amounts (SFAS 158)	-		-		-		-		-		-		-			-			0.1			-		-			0.1
Amortization of
unrecognized amounts
(SFAS 158)	-		-		-		-		-		-		-			-			1.5			-		-			1.5
Other comprehensive income	-		-		-		-		-		-		-			-			16.9			-		-			16.9
Total comprehensive income	-		-		-		-		-		-		-			-			-			-		-			509.8
Balance at March 31, 2007	1.1	$	1,100.0		28.8	$	2,875.0		495.2	$	49.5	$	13,266.5		$	1,833.5		$	(3.0	)		114.2	$	(2,822.8	)	$	16,298.7

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

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FREEPORT-McMoRan COPPER & GOLD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.	GENERAL INFORMATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). Therefore, this information should be read in conjunction with Freeport-McMoRan Copper & Gold Inc.’s (FCX) consolidated financial statements and notes contained in its 2006 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 interim periods reported. With the exception of certain adjustments associated with the acquisition of Phelps Dodge Corporation (Phelps Dodge), all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three-month period ended March 31, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

For comparative purposes, certain amounts for the first quarter of 2006 have been reclassified to conform to current period presentation.

As further discussed in Note 2, on March 19, 2007, FCX completed its acquisition of Phelps Dodge. First-quarter 2007 financial results include Phelps Dodge’s results beginning March 20, 2007.

2.	ACQUISITION OF PHELPS DODGE

On March 19, 2007, FCX acquired Phelps Dodge. Phelps Dodge, now a wholly owned subsidiary of FCX, is a fully integrated producer of copper and molybdenum, with mines in North and South America and processing capabilities for other minerals as by-products, such as gold, silver and rhenium, and several development projects, including the Tenke Fungurume mine in the Democratic Republic of Congo (DRC). Additionally, Phelps Dodge has an international manufacturing division, Phelps Dodge International Corporation (PDIC), which manufactures engineered products principally for the global energy sector. The estimated fair value of assets acquired and liabilities assumed and the results of Phelps Dodge’s operations are included in FCX’s consolidated financial statements beginning March 20, 2007.

In the acquisition, each share of Phelps Dodge common stock was exchanged for 0.67 of a share of FCX common stock and $88.00 in cash. As a result, FCX issued 136.9 million shares and paid $18.0 billion in cash to Phelps Dodge shareholders. The acquisition has been accounted for under the purchase method as required by Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” with FCX as the accounting acquirer. Below is a summary of the $25.9 billion purchase price, which was funded through a combination of common shares issued, borrowings under a new $11.5 billion senior credit facility, proceeds from the offering of $6 billion of senior notes (refer to Note 8 for further discussion) and available cash resources (in millions, except exchange ratio):

Phelps Dodge common stock outstanding
and issuable at March 19, 2007		204.3
Exchange offer ratio of FCX common stock for each
Phelps Dodge common share		0.67
Shares of FCX common stock issued		136.9

Cash consideration of $88.00 for each Phelps Dodge common share	$	17,979	^a
Fair value of FCX common stock		7,781	^b
Estimated change of control costs and related employee benefits		69
Estimated transaction costs		62
Total purchase price	$	25,891

a.	Cash consideration includes cash paid in lieu of any fractional shares of FCX stock.

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b.	Measurement of the common stock component of the purchase price based on a weighted average closing price of FCX’s common stock of $56.85 for the two days prior to through two days after the public announcement of the merger on November 19, 2006.

In accordance with SFAS No. 141, the purchase price paid is determined at the date of the public announcement of the transaction and is allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the closing date of March 19, 2007. The estimated fair values were based on internal estimates and are subject to change as FCX completes its analysis. In valuing acquired assets and assumed liabilities, fair values are based on, but are not limited to: quoted market prices, where available; the intent of FCX with respect to whether the assets purchased are to be held, sold or abandoned; expected future cash flows; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; and appropriate discount rates and growth rates. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill. A significant decline in copper or molybdenum prices from those used to estimate the fair values of the acquired assets could result in impairment to the carrying amounts assigned to inventories; mill and leach stockpiles; property, plant, equipment and development costs and goodwill.

Below provides a summary of the preliminary purchase price allocation as of March 31, 2007 (in billions):

							Preliminary
							Purchase
	Historical			Fair Value			Price
	Balances			Adjustments			Allocation
Cash and cash equivalents	$	4.2		$	-		$	4.2
Metals inventories and mill and leach stockpiles^a		0.7			1.7			2.4
Property, plant, equipment and development costs^b		6.0			14.6			20.6
Other assets		3.3			(0.4	)		2.9
Allocation to goodwill^c		-			7.4			7.4
Total assets		14.2			23.3			37.5
Deferred income taxes (current and long-term)^d		(0.7	)		(5.6	)		(6.3	)
Other liabilities		(4.1	)		-			(4.1	)
Minority interests		(1.2	)		-			(1.2	)
Total	$	8.2		$	17.7		$	25.9

Inventories and stockpiles were valued using estimated discounted cash flows based on estimated selling prices less selling and completion costs and a reasonable profit allowance. Application of fair value principles to metals inventories and stockpiles resulted in a significantly higher value being applied to inventory compared with the historical cost carrying amounts recorded by Phelps Dodge. Consequently, when inventory on hand as of the date of acquisition is subsequently sold, FCX will recognize incremental noncash costs and realize a significantly smaller profit margin with respect to this inventory.

Includes amounts based on estimated discounted cash flows from future production of proven and probable reserves and for values of properties other than proven and probable reserves (VBPP). Carrying amounts assigned to proven and probable reserves are depleted using the unit of production method over the estimated lives of the reserves. Carrying amounts assigned to VBPP are not charged to income until the VBPP becomes associated with proven and probable reserves or are determined to be impaired.

The concept of VBPP is described in Emerging Issue Task Force (EITF) Issue No. 04-3, “Mining Assets: Impairment and Business Combinations,” and has been interpreted differently by different mining companies. FCX’s preliminary adjustment to property, plant, equipment and development costs includes VBPP attributable to mineralized material that FCX believes could be brought into production with the establishment or modification of required permits and should market conditions and technical assessments warrant. Mineralized material is a mineralized body that has been delineated by appropriately spaced drilling and/or underground sampling to support reported tonnage and average

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grade of metal(s). Such a deposit may not qualify as proven and probable reserves until legal and economic feasibility are confirmed based upon a comprehensive evaluation of development costs, unit costs, grades, recoveries and other material factors. The carrying amount for property, plant, equipment and development costs includes preliminary adjustments attributable to inferred mineral resources and exploration potential. FCX is continuing to analyze VBPP and the final values may vary significantly from preliminary estimates.

The final valuation of assets acquired and liabilities assumed is not complete and the net adjustments to those values will result in changes to goodwill and other carrying amounts assigned to assets and liabilities based on the preliminary analyses. None of the $7.4 billion allocation to goodwill is deductible for tax purposes.

d.	Deferred income taxes have been recognized based on the estimated fair value adjustments to net assets.

As of March 31, 2007, FCX had not identified any material pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available that an asset existed, a liability had been incurred or an asset had been impaired as of the acquisition date, and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.

FCX paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets acquired for a number of potential strategic and financial benefits that are expected to be realized, including, but not limited to, the following:

·	The combined company’s increased scale of operations, management depth and strengthened cash flow provide an improved platform to capitalize on growth opportunities in the global market.

·	The combined company is well-positioned to benefit from the positive copper market at a time when there is a scarcity of large-scale copper development projects combined with strong global demand for copper.

·	The combined company has long-lived, geographically diverse reserves, totaling approximately 77 billion pounds of copper, 38 million ounces of gold and 2 billion pounds of molybdenum, net of minority interests as of December 31, 2006.

·	The combined company has exploration rights with significant potential in copper regions around the world, including FCX’s prospective acreage in Papua, Indonesia, and Phelps Dodge’s opportunities at its Tenke Fungurume concessions in the DRC.

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Pro Forma Financial Information. The following pro forma information assumes that FCX acquired Phelps Dodge effective January 1, 2007 for the three-month period ended March 31, 2007, and effective January 1, 2006, for the three-month period ended March 31, 2006 (in millions, except per share data):

	Historical					Pro forma
				Phelps		Purchase			Pro forma
Three months ended March 31, 2007	FCX			Dodge^a		Adjustments			Consolidated
Revenues	$	2,302.9		$	2,536.7	$	-		$	4,839.6	^b
Operating income	$	1,179.1		$	817.2	$	(375.7	)^c	$	1,620.6	^b
Income before income taxes and minority
interests	$	1,067.5	^c,d,e	$	861.4	$	(469.0	)^c,e	$	1,459.9	^b
Net income applicable to common stock	$	476.2	^c,d,e	$	508.0	$	(363.0	)^c	$	621.2	^b
Diluted net income per share of common stock	$	2.02			N/A	$	-		$	1.51
Diluted weighted average shares outstanding		244.0			N/A		N/A			453.6	^g

Three months ended March 31, 2006
Revenues	$	1,086.1	^f	$	2,224.6	$	-		$	3,310.7	^b
Operating income	$	531.7	^f	$	574.2	$	(686.8	)^c	$	419.1	^b
Income from continuing operations before
income taxes and minority interests	$	515.6	^e,f	$	603.7	$	(895.4	)^c,e	$	223.9	^b
Income (loss) from continuing operations
applicable to common stock	$	251.7	^e,f	$	350.7	$	(669.1	)^c,e	$	(66.7	)^b
Diluted income (loss) per share from continuing operations	$	1.23		$	1.72	$	-		$	(0.18	)
Weighted average shares outstanding		221.5			203.4		N/A			372.2	^g

a.	First-quarter 2007 represents the results of Phelps Dodge’s operations from January 1, 2007, through March 19, 2007. Beginning March 20, 2007, the results of Phelps Dodge’s operations are included in FCX’s consolidated financial statements.

Includes charges to revenues for mark-to-market accounting adjustments on Phelps Dodge’s copper collar price protection program totaling $58.3 million ($35.6 million to net income or $0.08 per share) in the first quarter of 2007, and $392.6 million ($298.4 million to net loss or $0.80 per share) in the first quarter of 2006.

Includes charges to production and delivery costs of $425.3 million ($267.9 million to net income) for first-quarter 2007 and $494.1 million ($311.3 million to net loss) for first-quarter 2006 resulting from the purchase accounting impacts of higher values for metals inventories, and also includes charges to depreciation, depletion and amortization of $185.5 million ($116.9 million to net income) for first-quarter 2007 and $196.5 million ($123.8 million to net loss) for first-quarter 2006 resulting from the purchase accounting impacts of the increase in the carrying value of Phelps Dodge’s property, plant and equipment costs.

d.	Excludes net losses on early extinguishment of debt totaling $87.8 million ($74.6 million to net income, or $0.16 per share) for financing transactions related to the acquisition of Phelps Dodge.

e.	Includes interest expense from the debt issued in connection with the acquisition of Phelps Dodge.

f.	Includes a charge to revenues on the redemption of FCX’s Gold-Denominated Preferred Stock, Series II totaling $69.0 million ($36.6 million to net loss or $0.10 per share) in the first quarter of 2006.

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g.	Pro forma diluted weighted average shares outstanding for the three months ended March 31, 2007 and 2006, were estimated as follows (in millions):

	March 31,
	2007	2006
Average number of basic shares of historical FCX common stock
outstanding	197.2	187.9
Dilutive securities	25.2	-	^a
Shares of FCX common stock issued in acquisition	137.1	137.1
Sale of FCX shares^b	47.2	47.2
Mandatory convertible preferred stock^b	46.9	-	^a
Pro forma average number of FCX common shares outstanding	453.6	372.2

a. These securities were not dilutive because of the pro forma loss for the period.

b. Refer to Note 8 for additional information.

The above pro forma consolidated information has been prepared for illustrative purposes only and is not intended to be indicative of the results that would actually have occurred, or the results expected in future periods, had the events reflected herein occurred on the dates indicated.

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As a result of the acquisition of Phelps Dodge, the following supplements the significant accounting policies contained in FCX’s 2006 Annual Report on Form 10-K for the year ended December 31, 2006.

Basis of Presentation. Effective March 20, 2007, FCX began consolidating its wholly owned subsidiary, Phelps Dodge. Phelps Dodge’s financial information consolidates the results of operations and the assets and liabilities of majority-owned subsidiaries and reports the minority interest. Investments in unincorporated joint ventures, including Phelps Dodge’s Morenci copper mine, are reflected using the proportionate consolidation method. All significant intercompany transactions and balances have been eliminated.

Investments in unconsolidated companies owned 20 percent or more are recorded on an equity basis. Investments in companies owned less than 20 percent, and for which FCX does not exercise significant influence, are carried at cost.

Foreign Currencies. Except as noted below, the assets and liabilities of foreign subsidiaries are translated at current exchange rates, while revenues and expenses are translated at average rates in effect for the period. The related translation gains and losses are included in accumulated other comprehensive income (loss) within stockholders’ equity. For the translation of the financial statements of certain foreign subsidiaries dealing predominantly in U.S. dollars, assets receivable and liabilities payable in cash are translated at current exchange rates, and inventories and other non-monetary assets and liabilities are translated at historical rates. Gains and losses resulting from translation of such financial statements are included in operating results, as are gains and losses incurred on foreign currency transactions.

Mill and Leach Stockpiles. Mill and leach stockpiles acquired in connection with the Phelps Dodge acquisition are stated at the lower of cost or market. FCX uses the average cost method for recording its mill and leach stockpiles.

Both mill and leach stockpiles contain low-grade ore that has been extracted from the ore body and is available for copper recovery. For mill stockpiles, recovery is through milling, concentrating, smelting and refining or, alternatively, by concentrate leaching, and for leach stockpiles through exposure to acidic solutions that dissolve contained copper and deliver it in solution to extraction processing facilities. The recorded cost of

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mill and leach stockpiles include mining and haulage costs incurred to deliver ore to stockpiles, including associated depreciation, depletion, amortization and overhead costs.

Because the determination of copper contained in mill and leach stockpiles by physical count is often impracticable, reasonable estimation methods are employed. The quantity of material delivered to mill and leach stockpiles is based on surveyed volumes of mined material and daily production records. Sampling and assaying of blasthole cuttings determine the estimated copper grades of material delivered to mill and leach stockpiles.

Expected copper recovery rates for mill stockpiles are determined by metallurgical testing. The recoverable copper in mill stockpiles can be extracted into copper concentrate almost immediately. Estimates of copper contained in mill stockpiles are adjusted as material is added or removed and fed to the mill. Expected copper recovery rates for leach stockpiles are determined using small-scale laboratory tests, small- to large-scale column testing (which simulates the production-scale process), historical trends and other factors, including mineralogy of the ore and rock type.

Ultimate recovery of copper contained in leach stockpiles can vary from a low percentage to more than 90 percent depending on several variables, including type of copper recovery, mineralogy and particle size of the rock. Although as much as 70 percent of the copper ultimately recoverable may be extracted during the first year, the remaining copper is recovered over several years. Processes and recovery rates are monitored continuously. Recovery rate estimates are adjusted periodically as additional information becomes available and as related technology changes.

Goodwill. Goodwill has an indefinite useful life and is not amortized, but rather is tested for impairment at least annually, unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value of a related reporting unit below its carrying amount.

Goodwill totaling $7.4 billion at March 31, 2007, was recorded as a result of the Phelps Dodge acquisition. This amount, which represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed, is subject to adjustment as FCX completes its analysis of these fair values, which may take up to one year after the acquisition date. In accordance with accounting rules, goodwill resulting from a business combination is assigned to the acquiring entity's reporting units that are expected to benefit from the business combination, regardless of whether other assets or liabilities of the acquired entity have been assigned to those reporting units. FCX is in the process of determining the appropriate definition of reporting units for the allocation of goodwill, which could range from either an individual mine to an aggregation of several mines. The allocation of goodwill to reporting units will be completed at the conclusion of this analysis.

Intangible Assets. Intangible assets acquired as a result of the Phelps Dodge acquisition include water rights, land easements and trademarks primarily at North American mining sites. The principal amortization method for such intangible assets is the computation of an overall unit rate applied to pounds of principal products sold from mine production. As of March 31, 2007, FCX has not completed the identification and valuation of intangible assets resulting from the acquisition of Phelps Dodge. FCX expects to record additional intangible assets, which could include such items as customer relationships and patents, as it identifies and values them, which will result in a reduction of the amount allocated to goodwill.

Environmental Expenditures. Environmental expenditures are expensed or capitalized, depending upon their future economic benefits. Liabilities for such expenditures are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. For closed facilities and closed portions of operating facilities with environmental obligations, an environmental liability is accrued when a decision to close a facility, or a portion of a facility, is made by management and the environmental liability is considered to be probable. Environmental liabilities attributed to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) or analogous state programs are considered probable when a claim is asserted, or is probable of assertion, and FCX, or any of its subsidiaries, have been associated with the site. Other environmental remediation liabilities are considered probable based on specific facts and circumstances. FCX’s estimates of these costs are based on an evaluation of various factors, including

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currently available facts, existing technology, presently enacted laws and regulations, remediation experience, whether or not FCX is a potentially responsible party (PRP) and the ability of other PRPs to pay their allocated portions. With the exception of those obligations assumed in the acquisition of Phelps Dodge (see Note 11), environmental obligations are recorded on an undiscounted basis. Where the available information is sufficient to estimate the amount of liability, that estimate has been used. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. Possible recoveries of some of these costs from other parties are not recognized in the consolidated financial statements until they become probable. Legal costs associated with environmental remediation, as defined in Statement of Position 96-1, “Environmental Remediation Liabilities,” are included as part of the estimated liability.

At March 31, 2007, FCX recorded approximately $356 million in the consolidated balance sheet to reflect the fair value of environmental liabilities assumed in the Phelps Dodge acquisition. At March 31, 2007, the unescalated, undiscounted environmental reserve totaled approximately $382 million, leaving approximately $26 million to be accreted over time.

4.	PENSION AND POSTRETIREMENT BENEFITS

With the acquisition of Phelps Dodge, FCX acquired trusteed, non-contributory pension plans covering substantially all of Phelps Dodge’s U.S. employees. The applicable plan design determines the manner in which benefits are calculated for any particular group of employees. With respect to certain of these plans, benefits are calculated based on final average monthly compensation and years of service. In the case of other plans, benefits are calculated based on a fixed amount for each year of service. Participants in the Phelps Dodge plans generally vest in their accrued benefits after five years of service. At the date of acquisition, Phelps Dodge had both underfunded and overfunded pension plans. The funded status of Phelps Dodge’s overfunded pension plans was approximately $129 million, which represents the fair value of plans assets of approximately $1,363 million less the projected benefit obligation of approximately $1,234 million. The funded status of Phelps Dodge’s underfunded pension plans was approximately $(70) million, which represents a projected benefit obligation of approximately $81 million less the fair value of plan assets of approximately $11 million. The majority of plan assets are invested in a diversified portfolio of stocks, bonds and cash and cash equivalents, which consist primarily of equity and fixed-income securities. As of March 19, 2007, a discount rate of 5.78 percent and a wage increase assumption of 4.25 percent were used to estimate the projected benefit obligation, and the long-term expected rate of return on plan assets was 8.5 percent. Under the merger agreement between FCX and Phelps Dodge, FCX will continue all of Phelps Dodge’s existing pension plans until at least December 31, 2008.

In addition to the pension benefits, Phelps Dodge provides postretirement medical and life insurance benefits for certain U.S. employees and, in some cases, employees of international subsidiaries. These postretirement benefits vary among plans, and many plans require contributions from retirees. The expected cost of providing such postretirement benefits is accrued during the years employees render the necessary service. At the date of acquisition, the funded status of the Phelps Dodge postretirement medical and life insurance benefits was approximately $(80) million, which represents a benefit obligation of approximately $253 million less the fair value of plan assets of approximately $173 million. The plan assets consist of two Voluntary Employees’ Beneficiary Association (VEBA) trusts, which FCX acquired through the acquisition of Phelps Dodge. One trust is dedicated to funding postretirement medical obligations and the other to funding postretirement life insurance obligations for eligible U.S. retirees. The majority of the assets of the VEBA trusts are invested in U.S. fixed-income securities. FCX’s funding policy provides that contributions to the VEBA trusts shall be at least sufficient to pay plan benefits as they come due. Additional contributions may be made from time to time. For participants not eligible to receive payments from the VEBA trusts, FCX’s funding policy provides that contributions shall be at least equal to the cash basis obligations. As of March 19, 2007, a discount rate of 5.62 percent was used to estimate the accumulated postretirement benefit obligation for the medical plans and 5.66 percent for the retiree life insurance plan. The long-term expected rate of return on plan assets for the VEBA medical and life insurance trusts was 3.7 percent and 4.5 percent, respectively.

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Net periodic benefit cost for pension and postretirement benefits for Phelps Dodge have been included in the consolidated financial statements beginning March 20, 2007. The components of net periodic benefit cost for pension and postretirement benefits for all of FCX’s plans for the three-month periods ended March 31, 2007 and 2006, follow (in millions):

																Phelps
	FCX					PT Freeport Indonesia						Atlantic Copper				Dodge
	2007			2006		2007			2006			2007		2006		2007
Service cost	$	0.1		$	0.1	$	1.2		$	1.0		$	-	$	-	$	0.8
Interest cost		0.3			0.4		1.4			1.2			1.1		1.1		2.5
Expected return on plan assets		(0.1	)		0.3		(0.8	)		(0.6	)		-		-		(3.5	)
Amortization of prior service cost		1.1			1.1		0.2			0.2			-		-		-
Amortization of net actuarial loss		-			-		0.2			0.1			0.2		0.2		-
Net periodic benefit cost	$	1.4		$	1.9	$	2.2		$	1.9		$	1.3	$	1.3	$	(0.2	)

5.	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 millions, except per share amounts):

	Three Months Ended
	March 31,
	2007			2006
Net income before preferred dividends	$	492.9		$	266.8
Preferred dividends		(16.7	)		(15.1	)
Net income applicable to common stock		476.2			251.7
Plus income impact of assumed conversion of:
5½% Convertible Perpetual Preferred Stock		15.1			15.1
6¾% Mandatory Convertible Preferred Stock		1.6			-
7% Convertible Senior Notes		0.1			5.1
Diluted net income applicable to common stock	$	493.0		$	271.9

Weighted average common shares outstanding		216.8			187.9
Add:
Shares issuable upon conversion, exercise or vesting of:
5½% Convertible Perpetual Preferred Stock		23.3			21.7
6¾% Mandatory Convertible Preferred Stock		2.0			-
7% Convertible Senior Notes		0.2			10.2
Dilutive stock options		1.0			1.1
Restricted stock		0.7			0.6
Weighted average common shares outstanding for purposes of calculating
diluted net income per share		244.0			221.5

Diluted net income per share of common stock	$	2.02		$	1.23

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 summary of the excluded amounts follows:

	Three Months Ended March 31,
	2007	2006
Weighted average outstanding options (in thousands)	996.4	677.5
Weighted average exercise price	$63.76	$63.77

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6.	INVENTORIES

A summary of inventories, which were recorded using the average cost method (except where otherwise indicated) and include the impact of purchase accounting adjustments as described in Note 2, follows (in millions):

	March 31,		December 31,
	2007		2006
Mining Operations:
Raw materials	$	1.7	$	-
Work-in-process		91.5		10.9
Finished goods^a		1,300.4		3.8
Stockpiles		772.1		-
Atlantic Copper:
Concentrates - First in, first out (FIFO)		63.8		189.1
Work-in-process - FIFO		276.7		168.1
Finished goods - FIFO		5.5		12.3
PDIC:
Raw materials		122.7		-
Work-in-process		12.9		-
Finished goods		62.8		-
Total product inventories		2,710.1		384.2
Total materials and supplies, net^b		652.9		340.0
Total inventories	$	3,363.0	$	724.2

a.	Finished goods inventory associated with mining operations primarily includes concentrates and cathodes.

b.	Materials and supplies inventories are net of obsolescence reserves totaling $16.7 million at March 31, 2007, and $16.4 million at December 31, 2006.

7.	TRUST ASSETS

Following is a summary of FCX’s trust assets, which were acquired in connection with the acquisition of Phelps Dodge, at March 31, 2007 (in millions):

Global reclamation and remediation	$	422.4
Financial assurance		99.4	^a
Non-qualified retirement benefits		58.9
Change of control		42.3
Other		0.2
Total trust assets	$	623.2

a.	Represents legally restricted funds for the use of asset retirement obligation activities at Chino, Tyrone and Cobre.

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8.	DEBT AND EQUITY TRANSACTIONS

At March 31, 2007, FCX had $12.0 billion in debt, including $10.4 billion in acquisition debt, $0.9 billion in Phelps Dodge debt and $0.7 billion of previously existing FCX debt. In connection with financing its acquisition of Phelps Dodge, FCX used $2.5 billion of cash and funded the remainder with proceeds from the following debt transactions:

·	borrowed $10.0 billion under a new $11.5 billion senior credit facility; and

·	issued $6.0 billion in senior notes.

Additionally, in accordance with its plan to reduce debt, FCX completed the following equity transactions immediately following the closing of the acquisition, using the net proceeds to reduce borrowings under the credit facility:

·	sold 47.15 million shares of common stock at $61.25 per share for net proceeds of $2.8 billion; and

·	sold 28.75 million shares of 6¾% mandatory convertible preferred stock for net proceeds of $2.8 billion.

A summary of the financing transactions associated with the Phelps Dodge acquisition and the related debt balances at March 31, 2007, follows (in billions):

						March 31,
	Borrowings		Repayments			2007
$11.5 billion senior credit facility:
$2.5 billion senior term loan due March 2012	$	2.5	$	(2.5	)	$	-
$7.5 billion senior term loan due March 2014		7.5		(3.1	)		4.4
$1.5 billion revolving credit facilities		-		-			-
$6.0 billion in senior notes:
$1.0 billion of senior floating rate notes due April 2015		1.0		-			1.0
$1.5 billion of 8¼% Senior Notes due April 2015		1.5		-			1.5
$3.5 billion of 8⅜% Senior Notes due April 2017		3.5		-			3.5
	$	16.0	$	(5.6	)	$	10.4

Senior Credit Facility. At the close of the Phelps Dodge acquisition, the senior credit facility consisted of a $2.5 billion term loan due March 2012, a $7.5 billion term loan due March 2014 and $1.5 billion in revolving credit facilities due March 2012. The revolving credit facilities are composed of a $1.0 billion line of credit available to FCX and a $0.5 billion line of credit available to both FCX and PT Freeport Indonesia. The $0.5 billion line of credit represents an amendment and restatement to the FCX/PT Freeport Indonesia $465 million revolver that was scheduled to mature in 2009. Following the closing of the Phelps Dodge acquisition, FCX applied the net proceeds from the issuance and sale of its common stock and mandatory convertible preferred stock to repay in full the $2.5 billion term loan due March 2012 and to partially repay $3.1 billion of the $7.5 billion term loan due March 2014. At March 31, 2007, $4.4 billion of the term loan due March 2014 was outstanding.

Interest on the $1.5 billion revolving credit facilities currently accrues at the London Interbank Offered Rate (LIBOR) plus a margin 1.25 percent, subject to an increase or decrease in the interest rate margin based on the credit rating assigned by Standard & Poor’s and Moody’s to the senior credit facility. Interest on the term loan due March 2014 accrues at LIBOR plus 1.75 percent.

The senior credit facility contains covenants, including limitations on indebtedness, liens, asset sales, prepayments of indebtedness and transactions with affiliates. Financial leverage ratios must be met in order to incur certain indebtedness and are required to be maintained when there are amounts drawn or letters of credits outstanding under the revolving credit facilities. The senior credit facility is guaranteed by certain wholly owned subsidiaries of FCX and is secured by the pledge of equity in substantially all of these subsidiary guarantors and certain other non-guarantor subsidiaries of FCX, and intercompany indebtedness owed to

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FCX. Borrowings by FCX and PT Freeport Indonesia under the $0.5 billion revolver are also secured with a pledge of 50.1 percent of the outstanding stock of PT Freeport Indonesia, over 90 percent of the assets of PT Freeport Indonesia and, with respect to borrowings by PT Freeport Indonesia, a pledge of the Contract of Work.

Senior Notes. Interest on the senior notes is payable semiannually on April 1 and October 1, beginning on October 1, 2007. Interest on the $1.0 billion of senior floating rate notes due April 2015 accrues at the six-month LIBOR plus 3.25 percent. FCX may redeem some or all of the notes at its option at make-whole redemption prices, and afterwards at stated redemption prices. FCX may make these optional make-whole redemptions prior to April 1, 2009, for the senior floating rate notes; April 1, 2011, for the 8¼% Senior Notes due April 2015; and April 1, 2012, for the 8⅜% Senior Notes due April 2017. The indenture governing the notes contains restrictions, including restrictions on incurring debt, creating liens, selling assets, entering into certain transactions with affiliates, paying cash dividends on common stock, repurchasing or redeeming common or preferred equity, prepaying subordinated debt and making investments.

Preferred Stock. On May 10, 2010, the 6¾% mandatory convertible preferred stock will automatically convert into between approximately 39 million and 47 million shares of FCX common stock at a conversion rate that will be determined based on FCX’s common stock price. The conversion rate per $100 face amount of mandatory preferred will be 1.6327 when the FCX common stock price is at or below $61.25 and 1.3605 when the FCX common stock price is at or above $73.50. For FCX common stock prices between these levels, the conversion rate will be equal to $100 divided by FCX’s common stock price. Prior to May 1, 2010, holders may convert their 6¾% mandatory convertible preferred stock at a conversion rate of 1.3605. Beginning August 1, 2007, dividends are payable quarterly on February 1, May 1, August 1 and November 1.

In the first quarter of 2007, FCX recorded net charges totaling $87.8 million ($74.6 million to net income or $0.31 per share) associated with the accelerated amortization of deferred financing costs for the credit facility.

In May 2007, FCX redeemed its 10⅛% Senior Notes ($272.4 million balance) for $286.2 million. FCX also prepaid an additional $500 million of term debt in April 2007. As a result of these transactions, FCX will record charges totaling approximately $24 million (approximately $21 million to net income) in the second quarter of 2007 related to the premiums paid and the accelerated recognition of deferred financing costs associated with these debt reductions.

9.	INCOME TAXES

FCX’s first-quarter 2007 income tax provision resulted from taxes on earnings of international operations ($505.7 million), offset by a tax benefit from losses in the U.S. ($45.5 million). The first-quarter 2007 income tax provision primarily related to the operations of PT Freeport Indonesia, FCX’s Indonesian mining unit. Also included is $33.5 million associated with Phelps Dodge’s earnings for the 12-day period ending March 31, 2007. FCX’s income tax provision ($221.7 million) for first-quarter 2006 resulted from taxes on PT Freeport Indonesia’s earnings.

FCX’s effective income tax rate was approximately 43 percent for first-quarter 2007 and 2006. The difference between the effective income tax rates for the first quarters of 2007 and 2006 and the U.S. federal statutory rate of 35 percent primarily was attributable to withholding taxes incurred in connection with earnings from Indonesian mining operations and income taxes incurred by PT Indocopper Investama.

Effective January 1, 2007, FCX adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon adoption, FCX recognized a cumulative effect adjustment to increase beginning retained earnings of approximately $4 million. Following adoption of FIN 48, FCX no longer classifies interest and penalties accrued for unrecognized tax benefits within the calculation of the provision for income taxes. The following provides a summary of first-quarter 2007 activity associated with the reserve for unrecognized tax benefits, interest and penalties (in millions):

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	Unrecognized
	Tax Benefit		Interest		Penalties
Balance, at beginning of period	$	40.8	$	10.6	$	-
Additions:
Acquisition of Phelps Dodge		220.4		6.6		1.7
Prior year tax positions		1.2		1.0		-
Balance, March 31, 2007	$	262.4	$	18.2	$	1.7

The reserve for unrecognized tax benefits of $262.4 million at March 31, 2007, includes $123.6 million ($116.3 million net of income tax benefits) that, if recognized, would reduce FCX’s provision for income taxes.

For first-quarter 2006, interest and penalties accrued for unrecognized tax benefits recorded in the provision for income taxes totaled $3.1 million.

FCX or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The tax years of FCX and its significant subsidiaries that remain subject to examination are as follows:

Jurisdiction	Years Under Examination	Additional Open Years
U.S. Federal	1997-2005	2006
Indonesia	-	2002-2006
Peru	2003	1999-2002, 2004-2006
Chile	-	2003-2006
Arizona	-	2002-2006
New Mexico	-	2003-2006

FCX has not identified any uncertain tax position for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly increase or decrease within the 12-month period following the date of adoption.

10.

INTEREST COST

Interest expense excludes capitalized interest of $6.8 million in the first quarter of 2007 and $1.8 million in the first quarter of 2006.

11.

ENVIRONMENTAL, RECLAMATION AND CLOSURE

FCX has the following environmental, reclamation and closure obligations following its acquisition of Phelps Dodge:

Environmental. FCX is subject to various stringent federal, state and local environmental laws and regulations that govern emissions of air pollutants; discharges of water pollutants; and generation, handling, storage and disposal of hazardous substances, hazardous wastes and other toxic materials. FCX also is subject to potential liabilities arising under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or similar state laws that impose responsibility on persons who arranged for the disposal of hazardous substances, and on current and previous owners and operators of a facility for the cleanup of hazardous substances released from the facility into the environment, including damages to natural resources. In addition, FCX is subject to potential liabilities under the Resource Conservation and Recovery Act (RCRA) and analogous state laws that require responsible parties to remediate releases of hazardous or solid waste constituents into the environment associated with past or present activities.

Phelps Dodge or its subsidiaries previously have been advised by EPA, the U.S. Forest Service and several state agencies that, under CERCLA or similar state laws and regulations, they may be liable for costs of responding to environmental conditions at a number of sites that have been or are being investigated by EPA, the U.S. Forest Service or states to determine whether releases of hazardous substances have occurred and, if so, to develop and implement remedial actions to address environmental concerns. Phelps Dodge or its

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subsidiaries also have previously been advised by trustees for natural resources that it may be liable under CERCLA or similar state laws for damages to natural resources caused by releases of hazardous substances.

At March 31, 2007, environmental reserves totaled approximately $356 million, which reflected the fair value of the estimated obligations. The long-term portion of these reserves is included in accrued post retirement benefits and other liabilities on the consolidated balance sheets and amounted to $250.4 million at March 31, 2007. At March 31, 2007, the unescalated, undiscounted environmental reserve totaled approximately $382 million, leaving approximately $26 million to be accreted over time. These environmental obligations were estimated based on projected cash flows, which included an estimated long-term inflation rate of 2.25 percent, and then discounted using a credit-adjusted risk-free interest rate of 7.8 percent.

Pinal Creek. The Pinal Creek site located near Miami, Arizona, has the most significant environmental reserve of all sites totaling approximately $96 million. The Pinal Creek site was listed under the Arizona Department of Environmental Quality (ADEQ) Water Quality Assurance Revolving Fund program in 1989 for contamination in the shallow alluvial aquifers within the Pinal Creek drainage near Miami, Arizona. Since that time, environmental remediation has been performed by the members of the Pinal Creek Group (PCG), consisting of Phelps Dodge Miami, Inc., a wholly owned subsidiary of Phelps Dodge, and two other companies. In 1998, the District Court approved a Consent Decree between the PCG members and the state of Arizona resolving all matters related to an enforcement action contemplated by the state of Arizona against the PCG members with respect to the groundwater matter. The Consent Decree committed Phelps Dodge Miami, Inc. and the other PCG members to complete the remediation work outlined in the Consent Decree. That work continues at this time pursuant to the Consent Decree and consistent with state law and the National Contingency Plan prepared by EPA under CERCLA.

Phelps Dodge Miami, Inc. and the other PCG members have been pursuing contribution litigation against three other parties involved with the site. Phelps Dodge Miami, Inc. dismissed its contribution claims against one defendant when another PCG member agreed to be responsible for any share attributable to that defendant. Phelps Dodge Miami, Inc. and the other PCG members settled their contribution claims against another defendant in April 2005. While the terms of the settlement are confidential, the proceeds of the settlement will be used to address remediation at the Pinal Creek site. The trial on the issue of allocating liability has been postponed because of a discovery dispute and related orders and appeals, and has not yet been rescheduled.

While recoveries or payments may result from the contribution litigation, FCX cannot reasonably estimate the amount and, therefore, has not taken this into consideration in its reserve estimates.

Phelps Dodge Miami, Inc.’s share of the planned remediation work based on the interim agreements between the parties has a cost range on an undiscounted and unescalated basis for reasonably expected outcomes estimated to be from $90 million to $203 million. Approximately $96 million (based on discounted present value calculations) remained in FCX’s Pinal Creek remediation reserve at March 31, 2007.

Other. At March 31, 2007, the cost range for reasonably possible outcomes for all reservable environmental remediation sites on an undiscounted and unescalated basis (including Pinal Creek’s estimate of approximately $90 million to $203 million) was approximately $336 million to $624 million (of which approximately $356 million has been reserved). Significant work is expected to be completed in the next several years to remediate these sites.

FCX believes it has other potential claims for recovery from other third parties, including the U.S. government and other potentially responsible parties (PRPs). Neither claims nor offsets are recognized unless realization of such offsets is considered probable.

FCX has several sites for which no environmental reserve has been recognized because it is not probable that a successful claim will be made against FCX for those sites, but for which there is a reasonably possible likelihood of an environmental remediation liability. While liabilities, if any, ultimately arising from potential environmental obligations that have not been reserved at this time may be material to the operating results of any single future quarter or year, management does not believe such liability is likely to have a material

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adverse effect on FCX’s liquidity or financial position as such obligations could be satisfied over a period of years.

The following table summarizes environmental reserve activities for the period ended March 31, 2007 (in millions):

Balance, beginning of period	$	-
Liabilities assumed in acquisition of Phelps Dodge		358.4
Spending against reserves		(2.3	)
Balance, end of period	$	356.1

Asset Retirement Obligations. In connection with its acquisition of Phelps Dodge, FCX has recorded the following asset retirement obligations (AROs) at March 31, 2007, accounted for in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations” (in millions):

Asset Retirement Obligations

Balance, beginning of period	$	-
Liabilities assumed in acquisition of Phelps Dodge		406.2
Accretion expense		1.0
Payments		(1.3	)
Balance, end of period	$	405.9

At March 31, 2007, FCX estimated its share of the total cost of AROs, including anticipated future disturbances and cumulative payments, at approximately $1.3 billion (unescalated, undiscounted and on a third-party cost basis), leaving approximately $900 million remaining to be accreted over time. These aggregate costs may increase or decrease materially in the future as a result of changes in regulations, engineering designs and technology, permit modifications or updates, mine plans or other factors and as actual reclamation spending occurs. ARO activities and expenditures generally are made over an extended period of time commencing near the end of the mine life; however, certain reclamation activities could be accelerated if they are determined to be economically beneficial.

At March 31, 2007, FCX had a trust dedicated to funding global reclamation and remediation activities totaling $422.4 million, and also had trust assets that are legally restricted, totaling $99.4 million, to fund a portion of its asset retirement obligations for Chino, Tyrone and Cobre as required for New Mexico financial assurance.

12.

CONTINGENCIES

FCX has the following additional contingencies in connection with the acquisition of Phelps Dodge:

Letters of Credit and Surety Bonds. Standby letters of credit totaled approximately $98 million at March 31, 2007, primarily for reclamation, environmental obligations and workers’ compensation insurance programs. In addition, FCX had surety bonds totaling approximately $94 million at March 31, 2007, associated with reclamation, closure and environmental obligations (approximately $66 million or 70 percent - see discussion below), self-insurance bonds primarily for workers’ compensation (approximately $23 million or 25 percent) and miscellaneous bonds (approximately $5 million or 5 percent).

Insurance. FCX purchases a variety of insurance products to mitigate insurable losses. The various insurance products typically have specified deductible amounts, or self-insured retentions, and policy limits. FCX and Phelps Dodge each purchase all-risk property insurance with varying site deductibles. FCX is in the process of integrating the Phelps Dodge operations into its global property insurance program and expects to complete this process by the end of second-quarter 2007. FCX generally is self-insured for U.S. workers’ compensation, but purchases excess insurance up to statutory limits. An actuarial study is performed twice a year by an independent, third-party actuary for various FCX casualty programs, including workers’ compensation, to estimate required insurance reserves. Insurance reserves totaled approximately $56 million at March 31, 2007.

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Environmental and Reclamation Programs. With regard to the disclosed environmental, reclamation and closure obligations discussed in Note 11, following provides a summary of the significant Arizona and New Mexico environmental and reclamation programs and related contingencies.

Significant Arizona Environmental and Reclamation Programs. FCX’s Arizona properties are subject to regulatory oversight and compliance in several areas. The ADEQ has adopted regulations for its aquifer protection permit (APP) program that replaced previous Arizona groundwater quality protection permit regulations. APP regulations require permits for certain facilities, activities and structures for mining, concentrating and smelting and requires compliance with aquifer water quality standards at an applicable point of compliance well or location. The APP program also may require mitigation and discharge reduction or elimination of some discharges.

An application for an APP requires a description of a closure strategy to meet applicable groundwater protection requirements following cessation of operations and a cost estimate to implement the closure strategy. An APP may specify closure requirements, which may include post-closure monitoring and maintenance requirements. A more detailed closure plan must be submitted within 90 days after a permitted entity notifies ADEQ of its intent to cease operations. A permit applicant must demonstrate its financial capability to meet the closure costs required under the APP.

Portions of the acquired Phelps Dodge Arizona mining facilities that operated after January 1, 1986, also are subject to the Arizona Mined Land Reclamation Act (AMLRA). AMLRA requires reclamation to achieve stability and safety consistent with post-mining land use objectives specified in a reclamation plan. Reclamation plans require approval by the State Mine Inspector and must include a cost estimate to perform the reclamation measures specified in the plan. Financial assurance must be provided under AMLRA covering the estimated cost of performing the reclamation plan.

At March 31, 2007, FCX had accrued closure costs of approximately $71 million for its Arizona operations. The amount of financial assurance currently demonstrated for Arizona closure and reclamation activities is approximately $183 million.

The Tohono facility is located on Tohono O’odham Nation (the Nation) property in southern Arizona. Tohono’s leases and Mine Plans of Operations (MPOs) impose certain environmental compliance, closure and reclamation requirements, with closure and reclamation actions required upon termination of the leases, which currently expire between 2012 and 2017, unless terminated earlier in accordance with the terms of the leases. Previous studies indicate that closure and reclamation requirements are estimated at approximately $5 million. Phelps Dodge previously provided interim financial assurance in the amount of $5.1 million, of which $5.0 million is in the form of a corporate performance guarantee. Tohono has informally obtained an extension from the Nation to update the previous closure and reclamation studies and associated cost estimates by June 2008.

Significant New Mexico Environmental and Reclamation Programs. FCX’s New Mexico operations are subject to regulation under the New Mexico Water Quality Act and the Water Quality Control Commission (WQCC) regulations adopted under that Act. The New Mexico Environment Department (NMED) has required each of these operations to submit closure plans for NMED’s approval. The closure plans must describe measures to be taken to prevent groundwater quality standards from being exceeded following the closure of discharging facilities and to abate any groundwater or surface water contamination.

FCX’s New Mexico operations also are subject to regulation under the New Mexico Mining Act (the Mining Act), which was enacted in 1993, and the Mining Act Rules, which are administered by Mining Minerals Division (MMD). Under the Mining Act, mines are required to submit and obtain approval of closeout plans describing the reclamation to be performed following closure of the mines or portions of the mines.

Chino, Tyrone and Cobre each have NMED-issued closure permits and MMD-approved closeout plans. Chino’s closure permit was appealed to the WQCC by a third party. The appeal originally was dismissed by the WQCC on procedural grounds, but that decision was overturned by the New Mexico Court of Appeals. The WQCC has postponed the hearing on the Chino closure permit pending a report by the parties regarding

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settlement discussions. Tyrone appealed certain conditions in its closure permit to the WQCC, which upheld the permit conditions. Tyrone appealed the WQCC’s decision to the Court of Appeals, and on June 15, 2006, the Court of Appeals overturned two conditions that Tyrone had challenged in its closure permit. The New Mexico Supreme Court denied Petitions for Certiorari filed by other parties. The case has been remanded to the WQCC for further proceedings to address the Court of Appeals decision and a hearing before the WQCC is set for June 12, 2007. Hidalgo has applied for renewal of its discharge permit, which includes a requirement for an updated closure plan. Hidalgo expects NMED to issue a new permit, including permit conditions regarding closure and financial assurance.

The terms of the NMED closure permits and MMD-approved closeout plans for Chino, Tyrone and Cobre require the facilities to conduct supplemental studies concerning closure and closeout, including feasibility studies to evaluate additional closure and reclamation alternatives. The feasibility studies are due, along with amended closure plans, before the end of the five-year permit terms, which end in 2008 for Chino and Tyrone and in 2009 for Cobre. Chino’s feasibility study report was submitted in February 2007. The terms of the NMED closure permits also require the facilities to prepare and submit abatement plans to address groundwater that exceeds New Mexico groundwater quality standards as well as potential sources of future groundwater contamination. Changes to the existing closure plans and additional requirements arising from the abatement plans could increase or decrease the cost of closure and closeout. Cobre submitted an application to MMD and NMED for a standby permit to defer implementation of closure and reclamation requirements, which was approved on December 5, 2006. Cobre continues on care-and-maintenance status.

Internal cost estimates to perform the work (internal cost basis) generally are lower than the cost estimates used for financial assurance because of savings from the use of internal personnel and equipment as opposed to third-party contractor costs, and opportunities to prepare the site for more efficient reclamation as mining progresses, among other factors. FCX estimates its total cost, on an internal cost basis, to perform the requirements of the approved closure and closeout permits to be approximately $283 million for Chino, $338 million for Tyrone and $39 million for Cobre (undiscounted and unescalated) over the 100-year period of the closure and closeout plans. Cost estimates, on a third-party cost basis used to determine the fair value of closure and closeout accrual for SFAS No. 143 totaled approximately $391 million for Chino, $438 million for Tyrone and $47 million for Cobre (undiscounted and unescalated). At March 31, 2007, FCX had accrued approximately $53 million for Chino, $201 million for Tyrone, $9 million for Cobre and $4 million for Hidalgo.

The terms of the permits also require Chino, Tyrone, Cobre and Hidalgo to provide and maintain financial assurance based upon the estimated cost to the state of New Mexico to implement the closure and closeout plans, including any long-term operation and maintenance obligations, in the event of a default by the operators. The third-party cost estimates for financial assurance under the existing permits are $395 million for Chino, $373 million for Tyrone and $45 million for Cobre on an undiscounted and unescalated basis over the 100-year period of the closure and closeout plans. Hidalgo is updating its cost estimate as part of its pending closure permit renewal. These cost estimates are converted to a discounted present value basis to determine the amount of financial assurance required for each facility. Financial assurance amounts as of March 31, 2007, which reflected reductions for work completed through 2006 and agreed upon by NMED and MMD, were $185 million for Chino and $29 million for Cobre. As of April 23, 2007, Tyrone’s financial assurance requirement was adjusted to $218 million.

Up to 70 percent of the financial assurance for Chino, Tyrone and Cobre is in the form of third-party guarantees provided by Phelps Dodge. The terms of the applicable regulations and the guarantees require Phelps Dodge to meet certain financial tests. Phelps Dodge provided demonstrations that it met the applicable financial tests under the terms of the applicable regulations and the guarantees as of the end of 2006. If it is determined that Phelps Dodge no longer meets the applicable financial tests following its acquisition by FCX, the Phelps Dodge guarantees would have to be replaced with financial assurance in another form.

Legal. Columbian Chemicals Company (Columbian), formerly a subsidiary of Phelps Dodge, together with several other companies, is a defendant in an action entitled Technical Industries, Inc. v. Cabot Corporation, et al., No. CIV 03-10191 WGY, filed on January 30, 2003, in the U.S. District Court in Boston, Massachusetts, and 14 other actions filed in four U.S. district courts, on behalf of a purported class of all individuals or entities who purchased carbon black directly from the defendants since January 1999. The Judicial Panel on

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Multidistrict Litigation consolidated all of these actions in the U.S. District Court for the District of Massachusetts under the caption In Re Carbon Black Antitrust Litigation. The consolidated amended complaint, which alleges that the defendants fixed the prices of carbon black and engaged in other unlawful activities in violation of the U.S. antitrust laws, seeks treble damages in an unspecified amount and attorney’s fees. The court certified a class that includes all direct purchasers of carbon black in the United States from January 30, 1999, through January 18, 2005. On March 20, 2007, the court approved a $4 million settlement by one group of defendants. The motion for summary judgment filed by Columbian and the other remaining defendants is still pending. The court has scheduled a trial date of July 23, 2007, if the motion is not granted.

A separate action entitled Carlisle Companies Incorporated, et al. v. Cabot Corporation, et al., was filed against Columbian and other defendants on behalf of a group of affiliated companies that opted out of the federal class action. This action, which asserts similar claims as the class action, was filed in the Northern District of New York on July 28, 2005, but was transferred to the District of Massachusetts, where the class action is pending, and was consolidated with the class action for pretrial purposes. No separate proceedings have occurred in this action, which is not subject to the summary judgment motion in the class action.

Actions are pending in state courts in California, Florida, Kansas, South Dakota and Tennessee on behalf of purported classes of indirect purchasers of carbon black in those and six other states, alleging violations of state antitrust and deceptive trade practices laws. Motions to dismiss are pending in the Kansas and South Dakota actions. A motion for class certification has been filed in the Tennessee action. Similar actions filed in state courts in New Jersey and North Carolina, and additional actions in Florida and Tennessee, have been dismissed. Columbian also received a demand for relief on behalf of indirect purchasers in Massachusetts, but no lawsuit has been filed.

Phelps Dodge retained responsibility for the claims against Columbian pursuant to the agreement for the sale of Columbian. Columbian has committed to provide appropriate assistance to defend these matters. FCX believes the claims are without merit and intends to defend the lawsuits vigorously.

Since approximately 1990, Phelps Dodge or its subsidiaries have been named as a defendant in a large number of product liability or premises lawsuits claiming injury from exposure to asbestos found in electrical wire products produced or marketed many years ago, or from asbestos at certain Phelps Dodge properties. FCX believes its liability, if any, in these matters will not have a material adverse effect, either individually or in the aggregate, upon its business, financial condition, liquidity, results of operations or cash flow. There can be no assurance, however, that future developments will not alter this conclusion.

13.

COMMITMENTS AND GUARANTEES

Following its acquisition of Phelps Dodge, FCX has unconditional purchase obligations (take-or-pay contracts with terms in excess of one year) of $774.2 million, comprising the procurement of copper anodes, transportation, electricity, other supplies and services, sulfuric acid, port fee commitments and oxygen that are essential to its worldwide operations. A summary of the maturities of these take-or-pay obligations at March 31, 2007, follows (in millions):

	Total		1 Year		1-3 Years		4-5 Years		+5 Years
Take-or-pay obligations	$	774.2	$	398.2	$	288.8	$	64.8	$	22.4

Following its acquisition of Phelps Dodge, FCX is also a guarantor in financial guarantees (including option guarantees and indirect guarantees of the indebtedness of others) and indemnities. At its Morenci mine in Arizona, FCX has a venture agreement dated February 7, 1986, with its business partner, Sumitomo Metal Mining Arizona, Inc. (Sumitomo), which includes a put/call option guarantee clause. FCX holds an 85 percent undivided interest in the Morenci complex. Under certain conditions defined in the venture agreement, Sumitomo has the right to sell its 15 percent share to FCX. Likewise, under certain conditions, FCX has the right to exercise its purchase option to acquire Sumitomo’s share of the venture. Based on calculations defined in the venture agreement, at March 31, 2007, the maximum potential payment FCX is obligated to make to Sumitomo upon exercise of the put option (or FCX’s exercise of its call option) totaled $146.7 million. As of March 31, 2007, FCX had not recorded any liability in its consolidated financial statements in connection with this guarantee as FCX does not believe, based on information available, that it is probable that any

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amounts will be paid under this guarantee as the fair value of Sumitomo’s 15 percent share is well in excess of the exercise price.

Prior to its acquisition by FCX, Phelps Dodge and its subsidiaries have, as part of merger, acquisition, divestiture and other transactions entered into during the ordinary course of business (including transactions involving the purchase and sale of property), from time to time, indemnified certain sellers, buyers or other parties related to the transaction from and against certain liabilities associated with conditions in existence (or claims associated with actions taken) prior to the closing date of the transaction. As part of certain transactions, Phelps Dodge indemnified the counterparty from and against certain excluded or retained liabilities existing at the time of sale that would otherwise have been transferred to the party at closing. These indemnity provisions generally now require FCX to indemnify the party against certain liabilities that may arise in the future from the pre-closing activities of Phelps Dodge for assets sold or purchased. The indemnity classifications include environmental, tax and certain operating liabilities, claims or litigation existing at closing and various excluded liabilities or obligations. Most of these indemnity obligations arise from transactions that closed many years ago, and given the nature of these indemnity obligations, it is impossible to estimate the maximum potential exposure. Except as described in the following sentence, FCX does not consider any of such obligations as having a probable likelihood of payment that is reasonably estimable, and accordingly, has not recorded any obligations associated with these indemnities. With respect to FCX’s environmental indemnity obligations, any expected costs from these guarantees are accrued when potential environmental obligations are considered by management to be probable and the costs can be reasonably estimated.

14.

DERIVATIVE FINANCIAL INSTRUMENTS

In connection with the acquisition of Phelps Dodge, we acquired certain derivative instruments entered into by Phelps Dodge. The most significant of these derivatives are zero-premium copper collars (consisting of both put and call options) and copper put options. These derivative instruments do not qualify for hedge accounting and are adjusted to fair market value based on the forward curve price and implied volatility as of the last day of the respective reporting period, with the gain or loss recorded in revenues. The fair values of derivative instruments of Phelps Dodge following its acquisition by FCX are based on valuations provided by third parties, purchased derivative pricing models or widely published market closing prices at period end. A summary of the most significant acquired derivative financial instruments as of March 31, 2007, follows (in millions, except per unit prices):

						Expired Derivative
						Positions
						Hedged
	Open Derivative Positions					Sales
	Open	Gain/				Price Per		Gain/
	Position	(Loss)^a			Maturity	Unit		(Loss)^a

Copper price protection (lbs.)^b	1,215.6	$	(38.1	)	December 2007	$	-	$	-
Copper fixed-price rod sales (lbs.)	121.0		12.8		November 2008		3.07/lb.		2.2
Metal purchase (lbs.)	55.4		0.3		June 2008		-		0.1

a.	Gains/losses are recognized in the consolidated statements of income for the March 20, 2007 to March 31, 2007 period.

With the acquisition of Phelps Dodge, FCX assumed copper hedging contracts whereby 486 million pounds of copper for 2007 are capped at $2.00 per pound. Mark-to-market accounting adjustments on these contracts resulted in charges of $38.1 million to revenues for the first quarter of 2007. At March 31, 2007, the liability associated with these contracts is $461.5 million (refer to discussion of copper price protection program below for additional information).

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A summary of the significant hedging strategies and the derivative instruments used in FCX’s risk management programs are provided below:

Metals Hedging

Copper Price Protection Program. Following the acquisition of Phelps Dodge, FCX has Phelps Dodge’s 2007 copper price protection program, which consists of zero-premium copper collars for 486 million pounds of copper, capped at $2.00 per pound and put options for 730 million pounds with a floor price of $0.95 per pound. Hedge gains or losses from the protection program are recognized in revenue. The 2007 copper price protection program matures December 31, 2007, and will settle in the first quarter of 2008 based on the annual average London Metal Exchange (LME) price. FCX does not currently intend to enter into similar hedging programs in the future.

Copper Fixed-Price Rod Sales. Some copper wire customers request a fixed sales price instead of the New York Commodity Exchange (COMEX) average price in the month of shipment. This fixed-price sales exposure is hedged in a manner that allows FCX to receive the COMEX average price in the month of shipment while customers receive the requested fixed price. Gains or losses from these contracts are recognized in revenue.

Metal Purchase. FCX’s international manufacturing operations may enter into metal (aluminum, copper and lead) swap contracts to hedge metal purchase price exposure on fixed-price sales contracts to allow FCX to lock in the cost of the metal used in fixed-price sales of cable to customers. These swap contracts are generally settled during the month of finished product shipment and result in a net LME metal price consistent with that agreed with FCX’s customers. Gains or losses from the swap contracts are recognized in production and delivery costs.

15.

BUSINESS SEGMENTS

With the acquisition of Phelps Dodge, FCX’s business consists of three primary operating divisions - Indonesian mining, North American mining and South American mining. A discussion of the reportable segments included in these operating divisions, as well as FCX’s other reportable segments - Atlantic Copper and PDIC, follows. FCX continues to evaluate reportable segments in conjunction with its review of its management reporting structure following the acquisition of Phelps Dodge, and therefore, the following reportable segments may change in the future.

Indonesian Mining. Indonesian mining includes PT Freeport Indonesia’s copper and gold mining operations and PT Puncakjaya Power’s power-generating operations (after eliminations with PT Freeport Indonesia).

North American Mining. North American mining comprises copper operations from mining through rod production, molybdenum operations from mining through conversion to chemical and metallurgical products, marketing and sales. The North American mining operating division includes one reportable copper production segment (Morenci), and also includes as reportable segments Primary Molybdenum and Manufacturing.

The Morenci open-pit mine, located in southeastern Arizona, primarily produces electrowon copper cathodes and copper concentrates. In addition to copper, the Morenci mine produces molybdenum. FCX owns an 85 percent undivided interest in Morenci, an unincorporated joint venture, and applies the proportional consolidation method of accounting. The remaining 15 percent is owned by Sumitomo Metal Mining Arizona, Inc., a jointly owned subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation. Each partner takes in kind its share of Morenci’s production.

The Manufacturing segment consists of copper conversion facilities, including a smelter, refinery, rod mills and specialty copper products facility. This segment processes copper produced at the North American mines and copper purchased from others into copper anode, cathode, rod and custom copper shapes. The Miami smelter is the most significant source of sulfuric acid for the various North American leaching operations. In addition, at times it smelts and refines copper and produces copper rod and shapes for customers on a toll basis. Toll arrangements require the tolling customer to deliver appropriate copper-bearing material to FCX’s facilities for processing into a product that is returned to the customer. The customer pays FCX for processing its material into the specified products.

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The Primary Molybdenum segment includes FCX’s wholly owned Henderson and Climax molybdenum mines in Colorado, related conversion facilities and a technology center. This segment is an integrated producer of molybdenum, with mining, roasting and processing facilities that produce high-purity, molybdenum-based chemicals, molybdenum metal powder and metallurgical products, which are sold to customers around the world. In addition, at times this segment roasts and/or processes material on a toll basis. Toll arrangements require the tolling customer to deliver appropriate molybdenum-bearing material to FCX’s facilities for processing into a product that is returned to the customer. The customer pays FCX for processing its material into the specified products. This segment also includes a technology center whose primary activity is developing new engineered products and applications.

Other North American mining operations, although not reportable segments, include FCX’s other southwestern U.S. copper mines - Bagdad, Sierrita, Chino, Cobre, Tyrone, Miami, Bisbee and Tohono. In addition to copper, the Bagdad, Sierrita and Chino mines produce molybdenum, gold, silver and rhenium. Other North American mining operations also include the Safford project, which is currently under development and a sales company, which functions as an agent to purchase and sell copper from the North American mines and the Manufacturing segment and also purchases and sells any copper not sold by the South American mines to third parties.

Intersegment revenues of individual North American mines represent an internal allocation based on sales to unaffiliated customers and realized copper prices. Intersegment sales by the South American mines are based upon arms-length prices at the time of the sale. Intersegment sales of any individual mine may not be reflective of the actual prices ultimately realized because of a variety of factors, including additional processing, timing of sales to unaffiliated customers and transportation premiums.

South American Mining. South American mining includes one reportable copper production segment (Cerro Verde). The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces electrowon copper cathodes and copper concentrates. In addition to copper, the Cerro Verde mine produces molybdenum and silver. FCX owns a 53.56 percent equity interest in Cerro Verde, which it fully consolidates and reports the minority interest. The remaining 46.44 percent is held by SMM Cerro Verde Netherlands B.V., Compañía de Minas Buenaventura S.A.A. and other minority shareholders through shares publicly traded on the Lima Stock Exchange.

Cerro Verde has recently completed an approximate $900 million expansion project, which permits the mining of a primary sulfide ore body beneath the leachable ore body currently in production. Through the expansion, approximately 1.5 billion tons of sulfide ore reserves averaging 0.47 percent copper and 0.02 percent molybdenum will be processed through the new concentrator. Processing of the sulfide ore began in the fourth quarter of 2006, and the mill is on schedule to reach design capacity during the second quarter of 2007. With the completion of the expansion, copper production at Cerro Verde initially is expected to approximate 650 million pounds per year (approximately 348 million pounds per year for FCX’s share). In addition, the expansion is expected to produce an average of approximately 8 million pounds of molybdenum per year (approximately 4 million pounds per year for FCX’s share) for the next 10 years.

Other South American mining operations, although not reportable segments, include FCX’s other South American copper mines - Candelaria, Ojos del Salado and El Abra - which include open-pit and underground mining, sulfide ore concentrating, leaching, solution extraction and electrowinning. In addition to copper, the Candelaria and Ojos del Salado mines produce gold and silver. FCX owns an 80 percent partnership interest in both the Candelaria and Ojos del Salado mines, and owns a 51 percent partnership interest in the El Abra mine. FCX fully consolidates these operations and reports the minority interest. Other South American mining operations also includes other ancillary operations.

Atlantic Copper Smelting & Refining. Atlantic Copper smelting & refining includes FCX’s smelting and refining operations in Spain.

PDIC. PDIC is FCX’s international manufacturing division, which produces engineered products principally for the global energy sector. Its operations are characterized by products with internationally competitive costs

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and quality, and specialized engineering capabilities. Its factories, which are located in nine countries throughout Latin America, Asia and Africa, manufacture energy cables for international markets. Three of PDIC’s international manufacturing companies have continuous-cast copper rod facilities, and three have continuous-cast aluminum rod facilities.

In addition to the allocation of revenues, FCX allocates certain operating costs, expenses and capital to the individual segments that may not be reflective of market conditions. FCX does not allocate all costs and expenses applicable to a mine or operation from the division or corporate offices. Accordingly, the following segment information reflects management determinations that may not be indicative of actual financial performance of each segment as if it was an independent entity.

Business Segments.

(in millions)	Indonesia			North America									South America
									Other		Total			Other		Total		Atlantic
									North		North			South		South		Copper		Corporate,
						Manufac-	Primary		American		American		Cerro	American		American		Smelting		Other &		FCX
First-Quarter 2007	Grasberg			Morenci		turing	Molybdenum		Mining		Mining		Verde	Mining		Mining		& Refining	PDIC	Eliminations		Total
Revenues:
Unaffiliated customers	$	1,331.9	^a	-		206.6	52.2		60.4		319.2		14.4	125.1		139.5		454.0	57.0	1.3		2,302.9
Intersegment		376.6		21.6		8.8	-		(6.1	)	24.3		96.8	25.4		122.2		-	0.1	(523.2	)	-
Production and delivery		322.5		29.5		209.8	51.8		61.0		352.1	^b	44.6	71.4		116.0	^b	427.0	48.6	(314.1	)	952.1
Depreciation, depletion
and amortization		59.2		5.0		0.4	3.3		5.3		14.0		8.8	19.6		28.4		10.5	0.5	3.7		116.3
Exploration and research
expenses		-		-		-	-		0.2		0.2		-	-		-		-	-	6.3		6.5
Selling, general and
administrative expenses		43.8		-		-	0.5		0.3		0.8		-	-		-		4.1	0.9	(0.7	)	48.9
Operating income (loss)	$	1,283.0		(12.9	)	5.2	(3.4	)	(12.5	)	(23.6	)	57.8	59.5		117.3		12.4	7.1	(217.1	)	1,179.1
Interest expense, net	$	4.0		-		0.2	-		(0.2	)	-		0.4	(0.2	)	0.2		7.2	0.3	40.2		51.9
Equity in affiliated
companies’ net earnings	$	-		-		-	-		0.2		0.2		-	-		-		-	-	4.3		4.5
Provision for income taxes	$	452.9		-		-	-		-		-		21.7	19.2		40.9		-	-	(33.6	)	460.2
Minority interests in net
income of consolidated
subsidiaries	$	-		-		-