424B3
The
information in this prospectus supplement is not complete and
may be changed. This prospectus supplement is not an offer to
sell these securities and we are not soliciting offers to buy
these securities in any state where the offer or sale is not
permitted.
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Filed Pursuant to Rule 424(b)(3).
Registration Statement File No. 333-140997
Subject to
completion, dated March 1, 2007
Prospectus supplement
(To Prospectus dated March
1, 2007)
Freeport-McMoRan
Copper & Gold Inc.
$6,000,000,000
$
% Senior Notes due 2015
$ %
Senior Notes due 2017
Interest
payable and
Issue
price: %
and %, respectively
The % Senior Notes due 2015 (the
2015 notes) will mature
on ,
2015, and the % Senior Notes due
2017 (the 2017 notes) will mature
on ,
2017. Interest will accrue
from
, 2007, and the first interest payment date will
be ,
2007.
We may redeem some or all of the 2015 notes at any time prior
to ,
2011, at a price equal to 100% of the principal amount of the
2015 notes plus a make-whole premium. In addition,
we may redeem some or all of the 2015 notes at any time on or
after ,
2011, at the redemption prices set forth in this prospectus
supplement. We may redeem some or all of the 2017 notes at any
time prior
to ,
2012 at a price equal to 100% of the principal amount of the
2017 notes plus a make-whole premium. In addition,
we may redeem some or all of the 2017 notes at any time on or
after ,
2012, at the redemption prices set forth in this prospectus
supplement. Prior
to ,
2010, we may also redeem up to 35% of each series of the notes
using the proceeds of certain equity offerings at the redemption
prices set forth in this prospectus supplement. If we sell
certain of our assets or experience specific kinds of changes in
control, we must offer to purchase the notes of each series.
The notes will be unsecured, will rank equally with all our
existing and future unsecured senior debt and rank senior to all
our future subordinated debt. The notes will be effectively
subordinated to all of our existing and future secured debt to
the extent of the collateral securing that debt, including our
new senior credit facilities and certain of our outstanding debt
securities. The notes will be effectively subordinated to all
indebtedness and other obligations, including trade payables, of
our subsidiaries. The notes will not be guaranteed by any of our
subsidiaries.
See Risk factors beginning on page S-22 for a
discussion of certain risks that you should consider in
connection with an investment in the notes.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the notes
or determined that this prospectus supplement or the
accompanying prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
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Per 2015
note
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Total
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Per 2017
note
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Total
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Public offering
price(1)
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%
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$
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%
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$
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Underwriting discounts and
commissions
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%
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$
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%
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$
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Proceeds to us before expenses
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%
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$
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%
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$
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(1)
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Plus accrued interest
from ,
2007, if settlement occurs after that date.
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The notes will not be listed on any securities exchange.
Currently, there is no public market for the notes.
We expect that delivery of the notes will be made to investors
in book-entry form through The Depository Trust Company,
Euroclear or Clearstream on or
about
, 2007.
Joint book-running managers
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JPMorgan |
Merrill
Lynch & Co. |
Co-managers
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HSBC |
Scotia
Capital |
UBS
Investment Bank |
,
2007
In making your investment decision, you should rely only on
the information contained or incorporated by reference in this
prospectus supplement and the accompanying prospectus. We and
the underwriters have not authorized anyone to provide you with
any other information. If you receive any other information, you
should not rely on it. You should not assume that the
information contained or incorporated by reference in this
prospectus supplement is accurate as of any date other than the
date on the front cover of this prospectus supplement or that
the information contained or incorporated by reference in the
accompanying prospectus is accurate as of any date other than
the date on the front cover of the accompanying prospectus. We
and the underwriters are offering to sell the notes only in
places where offers and sales are permitted.
Table of
contents
Prospectus
supplement
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Page
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S-ii
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S-1
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S-22
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S-41
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S-42
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S-43
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S-54
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S-57
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S-60
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S-61
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S-64
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S-107
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S-200
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S-202
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S-238
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S-301
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S-307
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S-352
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S-354
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S-358
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S-360
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S-360
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S-360
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S-361
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Prospectus
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Page
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About this prospectus
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1
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Freeport-McMoRan Copper &
Gold Inc.
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1
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Use of proceeds
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1
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Ratio of earnings to fixed charges
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2
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Description of securities
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2
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Description of Freeport-McMoRan
capital stock
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2
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Description of debt securities
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6
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Description of warrants
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6
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Description of purchase contracts
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6
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Description of units
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7
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Forms of securities
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7
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Plan of distribution
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9
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Where you can find more information
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10
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Information concerning
forward-looking statements
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11
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Legal opinions
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12
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Experts
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12
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Reserves
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13
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Except as otherwise described herein or the context otherwise
requires, all references to (i) the combined
company, we, us, our
and ours in this prospectus supplement mean
Freeport-McMoRan Copper & Gold Inc. and all entities
owned or controlled by Freeport-McMoRan Copper & Gold
Inc. (including Phelps Dodge Corporation and its subsidiaries on
a pro forma basis after giving effect to the acquisition of
Phelps Dodge by Freeport-McMoRan and the other transactions
described herein), (ii) Freeport-McMoRan refer
to Freeport-McMoRan Copper & Gold Inc. and its
subsidiaries prior to the acquisition and
(iii) Phelps Dodge refer to Phelps Dodge
Corporation and its subsidiaries.
S-i
Cautionary
statement regarding forward-looking statements
This prospectus supplement and the accompanying prospectus,
including the documents incorporated by reference herein and
therein, contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933,
as amended (the Securities Act) and Section 21E
of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Such forward-looking information
about Freeport-McMoRan, Phelps Dodge and the combined company
after completion of the transactions is intended to be covered
by the safe harbor to forward-looking statements
provided by the Private Securities Litigation Reform Act of
1995. These statements may be made directly in this prospectus
supplement or the accompanying prospectus or may be incorporated
in this prospectus supplement or the accompanying prospectus by
reference to other documents and may include statements for the
period following the completion of this transaction.
Representatives of Freeport-McMoRan and Phelps Dodge may also
make forward-looking statements. When used in this document, the
words anticipates, may, can,
plans, feels, believes,
estimates, expects,
projects, intends, likely,
will, should, to be and any
similar expressions and any other statements that are not
historical facts, in each case as they relate to
Freeport-McMoRan or Phelps Dodge, the management of either such
company or the transactions are intended to identify those
assertions as forward-looking statements. In making any of those
statements, the person making them believes that its
expectations are based on reasonable assumptions. However, any
such statement may be influenced by factors that could cause
actual outcomes and results to be materially different from
those projected or anticipated. These forward-looking statements
are subject to numerous risks and uncertainties, including the
risks described in this prospectus supplement under Risk
factors, that could cause actual results to differ
materially from those expressed in, or implied or projected by,
the forward-looking information and statements.
Some other risks and uncertainties include, but are not limited
to:
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risks related to our substantial indebtedness and ability to
service the notes;
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our holding company structure and its potential effect on your
ability to receive dividends or payments on the notes;
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macroeconomic conditions and general industry conditions, such
as the competitive environment of the mining industry;
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unanticipated mining, milling and other processing problems;
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accidents that lead to personal injury or property damage;
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persistent commodity price reductions;
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changes in political, social or economic circumstances in areas
where Freeport-McMoRan and Phelps Dodge operate or plan to
operate;
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expropriation;
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variances in ore grades;
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labor relations;
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adverse weather conditions and natural disasters, such as
earthquakes;
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S-ii
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the speculative nature of mineral exploration;
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increases in energy and production costs;
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fluctuations in interest rates or foreign currency exchange
rates and other adverse financial market conditions;
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regulatory and litigation matters and risks;
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changes in tax and other laws;
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the risk that a regulatory approval that may be required for the
transactions is not obtained or is obtained subject to
conditions that are not anticipated; and
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other risks to consummation of the transactions.
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The actual results or performance by Freeport-McMoRan or Phelps
Dodge, and issues relating to the transactions, could differ
materially from those expressed in, or implied by, any
forward-looking statements relating to those matters.
Accordingly, no assurances can be given that any of the events
anticipated by the forward-looking statements will transpire or
occur, or if any of them do so, what impact they will have on
the results of operations or financial condition of
Freeport-McMoRan or Phelps Dodge, the combined company or
the transactions. Except as required by law, we are under no
obligation, and expressly disclaim any obligation, to update,
alter or otherwise revise any forward-looking statement, whether
written or oral, that may be made from time to time, whether as
a result of new information, future events or otherwise.
Industry and
other information
Unless we indicate otherwise, we base the information concerning
the mining industry contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus on
our general knowledge of and expectations concerning the
industry. Our market positions and market shares are based on
our estimates using data from various industry sources and
assumptions that we believe to be reasonable based on our
knowledge of the mining industry. We have not independently
verified data from industry sources and cannot guarantee its
accuracy or completeness. In addition, we believe that data
regarding the mining industry and our market positions and
market shares within such industry provide general guidance but
are inherently imprecise. Further, our estimates involve risks
and uncertainties and are subject to change based on various
factors, including those discussed in the Risk
factors section of this prospectus supplement. The
information regarding Freeport-McMoRans reserves as of
December 31, 2006, that is contained in this prospectus
supplement or the accompanying prospectus, including the
documents incorporated by reference herein or therein, has been
verified by Independent Mining Consultants, Inc. as experts in
mining, geology and reserve determination.
S-iii
Prospectus
supplement summary
This summary highlights certain information contained
elsewhere or incorporated by reference in this prospectus
supplement. Because this is only a summary, it does not contain
all the information that may be important to you. For a more
complete understanding of our business and this offering, you
should read the entire prospectus supplement and the
accompanying prospectus and the documents incorporated herein
and therein by reference, including the annual financial
statements included elsewhere or incorporated by reference in
this prospectus supplement and the accompanying prospectus. You
should also carefully consider the matters discussed under
Risk factors.
On November 18, 2006, Freeport-McMoRan Copper &
Gold Inc. executed a definitive merger agreement pursuant to
which, subject to the terms and conditions set forth therein, it
expects to acquire all outstanding shares of Phelps Dodge
Corporation (the acquisition). In this prospectus
supplement, we refer to the issuance of the notes offered hereby
and the borrowings under the new senior credit facilities as the
financing and the acquisition and the related
transactions, including the financing, as the
transactions. The transactions are more fully
described below under The transactions.
Overview
Freeport-McMoRan Copper & Gold Inc. is one of the
worlds largest producers of copper and gold.
Freeport-McMoRans Grasberg minerals district in Papua,
Indonesia contains the worlds single largest copper
reserve and the worlds single largest gold reserve. Phelps
Dodge Corporation is one of the worlds leading producers
of copper and molybdenum. Phelps Dodge has mines in operation or
under development in North and South America, and Africa,
including the Tenke Fungurume development project in the
Democratic Republic of Congo.
On November 19, 2006, Freeport-McMoRan and Phelps Dodge
announced that they had signed a merger agreement pursuant to
which Freeport-McMoRan will acquire Phelps Dodge for
approximately $25.9 billion in cash and stock, based on
Freeport-McMoRans closing stock price on November 17,
2006, creating one of the worlds largest publicly-traded
copper companies and one of North Americas largest mining
companies. Freeport-McMoRan will use the proceeds from this
offering to fund a portion of the cash consideration of the
acquisition and to pay all transaction costs. This offering is
conditioned upon the consummation of the acquisition.
Acquisition
rationale
The combination of Freeport-McMoRan and Phelps Dodge will
dramatically expand Freeport-McMoRans operations, reserves
and project pipeline, while diversifying both its geographic and
commodity portfolio. The significant benefits of the acquisition
include:
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our increased scale of operations, management depth and
strengthened cash flows will provide an improved platform from
which to capitalize on growth opportunities in the global market;
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we will be 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;
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S-1
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we will have long-lived, geographically diverse ore reserves
totaling 77.2 billion pounds of copper, 38.3 million
ounces of gold and 1.8 billion pounds of molybdenum, net of
minority interests of all joint venture partners and minority
owners;
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we expect to generate strong cash flows, which will enable
significant debt reduction;
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our future growth will be supported by a project pipeline with
the potential to add nearly one billion pounds of copper
production capacity on a consolidated basis by the end of 2009;
and
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we will have exploration rights with significant potential in
copper regions around the world, including
Freeport-McMoRans prospective acreage in Papua, Indonesia,
and Phelps Dodges opportunities at its Tenke Fungurume
concessions in the Democratic Republic of Congo.
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Our
business
The combined company will be a new industry leader with large,
long-lived, geographically diverse assets and significant proven
and probable reserves of copper, gold and molybdenum. For the
year ended December 31, 2006, on a pro forma basis giving
effect to the transactions, the combined companys revenues
and Adjusted EBITDA (as defined under Summary
unaudited pro forma condensed combined financial
information) totaled $17.7 billion and
$7.8 billion, respectively.
The combined company will have significant, geographically
diverse ore reserves. At December 31, 2006, on a pro forma
basis after giving effect to the transactions, the combined
companys ore reserves on a consolidated basis totaled
93.6 billion pounds of copper, 42.4 million ounces of
gold and 2.0 billion pounds of molybdenum, and the combined
companys equity share of those ore reserves, net of the
interests of all joint venture partners and minority owners,
totaled 77.2 billion pounds of copper, 38.3 million
ounces of gold and 1.8 billion pounds of molybdenum. The
combined companys mines will have lives ranging from
6 years to 37 years based on current ore reserves and mine
plans. The combined companys consolidated implied reserve
lives, calculated by dividing ore reserves by estimated
production rates, will be 21 years for copper,
22 years for gold and 25 years for molybdenum. The
charts below illustrate the composition and diversity of the
combined companys portfolio by geography and commodity:
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Freeport-McMoRan conducts its operations primarily through its
principal operating subsidiaries, PT Freeport Indonesia and
Atlantic Copper, S.A., which operates a copper smelter and
refinery in Huelva, Spain. In addition, Freeport-McMoRan holds
exploration rights covering approximately 2.2 million acres
in Papua, Indonesia. PT Freeport Indonesias operations in
Papua, Indonesia, involve mineral exploration and development,
mining and milling of ore containing copper,
S-2
gold and silver and the worldwide marketing of concentrates
containing those metals. PT Freeport Indonesias principal
asset is the world-class Grasberg mine discovered in 1988.
The Grasberg minerals district contains the worlds largest
single copper reserve and worlds largest single gold
reserve. PT Freeport Indonesia is also a 25 percent owner
of PT Smelting, which operates a copper smelter and refinery in
Gresik, Indonesia.
Phelps Dodge conducts its operations primarily through its two
divisions, Phelps Dodge Mining Company (PDMC) and
Phelps Dodge Industries (PDI). PDMC is a fully
integrated producer of copper and molybdenum, with mines and
processing facilities in North America, South America and Europe
and processing capabilities for other minerals as by-products,
such as gold, silver and rhenium. PDI consists of Phelps Dodge
Wire and Cable, which manufactures engineered products
principally for the global energy sector.
Competitive
strengths
Geographically diverse asset base. The combined
company will have a geographically diverse portfolio of assets
across four continents, which produce copper, gold and
molybdenum for global sale and consumption. The combined company
will have 15 mines in operation located in Chile, Indonesia,
Peru and the United States and scheduled development projects in
North and South America, Asia and Africa. On a pro forma basis
after giving effect to the transactions, 38 percent of
total 2006 mining revenues of $12.9 billion were generated
from Indonesia, 35 percent from North America,
22 percent from Chile and 5 percent from Peru. While
the combined company will derive the majority of its revenues
from copper (78 percent of 2006 mining revenues on a pro
forma basis after giving effect to the transactions), gold and
molybdenum each represent important pieces of the production
profile, representing 10 percent and 12 percent of 2006
mining revenues, respectively, on a pro forma basis after giving
effect to the transactions. We believe the scope of operations
and diversification should enable the combined company to
perform well throughout periods of volatile commodity prices and
demand fluctuations.
S-3
Strong production and long-lived ore reserves. We
believe that the combined companys geographically diverse
asset base is characterized by large scale production, long
reserve lives and strong future growth opportunities. The table
below reflects our consolidated and net reserves and production.
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Consolidated
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Net
interest(a)
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Production for year ended
December 31, 2006:
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Copper (billion pounds)
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3.6
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3.1
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Gold (million ounces)
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1.8
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1.7
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Molybdenum (million pounds)
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68.2
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68.2
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Ore reserves as of
December 31, 2006:
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Copper (billion pounds)
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93.6
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77.2
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Gold (million ounces)
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42.4
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38.3
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Molybdenum (billion pounds)
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2.0
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1.8
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Copper reserves as of
December 31, 2006 by geographical region (billion
pounds):
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Indonesia
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38.8
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35.2
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United States
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24.8
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24.8
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Chile
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10.0
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6.4
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Peru
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15.5
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8.3
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Democratic Republic of Congo
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4.5
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2.6
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Implied ore reserve life
(years)(b):
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Copper
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21
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21
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Gold
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22
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22
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Molybdenum
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25
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25
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(a)
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Reflects the combined
companys equity share, net of the interests of all joint
venture partners and minority owners.
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(b)
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Calculated by dividing ore reserves
by estimated production rates.
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Attractive project pipeline. We believe that the
combined company will have significant potential for growth
through the development of its existing asset base, including
replacing production at existing mines that would otherwise be
depleted. The combined company has a number of projects that we
believe will add nearly one billion pounds of copper
production capacity on a consolidated basis by the end of 2009.
The Tenke Fungurume development project is considered to be one
of the largest, highest grade, undeveloped copper/cobalt
concessions in the world today, which we expect will commence
production by early 2009. Initial production rates are expected
to be approximately 250 million pounds of copper and
18 million pounds of cobalt on a consolidated basis. The
Safford, Arizona project is currently under construction and is
expected to be in production during the first half of 2008 and
to initially produce approximately 240 million pounds of
copper per year on a consolidated basis.
In South America, the combined company will have two mines with
significant development potential: Cerro Verde and El Abra.
Cerro Verde, in Peru, has recently been expanded and has the
capacity to initially produce approximately 430 million
pounds of additional copper per year on a consolidated basis. El
Abra, in Chile, has completed a feasibility study for developing
its sulfide ore reserves to produce approximately
325 million pounds of copper per year on a consolidated
basis for approximately 10 years beginning as early as 2010.
Significant exploration potential. The combined
company will have exploration rights with significant potential
in copper regions around the world. Two of the key exploration
areas are Freeport-McMoRans 2.2 million acres in
Papua, Indonesia, and Phelps Dodges opportunities at
S-4
its Tenke Fungurume development project in the Democratic
Republic of Congo. The Papua acreage is located in highly
prospective areas that we believe have the potential for major
mine developments in the future. In recent years, exploration in
Papua was suspended, but Freeport-McMoRan plans to resume
exploration activities in certain prospective areas during 2007.
See Risk factorsRisks related to
Freeport-McMoRans businessAny suspension of required
activities under Freeport-McMoRans Contracts of Work
requires the consent of the Indonesian government. The
Tenke Fungurume copper/cobalt deposits are located within four
concessions totaling approximately 394,000 acres of mining
claims. Substantial portions of these concessions have had only
limited historical exploration and a major target definition and
drilling program is now under way in this high potential
copper/cobalt region.
Experienced management team. The combined company
will have a highly experienced management team with a successful
track record for finding and developing reserves and effectively
managing large-scale operations. The team will include a
combination of Freeport-McMoRan and Phelps Dodge management and
will be complemented by a strong operating team with extensive
mining experience.
Strategy
Continue to maximize free cash
flows. Freeport-McMoRan and Phelps Dodge have proven
track records for generating significant cash flows. We will
continue to maintain active programs to improve efficiencies
throughout the combined companys mining operations in
order to optimize production.
Strengthen our financial profile. Strong cash flows
have historically allowed both Freeport-McMoRan and Phelps Dodge
to significantly reduce indebtedness. We plan to continue to use
available cash flows to reduce indebtedness of the combined
company. In addition, we will consider opportunities to reduce
debt of the combined company shortly following the closing of
the transactions through issuances of equity and equity-linked
securities and possibly through asset sales. While copper, gold
and molybdenum prices will play a significant role in
determining the extent of the combined companys free cash
flows, we will continue to strengthen our financial profile as
well as maximize the cash flows from our ore bodies through
production and aggressive cost management.
Actively pursue project pipeline and exploration. We
manage our business to maximize the long-term value of our
mineral deposits. We have been disciplined in managing and
evaluating potentially attractive capital investments. The
combined company will have significant potential for growth
through the development of its existing asset base and
exploration, which we plan to actively develop to grow our
production and ore reserves.
Industry
overview
Copper
Copper is an internationally traded commodity, and its price is
effectively determined by the major metals exchangesthe
New York Commodity Exchange (COMEX), the London Metal Exchange
(LME) and the Shanghai Futures Exchange (SHFE). Prices on these
exchanges generally reflect the worldwide balance of copper
supply and demand, but also are influenced significantly, from
time to time, by speculative actions and by currency exchange
rates.
S-5
Coppers physical attributes include superior electrical
conductivity, corrosion resistance, structural capability,
efficient heat transfer and aesthetics. Other materials that
compete with copper include aluminum, plastics, stainless steel
and fiber optics. Despite recent higher prices, substitution of
competing materials has been modest because it is difficult to
duplicate coppers unique characteristics.
Copper is a critical component of the worlds
infrastructure. The demand for copper ultimately reflects the
rate of underlying world economic growth, particularly in
industrial production and construction. Coppers end-use
markets reflect its fundamental role in the world economy.
Coppers end-use markets (and their estimated shares of
total consumption based on Brook Hunts estimate of 2006
Western world copper consumption) are (a) construction
(38 percent), (b) electrical applications
(28 percent), (c) industrial machinery
(13 percent), (d) transportation (11 percent) and
(e) consumer products (10 percent). Since 1990,
refined copper consumption grew by an estimated compound annual
growth rate of 3.1 percent to 17.6 million tons in
2006, according to published 1990 data by the World Bureau of
Metals Statistics (WBMS) and our estimates for 2006. This rate
of increase was slightly higher than the growth rate of
2.9 percent for world industrial production over the same
period. Asian copper consumption, led by China, has been
particularly strong, increasing by a compound annual rate of
approximately 6 percent from 1990. Asia now represents
approximately half of the worlds refined copper
consumption, compared with approximately 22 percent for
Western Europe and approximately 20 percent for the
Americas.
From 1990 through 2006, refined copper production has grown at
an average annual rate of approximately 3 percent, based on
published 1990 data by the WBMS and our estimates for 2006.
Absent major new discoveries of copper reserves, which have been
rare in the last decade, the industry is expected to face the
challenge of depleting reserves going forward. While a number of
expansion projects are currently being pursued, development of
major new mines requires long lead times as a result of, among
other things, technical challenges, limited availability of
equipment and experienced operators and political and regulatory
issues.
Copper consumption is closely associated with industrial
production and, therefore, tends to follow economic cycles.
During an expansion, demand for copper tends to increase thereby
driving up the price. As a result, copper prices are volatile
and cyclical. During the past 15 years, the LME price of
copper averaged $1.13 per pound and ranged from a high annual
average price of $3.05 per pound in 2006 to a low annual average
price of $0.71 per pound in 2002. In addition, during the past
15 years, the COMEX price of copper averaged $1.14 per
pound, and has ranged from a high annual average price of $3.09
per pound in 2006 to a low annual average price of $0.72 per
pound in 2002. The closing 3-month LME and active-month COMEX
copper prices on February 27, 2007 were $2.83 per pound and
$2.81 per pound, respectively.
Gold
Gold continues to represent a significant portion of the
international reserve assets for most national central banks.
Due to its value as a currency and historical monetary role,
investment demand has played a significantly larger role in
determining the gold price than market fundamentals.
During 2006, the relative weakness in the U.S. dollar, a low
global interest rate environment, global political instability
and the establishment of exchange-traded funds all contributed
to increased investment demand for gold. Jewelry is the largest
single component of gold usage,
S-6
comprising approximately 67 percent of 2006 demand in
dollar terms, according to the World Gold Council. In 2006
demand for jewelry reached a new record in dollar terms, while
demand for gold in electronics and dental applications rose to a
new volume record. Despite an approximate 10 percent
decline in total volume demand in 2006, total dollar demand for
gold reached a new record, increasing by approximately
22 percent over 2005.
Gold supply is comprised of mine production, gold scrap and
central bank sales. According to World Gold Council data, global
mine production, net of producer hedging, accounted for
approximately 60 percent of total gold supply. Gold scrap
is the second-largest source of gold, providing approximately 30
percent of 2006 supply. The remainder of gold supply comes from
central bank sales. The total gold supply in terms of volume
declined by 13 percent in 2006 according to the World Gold
Council. A decrease in central banks sales accounted for a
majority of the supply decrease. Mine supply fell approximately
2 percent in 2006, and has remained flat over the past
three years due to a lack of new large-scale gold mining
projects.
Investment demand and record gold jewelry and industrial demand,
combined with constrained supply, created a favorable gold price
environment in 2006. The average gold price of $604 per ounce in
the 2006 London spot market represents a 36 percent
increase over the 2005 average price of $444 per ounce. Gold hit
a 26-year
high of $726 per ounce in mid-May 2006. The closing London PM
Fix gold spot price on February 27, 2007 was $676 per ounce.
Molybdenum
Molybdic oxide, derived from molybdenum, is used primarily in
the steel industry for corrosion resistance, strengthening and
heat resistance. Molybdenum chemicals are used in a number of
diverse applications such as lubricants, additives for water
treatment, feedstock for the production of pure molybdenum metal
and catalysts used for petroleum refining. Pure molybdenum metal
powder products are used in a number of diverse applications,
such as lighting, electronics, and specialty steel alloys.
Molybdenum demand is heavily dependent on the worldwide steel
industry, which comprises approximately 80 percent of
molybdenum demand. The balance is used in specialty chemical
applications. There are no terminal exchanges or forward markets
for molybdenum products.
The metallurgical market for molybdenum is characterized by
cyclical and volatile prices, little product differentiation and
strong competition. The chemical market is more diverse and
contains more specialty products and segments. In both markets,
prices are influenced by, among other things, production costs
of domestic and foreign competitors, worldwide economic
conditions, world and regional supply/demand balances, inventory
levels, governmental regulatory actions and currency exchange
rates. Molybdenum prices also are affected by the demand for
end-use products in, for example, the construction,
transportation and durable goods markets. A substantial portion
of world molybdenum is produced as a by-product of copper
mining, which is relatively insensitive to molybdenum price
levels. Materials that compete with molybdenum include other
metals and alloys, graphite and plastics, depending upon the
application. Despite recent high prices, substitution of
competing materials has been modest for the metallurgical
segment. Certain chemical segments have experienced some
substitution, however, it has not significantly impacted overall
chemical demand.
During 2006, primary mine production increased in both North
America and China, although production in China remains
difficult to estimate. By-product molybdenum production
decreased from 2005 levels primarily due to lower production in
South America. Tight supplies of Western,
S-7
high-quality materials continued throughout the first half of
2006, but eased in the second half as demand slowed in the
metallurgical segment. Western roaster capacity constraints were
reduced in 2006 as increased capacity was realized and
by-product supply decreased. Overall, market fundamentals
shifted from a supply deficit in the first half of 2006 to a
slight surplus late in the year, with the overall year being
relatively balanced.
During the past 15 years, Metals Week molybdenum
Dealer Oxide prices have ranged from a high of $40.00 per pound
to a low of $1.82 per pound. In 2006, the Metals Week
molybdenum Dealer Oxide mean price decreased 22 percent
from the 2005 mean price of $31.73 per pound to $24.75 per
pound. Although price levels were lower than those experienced
in 2005, 2006 molybdenum prices remained at historically high
levels. Strong demand, which has outpaced supply over the past
several years, has continued and inventory levels throughout the
industry remain low. The Metals Week molybdenum Dealer
Oxide price on February 26, 2007 was $26.00 per pound.
The
transactions
The boards of directors of Freeport-McMoRan and Phelps Dodge
have approved a merger agreement pursuant to which
Freeport-McMoRan will acquire Phelps Dodge. The acquisition is
subject to certain closing conditions, including:
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approval of the merger agreement by the affirmative vote of the
holders of at least two-thirds of the outstanding shares of
Phelps Dodge common stock entitled to vote on the matter at a
special meeting of shareholders scheduled to be held on
March 14, 2007;
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approval of the issuance of Freeport-McMoRan common stock to be
issued in the acquisition by the affirmative vote of the holders
of a majority of shares of its common stock cast on the matter
at a special meeting of shareholders scheduled to be held on
March 14, 2007;
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the receipt of all governmental and regulatory approvals; and
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the absence of events or developments since the date of the
merger agreement that would reasonably be expected to have a
material adverse effect with respect to Freeport-McMoRan or
Phelps Dodge.
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The acquisition is expected to close shortly after the special
meetings of shareholders.
At the effective time of the acquisition, each issued and
outstanding Phelps Dodge common share will be converted into the
right to receive a combination of 0.67 of a share of
Freeport-McMoRan common stock and $88.00 in cash, without
interest. Upon completion of the acquisition, we expect that
Freeport-McMoRan shareholders will own approximately
59 percent of the combined company (62 percent on a fully
diluted basis) and former Phelps Dodge shareholders will own
approximately 41 percent of the combined company
(38 percent on a fully diluted basis). Following the
acquisition, Phelps Dodge will continue as a surviving
corporation and become a wholly owned subsidiary of
Freeport-McMoRan; accordingly, Phelps Dodge shares will no
longer be publicly traded.
Freeport-McMoRan will have cash requirements of approximately
$18,500 million in connection with the acquisition,
including the cash consideration of the acquisition and
transaction costs. In
S-8
order to finance a portion of these cash requirements, the
following financing transactions will occur in connection with
the closing of the acquisition:
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borrowings under a new $11,500 million senior credit
facility, consisting of a $1,500 million revolving credit
facility (which refers to our new $1,000 million revolving
credit facility and our amended and restated $500 million
revolving credit facility), a $2,500 million five-year
Tranche A term loan facility and a $7,500 million
seven-year Tranche B term loan facility; and
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the issuance of the notes offered hereby.
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The remainder of the cash requirements will be met from cash
available at Freeport-McMoRan and Phelps Dodge. The offering of
the notes will occur concurrently with, and is conditioned upon,
the closing of the acquisition and the other transactions.
Sources
and uses
The table below sets forth the estimated sources and uses for
the transactions based on balances as of December 31, 2006:
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(Dollars
in millions)
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Sources of
funds
|
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Amount
|
|
Uses of
funds
|
|
Amount
|
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|
Cash
|
|
$
|
2,500.0
|
|
Equity
purchased(c)
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$
|
25,791.0
|
New revolving credit
facility(a)
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Estimated fees and
expenses(d)
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500.0
|
New Tranche A term loan
facility
|
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|
2,500.0
|
|
|
|
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New Tranche B term loan
facility
|
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7,500.0
|
|
|
|
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Senior notes offered hereby
|
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6,000.0
|
|
|
|
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Additional common
equity(b)
|
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|
7,791.0
|
|
|
|
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|
|
|
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|
|
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|
Total sources
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|
$
|
26,291.0
|
|
Total uses
|
|
$
|
26,291.0
|
|
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(a)
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Based on expected cash balances at
closing, we do not expect to make any drawings under our new
revolving credit facility. Availability under the new revolving
credit facility will be reduced by outstanding letters of
credit. Our availability under our revolving credit facility is
anticipated to be approximately $1,400.0 million at closing
after giving effect to outstanding letters of credit. Following
the closing, we may be required to issue additional letters of
credit in connection with financial assurances with respect to
our reclamation obligations. See Risk factors
Risks related to Phelps Dodges business Mine
closure regulations may impose substantial costs.
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(b)
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Reflects the fair value of
Freeport-McMoRan common stock to be issued to Phelps Dodge
shareholders as a result of the acquisition calculated by using
the weighted average market price of Freeport-McMoRan common
stock from November 16, 2006 to November 21, 2006
multiplied by the estimated shares of Freeport-McMoRan stock to
be issued to Phelps Dodge shareholders.
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(c)
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Based on the weighted average
market price of Freeport-McMoRan common stock from
November 16, 2006 to November 21, 2006, the cash
consideration to be paid in the acquisition, and the estimated
Phelps Dodge common shares outstanding and issuable at
December 31, 2006.
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(d)
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Reflects our estimate of fees and
expenses associated with the transactions, including financing
fees, estimated change of control costs and related employee
benefits and other transaction costs and professional fees.
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S-9
Corporate
structure
Under the terms of the proposed transactions, a wholly owned
subsidiary of Freeport-McMoRan will merge into Phelps Dodge. As
a result, Phelps Dodge will continue as a surviving corporation
and will become a wholly owned subsidiary of Freeport-McMoRan.
The diagram below shows a summary of the corporate structure of
the combined company.
Recent
developments
On November 22, December 12 and December 14, 2006,
putative class actions were filed on behalf of Phelps Dodge
shareholders in Arizona state court, New York state court and
Arizona state court, respectively. The class actions allege
breaches of fiduciary duties by the Phelps Dodge board of
directors in connection with the acquisition. The complaints
allege, among other things, that the named defendants engaged in
self-dealing, obtained for themselves personal benefits not
shared equally by Phelps Dodge shareholders and failed to
disclose all material information concerning the acquisition to
Phelps Dodge shareholders. One of these complaints names
Freeport-McMoRan as a defendant and alleges that
Freeport-McMoRan aided and abetted such alleged violations of
fiduciary duties. The plaintiffs seek, among other things,
injunctive relief barring consummation of the acquisition and
directing the defendants to obtain a transaction that is in the
best interests of Phelps Dodge shareholders.
Phelps Dodge, Freeport-McMoRan and the other named defendants
believe the allegations are without merit and intend to
vigorously defend the actions.
Freeport-McMoRan Copper & Gold Inc. is a Delaware
corporation. Our principal executive offices are located at 1615
Poydras Street, New Orleans, Louisiana 70112, and our telephone
number at that address is
(504) 582-4000.
Our website is located at www.fcx.com. The information on our
website is not part of this prospectus supplement or the
accompanying prospectus.
S-10
The
offering
The following summary contains basic information about the
notes and is not intended to be complete. It may not contain all
of the information that may be important to you. For a more
complete description of the notes, see Description of the
notes. In this summary of the offering, the words
company, we, us and
our refer only to Freeport-McMoRan Copper &
Gold Inc. and not to any of its subsidiaries. Unless otherwise
required by the context, we use the term notes in
this prospectus supplement to refer collectively to
the % senior notes due 2015 and
the % senior notes due 2017.
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Issuer |
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Freeport-McMoRan Copper & Gold Inc., a Delaware
corporation |
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Securities |
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$ million in aggregate principal
amount of % senior notes due 2015. |
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$ million in aggregate principal
amount of % senior notes due 2017. |
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Maturity |
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The % senior notes will mature
on ,
2015. |
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The % senior notes will mature
on ,
2017. |
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Interest |
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The senior notes due 2015 will accrue interest from , 2007 at a
rate of % per annum,
payable
and
of each year, beginning
on ,
2007. |
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The senior notes due 2017 will accrue interest
from ,
2007 at a rate of % per annum,
payable
and
of each year, beginning
on ,
2007. |
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Ranking |
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Each series of notes will be general unsecured obligations of
the company and will: |
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rank equally in right of payment with the notes of
the other series and with all existing and future senior
indebtedness of the company;
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be senior in right of payment to any future
subordinated obligations of the company;
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be effectively subordinated to all secured
indebtedness of the company, including secured indebtedness and
the other obligations under the new senior credit facilities and
certain of the companys existing debt securities, to the
extent of the value of the assets securing such indebtedness; and
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be effectively subordinated to all liabilities
(including trade payables) and preferred stock of each
subsidiary of the company, including Phelps Dodges
existing debt securities.
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As of December 31, 2006, on a pro forma basis after giving
effect to the transactions, the company would have had
approximately $17,251.0 million aggregate principal amount of
indebtedness (excluding intercompany debt), all of which would
have been senior |
S-11
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indebtedness, including $10,612.9 million of secured
indebtedness ($10,000.0 million of which consists of
indebtedness and guarantees under the companys new senior
credit facilities and $612.9 million of which consists of
secured indebtedness of certain of the companys existing
debt securities), $631.0 million of guarantees of existing debt
securities of the companys subsidiaries, $6,000.0 million
of the notes offered hereby and $7.1 million of other
senior indebtedness. |
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As of December 31, 2006, on a pro forma basis after giving
effect to the transactions, our subsidiaries would have had
approximately $23,495.3 million of total liabilities (including
trade payables). |
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See Description of the notesRanking. |
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Optional redemption |
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Beginning
on ,
2011, we may redeem the 2015 notes, in whole or in part, at the
redemption prices listed under Description of the
notes Optional redemption plus accrued and
unpaid interest on the 2015 notes to the redemption date. Prior
to ,
2011, we may redeem the 2015 notes, in whole or in part,
pursuant to a make-whole call, plus accrued and
unpaid interest on the 2015 notes to the redemption date. |
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Beginning
on ,
2012, we may redeem the 2017 notes, in whole or in part, at the
redemption prices listed under Description of the
notesOptional redemption plus accrued and unpaid
interest on the 2017 notes to the redemption date. Prior
to ,
2012, we may redeem the 2017 notes, in whole or in part,
pursuant to a make-whole call, plus accrued and
unpaid interest on the 2017 notes to the redemption date. |
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In addition, prior
to ,
2010, on one or more occasions, we may redeem up to 35% of the
aggregate principal amount of each series of notes with the
proceeds of one or more equity offerings at a redemption price
equal to %, in the case of the 2015
notes, and %, in the case of the
2017 notes, of the principal amount thereof, in each case plus
accrued and unpaid interest to the redemption date (as described
under Description of the notesOptional
redemption). |
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Change of control |
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Upon the occurrence of certain kinds of changes of control, you
will have the right, as holders of the notes, to require us to
repurchase some or all of your notes at 101% of their principal
amount, plus accrued and unpaid interest to the repurchase date.
See Description of the notesChange of control. |
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Basic covenants |
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The indenture governing the notes contains covenants that will
impose significant restrictions on our business. The
restrictions that these covenants will place on us and our
restricted subsidiaries |
S-12
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include limitations on our ability and the ability of our
restricted subsidiaries to: |
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incur additional indebtedness;
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pay dividends or make distributions in respect of
our capital stock or make certain other restricted payments or
investments;
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sell assets, including the capital stock of our
restricted subsidiaries;
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consolidate, merge, sell or otherwise dispose of all
or substantially all of our assets;
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incur liens; |
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enter into sale/leaseback transactions; and |
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designate our subsidiaries as unrestricted subsidiaries. |
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Certain of these covenants will be suspended with respect to the
notes of a series if one of the two specified rating agencies
assigns such series of notes an investment grade credit rating
in the future and no default or event of default exists under
the indenture. Such covenants will be reinstated with respect to
such series of notes to the extent a default or event of default
with respect to such series of notes has occurred and is
continuing or both of the specified ratings agencies assign such
series of notes non-investment grade credit ratings. These
covenants are also subject to other important exceptions and
qualifications, which are described under Description of
the notesCertain covenants. |
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No prior market |
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Both series of notes are new securities and there is currently
no established trading market for the notes. Although the
underwriters have informed us that they intend to make a market
in the notes, they are not obligated to do so and they may
discontinue market making activities at any time without notice.
Accordingly, we cannot assure you that a liquid market for the
notes will develop or be maintained. |
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Use of proceeds |
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We will use the net proceeds from the offering to fund a portion
of the acquisition consideration and pay related fees and
expenses. See Use of proceeds. |
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Conditions to the offering |
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Closing of this offering will occur concurrently with, and is
conditioned upon, the closing of the transactions. |
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Risk factors |
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Investing in the notes involves substantial risks. You should
carefully consider all the information in this prospectus
supplement prior to investing in the notes. In particular, we
urge you to carefully consider the factors set forth under
Risk factors. |
S-13
Summary
consolidated historical financial and
operating data of
Freeport-McMoRan
The following summary consolidated historical financial data as
of and for the years ended December 31, 2004, 2005 and
2006, have been derived from the audited consolidated financial
statements of Freeport-McMoRan incorporated by reference herein.
The historical results presented below are not necessarily
indicative of results that you can expect for any future period.
You should read the table in conjunction with the sections
entitled Use of proceeds,
Capitalization, Unaudited pro forma condensed
combined financial statements, Selected consolidated
historical financial and operating data of
Freeport-McMoRan, Managements discussion and
analysis of financial condition and results of operations of
Freeport-McMoRan and the consolidated financial statements
of Freeport-McMoRan and the related notes incorporated by
reference herein. See Where you can find more
information.
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Years ended
December 31,
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(Dollars
in millions)
|
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2004
|
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2005
|
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2006
|
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Statement of income
data:
|
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|
|
|
|
|
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|
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Revenues
|
|
$
|
2,371.9
|
|
$
|
4,179.1
|
|
$
|
5,790.5
|
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Costs and expenses
|
|
|
1,668.3
|
|
|
2,001.8
|
|
|
2,921.8
|
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Operating income
|
|
|
703.6
|
|
|
2,177.3
|
|
|
2,868.7
|
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Interest expense, net
|
|
|
148.1
|
|
|
131.6
|
|
|
75.6
|
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Net income applicable to common
stock
|
|
|
156.8
|
|
|
934.6
|
|
|
1,396.0
|
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Balance sheet data at end of
period:
|
|
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|
|
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|
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Cash and cash equivalents
|
|
$
|
552.0
|
|
$
|
763.6
|
|
$
|
907.5
|
|
Working
capital(a)
|
|
|
762.4
|
|
|
673.8
|
|
|
1,178.6
|
|
Total assets
|
|
|
5,087.0
|
|
|
5,550.2
|
|
|
5,389.8
|
|
Total
debt(b)
|
|
|
1,951.9
|
|
|
1,255.9
|
|
|
680.1
|
|
Stockholders equity
|
|
|
1,163.6
|
|
|
1,843.0
|
|
|
2,445.1
|
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
EBITDA(c)
|
|
$
|
842.0
|
|
$
|
2,232.8
|
|
$
|
2,900.4
|
|
Adjusted
EBITDA(c)
|
|
|
823.0
|
|
|
2,428.7
|
|
|
3,096.4
|
|
Capital expenditures and
investments in subsidiaries
|
|
|
142.9
|
|
|
143.0
|
|
|
257.1
|
(d)
|
Depreciation and amortization
|
|
|
206.4
|
|
|
251.5
|
|
|
227.6
|
|
Cash flow from operating
activities(e)
|
|
|
341.4
|
|
|
1,552.5
|
|
|
1,866.4
|
|
Cash flow used in investing
activities
|
|
|
64.0
|
|
|
134.3
|
|
|
223.5
|
|
Cash flow used in financing
activities
|
|
|
189.6
|
|
|
1,206.1
|
|
|
1,499.1
|
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S-14
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|
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Years ended
December 31,
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2004
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2005
|
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2006
|
|
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Operating data:
|
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|
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|
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PT Freeport Indonesia operating
data, net of Rio Tintos
interest(f):
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|
|
|
|
|
|
|
|
|
|
Copper (recoverable)
|
|
|
|
|
|
|
|
|
|
|
Production (000s of pounds)
|
|
|
996,500
|
|
|
1,455,900
|
|
|
1,201,200
|
|
Sales (000s of pounds)
|
|
|
991,600
|
|
|
1,456,500
|
|
|
1,201,400
|
|
Average realized price per pound
|
|
$
|
1.37
|
|
$
|
1.85
|
|
$
|
3.13
|
|
Net cash production cost per
pound(g)
|
|
$
|
0.40
|
|
$
|
0.07
|
|
$
|
0.60
|
|
Gold (recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,456,200
|
|
|
2,789,400
|
|
|
1,731,800
|
|
Sales
|
|
|
1,443,000
|
|
|
2,790,200
|
|
|
1,736,000
|
|
Average realized price per ounce
|
|
$
|
412.32
|
|
$
|
456.27
|
|
$
|
566.51
|
(h)
|
PT Freeport Indonesia, 100%
operating data:
|
|
|
|
|
|
|
|
|
|
|
Copper (recoverable) (000s of
pounds)
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,098,600
|
|
|
1,688,900
|
|
|
1,299,500
|
|
Sales
|
|
|
1,092,700
|
|
|
1,689,400
|
|
|
1,300,000
|
|
Gold (recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,536,600
|
|
|
3,439,600
|
|
|
1,824,100
|
|
Ore milled (metric tons per day)
|
|
|
185,100
|
|
|
216,200
|
|
|
229,400
|
|
Average ore grade
|
|
|
|
|
|
|
|
|
|
|
Copper (percent)
|
|
|
0.87
|
|
|
1.13
|
|
|
0.85
|
|
Gold (grams per metric ton)
|
|
|
0.88
|
|
|
1.65
|
|
|
0.85
|
|
Gold (ounce per metric ton)
|
|
|
0.028
|
|
|
0.053
|
|
|
0.027
|
|
Recovery rates (percent)
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
|
88.6
|
|
|
89.2
|
|
|
86.1
|
|
Gold
|
|
|
81.8
|
|
|
83.1
|
|
|
80.9
|
|
|
|
|
|
|
(a)
|
|
Working capital represents current
assets less current liabilities.
|
|
(b)
|
|
Includes current portion of debt
and short term borrowings.
|
|
(c)
|
|
EBITDA and Adjusted EBITDA are
non-GAAP financial measures. EBITDA represents net income
applicable to common stock plus (i) interest expense, net,
(ii) provision for income taxes and (iii) depreciation
and amortization. Adjusted EBITDA represents EBITDA further
adjusted to reflect the impact of (i) preferred dividends,
(ii) minority interests in net income of consolidated
subsidiaries, (iii) losses on early extinguishment and
conversion of debt, (iv) gains on sales of assets,
(v) gain on insurance settlement, (vi) other income,
net and (vii) equity in PT Smelting earnings.
|
|
|
|
EBITDA and Adjusted EBITDA are
frequently used by securities analysts, investors, lenders and
others to evaluate companies performance, including, among
other things, profitability before the effect of financing and
similar decisions. Because securities analysts, investors,
lenders and others use EBITDA and Adjusted EBITDA, our
management believes that our presentation of EBITDA and Adjusted
EBITDA affords them greater transparency in assessing our
financial performance. EBITDA and Adjusted EBITDA should not be
considered as a substitute for measures of financial performance
prepared in accordance with GAAP. EBITDA and Adjusted EBITDA may
not necessarily be comparable to similarly titled measures
reported by other companies, as different companies calculate
them differently.
|
S-15
|
|
|
|
|
The following table reconciles net
income applicable to common stock to EBITDA and to Adjusted
EBITDA for each period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
(Dollars in
millions)
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Net income applicable to common
stock
|
|
$
|
156.8
|
|
|
$
|
934.6
|
|
|
$
|
1,396.0
|
|
Interest expense, net
|
|
|
148.1
|
|
|
|
131.6
|
|
|
|
75.6
|
|
Provision for income taxes
|
|
|
330.7
|
|
|
|
915.1
|
|
|
|
1,201.2
|
|
Depreciation and amortization
|
|
|
206.4
|
|
|
|
251.5
|
|
|
|
227.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
842.0
|
|
|
$
|
2,232.8
|
|
|
$
|
2,900.4
|
|
Preferred dividends
|
|
|
45.5
|
|
|
|
60.5
|
|
|
|
60.5
|
|
Minority interests in net income of
consolidated subsidiaries
|
|
|
41.4
|
|
|
|
126.7
|
|
|
|
168.2
|
|
Losses on early extinguishment and
conversion of
debt(1)
|
|
|
14.0
|
|
|
|
52.2
|
|
|
|
32.0
|
|
Gains on sales of
assets(2)
|
|
|
(28.8
|
)
|
|
|
(6.6
|
)
|
|
|
(30.6
|
)
|
Gain on insurance
settlement(3)
|
|
|
(87.0
|
)
|
|
|
|
|
|
|
|
|
Other income,
net(4)
|
|
|
(2.1
|
)
|
|
|
(27.6
|
)
|
|
|
(27.6
|
)
|
Equity in PT Smelting earnings
|
|
|
(2.0
|
)
|
|
|
(9.3
|
)
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
823.0
|
|
|
$
|
2,428.7
|
|
|
$
|
3,096.4
|
|
|
|
|
|
|
(1)
|
|
Amounts for 2004 primarily relate
to induced conversions of
81/4%
Convertible Notes due 2006; and amounts for 2005 and 2006
primarily relate to induced conversions of 7% Convertible Senior
Notes due 2011 and purchases of
101/8%
Senior Notes due 2010.
|
|
(2)
|
|
Amounts for 2004 include a
$20.4 million gain from the sale of a parcel of land in
Arizona held by a joint venture, and a $7.5 million gain
from Atlantic Coppers sale of its wire rod and wire
assets; amounts for 2005 include a $4.9 million gain from
the sale of a parcel of land in Arizona held by a joint venture;
and amounts for 2006 include gains of $29.7 million at
Atlantic Copper from the disposition of land and certain royalty
rights.
|
|
(3)
|
|
Gain on insurance settlement
related to the fourth quarter 2003 slippage and debris flow
events at the Grasberg open pit.
|
|
(4)
|
|
Primarily relates to interest
income and the impact of translating into U.S. dollars Atlantic
Coppers euro-denominated net liabilities.
|
|
|
|
(d)
|
|
Includes $4.6 million of
Phelps Dodge acquisition costs.
|
|
(e)
|
|
Cash flow from operating activities
represents net income before non-cash charges including
depreciation and amortization, losses on early extinguishment
and conversion of debt, deferred income taxes, minority
interests share of net income, equity (earnings) losses in
PT Smelting and other non-cash costs. Changes in working capital
also impact cash flow from operating activities.
|
|
(f)
|
|
For a description of Rio
Tintos interests, see Business of
Freeport-McMoRanGeneral.
|
|
(g)
|
|
For a reconciliation of unit net
cash costs to production and delivery costs applicable to sales
reported in Freeport-McMoRans consolidated financial
statements, refer to Product revenues and production
costs included in Managements discussion and
analysis of financial condition and results of operations of
Freeport-McMoRan elsewhere in this prospectus supplement.
|
|
(h)
|
|
Amount was $606.36 before a loss
resulting from redemption of Freeport-McMoRans
Gold-Denominated Preferred Stock, Series II.
|
S-16
Summary
consolidated historical financial and
operating data of Phelps
Dodge
The following summary consolidated historical financial data as
of and for the years ended December 31, 2004, 2005 and
2006, have been derived from the audited consolidated financial
statements of Phelps Dodge incorporated by reference herein. The
historical results presented below are not necessarily
indicative of results that you can expect for any future period.
You should read the table below in conjunction with the sections
entitled Use of proceeds,
Capitalization, Unaudited pro forma condensed
combined financial statements, Selected consolidated
historical financial and operating data of Phelps Dodge,
Managements discussion and analysis of financial
condition and results of operations of Phelps Dodge and
the consolidated financial statements of Phelps Dodge and the
related notes incorporated by reference herein. See Where
you can find more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
(Dollars
in millions)
|
|
2004(a)
|
|
2005(b)
|
|
2006(c)
|
|
|
Statement of income
data:
|
|
|
|
|
|
|
|
|
|
Sales and other operating revenues
|
|
$
|
6,415.2
|
|
$
|
8,287.1
|
|
$
|
11,910.4
|
Operating costs and expenses
|
|
|
4,940.3
|
|
|
6,522.2
|
|
|
7,683.5
|
Operating income
|
|
|
1,474.9
|
|
|
1,764.9
|
|
|
4,226.9
|
Interest expense, net of
capitalized interest
|
|
|
122.9
|
|
|
62.3
|
|
|
19.0
|
Net income applicable to common
shares
|
|
|
1,032.8
|
|
|
1,549.6
|
|
|
3,017.8
|
Balance sheet data at end of
period:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,200.1
|
|
$
|
1,916.7
|
|
$
|
4,947.4
|
Working
capital(d)
|
|
|
1,493.7
|
|
|
2,461.4
|
|
|
4,338.0
|
Total assets
|
|
|
8,594.1
|
|
|
10,358.0
|
|
|
14,632.3
|
Total debt
|
|
|
1,096.9
|
|
|
694.5
|
|
|
891.9
|
Shareholders equity
|
|
|
4,343.1
|
|
|
5,601.6
|
|
|
7,690.4
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
EBITDA(e)
|
|
$
|
1,808.3
|
|
$
|
2,647.1
|
|
$
|
4,501.2
|
Adjusted
EBITDA(e)
|
|
|
2,037.4
|
|
|
2,719.7
|
|
|
4,769.2
|
Capital expenditures and
investments, net
|
|
|
317.3
|
|
|
698.2
|
|
|
1,187.8
|
Depreciation, depletion and
amortization
|
|
|
455.5
|
|
|
441.8
|
|
|
448.7
|
Net cash provided by operating
activities
|
|
|
1,700.1
|
|
|
1,769.7
|
|
|
5,079.2
|
Net cash used in investing
activities
|
|
|
291.0
|
|
|
368.0
|
|
|
844.2
|
Net cash used in financing
activities
|
|
|
947.2
|
|
|
685.8
|
|
|
1,213.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
Copper production (million
pounds consolidated
basis)(f)
|
|
|
2,521.2
|
|
|
2,456.0
|
|
|
2,437.4
|
Copper production (million
pounds pro rata
basis)(g)
|
|
|
2,163.4
|
|
|
2,084.6
|
|
|
2,012.6
|
Copper sales from Phelps
Dodges mines (million pounds consolidated
basis)(f)
|
|
|
2,537.8
|
|
|
2,476.8
|
|
|
2,429.0
|
Copper sales from Phelps
Dodges mines (million pounds pro rata
basis)(g)
|
|
|
2,178.2
|
|
|
2,103.2
|
|
|
2,006.2
|
COMEX copper price per
pound(h)
|
|
$
|
1.29
|
|
$
|
1.68
|
|
$
|
3.09
|
LME copper price per
pound(i)
|
|
$
|
1.30
|
|
$
|
1.67
|
|
$
|
3.05
|
Molybdenum production (million
pounds)
|
|
|
57.5
|
|
|
62.3
|
|
|
68.2
|
Molybdenum sales from Phelps
Dodges mines (million pounds)
|
|
|
63.1
|
|
|
59.9
|
|
|
68.8
|
Purchased molybdenum (million
pounds)
|
|
|
12.9
|
|
|
12.9
|
|
|
8.3
|
Total molybdenum sales (million
pounds)
|
|
|
76.0
|
|
|
72.8
|
|
|
77.1
|
Metals
Week molybdenum Dealer
Oxide mean price per
pound(j)
|
|
$
|
16.41
|
|
$
|
31.73
|
|
$
|
24.75
|
|
|
S-17
|
|
|
(a)
|
|
Reported amounts for 2004 included
after-tax, net special charges of $50.4 million, including
$44.7 million for environmental provisions;
$30.9 million (net of minority interests) for early debt
extinguishment costs; $9.9 million for the write-down of
two cost-basis investments; $9.6 million for taxes on
anticipated foreign dividends; $9.0 million for a deferred
tax asset valuation allowance at Phelps Dodges Brazilian
wire and cable operation; $7.6 million for Phelps Dodge
Magnet Wire restructuring activities; $5.9 million for
asset impairment charges (included $4.5 million for
discontinued operations); and $0.7 million for interest on
a Texas franchise tax matter; partially offset by after-tax net
special gains of $30.0 million for the reversal of a U.S.
deferred tax asset valuation allowance; $15.7 million (net
of minority interest) for the reversal of an El Abra deferred
tax asset valuation allowance; $10.1 million for the gain
on the sale of uranium royalty rights; $7.4 million for
environmental insurance recoveries; and $4.7 million for
the settlement of historical legal matters.
|
|
(b)
|
|
Reported amounts for 2005 included
after-tax, net special charges of $54.1 million, including
$331.8 million for asset impairment charges; tax expense of
$88.1 million for foreign dividend taxes;
$86.4 million for environmental provisions;
$42.6 million associated with discontinued operations in
connection with the sale of Columbian Chemicals Company, which
is referred to in this document as Columbian, previously
disclosed as PDIs Specialty Chemicals Segment;
$41.3 million for early debt extinguishment costs;
$34.5 million (net of minority interest) for tax on
unremitted foreign earnings; $23.6 million for a tax charge
associated with minimum pension liability reversal;
$10.1 million for cumulative effect of accounting change;
$5.9 million for transaction and employee-related costs
associated with the sale of substantially all of Phelps
Dodges North American magnet wire assets; partially offset
by after-tax, net special gains of $388.0 million for the
sale of a cost-basis investment; $181.7 million for change
in interest gains at Cerro Verde and Ojos del Salado;
$15.6 million for legal matters; $11.9 million for the
reversal of Phelps Dodge Brazils deferred tax asset
valuation allowance; $8.5 million for the sale of non-core
real estate; $4.0 million for the reversal of U.S. deferred
tax asset valuation allowance; $0.4 million for
environmental insurance recoveries; and $0.1 million for
Phelps Dodge Magnet Wire restructuring activities. The
after-tax, net special charges of $42.6 million associated
with discontinued operations consisted of $67.0 million
(net of minority interests) for a goodwill impairment charge;
taxes of $7.6 million associated with the sale and
dividends paid in 2005; and $5.0 million for a loss on
disposal of Columbian associated with transactions and
employee-related costs, partially offset by a deferred income
tax effect of $37.0 million.
|
|
(c)
|
|
Reported amounts for 2006 included
after-tax,
net special gains of $344.2 million, including $330.7 million
for the Inco termination fee; $127.5 million for the reversal of
U.S. deferred tax asset valuation allowance; $2.0 million for
legal matters; $0.4 million for sale of
non-core
real estate; and $0.2 million for the reversal of Minera PD Peru
deferred tax asset valuation allowance; partially offset by
after-tax,
net special charges of $54.5 million for environmental
provisions; $30.9 million for charges associated with
discontinued operations in connection with the sale of
Columbian; $9.6 million for asset impairment charges; $7.6
million (net of minority interest) for tax on unremitted foreign
earnings; $5.1 million for transaction and employee-related
charges and loss on disposal in connection with the sale of
North American magnet wire assets; $4.7 million for transaction
and employee-related charges and loss on the disposal in
connection with the sale of HPC; $3.0 million for a lease
termination settlement; and $1.2 million associated with the
dissolution of an international wire and cable entity.
|
|
(d)
|
|
Working capital represents current
assets less current liabilities.
|
|
(e)
|
|
EBITDA and Adjusted EBITDA are
non-GAAP
financial measures. EBITDA represents net income applicable to
common shares plus (i) interest expense, net of capitalized
interest, (ii) provision for taxes on income,
(iii) depreciation, depletion and amortization and
(iv) amounts included in discontinued operations. Adjusted
EBITDA represents EBITDA further adjusted to reflect the impact
of (i) preferred stock dividends, (ii) minority
interests in consolidated subsidiaries, (iii) equity in net
earnings of affiliated companies, (iv) special items and
provisions, net, (v) early debt extinguishment costs,
(vi) Inco termination fee, net of expenses, (vii) gain
on sale of
cost-basis
investments, net of expenses, (viii) change in interest
gains, net of expenses, (ix) miscellaneous income and
expense, net and (x) other amounts included in discontinued
operations.
|
|
|
|
EBITDA and Adjusted EBITDA are
frequently used by securities analysts, investors, lenders and
others to evaluate companies performance, including, among
other things, profitability before the effect of financing and
similar decisions. Because securities analysts, investors,
lenders and others use EBITDA and Adjusted EBITDA, our
management believes that our presentation of EBITDA and Adjusted
EBITDA affords them greater transparency in assessing our
financial performance. EBITDA and Adjusted EBITDA should not be
considered as a substitute for measures of financial performance
prepared in accordance with GAAP. EBITDA and Adjusted EBITDA may
not necessarily be comparable to similarly titled measures
reported by other companies, as different companies calculate
them differently.
|
S-18
|
|
|
|
|
The following table reconciles net
income applicable to common shares to EBITDA and Adjusted EBITDA
for each period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
(Dollars in
millions)
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Net income applicable to common
shares
|
|
$
|
1,032.8
|
|
|
$
|
1,549.6
|
|
|
$
|
3,017.8
|
|
Interest expense, net of
capitalized interest
|
|
|
122.9
|
|
|
|
62.3
|
|
|
|
19.0
|
|
Provision for taxes on income
|
|
|
131.3
|
|
|
|
577.0
|
|
|
|
1,010.2
|
|
Depreciation, depletion and
amortization
|
|
|
455.5
|
|
|
|
441.8
|
|
|
|
448.7
|
|
Amounts included in discontinued
operations(1)
|
|
|
65.8
|
|
|
|
16.4
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
1,808.3
|
|
|
$
|
2,647.1
|
|
|
$
|
4,501.2
|
|
Preferred stock dividends
|
|
|
13.5
|
|
|
|
6.8
|
|
|
|
|
|
Minority interests in consolidated
subsidiaries
|
|
|
201.1
|
|
|
|
190.4
|
|
|
|
792.4
|
|
Equity in net earnings of
affiliated companies
|
|
|
(1.9
|
)
|
|
|
(2.7
|
)
|
|
|
(4.6
|
)
|
Special items and provisions,
net(2)
|
|
|
61.6
|
|
|
|
523.1
|
|
|
|
93.6
|
|
Early debt extinguishment costs
|
|
|
43.2
|
|
|
|
54.0
|
|
|
|
|
|
Inco termination fee, net of
expenses(3)
|
|
|
|
|
|
|
|
|
|
|
(435.1
|
)
|
Gain on sale of cost-basis
investment, net of
expenses(4)
|
|
|
|
|
|
|
(438.4
|
)
|
|
|
|
|
Change in interest gains, net of
expenses(5)
|
|
|
|
|
|
|
(168.3
|
)
|
|
|
|
|
Miscellaneous income and expense,
net(6)
|
|
|
(45.3
|
)
|
|
|
(93.3
|
)
|
|
|
(190.9
|
)
|
Other amounts included in
discontinued
operations(7)
|
|
|
(43.1
|
)
|
|
|
1.0
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
2,037.4
|
|
|
$
|
2,719.7
|
|
|
$
|
4,769.2
|
|
|
|
|
|
|
(1)
|
|
Reflects interest expense, net of
capitalized interest, provision for taxes on income,
depreciation, depletion and amortization, in each case, included
within discontinued operations in the amounts of
$3.2 million, $11.0 million and $51.6 million in
2004, respectively, $4.2 million, ($37.0) million and
$49.2 million in 2005, respectively, and $0.4 million,
$4.8 million and $0.3 million in 2006, respectively.
|
(2)
|
|
Primarily reflects charges for
asset impairments and environmental provisions for closed
facilities or closed portions of operating facilities, including
net charges of approximately $58.9 million for
environmental provisions in 2004, approximately
$419.1 million for asset impairments at the Tyrone and
Cobre mines, Chino smelter and Miami refinery in 2005 and
approximately $71.7 million for environmental provisions in
2006.
|
(3)
|
|
Reflects the gain from the
termination fee received, net of expenses, resulting from the
termination of a Combination Agreement with Inco, Ltd.
|
(4)
|
|
Reflects the gain, net of expenses,
resulting from the 2005 sale of Phelps Dodges investment
in Southern Peru Copper Corporation.
|
(5)
|
|
Reflects gains, net of expenses,
resulting from reductions in ownership interests in Cerro Verde
and Ojos del Salado during 2005.
|
(6)
|
|
Primarily reflects interest income
and dividends received from Southern Peru Copper Corporation
prior to its sale in 2005.
|
(7)
|
|
Reflects (income) loss included
within discontinued operations.
|
|
|
|
(f)
|
|
Consolidated basis excludes
15 percent undivided interest in the Morenci, Arizona
copper mining complex held by Sumitomo Metal Mining Arizona, Inc.
|
|
(g)
|
|
Pro rata basis reflects Phelps
Dodges ownership interests in El Abra (51%), Candelaria
(80%), and Morenci (85%) for all periods, Cerro Verde (82.5%
through May 2005 and 53.56% thereafter) and Ojos del Salado
(100% through December 2005 and 80% thereafter).
|
|
(h)
|
|
New York Commodity Exchange average
spot price per poundcathodes.
|
|
(i)
|
|
London Metal Exchange average spot
price per poundcathodes.
|
|
(j)
|
|
Annual Metals Week
molybdenum Dealer Oxide mean price per pound as quoted in Platts
Metals Week.
|
S-19
Summary unaudited
pro forma
condensed combined financial information
The following table sets forth summary unaudited pro forma
condensed combined financial information of Freeport-McMoRan.
The pro forma information has been derived from, and should be
read in conjunction with, the Unaudited pro forma
condensed combined financial statements and related notes,
which are included in this prospectus supplement and give pro
forma effect to the transactions.
The pro forma condensed combined balance sheet information gives
effect to the transactions as if they occurred on
December 31, 2006. The pro forma condensed combined
statements of income information gives effect to the
transactions as if they occurred on January 1, 2006. The
summary unaudited pro forma condensed combined financial
information is provided for illustrative purposes only and does
not purport to represent what the actual consolidated results of
operations or the consolidated financial position of
Freeport-McMoRan would have been had the transactions occurred
on the dates assumed, nor are they necessarily indicative of
future consolidated results of operations or consolidated
financial position.
|
|
|
|
|
|
|
Pro
forma
|
|
|
year ended
|
(Dollars in
millions, except ratios)
|
|
December
31, 2006
|
|
|
Statement of income
data:
|
|
|
|
Revenues(a)
|
|
$
|
17,700.9
|
Costs and expenses
|
|
|
11,167.3
|
Operating income
|
|
|
6,533.6
|
Interest expense,
net(b)
|
|
|
1,393.7
|
Income from continuing operations
applicable to common
stock(a)
|
|
|
2,868.7
|
Balance sheet data at end of
year:
|
|
|
|
Cash and cash
equivalents(c)
|
|
$
|
3,383.4
|
Working
capital(d)
|
|
|
5,749.6
|
Total assets
|
|
|
40,657.5
|
Total
debt(e)
|
|
|
17,607.4
|
Stockholders equity
|
|
|
10,235.9
|
Other financial data:
|
|
|
|
EBITDA(f)
|
|
$
|
7,444.1
|
Adjusted
EBITDA(f)
|
|
|
7,801.8
|
Capital expenditures and
investments in subsidiaries
|
|
|
1,499.3
|
Depreciation, depletion and
amortization
|
|
|
1,268.2
|
Ratio of total debt to Adjusted
EBITDA
|
|
|
2.3x
|
Ratio of Adjusted EBITDA to
interest expense, net
|
|
|
5.6x
|
|
|
|
|
|
(a)
|
|
Amounts include charges for
mark-to-market
losses on Phelps Dodges copper price protection program
totaling $1,008.9 million in revenues and $766.8 million in
income from continuing operations applicable to common stock for
the year ended December 31, 2006.
|
(b)
|
|
The pro forma information
presented herein assumes a weighted average annual interest rate
of 7.8% on the notes, the Tranche A term loan facility and
the Tranche B term loan facility. A 0.125% variance in the
interest rate on the Tranche A term loan portion of the new
senior credit facilities would cause an increase or decrease of
$3.1 million in interest expense. A 0.125% variance in the
interest rate on the Tranche B term loan portion of the new
senior credit facilities would cause an increase or decrease of
$9.4 million in interest expense. A 0.125% variance on the
weighted average interest rate on the notes would cause an
increase or decrease of $7.5 million in interest expense.
|
(c)
|
|
At December 31, 2006,
Freeport-McMoRan and Phelps Dodge had $5,854.9 million of
combined unrestricted cash on hand.
|
(d)
|
|
Working capital represents current
assets less current liabilities.
|
(e)
|
|
Based on fair value of Phelps
Dodges debt and includes current portion of debt and
short-term
borrowings. Pro forma total debt based on book values as of
December 31, 2006 was $17,572.0 million.
|
(f)
|
|
EBITDA and Adjusted EBITDA are
non-GAAP financial measures. For purposes of this presentation,
pro forma EBITDA represents income from continuing operations
applicable to common stock plus (i) interest expense, net,
(ii) provision for income taxes and
(iii) depreciation, depletion and amortization. Pro forma
Adjusted EBITDA represents pro forma EBITDA further adjusted to
reflect the impact of (i) preferred dividends,
(ii) minority interest in net income of consolidated
subsidiaries,
|
S-20
|
|
|
|
|
(iii) losses on early
extinguishment and conversion of debt, (iv) gains on sales
of assets, (v) Inco termination fee, net of expenses,
(vi) other income, net and (vii) equity in PT Smelting
and affiliated companies earnings.
|
|
|
EBITDA and Adjusted EBITDA are
frequently used by securities analysts, investors, lenders and
others to evaluate companies performance, including, among
other things, profitability before the effect of financing and
similar decisions. Because securities analysts, investors,
lenders and others use EBITDA and Adjusted EBITDA, our
management believes that our presentation of EBITDA and Adjusted
EBITDA affords them greater transparency in assessing our
financial performance. EBITDA and Adjusted EBITDA should not be
considered as a substitute for measures of financial performance
prepared in accordance with GAAP. EBITDA and Adjusted EBITDA
may not necessarily be comparable to similarly titled measures
reported by other companies, as different companies calculate
them differently.
|
|
|
The following table reconciles net
income applicable to common stock to EBITDA and to Adjusted
EBITDA for the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
Year Ended
|
|
(Dollars in
millions)
|
|
December 31,
2006
|
|
|
|
|
Income from continuing operations
applicable to common stock
|
|
$
|
2,868.7
|
|
Interest expense, net
|
|
|
1,393.7
|
|
Provision for income taxes
|
|
|
1,913.5
|
|
Depreciation, depletion and
amortization
|
|
|
1,268.2
|
|
|
|
|
|
|
EBITDA
|
|
$
|
7,444.1
|
|
Preferred dividends
|
|
|
60.5
|
|
Minority interests in net income of
consolidated subsidiaries
|
|
|
960.6
|
|
Losses on early extinguishment and
conversion of debt
|
|
|
32.0
|
|
Gains on sales of
assets(1)
|
|
|
(30.6
|
)
|
Inco termination fee, net of
expenses(2)
|
|
|
(435.1
|
)
|
Other income,
net(3)
|
|
|
(218.6
|
)
|
Equity in PT Smelting and
affiliated companies earnings
|
|
|
(11.1
|
)
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
7,801.8
|
|
|
|
|
|
|
(1)
|
|
Includes gains of
$29.7 million at Atlantic Copper from the disposition of
land and certain royalty rights.
|
(2)
|
|
Reflects gain from a termination
fee received, net of expenses, resulting from termination of a
Combination Agreement with Inco, Ltd.
|
(3)
|
|
Primarily relates to interest
income.
|
S-21
Risk
factors
In addition to the other information included or incorporated
by reference in this prospectus supplement, including the
matters addressed in Cautionary statement regarding
forward-looking statements, you should carefully consider
the following risk factors set forth below before making an
investment decision with respect to the notes. In addition, you
should read and consider the risk factors associated with each
of the businesses of Freeport-McMoRan and Phelps Dodge because
these risk factors may also affect the operations and financial
results reported by the combined company. See Where you
can find more information.
Risks
related to the notes
Our substantial
indebtedness could adversely affect our financial condition and
prevent us from fulfilling our obligations under our outstanding
indebtedness and the notes.
The combined company will have incurred significant debt to fund
a portion of the cash consideration payable to the Phelps Dodge
shareholders in the acquisition. As of December 31, 2006,
on a pro forma basis giving effect to the transactions, the
outstanding principal amount of our indebtedness would have been
approximately $17.6 billion (excluding unused availability under
our revolving credit facility of approximately $1.4 billion
after giving effect to outstanding letters of credit). Our level
of indebtedness could have important consequences for you as a
note holder. For example, it could:
|
|
|
make it difficult for us to satisfy our obligations with respect
to the notes;
|
|
|
increase our vulnerability to general adverse economic and
industry conditions;
|
|
|
require us to dedicate a substantial portion of our cash flow
from operations and proceeds of any equity issuances to payments
on our indebtedness, thereby reducing the availability of cash
flow to fund working capital, capital expenditures, acquisitions
and investments and other general corporate purposes;
|
|
|
make it difficult for us to optimally capitalize and manage the
cash flow for our businesses;
|
|
|
limit our flexibility in planning for, or reacting to, changes
in our businesses and the markets in which we operate;
|
|
|
place us at a competitive disadvantage to our competitors that
have less debt;
|
|
|
limit our ability to borrow money or sell stock to fund our
working capital, capital expenditures, acquisitions and debt
service requirements and other financing needs; and
|
|
|
increase our interest expense if interest rates in general
increase because a substantial portion of our indebtedness bears
interest at floating rates.
|
In addition, we may need to incur additional indebtedness in the
future in the ordinary course of business. The terms of our new
senior credit facilities and other agreements governing our
indebtedness allow us to incur additional debt subject to
certain limitations. If new debt is added to current debt
levels, the risks described above could intensify. Furthermore,
if future debt financing is not available to us when required or
is not available on acceptable terms, we may be unable to grow
our business, take advantage of business opportunities, respond
to competitive pressures or refinance maturing debt, any of
which could have a material adverse effect on our operating
results and financial condition. Moreover, the combined
companys
S-22
ability to satisfy financial tests or utilize third-party
guarantees for financial assurance with respect to reclamation
obligations may be adversely impacted if its credit ratings were
downgraded below investment grade.
We need
significant amounts of cash to service our indebtedness. If we
are unable to generate a sufficient amount of cash to service
our indebtedness, our financial condition and results of
operations could be negatively impacted.
We need significant amounts of cash in order to service and
repay our indebtedness. Our ability to generate cash in the
future will be, to a certain extent, subject to general
economic, financial, competitive and other factors that may be
beyond our control. In addition, our ability to borrow funds in
the future to service our debt will depend on covenants in our
new senior credit facilities, existing indentures and other debt
agreements we may have in the future. Future borrowings may not
be available to us under our new senior credit facilities or
from the capital markets in amounts sufficient to enable us to
pay our obligations as they mature or to fund other liquidity
needs. If we are not able to obtain such borrowings or generate
cash flow from operations in an amount sufficient to enable us
to service and repay our indebtedness, we will need to refinance
our indebtedness or be in default under the agreements governing
our indebtedness. Such refinancing may not be available on
favorable terms or at all. The inability to service, repay
and/or refinance our indebtedness could negatively impact our
financial condition and results of operations.
The notes are
unsecured and effectively subordinated to our existing and
future secured indebtedness.
Our obligations under each series of notes will not be secured
by any of our assets, while our obligations under our new senior
credit facilities and under certain outstanding debt securities
issued by Freeport-McMoRan and certain outstanding debt
securities issued or assumed by Phelps Dodge will be secured by
certain stock pledges. The new senior credit facilities and
certain of the existing Freeport-McMoRan debt securities will be
secured by pledges of all or a portion of the outstanding shares
of capital stock of certain of Freeport-McMoRans
subsidiaries. Certain of the existing Phelps Dodge debt
securities will be secured by pledges of all or a portion of the
outstanding shares of capital stock of certain of Phelps
Dodges subsidiaries. In addition, our new senior credit
facilities will be secured by pledges of the indebtedness owed
to Freeport-McMoRan by its subsidiaries and the amended and
restated portion of our new revolving credit facility will
continue to be secured by PT Freeport Indonesias assets,
including its Contract of Work. Therefore, the lenders under our
new senior credit facilities, the holders of certain outstanding
Freeport-McMoRan and Phelps Dodge debt securities and holders of
any other secured debt that we or our subsidiaries may incur in
the future, will have claims with respect to these assets that
have priority over the claims of holders of the 2015 notes and
2017 notes.
In the event that we are declared bankrupt, become insolvent or
are liquidated or reorganized, holders of secured obligations
will be entitled to be paid to the extent of the assets securing
such debt. Thereafter, holders of the notes will participate
ratably with all holders of our other senior unsecured
indebtedness, based upon the respective amounts owed to each
holder or creditor, in our remaining assets. In any of the
foregoing events, we cannot assure you that there will be
sufficient assets to pay amounts due on the notes. As a result,
holders of notes may receive less, ratably, than holders of our
secured indebtedness.
S-23
As of December 31, 2006, on a pro forma basis giving effect
to the transactions, we had $10,612.9 million of secured
indebtedness ($10,000.0 million of which consisted of
outstanding borrowings and related guarantees under our new
senior credit facilities and $612.9 million of which consisted
of indebtedness under certain existing Freeport-McMoRan debt
securities). We had approximately $1.4 billion of secured
debt available for additional borrowing under our new revolving
credit facility as of December 31, 2006 on a pro forma
basis after giving effect to the transactions and outstanding
letters of credit. For further information related to this risk
factor, see Description of certain indebtedness.
The notes will
not be guaranteed by any of our subsidiaries, including Phelps
Dodge, and will be structurally subordinated to the debt and
other liabilities of our subsidiaries, which means that
creditors of our subsidiaries will be paid from the assets of
those entities before holders of the notes would have any claims
to those assets.
The notes will not be guaranteed by any of our subsidiaries,
including Phelps Dodge. Accordingly, the notes will be
effectively subordinated to all debt and other liabilities,
including trade debt and preferred share claims, of our
subsidiaries. As of December 31, 2006, after giving pro
forma effect to the transactions, our subsidiaries would have
had $23,495.3 million of total liabilities (including trade
payables). In the event of a bankruptcy, liquidation or
reorganization of any of our subsidiaries, holders of its
indebtedness and its creditors (including preferred
stockholders) will generally be entitled to payment from the
assets and earnings of such subsidiary before any assets of such
subsidiary are available for distribution to us and our
creditors, including holders of the notes. In any of the
foregoing events, we cannot assure you that there will be
sufficient assets to pay amounts due on the notes. In addition,
certain of our subsidiaries will guarantee our obligations under
our new senior credit facilities and the existing
Freeport-McMoRan debt securities to the extent the guarantee
would not constitute a fraudulent conveyance, result in adverse
tax consequences to us or violate applicable local law. For
further information related to this risk factor, see
Description of the notesRanking.
The notes lack
certain covenants typically found in other comparably rated
public debt securities.
Although the notes are rated below investment grade by both
Standard & Poors and Moodys Investors
Service, they lack the protection of certain financial and other
restrictive covenants typically associated with comparably rated
public debt securities, including covenants related to
transactions with affiliates and dividend and other payment
restrictions affecting subsidiaries.
The agreements
governing our indebtedness contain various covenants that limit
our discretion in the operation of our business and also require
us to meet financial maintenance tests and other covenants. The
failure to comply with such tests and covenants could have a
material adverse effect on us.
The agreements governing our indebtedness contain various
covenants, including those that restrict our ability to:
|
|
|
incur additional indebtedness;
|
|
|
engage in transactions with affiliates;
|
|
|
create liens on our assets;
|
S-24
|
|
|
make payments in respect of, or redeem or acquire, debt or
equity issued by us or our subsidiaries, including the payment
of dividends on our common stock;
|
|
|
make acquisitions of new subsidiaries;
|
|
|
make investments in or loans to entities that we do not control,
including joint ventures;
|
|
|
use assets as security in other transactions;
|
|
|
sell assets, subject to certain exceptions;
|
|
|
merge with or into other companies;
|
|
|
enter into sale and leaseback transactions;
|
|
|
enter into unrelated businesses;
|
|
|
enter into agreements or arrangements that restrict the ability
of certain of our subsidiaries to pay dividends or other
distributions;
|
|
|
prepay indebtedness; and
|
|
|
enter into certain new hedging transactions other than in the
ordinary course.
|
In addition, our new senior credit facilities require that we
meet certain financial tests at any time that borrowings are
outstanding under our new revolving credit facility, including a
leverage ratio test and a secured leverage ratio test. During
periods in which copper, gold or molybdenum prices or production
volumes, or other conditions reflect the adverse impact of
cyclical market trends or other factors, we may not be able to
comply with the applicable financial covenants.
Any failure to comply with the restrictions of our new senior
credit facilities or any agreement governing our other
indebtedness may result in an event of default under those
agreements. Such default may allow the creditors to accelerate
the related debt, which acceleration may trigger
cross-acceleration or cross-default provisions in other debt.
Our assets and cash flow may not be sufficient to fully repay
borrowings under our outstanding debt instruments, either upon
maturity or, if accelerated, upon an event of default.
If, when required, we are unable to repay, refinance or
restructure our indebtedness under, or amend the covenants
contained in, our new senior credit agreements, or if a default
otherwise occurs, the lenders under our new senior credit
facilities could elect to terminate their commitments
thereunder, cease making further loans, declare all borrowings
outstanding, together with accrued interest and other fees, to
be immediately due and payable, institute foreclosure
proceedings against those assets that secure the borrowings
under our new senior credit facilities and prevent us from
making payments on the notes. Any such actions could force us
into bankruptcy or liquidation, and we cannot provide any
assurance that we could repay our obligations under the notes in
such an event.
Our holding
company structure may impact your ability to receive payment on
the notes.
We are a holding company with no material assets other than the
capital stock of our subsidiaries. As a result, our ability to
repay our indebtedness, including the notes, is dependent on the
generation of cash flow by our subsidiaries and their ability to
make such cash available to us, by dividend, debt repayment or
otherwise. Our subsidiaries do not have any obligation to
S-25
pay amounts due on the notes or to make funds available for that
purpose. In addition, our subsidiaries may not be able to, or be
permitted to, make distributions to enable us to make payments
in respect of our indebtedness, including each series of notes.
Each of our subsidiaries is a distinct legal entity and, under
certain circumstances, legal and contractual restrictions, as
well as the financial condition and operating requirements of
our subsidiaries, may limit our ability to obtain cash from our
subsidiaries. Our rights to participate in any distribution of
our subsidiaries assets upon their liquidation,
reorganization or insolvency would generally be subject to the
prior claims of the subsidiaries creators, including any
trade creditors and preferred shareholders.
A financial
failure by any entity in which we have an interest may hinder
the payment of the notes.
A financial failure by any entity in which we have an interest
could affect payment of the notes if a bankruptcy court were to
substantively consolidate that entity with our
subsidiaries and/or with us. If a bankruptcy court substantively
consolidated an entity in which we have an interest with our
subsidiaries and/or with us, the assets of each entity so
consolidated would be subject to the claims of creditors of all
entities so consolidated. This could expose our creditors,
including holders of the notes, to potential dilution of the
amount ultimately recoverable because of the larger creditor
base. Furthermore, forced restructuring of the notes could occur
through the cram-down provisions of the U.S.
bankruptcy code. Under this provision, the notes could be
restructured over the note holders objections as to their
general terms, primarily interest rate and maturity.
We may not have
the ability to finance the change of control repurchase offer
required by the indenture governing the notes.
Upon certain change of control events, as that term is defined
in the indenture, including a change of control caused by an
unsolicited third party, we will be required to make an offer in
cash to repurchase all or any part of each holders notes
at a price equal to 101 percent of the principal amount
thereof, plus accrued interest. The source of funds for any such
repurchase would be our available cash or cash generated from
operations or other sources, including borrowings, sales of
equity or funds provided by a new controlling person or entity.
We cannot assure you that sufficient funds will be available at
the time of any change of control event to repurchase all
tendered notes pursuant to this requirement. Our failure to
offer to repurchase notes, or to repurchase notes tendered,
following a change of control will result in a default under the
indenture, which could lead to a cross-default under our new
senior credit facilities and under the terms of our other
indebtedness. In addition, our new senior credit facilities may
prohibit us from making any such required repurchases. Prior to
repurchasing the notes upon a change of control event, as
required under the indenture, we must either repay outstanding
indebtedness under our new senior credit facilities or obtain
the consent of the lenders under those facilities. If we do not
obtain the required consents or repay our outstanding
indebtedness under our new senior credit facilities, we would
remain prohibited from offering to repurchase the notes. Our new
senior credit facilities also provide that a change of control,
as defined therein, will be a default that permits the lenders
to accelerate the maturity of borrowings thereunder and, if such
debt is not repaid, to enforce the security interests in the
collateral securing such debt. For further information, see
Description of the notes.
S-26
One of the events which would trigger a change of control is a
sale of all or substantially all of our assets. The
phrase all or substantially all as used in the
definition of change of control has not been
interpreted under New York law (which is the governing law of
the indenture) to represent a specific quantitative test. As a
consequence, investors may not be able to determine when a
change of control has occurred, giving rise to the repurchase
obligations under the indenture. It is possible, therefore, that
there could be a disagreement between us and some or all of the
holders of the 2015 notes and/or 2017 notes over whether a
specific asset sale or sales is a change of control triggering
event and that holders of the notes might not receive a change
of control offer in respect of that transaction. In addition, in
the event the holders of the notes elected to exercise their
rights under the indenture and we elected to contest such
election, there could be no assurance as to how a court
interpreting New York law would interpret the phrase all
or substantially all. In addition, certain important
corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a
change of control under the indenture related to the
notes.
There is no
public market for the notes, and we cannot assure you that a
market for the notes will develop.
The underwriters have advised us that they currently intend to
make a market in the notes. However, the underwriters are not
obligated to do so and any underwriter may discontinue its
market-making activities at any time without notice. We do not
intend to apply for a listing of the notes on any securities
exchange or automated interdealer quotation system.
The notes will be a new class of securities for which there is
no established public trading market, and no assurance can be
given as to:
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the liquidity of any such market that may develop;
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the ability of holders of the notes to sell their notes; or
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the price at which the holders of the notes would be able to
sell their notes.
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If such a market were to exist, the notes could trade at prices
that may be higher or lower than their principal amount or
purchase price, depending on many factors, including:
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prevailing interest rates and the markets for similar securities;
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the interest of securities dealers in making a market;
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the market price of our common stock;
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general economic conditions; and
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our financial condition, historic financial performance and
future prospects.
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Risks related to
the combined company
Declines in the
market prices of copper, gold and molybdenum could adversely
affect the combined companys earnings and cash flows, and
therefore its ability to repay its debt.
The earnings and cash flows of the combined company will be
affected significantly by the market prices of copper and, to a
lesser extent, gold and molybdenum. The world market prices of
these commodities have fluctuated historically and will be
affected by numerous factors
S-27
beyond the control of the combined company. Many financial
analysts who follow the metals markets are predicting that
copper prices will decline significantly from their current,
historically high, levels over the next few years. A decline in
the world market price of one or more of these commodities could
adversely affect the combined companys earnings and cash
flows and therefore could adversely affect its ability to repay
its debt and depress its stock price.
World copper prices have historically fluctuated widely. During
the two years ended December 31, 2006, the daily closing
prices on the London spot market ranged from $1.39 to $3.99 per
pound for copper. World copper prices are affected by numerous
factors beyond our control, including:
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the strength of the U.S. economy and the economies of other
industrialized and developing nations, including China, which
has become the largest consumer of refined copper in the world;
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available supplies of copper from mine production and
inventories;
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sales by holders and producers of copper;
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demand for industrial products containing copper;
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investment activity, including speculation, in copper as a
commodity;
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the availability and cost of substitute materials; and
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currency exchange fluctuations, including the relative strength
of the U.S. dollar.
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World gold prices have historically fluctuated widely. During
the two years ended December 31, 2006, the daily closing
prices on the London spot market ranged from $411 to $726 per
ounce for gold. World gold prices are affected by numerous
factors beyond our control, including:
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the strength of the U.S. economy and the economies of other
industrialized and developing nations, including China;
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global or regional political or economic crises;
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the relative strength of the U.S. dollar and other currencies;
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expectations with respect to the rate of inflation;
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interest rates;
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purchases and sales of gold by central banks and other holders;
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demand for jewelry containing gold; and
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investment activity, including speculation, in gold as a
commodity.
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Molybdenum prices also fluctuate widely, even more so than
copper. Molybdenum demand depends heavily on the global steel
industry, which uses the metal as a hardening and corrosion
inhibiting agent. Approximately 80 percent of molybdenum
production is used in this application. The remainder is used in
specialty chemical applications such as catalysts, water
treatment agents and lubricants. Approximately 65 percent
of global molybdenum production is a by-product of copper
mining, which is relatively insensitive to molybdenum prices.
During the past 15 years, Platts Metals Week
molybdenum Dealer Oxide prices per pound have ranged from a high
of $40.00 to a low of $1.82. During the two years ended
December 31, 2006, Platts Metals
S-28
Week molybdenum Dealer Oxide price ranged from $20.50 to
$40.00 per pound. Molybdenum prices are affected by numerous
factors beyond our control, including:
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the worldwide balance of molybdenum demand and supply;
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rates of global economic growth, especially construction and
infrastructure activity that requires significant amounts of
steel;
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the volume of molybdenum produced as a by-product of copper
production;
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inventory levels;
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currency exchange fluctuations, including the relative strength
of the U.S. dollar; and
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production costs of U.S. and foreign competitors.
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Increased energy
and other production costs could reduce the combined
companys profitability and cash flow.
Each of Freeport-McMoRan and Phelps Dodge has experienced
increases in production costs in recent years primarily as a
result of higher energy costs and costs of other consumables,
higher mining costs and higher labor costs (including pension
and health-care costs).
Energy represents a significant portion of the production costs
for the combined companys operations. The principal
sources of energy for the combined companys operations are
electricity, purchased petroleum products, natural gas and coal.
The combined company will pay more for its energy needs during
times of progressively higher energy prices. As energy is a
significant portion of its production costs, if the combined
company is unable to procure sufficient energy at reasonable
prices in the future, it could adversely affect its profits and
cash flow.
In addition to energy, the combined companys production
costs will be affected by the prices of commodities it consumes
or uses in its operations, such as sulfuric acid, grinding
media, steel, reagents, liners, explosives and diluents. The
prices of such commodities are influenced by supply and demand
trends affecting the copper industry in general and other
factors, many of which are outside the combined companys
control, and are at times subject to volatile price movements.
Increases in the cost of these commodities could make production
at certain of the combined companys operations less
profitable, even in an environment of relatively high copper
prices. Increases in the costs of commodities that the combined
company consumes or uses may also significantly affect the
capital costs of new projects.
The volume and
grade of the ore reserves that the combined company recovers and
its rate of production may be more or less than
anticipated.
The combined companys ore reserve amounts are determined
in accordance with established mining industry practices and
standards, but are estimates of the mineral deposits that can be
recovered economically and legally based on currently available
data. Ore bodies may not conform to standard geological
expectations, and estimates may change as new data becomes
available. Because ore bodies do not contain uniform grades of
minerals, the combined companys metal recovery rates will
vary from time to time. There are also uncertainties inherent in
estimating quantities of ore reserves and copper recovered from
stockpiles. The quantity of copper contained in mill and leach
stockpiles is based upon surveyed volumes of mined material and
daily production records. The volume and grade of ore reserves
recovered, rates of
S-29
production and recovered copper from stockpiles may be less than
anticipated. Additionally, as the determination of ore reserves
is based, in part, on historical selling prices, a prospective
decrease in such prices may result in a reduction in reported
and economically recoverable ore reserves. These factors may
result in variations in the volumes of minerals that the
combined company can sell from period to period.
Some ore reserves may become unprofitable to develop if there
are unfavorable long-term market price fluctuations in copper,
gold or molybdenum, or if there are significant increases in
operating or capital costs. In addition, ore reserves are
depleted as mined.
Our ability to replenish our ore reserves is important to our
long-term viability. The combined companys exploration
programs may not result in the discovery of additional mineral
deposits that can be mined profitably.
The combined
companys business is subject to operational
risks.
Mines by their nature are subject to many operational risks and
factors that are generally outside of the combined
companys control and could impact its business, operating
results and cash flows. These operational risks and factors
include, but are not limited to:
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unanticipated ground and water conditions and adverse claims to
water rights;
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geological problems, including earthquakes and other natural
disasters;
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metallurgical and other processing problems;
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the occurrence of unusual weather or operating conditions and
other force majeure events;
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lower than expected ore grades or recovery rates;
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accidents;
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delays in the receipt of or failure to receive necessary
government permits;
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the results of litigation, including appeals of agency decisions;
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uncertainty of exploration and development;
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delays in transportation;
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labor disputes;
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inability to obtain satisfactory insurance coverage;
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unavailability of materials and equipment;
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the failure of equipment or processes to operate in accordance
with specifications or expectations; and
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the results of financing efforts and financial market conditions.
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The combined
company will operate on a broader geographical scope than either
Freeport-McMoRan
or Phelps Dodge has operated individually, and will be exposed
to a broader range of political, social and geographic risks
than either company has been exposed to on an individual
basis.
Freeport-McMoRans primary operating assets are located in
Indonesia. Accordingly, the business of the combined company may
be adversely affected by Indonesian political, economic and
social uncertainties, in addition to the usual risks associated
with conducting business in a foreign country. Because Phelps
Dodge does not have any significant operations in Indonesia,
these risks are different from and in addition to those to which
the business of Phelps Dodge
S-30
has historically been exposed. See Risk factorsRisks
related to Freeport-McMoRans business below.
Phelps Dodge conducts mining operations in the United States,
Chile and Peru and has a significant development project in the
Democratic Republic of Congo (which is expected to begin
production by early 2009). Accordingly, the business of the
combined company may be adversely affected by political,
economic and social uncertainties in these countries, in
addition to the usual risks associated with conducting business
in a foreign country. Because Freeport-McMoRan has no
significant operations in any of these countries, these risks
are different from and in addition to those to which the
business of Freeport-McMoRan has historically been exposed. See
Risk factorsRisks related to Phelps Dodges
business below.
Movements in
foreign currency exchange rates or interest rates could
negatively affect the combined companys operating
results.
Substantially all of the combined companys revenues and a
significant portion of its costs will be denominated in U.S.
dollars; however, some of its costs, and certain of its asset
and liability accounts, will be denominated in Indonesian
rupiah, Chilean pesos, Peruvian nuevos soles and other foreign
currencies. As a result, the combined company will be generally
less profitable when the U.S. dollar weakens in relation to
these foreign currencies. From time to time, the combined
company may implement currency hedges intended to reduce its
exposure to changes in foreign currency exchange rates. However,
its hedging strategies may not be successful, and any of its
unhedged foreign exchange payments will continue to be subject
to market fluctuations.
Freeport-McMoRan
and Phelps Dodge may experience difficulties in integrating
their businesses, which could cause the combined company to fail
to realize many of the anticipated potential benefits of the
transactions.
Achieving the anticipated benefits of the transactions will
depend in part upon whether our two companies integrate our
businesses in an efficient and effective manner. We may not be
able to accomplish this integration process smoothly or
successfully. The difficulties of combining the two
companies businesses potentially will include, among other
things:
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the necessity of coordinating geographically separated
organizations and addressing possible differences in corporate
cultures and management philosophies, and the integration of
certain operations following the transaction will require the
dedication of significant management resources, which may
temporarily distract managements attention from the
day-to-day
business of the combined company;
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any inability of our management to integrate successfully the
operations of our two companies or to adapt to the addition of
lines of business in which Freeport-McMoRan has not historically
engaged; and
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any inability of our management to cause best practices to be
applied to the combined companys businesses.
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An inability to realize the full extent of the anticipated
benefits of the acquisition, as well as any delays encountered
in the transition process, could have an adverse effect upon the
revenues, level of expenses and operating results of the
combined company.
S-31
The combined
company will depend on its senior management team and other key
employees, and the loss of any of these employees could
adversely affect the combined companys business.
The success of the combined company after the acquisition will
depend in part upon the ability of Freeport-McMoRan and Phelps
Dodge to retain senior management and other key employees of
both companies. Competition for qualified personnel can be very
intense. In addition, senior management and key employees may
depart because of issues relating to the uncertainty or
difficulty associated with the integration of the companies or a
desire not to remain with the combined company. Accordingly, no
assurance can be given that Freeport-McMoRan or Phelps Dodge
will be able to retain senior management and key employees to
the same extent that they have been able to do so in the past.
Risks related to
Freeport-McMoRans business
Because
Freeport-McMoRans primary operating assets are located in
the Republic of Indonesia, Freeport-McMoRans business may
be adversely affected by Indonesian political, economic and
social uncertainties, in addition to the usual risks associated
with conducting business in a foreign country.
Indonesia has faced political, economic and social
uncertainties, including separatist movements and civil and
religious strife in a number of provinces. In particular,
several separatist groups are opposing Indonesian rule over the
province of Papua, where Freeport-McMoRans mining
operations are located, and have sought political independence
for the province. In response, Indonesia enacted regional
autonomy laws, which became effective January 1, 2001. The
manner in which the new laws are being implemented and the
degree of political and economic autonomy that they may bring to
individual provinces, including Papua, are uncertain and are
ongoing issues in Indonesian politics. In Papua, there have been
sporadic attacks on civilians by separatists and sporadic but
highly publicized conflicts between separatists and the
Indonesian military. Social, economic and political instability
in Papua could materially and adversely affect us if this
instability results in damage to our property or interruption of
our activities.
Maintaining a good working relationship with the Indonesian
government is important to Freeport-McMoRan because all of
Freeport-McMoRans mining operations are located in
Indonesia and are conducted pursuant to a Contract of Work with
the Indonesian government. Accordingly, Freeport-McMoRan is also
subject to the risks associated with conducting business in and
with a foreign country, including the risk of forced
modification of existing contracts; changes in the
countrys laws and policies, including those relating to
taxation, royalties, divestment, imports, exports and currency
and the risk of having to submit to the jurisdiction of a
foreign court or arbitration panel or having to enforce the
judgment of a foreign court or arbitration panel against a
sovereign nation within its own territory. In addition,
Freeport-McMoRan is subject to the risk of expropriation.
Freeport-McMoRans insurance does not cover losses caused
by expropriation.
In February 2006, a group of illegal gold panners engaged in
conflict with Indonesian police and PT Freeport Indonesia
security personnel when they were requested to leave an area
near Freeport-McMoRans milling facilities. Following the
incident, the illegal panners blocked the road leading to the
Grasberg mine and mill in protest and Freeport-McMoRan
temporarily suspended mining and milling operations as a
precautionary measure. The panners also vandalized some of
Freeport-McMoRans light vehicles and offices near this
area, causing
S-32
approximately $2 million in damages.
Freeport-McMoRans port facilities continued to operate
during the disruption and concentrate shipments were not
affected. The panners, mostly Papuans from outside
Freeport-McMoRans area of operations, presented a list of
aspirations, primarily relating to their desire to share in the
benefits of Freeport-McMoRans existing initiatives and
programs provided for the Papuans who are the traditional
residents of Freeport-McMoRans operations area. Mining and
milling operations resumed after an approximate
four-day
outage. During the incident at Freeport-McMoRans mine and
mill, protestors in Jakarta vandalized the entrance floor of the
office building housing Freeport-McMoRans Indonesian
headquarters and staged a
three-day
rally outside the building. The Indonesian police handled this
matter, which did not disrupt Freeport-McMoRans
administrative functions or damage any of
Freeport-McMoRans facilities.
Freeport-McMoRan cannot predict if there will be additional
incidents similar to the February 2006 protests or other
incidents that could disrupt Freeport-McMoRans operations.
If there were additional protests or other incidents at
Freeport-McMoRans mine and mill facilities, it could
adversely affect Freeport-McMoRans business and
profitability in ways that Freeport-McMoRan cannot predict at
this time.
In addition to
the usual risks encountered in the mining industry,
Freeport-McMoRan faces additional risks because
Freeport-McMoRans operations are located on difficult
terrain in a very remote area.
Freeport-McMoRans mining operations are located in steeply
mountainous terrain in a very remote area in Indonesia. Because
of these conditions, Freeport-McMoRan has had to overcome
special engineering difficulties and develop extensive
infrastructure facilities. In addition, the area receives
considerable rainfall, which has led to periodic floods and
mudslides. The mine site is also in an active seismic area and
has experienced earth tremors from time to time. In addition to
these special risks, Freeport-McMoRan is also subject to the
usual risks associated with the mining industry, such as the
risk of encountering unexpected geological conditions that may
result in cave-ins and flooding of mine areas.
Freeport-McMoRans insurance may not sufficiently cover an
unexpected natural or operating disaster.
On October 9, 2003, a slippage of material occurred in a
section of the Grasberg open pit, resulting in eight fatalities.
On December 12, 2003, a debris flow involving a relatively
small amount of loose material occurred in the same section of
the open pit resulting in only minor property damage. All
material involved in the affected mining areas was removed. The
events caused Freeport-McMoRan to alter its short-term mine
sequencing plans, which adversely affected
Freeport-McMoRans 2003 and 2004 production. While
Freeport-McMoRan resumed normal production activities in the
second quarter of 2004, no assurance can be given that similar
events will not occur in the future.
On March 23, 2006, a mud/topsoil slide involving
approximately 75,000 metric tons of material occurred from a
mountain ridge above service facilities supporting PT Freeport
Indonesias mining facilities. Regrettably, three contract
workers were fatally injured in the event. The material damaged
a mess hall and an adjacent area. As a result of investigations
by PT Freeport Indonesia and the Indonesian Department of Energy
and Mineral Resources, Freeport-McMoRan conducted geotechnical
studies to identify any potential hazards to facilities from
slides. The existing early warning system for potential slides,
based upon rainfall and other factors, has also been expanded.
PT Freeport Indonesia recorded a charge of $1.9 million
($1.0 million to net income) in the first quarter of 2006
for damages related to this event. The event did not directly
S-33
involve operations within the Grasberg open-pit mine or PT
Freeport Indonesias milling operations.
The terrorist
attacks in the United States on September 11, 2001,
subsequent attacks in Indonesia and the potential for additional
future terrorist acts and other recent events have created
economic and political uncertainties that could materially and
adversely affect Freeport-McMoRans business.
On August 31, 2002, three people were killed and 11 others
were wounded in an ambush by a group of unidentified assailants.
The assailants shot at several vehicles transporting
international contract teachers from Freeport-McMoRans
school in Tembagapura, their family members, and other
contractors to PT Freeport Indonesia on the road near
Tembagapura, the mining town where the majority of PT Freeport
Indonesias personnel reside. Freeport-McMoRan, along with
the U.S. government, the central Indonesian government, the
Papuan provincial and local governments, and leaders of the
local people residing in the area of Freeport-McMoRans
operations condemned the attack. Indonesian authorities and the
U.S. FBI investigated the incident, which resulted in the U.S.
indictment of an alleged operational commander of the Free Papua
Movement/National Freedom Force. In January 2006, Indonesian
Police, accompanied by FBI agents, arrested the alleged
operational commander in the Free Papua Movement/National
Freedom Force and 11 other Papuans. In November 2006, verdicts
and sentencing were announced for seven of the accused in the
August 2002 shooting, including a life sentence for the
confessed leader of the attack.
On October 12, 2002, a bombing killed 202 people in the
Indonesian province of Bali, which is 1,500 miles west of
Freeport-McMoRans mining and milling operations.
Indonesian authorities arrested 35 people in connection with
this bombing and 29 of those arrested have been tried and
convicted. On August 5, 2003, 12 people were killed and
over 100 others were injured by a car bomb detonated outside of
the JW Marriott Hotel in Jakarta, Indonesia. On
September 9, 2004, 11 people were killed and over 200
others injured by a car bomb detonated in front of the
Australian embassy in Jakarta. On October 1, 2005, three
suicide bombers killed 19 people and wounded over 100 others in
Bali. The same international terrorist organizations are
suspected in each of these incidents. In November 2005,
Indonesian Police raided a house in East Java that resulted in
the death of other accused terrorists linked to the bombings
discussed above. Freeport-McMoRans mining and milling
operations were not interrupted by these incidents but their
corporate office in Jakarta had to relocate for several months
following the bombing in front of the Australian embassy.
We cannot predict whether there will be additional incidents
similar to the recent shooting or bombings. If there were to be
additional separatist, terrorist or other violence in Indonesia,
it could materially and adversely affect Freeport-McMoRans
business and profitability in ways that we cannot predict at
this time.
Terrorist attacks and other events have caused uncertainty in
the worlds financial and insurance markets and may
significantly increase global political, economic and social
instability, including in Indonesia. In addition to the Bali, JW
Marriott Hotel and Australian embassy bombings, there have been
anti-American
demonstrations in certain sections of Indonesia reportedly led
by radical Islamic activists. Radical activists have also
threatened to attack foreign interests and have called for the
expulsion of U.S. and British citizens and companies from
Indonesia.
It is possible that further acts of terrorism may be directed
against the U.S. domestically or abroad, and such acts could be
directed against properties and personnel of companies such as
S-34
our. The attacks and the resulting economic and political
uncertainties, including the potential for further terrorist
acts, have negatively impacted insurance markets. Moreover,
while Freeport-McMoRans property and business interruption
insurance covers damages to insured property directly caused by
terrorism, this insurance does not cover damages and losses
caused by war. Terrorism and war developments may materially and
adversely affect Freeport-McMoRans business and
profitability in ways that we cannot predict at this time.
Freeport-McMoRans
Contracts of Work are subject to termination if Freeport-McMoRan
does not comply with its contractual obligations, and if a
dispute arises, Freeport-McMoRan may have to submit to the
jurisdiction of a foreign court or arbitration panel.
PT Freeport Indonesias Contracts of Work and other
Contracts of Work in which Freeport-McMoRan has an interest were
entered into under Indonesias 1967 Foreign Capital
Investment Law, which provides guarantees of remittance rights
and protection against nationalization. Freeport-McMoRans
Contracts of Work can be terminated by the Government of
Indonesia if Freeport-McMoRan does not satisfy our contractual
obligations, which include the payment of royalties and taxes to
the government and the satisfaction of certain mining,
environmental, safety and health requirements.
At times, certain government officials and others in Indonesia
have questioned the validity of contracts entered into by the
Government of Indonesia prior to May 1998 (i.e., during the
Suharto regime, which lasted over 30 years), including PT
Freeport Indonesias Contract of Work, which was signed in
December 1991. Freeport-McMoRan cannot assure you that the
validity of, or their compliance with, the Contracts of Work
will not be challenged for political or other reasons. PT
Freeport Indonesias Contract of Work and
Freeport-McMoRans other Contracts of Work require that
disputes with the Indonesian government be submitted to
international arbitration. Notwithstanding that provision, if a
dispute arises under the Contracts of Work, Freeport-McMoRan
faces the risk of having to submit to the jurisdiction of a
foreign court or arbitration panel, and if Freeport-McMoRan
prevails in such a dispute, Freeport-McMoRan will face the
additional risk of having to enforce the judgment of a foreign
court or arbitration panel against Indonesia within its own
territory.
Indonesian government officials have periodically undertaken
reviews regarding Freeport-McMoRans compliance with
Indonesian environmental laws and regulations and the terms of
the Contracts of Work. In 2006, the Government of Indonesia
created a joint team for Periodic Evaluation on
Implementation of the PT-FI Contract of Work (COW) to
conduct a periodic evaluation every five years. The team
consists of five working groups, whose members are from relevant
ministries or agencies, covering production, state revenues,
community development, environmental issues and security issues.
Freeport-McMoRan has conducted numerous working meetings with
these groups. The joint team has indicated that it will issue
its report shortly. While Freeport-McMoRan believes that it
complies with the Contract of Work in all material respects,
Freeport-McMoRan cannot assure you that the report will conclude
that it is complying with all of the provisions of PT Freeport
Indonesias Contract of Work. Separately, the Indonesian
House of Representatives created a working committee on PT
Freeport Indonesia. Members of this group have also visited
Freeport-McMoRans operations and held a number of hearings
in Jakarta. Freeport-McMoRan will continue to work with these
groups to respond to their questions about
Freeport-McMoRans operations and its compliance with PT
Freeport Indonesias Contract of Work.
S-35
Any suspension of
required activities under Freeport-McMoRans Contracts of
Work requires the consent of the Indonesian
government.
Freeport-McMoRans Contracts of Work permit
Freeport-McMoRan to suspend certain contractually required
activities, including exploration, for a period of one year by
making a written request to the Indonesian government. These
requests are subject to the approval of the Indonesian
government and are renewable annually. If Freeport-McMoRan does
not request a suspension or is denied a suspension, then
Freeport-McMoRan is required to continue its activities under
the Contract of Work or potentially be declared in default.
Moreover, if a suspension continues for more than one year for
reasons other than force majeure and the Indonesian government
has not approved such continuation, then the government would be
entitled to declare a default under the Contract of Work.
Freeport-McMoRan suspended its field exploration activities
outside of Block A in recent years due to safety and security
issues and regulatory uncertainty relating to a possible
conflict between its mining and exploration rights in certain
forest areas and an Indonesian Forestry law enacted in 1999
prohibiting open-pit mining in forest preservation areas. In
2001, Freeport-McMoRan requested and received from the
Government of Indonesia, formal temporary suspensions of its
obligations under the Contracts of Work in all areas outside of
Block A. Recent Indonesian legislation permits open-pit mining
in PT Freeport Indonesias Block B area, subject to certain
requirements. Following an assessment of these requirements and
a review of security issues, in 2007 Freeport-McMoRan plans to
resume exploration activities in certain prospective Contract of
Work areas outside of Block A.
Freeport-McMoRans
mining operations create difficult and costly environmental
challenges, and future changes in environmental laws, or
unanticipated environmental impacts from Freeport-McMoRans
operations, could require it to incur increased costs.
Mining operations on the scale of Freeport-McMoRans
operations in Papua involve significant environmental risks and
challenges. Freeport-McMoRans primary challenge is to
dispose of the large amount of crushed and ground rock material,
called tailings, that results from the process by which
Freeport-McMoRan physically separates the copper-, gold- and
silver-bearing materials from the ore that it mines.
Freeport-McMoRans tailings management plan uses the river
system near its mine to transport the tailings to the lowlands
where the tailings and natural sediments are deposited in a
controlled area contained within a levee system that will be
regenerated. We incurred aggregate costs relating to tailings
management of $12.8 million in 2006, $8.7 million in
2005 and $11.8 million in 2004.
Another major environmental challenge is managing overburden,
which is the rock that must be moved aside in the mining process
in order to reach the ore. In the presence of air, water and
naturally occurring bacteria, some overburden can cause acid
rock drainage, or acidic water containing dissolved metals
which, if not properly managed, can have a negative impact on
the environment.
Certain Indonesian governmental officials have from time to time
raised issues with respect to Freeport-McMoRans tailings
and overburden management plans, including a suggestion that
Freeport-McMoRan implement a pipeline system rather than its
river deposition system for tailings disposal. Because
Freeport-McMoRans mining operations are remotely located
in steep mountainous terrain and in an active seismic area, a
pipeline system would be costly, difficult to construct and
maintain, more prone to catastrophic failure and involve
significant potentially
S-36
adverse environmental issues. An external panel of qualified
experts, as directed in Freeport-McMoRans 300K ANDAL (the
Environmental Impact Assessment document submitted to the
Indonesian government and approved in 1997), conducted detailed
reviews and analyses of a number of technical studies. They
concluded that all significant impacts identified were in line
with the 300K ANDAL predictions, and that the current system of
riverine tailings management was appropriate considering all
site-specific factors. For these reasons, Freeport-McMoRan does
not believe that a pipeline system is necessary or practical.
In March 2006, the Indonesian Ministry of Environment announced
the preliminary results of its PROPER environmental management
audit, acknowledging the effectiveness of PT Freeport
Indonesias environmental management practices in some
areas while making several suggestions for improvement in
others. Freeport-McMoRan is working with the Ministry of
Environment to address the issues raised as it completes the
audit process.
Freeport-McMoRan anticipates that it will continue to spend
significant financial and managerial resources on environmental
compliance. In addition, changes in Indonesian environmental
laws or unanticipated environmental impacts from
Freeport-McMoRans operations could require
Freeport-McMoRan to incur significant unanticipated costs.
Freeport-McMoRan
does not expect to mine all of its ore reserves before the
initial term of its Contract of Work expires.
All of Freeport-McMoRans current proven and probable ore
reserves, including the Grasberg deposit, are located in Block
A. The initial term of Freeport-McMoRans Contract of Work
covering these ore reserves expires at the end of 2021.
Freeport-McMoRan can extend this term for two successive
10-year
periods, subject to the approval of the Indonesian government,
which under Freeport-McMoRans Contract of Work cannot be
withheld or delayed unreasonably. Freeport-McMoRans ore
reserves reflect estimates of minerals that can be recovered
through the end of 2041 (i.e., through the expiration of the two
10-year
extensions) and its current mine plan has been developed, and
its operations are based on the assumption that Freeport-McMoRan
will receive the two
10-year
extensions. As a result, Freeport-McMoRan will not mine all of
its ore reserves during the current term of its Contract of
Work, and there can be no assurance that the Indonesian
government will approve the extensions. Prior to the end of
2021, Freeport-McMoRan expects to mine approximately
39 percent of aggregate proven and probable recoverable ore
at December 31, 2006, representing approximately
45 percent of PT Freeport Indonesias share of
recoverable copper reserves and approximately 59 percent of
its share of recoverable gold reserves.
Risks related to
Phelps Dodges business
Phelps
Dodges copper price protection programs may cause
significant volatility in its financial performance.
Phelps Dodges copper price protection programs have and
may continue to cause significant volatility in its financial
performance. At December 31, 2006, Phelps Dodge had in
place zero-premium copper collars (consisting of both put and
call options) for approximately 486 million pounds of its
expected 2007 copper sales. For 2007, the annual average London
Metals Exchange (LME) call strike price (ceiling) for its
zero-premium copper collars is $2.002 per pound. At
December 31, 2006, Phelps Dodge also had in place copper
put options for approximately 730 million pounds of its
expected 2007 copper sales, with an annual average LME put
strike
S-37
price (floor) of $0.95 per pound for 2007. In accordance with
generally accepted accounting principles in the United States,
transactions under these copper price protection programs do not
qualify for hedge accounting treatment and are adjusted to fair
market value based on the forward-curve price and implied
volatility as of the last day of the reporting period, with the
gain or loss recorded in revenues. These adjustments represent
non-cash events as the contracts are settled in cash only after
the end of the relevant year based on the annual average LME
copper price. For the year ended December 31, 2006, the
pre-tax charges arising from Phelps Dodges 2006 and 2007
copper price protection programs reduced operating income by
approximately $1,009 million.
Phelps
Dodges business is subject to complex and evolving laws
and regulations and environmental and regulatory compliance may
impose substantial costs.
Phelps Dodges global operations are subject to various
federal, state and local environmental laws and regulations
relating to improving or maintaining environmental quality.
Environmental laws often require parties to pay for remedial
action or to pay damages regardless of fault and may also often
impose liability with respect to divested or terminated
operations, even if the operations were terminated or divested
many years ago. The federal Clean Air Act has had a significant
impact, particularly on Phelps Dodges smelter and power
plants. Phelps Dodge also has potential liability for certain
sites it currently operates or formerly operated and for certain
third-party sites under the federal Superfund law and similar
state laws. Phelps Dodge is also subject to claims for natural
resource damages where the release of hazardous substances is
alleged to have injured natural resources.
Phelps Dodges mining operations and exploration
activities, both inside and outside the United States, are
subject to extensive laws and regulations governing prospecting,
development, production, exports, taxes, labor standards,
occupational health, waste disposal, protection and remediation
of the environment, protection of endangered and protected
species, mine safety, toxic substances and other matters. Mining
also is subject to risks and liabilities associated with
pollution of the environment and disposal of waste products
occurring as a result of mineral exploration and production.
Compliance with these laws and regulations imposes substantial
costs and subjects Phelps Dodge to significant potential
liabilities.
The laws and regulations that apply to Phelps Dodge are complex
and are continuously evolving in the jurisdictions in which
Phelps Dodge conducts business. Costs associated with
environmental and regulatory compliance have increased over
time, and Phelps Dodge expects these costs to continue to
increase in the future. In addition, the laws and regulations
that apply to Phelps Dodge may change in ways that could
otherwise have an adverse effect on its operations or financial
results. The costs of environmental obligations may exceed the
reserves that Phelps Dodge has established for such liabilities.
Mine closure
regulations may impose substantial costs.
Phelps Dodges operations in the United States are subject
to various federal and state mine closure and
mined-land
reclamation laws. The requirements of these laws vary depending
upon the jurisdiction. Over the last several years, there have
been substantial changes in these laws and regulations in the
states in which Phelps Dodges mines are located, as well
as changes in the regulations promulgated by the federal Bureau
of Land Management (BLM) for mining operations located on
unpatented mining claims located on federal public lands. The
amended BLM regulations governing
mined-land
reclamation for mining on federal lands will likely
S-38
increase Phelps Dodges regulatory obligations and
compliance costs over time with respect to mine closure
reclamation. As estimated costs increase, Phelps Dodges
mines are required to post increasing amounts of financial
assurance to ensure the availability of funds to perform future
closure and reclamation.
The amount of financial assurance that has been provided for our
Chino, Tyrone and Cobre mines, pursuant to an agreement Phelps
Dodge reached with two New Mexico state agencies, totaled
approximately $495 million at December 31, 2006. Up to
70 percent of such financial assurance is in the form of
third-party guarantees issued by Phelps Dodge on behalf of its
operating subsidiaries and the balance, or approximately
30 percent, is provided in the form of trust funds, real
property collateral and letters of credit. The actual amount
required for financial assurance is subject to the completion of
additional permitting procedures, final agency determinations
and the results of administrative appeals, all of which could
result in some changes to the closure and reclamation plans and
further increases in the cost estimates and its related
financial assurance obligations. In addition, Phelps
Dodges Arizona mining operations have obtained approval of
reclamation plans for its mined land and approval of financial
assurance totaling approximately $174 million, but applications
for approval of closure plans for groundwater quality protection
are pending for some portions of its mines. Phelps Dodge also
has approved
mined-land
reclamation plans and financial assurance in place for its two
Colorado mines totaling approximately $81 million.
Most of the financial assurance provided for Phelps Dodges
southwestern U.S. mines requires a demonstration that it meets
financial tests showing Phelps Dodges capability to
perform the required closure and reclamation. Demonstrations of
financial capability have been made for all of the financial
assurance for Phelps Dodges Arizona mines. The financial
tests required for continued use of the financial capability
demonstrations and third-party guarantees include maintaining an
investment-grade rating on its senior debt securities. If, in
the future, Phelps Dodges or the combined companys
credit rating for senior unsecured debt falls below investment
grade, a portion of Phelps Dodges financial assurance
requirements might be required to be supplied in another form,
such as letters of credit, real property collateral or cash.
Phelps Dodge has reduced its use of surety bonds in support of
financial assurance obligations in recent years due to
significantly increasing costs and because many surety companies
require a significant level of collateral supporting the bonds.
If remaining surety bonds are unavailable at commercially
reasonable terms, the combined company could be required to post
other collateral or cash or cash equivalents directly in support
of financial assurance obligations.
In addition, Phelps Dodges international mines are subject
to various mine closure and
mined-land
reclamation laws. There have recently been significant changes
in closure and reclamation programs in Peru and Chile.
Phelps
Dodges operations outside the United States are subject to
the risks of doing business in foreign countries.
In 2006, Phelps Dodges international operations provided
approximately 39 percent of its consolidated sales (including
sales through PDMCs U.S. based sales company) and Phelps
Dodges international operations (including international
exploration) contributed approximately 54 percent of its
consolidated operating income. Due to the current development of
the Tenke Fungurume project in the Democratic Republic of Congo
and expansion projects at Cerro Verde and El Abra, Phelps Dodge
expects international operations to increase as a percentage of
S-39
sales and operating income in future years. Phelps Dodge fully
consolidates the results of certain of its domestic and
international mining operations in which it owns less than a
100 percent interest (and reports the minority interest).
During 2006, Phelps Dodges minority partners in its South
American mines were entitled to approximately 212,400 tons, or
38 percent, of Phelps Dodges international copper
production.
Phelps Dodges international activities are conducted in
Canada, Latin America, Europe, Asia and Africa, and are subject
to certain political and economic risks, including but not
limited to:
|
|
|
political instability and civil strife;
|
|
|
changes in foreign laws and regulations, including those
relating to the environment, labor, tax, royalties on mining
activities and dividends or repatriation of cash and other
property to the United States;
|
|
|
foreign currency fluctuations;
|
|
|
expropriation or nationalization of property;
|
|
|
exchange controls; and
|
|
|
import, export and trade regulations.
|
S-40
Use of
proceeds
We estimate that the net proceeds from the sale of the notes
offered hereby, after deducting estimated fees and expenses and
the underwriters discounts, will be approximately
$5,875.0 million.
The table below sets forth the estimated sources and uses for
the transactions based on balances as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
Sources of
funds
|
|
Amount
|
|
Uses of
funds
|
|
Amount
|
|
|
Cash
|
|
$
|
2,500.0
|
|
Equity
purchased(c)
|
|
$
|
25,791.0
|
New revolving credit
facility(a)
|
|
|
|
|
Estimated fees and
expenses(d)
|
|
|
500.0
|
New Tranche A term loan
facility
|
|
|
2,500.0
|
|
|
|
|
|
New Tranche B term loan
facility
|
|
|
7,500.0
|
|
|
|
|
|
Senior notes offered hereby
|
|
|
6,000.0
|
|
|
|
|
|
Additional common
equity(b)
|
|
|
7,791.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources
|
|
$
|
26,291.0
|
|
Total uses
|
|
$
|
26,291.0
|
|
|
|
|
|
(a)
|
|
Based on expected cash balances at
closing, we do not expect to make any drawings under our new
revolving credit facility. Availability under the new revolving
credit facility will be reduced by outstanding letters of
credit. Our availability under our revolving credit facility is
anticipated to be approximately $1,400.0 million at closing
after giving effect to outstanding letters of credit. Following
the closing, we may be required to issue additional letters of
credit in connection with financial assurances with respect to
our reclamation obligations. See Risk factors
Risks related to Phelps Dodges business Mine
closure regulations may impose substantial costs.
|
|
(b)
|
|
Reflects the fair value of
Freeport-McMoRan common stock to be issued to Phelps Dodge
shareholders as a result of the acquisition calculated by using
the weighted average market price of Freeport-McMoRan common
stock from November 16, 2006 to November 21, 2006
multiplied by the estimated shares of Freeport-McMoRan common
stock to be issued to Phelps Dodge shareholders.
|
|
(c)
|
|
Based on the weighted average
market price of Freeport-McMoRan common stock from
November 16, 2006 to November 21, 2006, the cash
consideration to be paid in the acquisition, and the estimated
Phelps Dodge common shares outstanding and issuable at
December 31, 2006.
|
|
(d)
|
|
Reflects our estimate of fees and
expenses associated with the transactions, including financing
fees, estimated change of control costs and related employee
benefits and other transaction costs and professional fees.
|
S-41
Capitalization
The following table shows Freeport-McMoRans cash and cash
equivalents and capitalization as of December 31, 2006, on
an as reported basis, and cash and cash equivalents and
capitalization on a pro forma basis to reflect the transactions.
This table is unaudited and should be read in conjunction with
Use of proceeds, Unaudited pro forma condensed
combined financial statements, Selected consolidated
historical financial and operating data of
Freeport-McMoRan, Selected consolidated historical
financial and operating data of Phelps Dodge,
Managements discussion and analysis of financial
condition and results of operations of Freeport-McMoRan,
Managements discussion and analysis of financial
condition and results of operations of Phelps Dodge and
the financial statements and related notes of Freeport-McMoRan
and Phelps Dodge, which are included elsewhere or incorporated
by reference in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2006
|
(Dollars
in millions)
|
|
Actual
|
|
Pro
forma
|
|
|
Cash and cash
equivalents(a)
|
|
$
|
907.5
|
|
$
|
3,383.4
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
Existing indebtedness of
Freeport-McMoRan
|
|
|
|
|
|
|
101/8% senior
notes due 2010
|
|
$
|
272.4
|
|
$
|
272.4
|
7% convertible notes due 2011
|
|
|
7.1
|
|
|
7.1
|
67/8% notes
due 2014
|
|
|
340.3
|
|
|
340.3
|
Existing indebtedness of Phelps
Dodge(b)
|
|
|
|
|
|
|
7.375% notes due 2007
|
|
$
|
|
|
$
|
60.6
|
8.75% notes due 2011
|
|
|
|
|
|
108.8
|
7.125% debentures due 2027
|
|
|
|
|
|
115.0
|
9.50% notes due 2031
|
|
|
|
|
|
196.8
|
6.125% notes due 2034
|
|
|
|
|
|
149.8
|
New senior credit facilities
|
|
|
|
|
|
|
Revolving credit
facility(a)
|
|
$
|
|
|
$
|
|
Tranche A term loan facility
|
|
|
|
|
|
2,500.0
|
Tranche B term loan facility
|
|
|
|
|
|
7,500.0
|
Notes offered hereby
|
|
|
|
|
|
6,000.0
|
Other
debt(c)
|
|
|
60.3
|
|
|
321.2
|
|
|
|
|
|
|
Total
debt(b)
|
|
$
|
680.1
|
|
$
|
17,572.0
|
Total stockholders equity
|
|
|
2,445.1
|
|
|
10,235.9
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
3,125.2
|
|
$
|
27,807.9
|
|
|
|
|
|
(a)
|
|
Based on expected cash balances at
closing, we do not expect to make any drawings under our new
revolving credit facility. Availability under the new revolving
credit facility will be reduced by outstanding letters of
credit. Our availability under our revolving credit facility is
anticipated to be approximately $1,400.0 million at closing
after giving effect to outstanding letters of credit. Following
the closing, we may be required to issue additional letters of
credit in connection with financial assurances with respect to
our reclamation obligations. See Risk factors
Risks related to Phelps Dodges business Mine
closure regulations may impose substantial costs.
|
|
(b)
|
|
Pro forma total debt as of
December 31, 2006 shown above is based on Phelps
Dodges book values. Total debt as reflected in the pro
forma financial statements is based on the December 31,
2006 fair value of Phelps Dodges debt.
|
|
(c)
|
|
Actual amounts include equipment
capital leases and other ($54.5 million), Atlantic Copper
debt ($5.6 million) and other Freeport-McMoRan debt
($0.2 million). Pro forma amounts include, in addition,
certain project financing and subsidiary debt financing
($202.2 million), various pollution control and industrial
development revenue bonds ($25.0 million) and short-term
debt ($33.7 million) of Phelps Dodge.
|
S-42
Unaudited pro
forma condensed combined
financial statements
The unaudited pro forma condensed combined financial statements
presented herein, which have been prepared by the management of
Freeport-McMoRan, are derived from the historical consolidated
financial statements of Freeport-McMoRan and Phelps Dodge. The
unaudited pro forma condensed combined financial statements are
prepared using the purchase method of accounting, with the
acquisition of Phelps Dodge by Freeport-McMoRan assumed to have
occurred on January 1, 2006, for statement of income
purposes and on December 31, 2006, for balance sheet
purposes using accounting principles generally accepted in the
United States, referred to as U.S. GAAP. The pro forma
adjustments to reflect fair value of Phelps Dodges net
reported assets and other purchase accounting adjustments are
based on available data as of December 31, 2006. Upon
completion of the combination with Phelps Dodge, the
pre-combination shareholders of Freeport-McMoRan will own
approximately 59 percent (62 percent on a fully
diluted basis) of the combined company and the pre-combination
shareholders of Phelps Dodge will own approximately
41 percent (38 percent on a fully diluted basis). In
addition to considering these relative shareholdings,
Freeport-McMoRan also considered the proposed composition and
terms of the board of directors, the proposed structure and
members of the executive management team of Freeport-McMoRan and
the premium paid by Freeport-McMoRan to acquire Phelps Dodge, in
determining the accounting acquirer. Based on the weight of
these factors, Freeport-McMoRan management concluded that
Freeport-McMoRan was the accounting acquirer.
The pro forma amounts have been developed from (i) the
audited consolidated financial statements of Freeport-McMoRan
contained in its annual report on
Form 10-K
for the year ended December 31, 2006 and (ii) the
audited consolidated financial statements of Phelps Dodge
contained in its annual report on
Form 10-K
for the year ended December 31, 2006, each of which were
prepared in accordance with U.S. GAAP and are incorporated
by reference herein.
The unaudited pro forma condensed combined financial statements
are provided for illustrative purposes only and do not purport
to represent what the actual consolidated results of operations
or the consolidated financial position of Freeport-McMoRan would
have been had the combination occurred on the dates assumed, nor
are they necessarily indicative of future consolidated results
of operations or consolidated financial position. In this
regard, the reader should note that the unaudited pro forma
condensed combined financial statements do not give effect to
(i) any integration costs that may be incurred as a result
of the acquisition, (ii) synergies, operating efficiencies
and cost savings that are expected to result from the
acquisition, (iii) benefits expected to be derived from the
combined companys growth projects or brownfield expansions
or (iv) changes in commodities prices subsequent to the
dates of such unaudited pro forma condensed combined financial
statements.
Freeport-McMoRan has not yet developed formal plans for
combining the two companies operations. Accordingly,
additional liabilities may be incurred in connection with the
business combination and any ultimate restructuring. These
additional liabilities and costs have not been contemplated in
the unaudited pro forma condensed combined financial statements
because information necessary to reasonably estimate such costs
and to formulate detailed restructuring plans is not available
to Freeport-McMoRan. The allocation of the purchase price to
acquired assets and liabilities in the unaudited pro forma
condensed combined financial statements are based on
managements preliminary internal valuation estimates. Such
allocations will be
S-43
finalized based on valuation and other studies to be performed
by management with the services of outside valuation specialists
after the closing of the business combination. Accordingly, the
purchase price allocation adjustments and related impacts on the
unaudited pro forma condensed combined financial statements are
preliminary and are subject to revision, which may be material,
after the closing of the business combination.
The unaudited pro forma condensed combined financial statements
should be read in conjunction with the separate historical
consolidated financial statements and accompanying notes of
Freeport-McMoRan and Phelps Dodge incorporated by reference into
this prospectus supplement. See Where you can find more
information.
S-44
Unaudited pro
forma condensed combined statement of income
For
the year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
Historical
|
|
|
adjustments
|
|
|
Pro forma
|
|
(Dollars
in millions, except per share data)
|
|
Freeport-McMoRan
|
|
|
Phelps
Dodge
|
|
|
(Note
3)
|
|
|
combined
|
|
|
|
|
Revenues
|
|
$
|
5,790.5
|
|
|
$
|
11,910.4
|
(Note 4)
|
|
$
|
|
|
|
$
|
17,700.9
|
(Note 4)
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production and delivery
|
|
|
2,524.9
|
|
|
|
6,807.2
|
|
|
|
74.4
|
(A)
|
|
|
9,387.5
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.0
|
)(M)
|
|
|
|
|
Depreciation, depletion and
amortization
|
|
|
227.6
|
|
|
|
448.7
|
|
|
|
581.0
|
(J)
|
|
|
1,268.2
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
(A)
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
2,752.5
|
|
|
|
7,255.9
|
|
|
|
647.3
|
|
|
|
10,655.7
|
|
Selling, general and administrative
expenses
|
|
|
157.1
|
|
|
|
207.0
|
|
|
|
8.3
|
(A)
|
|
|
372.4
|
|
Exploration and research expenses
|
|
|
12.2
|
|
|
|
127.0
|
|
|
|
|
|
|
|
139.2
|
|
Special items and provisions, net
|
|
|
|
|
|
|
93.6
|
|
|
|
(93.6
|
)(A)
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,921.8
|
|
|
|
7,683.5
|
|
|
|
562.0
|
|
|
|
11,167.3
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,868.7
|
|
|
|
4,226.9
|
|
|
|
(562.0
|
)
|
|
|
6,533.6
|
|
Interest expense, net
|
|
|
(75.6
|
)
|
|
|
(73.0
|
)
|
|
|
54.0
|
(A)
|
|
|
(1,393.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1,299.1
|
)(N)
|
|
|
|
|
Capitalized interest
|
|
|
|
|
|
|
54.0
|
|
|
|
(54.0
|
)(A)
|
|
|
|
|
Equity in PT Smelting and
affiliated companies earnings
|
|
|
6.5
|
|
|
|
|
|
|
|
4.6
|
(A)
|
|
|
11.1
|
|
Losses on early extinguishment and
conversion of debt
|
|
|
(32.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(32.0
|
)
|
Gains on sales of assets
|
|
|
30.6
|
|
|
|
|
|
|
|
|
|
|
|
30.6
|
|
Inco termination fee, net of
expenses
|
|
|
|
|
|
|
435.1
|
|
|
|
|
|
|
|
435.1
|
|
Other income, net
|
|
|
27.7
|
|
|
|
190.9
|
|
|
|
|
|
|
|
218.6
|
|
|
|
|
|
|
|
Income from continuing operations
before taxes and minority interests in consolidated subsidiaries
|
|
|
2,825.9
|
|
|
|
4,833.9
|
|
|
|
(1,856.5
|
)
|
|
|
5,803.3
|
|
Provision for income taxes
|
|
|
(1,201.2
|
)
|
|
|
(1,010.2
|
)
|
|
|
297.9
|
(F)
|
|
|
(1,913.5
|
)
|
Minority interests in net income of
consolidated subsidiaries
|
|
|
(168.2
|
)
|
|
|
(792.4
|
)
|
|
|
|
|
|
|
(960.6
|
)
|
Equity in net earnings of
affiliated companies
|
|
|
|
|
|
|
4.6
|
|
|
|
(4.6
|
)(A)
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,456.5
|
|
|
|
3,035.9
|
(Note 4)
|
|
|
(1,563.2
|
)
|
|
|
2,929.2
|
(Note 4)
|
Preferred dividends
|
|
|
(60.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(60.5
|
)
|
|
|
|
|
|
|
Income from continuing operations
applicable to common stock
|
|
$
|
1,396.0
|
|
|
$
|
3,035.9
|
|
|
$
|
(1,563.2
|
)
|
|
$
|
2,868.7
|
|
|
|
|
|
|
|
Income per share from continuing
operations applicable to common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
7.32
|
|
|
$
|
15.00
|
|
|
|
|
|
|
$
|
8.75
|
|
Diluted
|
|
$
|
6.63
|
|
|
$
|
14.92
|
|
|
|
|
|
|
$
|
8.29
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
190.7
|
|
|
|
|
|
|
|
|
|
|
|
327.8
|
(L)
|
Diluted
|
|
|
221.5
|
|
|
|
|
|
|
|
|
|
|
|
358.5
|
(L)
|
|
|
See accompanying notes to these
pro forma condensed combined financial statements.
S-45
Unaudited pro
forma condensed combined balance sheet
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
Historical
|
|
|
adjustments
|
|
|
Pro forma
|
|
(Dollars
in millions)
|
|
Freeport-McMoRan
|
|
|
Phelps
Dodge
|
|
|
(Note
3)
|
|
|
combined
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
907.5
|
|
|
$
|
4,947.4
|
|
|
$
|
16,000.0
|
(K)
|
|
$
|
3,383.4
|
|
|
|
|
|
|
|
|
|
|
|
|
(330.0
|
)(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100.0
|
)(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.0
|
(H)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66.5
|
)(E)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,000.0
|
)(B)
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
25.4
|
|
|
|
|
|
|
|
25.4
|
|
Accounts receivable, less allowance
|
|
|
485.7
|
|
|
|
1,264.8
|
|
|
|
|
|
|
|
1,750.5
|
|
Mill and leach stockpiles
|
|
|
|
|
|
|
90.8
|
|
|
|
1,412.0
|
(D)
|
|
|
1,502.8
|
|
Product inventories
|
|
|
384.2
|
|
|
|
356.0
|
|
|
|
1,293.0
|
(D)
|
|
|
2,033.2
|
|
Materials and supplies
|
|
|
340.1
|
|
|
|
247.9
|
|
|
|
|
|
|
|
588.0
|
|
Prepaid expenses and other current
assets
|
|
|
33.5
|
|
|
|
116.3
|
|
|
|
|
|
|
|
149.8
|
|
Deferred income taxes
|
|
|
|
|
|
|
552.3
|
|
|
|
|
|
|
|
552.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,151.0
|
|
|
|
7,600.9
|
|
|
|
233.5
|
|
|
|
9,985.4
|
|
Investments and long-term
receivables
|
|
|
|
|
|
|
193.1
|
|
|
|
|
|
|
|
193.1
|
|
Property, plant, equipment and
development costs, net
|
|
|
3,098.5
|
|
|
|
5,873.5
|
|
|
|
11,620.4
|
(D)
|
|
|
20,592.4
|
|
Long-term mill and leach stockpiles
|
|
|
|
|
|
|
181.8
|
|
|
|
723.6
|
(D)
|
|
|
905.4
|
|
Goodwill
|
|
|
|
|
|
|
12.5
|
|
|
|
7,754.9
|
(D)
|
|
|
7,767.4
|
|
Trust assets
|
|
|
|
|
|
|
588.3
|
|
|
|
|
|
|
|
588.3
|
|
Other assets and deferred charges
|
|
|
140.3
|
|
|
|
182.2
|
|
|
|
330.0
|
(C)
|
|
|
625.5
|
|
|
|
|
|
|
|
|
|
|
|
|
(27.0
|
)(D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,389.8
|
|
|
$
|
14,632.3
|
|
|
$
|
20,635.4
|
|
|
$
|
40,657.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
789.0
|
|
|
$
|
2,705.8
|
|
|
$
|
|
|
|
$
|
3,494.8
|
|
Current portion of long-term debt
and short-term borrowings
|
|
|
19.1
|
|
|
|
121.8
|
|
|
|
0.4
|
(D)
|
|
|
141.3
|
|
Accrued income taxes
|
|
|
164.4
|
|
|
|
435.3
|
|
|
|
|
|
|
|
599.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
972.5
|
|
|
|
3,262.9
|
|
|
|
0.4
|
|
|
|
4,235.8
|
|
Long-term debt, less current portion
|
|
|
661.0
|
|
|
|
770.1
|
|
|
|
35.0
|
(D)
|
|
|
17,466.1
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000.0
|
(K)
|
|
|
|
|
Deferred income taxes
|
|
|
800.3
|
|
|
|
768.6
|
|
|
|
4,499.6
|
(F)
|
|
|
6,068.5
|
|
Accrued postretirement benefits and
other liabilities
|
|
|
297.9
|
|
|
|
890.7
|
|
|
|
|
|
|
|
1,188.6
|
|
Minority interests
|
|
|
213.0
|
|
|
|
1,249.6
|
|
|
|
|
|
|
|
1,462.6
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible perpetual preferred
stock
|
|
|
1,100.0
|
|
|
|
|
|
|
|
|
|
|
|
1,100.0
|
|
Common stock
|
|
|
31.0
|
|
|
|
1,275.1
|
|
|
|
13.7
|
(G)
|
|
|
44.7
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,275.1
|
)(I)
|
|
|
|
|
Capital in excess of par value of
common stock
|
|
|
2,668.1
|
|
|
|
1,372.7
|
|
|
|
7,777.1
|
(G)
|
|
|
10,445.2
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,372.7
|
)(I)
|
|
|
|
|
Retained earnings
|
|
|
1,414.8
|
|
|
|
5,221.4
|
|
|
|
(5,221.4
|
)(I)
|
|
|
1,414.8
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(19.9
|
)
|
|
|
(178.8
|
)
|
|
|
178.8
|
(I)
|
|
|
(19.9
|
)
|
Common stock held in treasury
|
|
|
(2,748.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,748.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,445.1
|
|
|
|
7,690.4
|
|
|
|
100.4
|
|
|
|
10,235.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
5,389.8
|
|
|
$
|
14,632.3
|
|
|
$
|
20,635.4
|
|
|
$
|
40,657.5
|
|
|
|
See accompanying notes to these
pro forma condensed combined financial statements.
S-46
Notes to the
unaudited pro forma
condensed combined financial statements
The unaudited pro forma condensed combined financial statements,
which have been prepared by Freeport-McMoRan management, have
been derived from historical consolidated financial statements
of Freeport-McMoRan and Phelps Dodge incorporated by reference
into this prospectus supplement.
Upon completion of the combination with Phelps Dodge the
pre-combination shareholders of Freeport-McMoRan will own
approximately 59 percent of the combined company
(62 percent on a fully diluted basis) and the
pre-combination shareholders of Phelps Dodge, will own
approximately 41 percent of the combined company
(38 percent on a fully diluted basis). In addition to
considering these relative shareholdings, Freeport-McMoRan
management also considered the proposed composition and terms of
the board of directors, the proposed structure and members of
the executive management team of Freeport-McMoRan, and the
premium paid by Freeport-McMoRan to acquire Phelps Dodge in
determining the accounting acquirer. Based on the weight of
these factors, Freeport-McMoRan management concluded that
Freeport-McMoRan was the accounting acquirer.
Freeport-McMoRan proposes to acquire all the issued and
outstanding common shares of Phelps Dodge for $88.00 in cash and
0.67 of a share of Freeport-McMoRan common stock for each Phelps
Dodge common share. Based on Freeport-McMoRans closing
stock price of $57.40 per share on November 17, 2006,
the implied value of the merger consideration is $126.46,
composed of $88.00 in cash and stock worth $38.46 per share.
The transaction will be accounted for under the purchase method
of accounting. The pro forma adjustments reflect
Freeport-McMoRans acquisition of 100 percent of
Phelps Dodges net reported assets at their fair values at
December 31, 2006 for the pro forma condensed combined
balance sheet, and at January 1, 2006, for the pro forma
condensed combined statement of income, and the subsequent
accounting for Phelps Dodge as a wholly owned subsidiary.
S-47
The purchase price consideration for the business combination is
estimated to include $18.0 billion in cash,
$7.8 billion in Freeport-McMoRan common stock and
$167 million for costs and fees of the acquisition as shown
below:
|
|
|
|
|
(In millions,
except per share amount)
|
|
|
|
|
Freeport-McMoRans acquisition
of Phelps Dodge:
|
|
|
|
Common shares outstanding and
issuable
|
|
|
204.540
|
Exchange offer ratio of
Freeport-McMoRan common stock for each Phelps Dodge common share
|
|
|
0.67
|
Shares of Freeport-McMoRan common
stock to be issued
|
|
|
137.042
|
Weighted average market price of
each share of Freeport-McMoRan common stock from November
16-21, 2006
|
|
$
|
56.85
|
|
|
|
|
Cash consideration for each Phelps
Dodge common share
|
|
$
|
88.00
|
|
|
|
|
Fair value of Freeport-McMoRan
common stock issued, comprising par value of $13.7
($0.10 per share) and capital in excess of par of $7,777.1
|
|
$
|
7,791
|
Cash consideration of $88.00 for
each Phelps Dodge common share
|
|
|
18,000
|
Estimated change of control costs
and related employee benefits
|
|
|
67
|
Estimated transaction costs
|
|
|
100
|
|
|
|
|
Purchase price
|
|
$
|
25,958
|
|
|
|
|
3.
|
Pro forma
assumptions and adjustments
|
The following assumptions and related pro forma adjustments give
effect to the proposed business combination of Freeport-McMoRan
and Phelps Dodge as if such combination occurred on
January 1, 2006, in the unaudited pro forma condensed
combined statement of income for the year ended
December 31, 2006, and on December 31, 2006, for the
unaudited pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined financial statements
are provided for illustrative purposes only and do not purport
to represent what the actual consolidated results of operations
or the consolidated financial position of Freeport-McMoRan would
have been had the business combination with Phelps Dodge
occurred on the respective dates assumed, nor are they
necessarily indicative of future consolidated operating results
or financial position.
The unaudited pro forma condensed combined financial statements
do not reflect and do not give effect to (i) any
integration costs that may be incurred as a result of the
acquisition, (ii) synergies, operating efficiencies and
cost savings that are expected to result from acquisition,
(iii) benefits expected to be derived from the combined
companys growth projects or brownfield expansions or
(iv) changes in commodities prices subsequent to the dates
of such unaudited pro forma condensed combined financial
statements.
Additionally, Freeport-McMoRan believes that cost savings will
be realized upon the consolidation and integration of the
companies. Freeport-McMoRan has not developed formal plans for
combining the operations. Accordingly, additional liabilities
may be incurred in connection with the business combination and
ultimate restructuring. These additional liabilities and costs
have not been contemplated in the unaudited pro forma condensed
combined financial statements because information necessary to
reasonably estimate such costs and to formulate detailed
restructuring plans is not yet available to Freeport-McMoRan.
Accordingly, the allocation of the
S-48
purchase price cannot be estimated with a reasonable degree of
accuracy and may differ materially from the amounts assumed in
the unaudited pro forma condensed combined financial statements.
As shown in adjustment D below, Freeport-McMoRan expects the
accounting for the acquisition of Phelps Dodge to result in a
significant amount of goodwill. Goodwill is the excess cost of
the acquired company over the sum of the amounts assigned to
assets acquired less liabilities assumed. U.S. GAAP
requires that goodwill not be amortized, but instead allocated
to a level within the reporting entity referred to as the
reporting unit and tested for impairment, at least annually.
There is currently diversity in the mining industry associated
with certain aspects of the accounting for business combinations
and related goodwill. This diversity includes how companies
define Value Beyond Proven and Probable reserves (referred to in
this document as VBPP) (see further discussion in adjustment J
below), what an appropriate reporting unit is and how goodwill
is allocated among reporting units. The methods of allocating
goodwill have included allocations primarily to a single
exploration reporting unit and allocations among individual mine
reporting units depending on the relevant circumstances. We
understand the industry is also evaluating other methodologies
for allocating goodwill. The method of allocating goodwill will
likely have an impact on the amount and timing of any future
goodwill impairment, if any. Freeport-McMoRan has not completed
its determination of the combined companys reporting units
nor its method of allocating goodwill to those reporting units.
Our ultimate accounting for VBPP and goodwill may not be
comparable to other companies within the mining industry.
The unaudited pro forma condensed combined financial statements
include the following pro forma assumptions and adjustments:
(A) Reclassifications have been made to the Phelps Dodge
historical consolidated financial information to conform to
Freeport-McMoRans presentation. This included
reclassifying amounts described by Phelps Dodge on a single line
item as Special items and provisions, net into
production and delivery costs, into depreciation, depletion and
amortization and into selling, general and administrative
expenses based on Freeport-McMoRans reporting for these
items. The reclassifications also reflect the reporting of
Phelps Dodges Capitalized interest as a
component of Interest expense, net and Phelps
Dodges Equity in net earnings of affiliated
companies as a component of Equity in PT Smelting
and affiliated companies earnings to conform to
Freeport-McMoRans reporting.
(B) This pro forma adjustment represents payment of the
cash component of the purchase price for Phelps Dodge common
shares.
(C) Freeport-McMoRan estimates it will incur approximately
$430 million of transaction costs, consisting primarily of
financing costs, financial advisory fees, legal and accounting
fees, financial printing and other charges related to the
purchase of Phelps Dodge. Approximately $330 million of
these transaction costs will be recorded as deferred charges on
the combined companys balance sheet and the remaining
approximately $100 million will be recorded as part of the
cost to purchase Phelps Dodge. These estimates are preliminary
and, therefore, are subject to change.
(D) The pro forma adjustments to reflect fair value of
Phelps Dodges net reported assets and other purchase
accounting adjustments were based on available data as of
December 31,
S-49
2006. On this basis, the pro forma adjustments to reflect the
fair value of Phelps Dodges net reported assets and other
purchase accounting adjustments are estimated as follows:
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
Phelps Dodge net assets on
December 31, 2006
|
|
$
|
7,690
|
|
Adjustment to fair value mill and
leach stockpiles inventorycurrent
|
|
|
1,412
|
|
Adjustment to fair value mill and
leach stockpiles inventorylong-term
|
|
|
724
|
|
Adjustment to fair value product
inventory
|
|
|
1,293
|
|
Adjustment to fair value property,
plant, equipment and development costs
|
|
|
11,620
|
|
Adjustment to fair value debt
issuance costs
|
|
|
(27
|
)
|
Adjustment to fair value debt
|
|
|
(35
|
)
|
Adjustment to deferred taxes to
reflect fair value adjustments (see F)
|
|
|
(4,500
|
)
|
Cash proceeds from assumed exercise
of stock options (see H)
|
|
|
25
|
|
|
|
|
|
|
Net tangible assets and liabilities
acquired
|
|
$
|
18,203
|
*
|
Allocation to goodwill
|
|
|
7,755
|
**
|
|
|
|
|
|
Total purchase price
|
|
$
|
25,958
|
|
|
|
|
|
|
*
|
|
Represents the sum of tangible
assets and liabilities acquired before rounding.
|
|
**
|
|
The allocation to goodwill was
reduced by $776 million from the amount reflected in the
amended joint proxy statement/prospectus filed on
February 12, 2007, because of changes in the fair value of
Phelps Dodges net assets from September 30, 2006 to
December 31, 2006, primarily because of changes in metal
price assumptions and a change in accounting for defined benefit
pension and other postretirement plans resulting from the
adoption of a new accounting standard on December 31, 2006.
|
The allocation of the purchase price is based upon
managements preliminary estimates and certain assumptions
with respect to the fair value increment associated with the
assets to be acquired and the liabilities to be assumed. The
actual fair values of the assets and liabilities will be
determined as of the date of acquisition and may differ
materially from the amounts disclosed above in the assumed pro
forma purchase price allocation because of changes in fair
values of the assets and liabilities between December 31,
2006 and the date of the acquisition, and as further analysis
(including of identifiable intangible assets, for which no
amounts have been estimated and included in the preliminary
amounts shown above) is completed. Consequently, the actual
allocation of the purchase price may result in different
adjustments in the unaudited pro forma condensed combined
statement of income. Following completion of the transactions,
the earnings of the combined company will reflect the impact of
purchase accounting adjustments, including the effect of changes
in the cost bases of both tangible and identifiable intangible
assets and liabilities on production costs and depreciation,
depletion and amortization expense. The unaudited pro forma
condensed combined statement of income reflects Phelps
Dodges metal inventories on its historical accounting
method of
last-in,
first-out. Inventories are subject to a lower of cost or
market assessment and a decline in metal prices could result in
a write down of metal inventory values and a corresponding
charge to future earnings of the combined company.
(E) This pro forma adjustment recognizes certain estimated
change of control obligations arising from the combination of
Phelps Dodge and Freeport-McMoRan.
(F) The estimated income tax effect of the pro forma
adjustments has been recorded based upon statutory tax rates in
effect in the various tax jurisdictions in which Phelps Dodge
operates, resulting in an estimated tax rate of approximately
10 percent for interest costs and 30 percent for all
other items. The statutory tax rates range from 20 percent
to
S-50
35 percent. The estimated tax rates are a weighted
calculation of the various statutory tax rates and consider tax
credits, exempt income and non-deductible expenses. The
estimated tax rate for interest costs of 10 percent has
been derived from a preliminary analysis of the applicable rules
for interest cost allocation required by U.S. tax
regulations and considers their associated limitation on the
utilization of foreign tax credits. These rates will vary
depending on the mix of income derived in the respective
countries of operation and the allocation of interest and other
expenses. The actual tax rates will also be affected by any tax
planning opportunities that may result from the combination of
the companies after the transaction. The business combination is
expected to be non-taxable to the respective companies, with
Phelps Dodges historical tax bases surviving for income
tax reporting purposes. Additional deferred income taxes have
been recognized based on the pro forma fair value adjustments to
assets and liabilities.
Provisions for pro forma income tax expense have been recorded
as pro forma adjustments to the unaudited pro forma condensed
combined statement of income.
(G) These pro forma adjustments reflect the issuance of
137.0 million shares of Freeport-McMoRan common stock in
connection with the offer for all the outstanding common shares
of Phelps Dodge. The common stock of Freeport-McMoRan totals
$13.7 million at $0.10 per share par value and capital
in excess of par of $7,777.1 million. These shares include
the shares issuable in connection with the stock options and
restricted stock of Phelps Dodge outstanding at December 31,
2006.
(H) This pro forma adjustment gives effect to
$25 million of proceeds to be received from the assumed
exercise of Phelps Dodges
in-the-money
stock options. Freeport-McMoRan has assumed that all eligible
Phelps Dodge stock options are exercised and all eligible
restricted stock is vested prior to the purchase transaction.
(I) These pro forma adjustments eliminate the historical
shareholders equity accounts of Phelps Dodge.
(J) This pro forma adjustment represents the estimated
increase to depreciation, depletion and amortization expense
associated with the preliminary fair value adjustment of
approximately $11,620 million allocated to plant, property,
equipment and development costs as further discussed in
adjustment D. Freeport-McMoRan has not completed an assessment
of the fair values of assets and liabilities of Phelps Dodge and
the related business integration plans and synergies. The
ultimate purchase price allocation will include possible
adjustments to the fair values of depreciable tangible assets,
proven and probable reserves, reserves related to current
development projects, VBPP and intangible assets after a full
review has been completed. The concept of VBPP is described in
Financial Accounting Standards Board Emerging Issue Task Force
Issue
No. 04-3
(EITF 04-3)
and has been interpreted differently by mining companies. Our
preliminary adjustment to property, plant, equipment and
development costs, as discussed below, includes VBPP
attributable to mineralized material that Freeport-McMoRan
believes could be brought into production should market
conditions 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
grade of metal(s). Such a deposit may not qualify as proven and
probable reserves until legal and economic feasibility are
concluded based upon a comprehensive evaluation of unit costs,
grade, recoveries and other material factors. Our preliminary
adjustments to property, plant, equipment and development costs
do not include adjustments attributable to inferred mineral
resources or exploration potential referred to in the EITF
04-3 Working
S-51
Group Report No. 1. We intend to allocate a portion of the
purchase price to all VBPP, including inferred mineral resources
and exploration potential, in accordance with EITF
04-3 after
performing a more thorough analysis to determine the fair value
of these assets.
The preliminary allocation of $11,620 million to property,
plant, equipment and development costs is primarily based on a
fair value assessment of estimated cash flows from Phelps
Dodges pro rata share of estimated proven and probable
reserves, an estimated market value of Phelps Dodges
estimated VBPP attributable to mineralized material and
valuation multiples applied to certain tangible assets.
Freeport-McMoRan has not completed an assessment of the fair
values of assets and liabilities of Phelps Dodge and the related
business integration plans and synergies. The ultimate purchase
price allocation will include possible adjustments to fair
values of depreciable tangible assets, proven and probable
reserves, reserves related to current development projects, mill
and leach stockpiles, product inventories, VBPP and intangible
assets after a full review has been completed.
For the purpose of preparing the unaudited pro forma condensed
combined statements of income, Freeport-McMoRan assumed an
average estimated remaining useful life of 20 years, which
was based on an analysis of Phelps Dodges estimated mine
lives and on the estimated useful lives of other property, plant
and equipment disclosed in Phelps Dodges public filings
and
life-of-mine
plans provided to Freeport-McMoRan. A one-year change in the
estimated useful life would have a 5 percent impact on the
pro forma depreciation, depletion and amortization expense.
Additionally, for each $1 billion that the final fair value
of property, plant, equipment and development costs differs from
the pro forma fair value, related depreciation, depletion and
amortization expense would increase or decrease approximately
$50 million annually, assuming a weighted
average 20-year
life.
(K) This pro forma adjustment relates to borrowings under
new $10.0 billion term loan facilities and
$6.0 billion of the notes offered hereby. The proceeds from
borrowings under these facilities, in conjunction with available
cash, would be used for: (i) the $88.00 per share cash
payment to Phelps Dodge shareholders and (ii) payments for
other transaction fees and expenses.
(L) Pro forma weighted average common stock and common
stock equivalents outstanding are estimated as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2006
|
(In
millions)
|
|
Basic
|
|
|
Diluted
|
|
|
Average number of shares of
historical Freeport-McMoRan common stock outstanding
|
|
|
190.7
|
|
|
|
221.5
|
Shares of Freeport-McMoRan common
stock to be issued in connection with the business combination
(Note 2)
|
|
|
137.0
|
|
|
|
137.0
|
|
|
|
|
|
|
Total
|
|
|
327.8
|
*
|
|
|
358.5
|
|
|
|
|
|
*
|
|
Represents the sum of the numbers
before rounding.
|
The average number of common shares outstanding gives effect to
outstanding Phelps Dodge stock options and restricted stock, all
eligible shares of which are assumed to be exercised or vested.
Based upon public information reported and the current exchange
offer ratio, Freeport-McMoRan estimates that the incremental
number of shares of Freeport-McMoRan stock issuable upon the
exercise and vesting of Phelps Dodge stock options and
restricted stock would be approximately 1.4 million.
S-52
(M) This pro forma adjustment eliminates amortization
expense for past service costs and net actuarial losses relating
to postretirement benefits recorded by Phelps Dodge.
(N) This pro forma adjustment recognizes imputed interest
expense for the year ended December 31, 2006, resulting
from the fair value adjustment of Phelps Dodges long-term
debt and acquisition-related debt discussed in Note
(K) above at an assumed weighted average annual interest
rate of approximately 7.8 percent. A 0.125% variance in the
interest rate on the Tranche A term loan portion of the new
senior credit facilities would cause an increase or decrease of
$3.1 million in interest expense. A 0.125% variance in the
interest rate on the Tranche B term loan portion of the new
senior credit facilities would cause an increase or decrease of
$9.4 million in interest expense. A 0.125% variance in the
weighted average effective interest rate on the notes would
cause an increase or decrease of $7.5 million in interest
expense.
Amounts include charges for
mark-to-market
losses on Phelps Dodges 2006 and 2007 copper price
protection programs totaling $1,008.9 million in revenues
and $766.8 million in income from continuing operations for
the year ended December 31, 2006.
S-53
Selected
consolidated historical financial and
operating data of
Freeport-McMoRan
The following selected historical consolidated financial data,
as of and for the years ended December 31, 2002, 2003,
2004, 2005 and 2006, have been derived from the audited
consolidated financial statements of Freeport-McMoRan for those
periods. The historical results presented below are not
necessarily indicative of results that you can expect for any
future period. You should read the table in conjunction with the
sections entitled Use of proceeds,
Capitalization, Unaudited pro forma condensed
combined financial statements, Summary historical
financial and operating data of Freeport-McMoRan,
Managements discussion and analysis of financial
condition and results of operations of Freeport-McMoRan
and the consolidated financial statements of Freeport-McMoRan
and the related notes incorporated by reference herein. See
Where you can find more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
dollars, except average shares, and in millions,
|
|
Years
ended December 31,
|
|
except per share
amounts)
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Statement of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,910.5
|
|
|
$
|
2,212.2
|
|
|
$
|
2,371.9
|
|
|
$
|
4,179.1
|
|
|
$
|
5,790.5
|
|
Operating income
|
|
|
640.1
|
|
|
|
823.3
|
|
|
|
703.6
|
(d)
|
|
|
2,177.3
|
|
|
|
2,868.7
|
(g)
|
Net income before cumulative effect
of changes in accounting principles
|
|
|
130.1
|
|
|
|
169.8
|
(b)
|
|
|
156.8
|
(d)(e)
|
|
|
934.6
|
(f)
|
|
|
1,396.0
|
(g)(h)
|
Cumulative effect of changes in
accounting principles, net
|
|
|
(3.0
|
)(a)
|
|
|
(15.6
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
stock
|
|
|
127.1
|
|
|
|
154.2
|
(b)
|
|
|
156.8
|
(d)(e)
|
|
|
934.6
|
(f)
|
|
|
1,396.0
|
(g)(h)
|
Basic net income per common share
|
|
|
0.88
|
|
|
|
0.99
|
|
|
|
0.86
|
|
|
|
5.18
|
|
|
|
7.32
|
|
Diluted net income per common share
|
|
|
0.87
|
|
|
|
0.97
|
(b)(c)
|
|
|
0.85
|
(d)(e)
|
|
|
4.67
|
(f)
|
|
|
6.63
|
(g)(h)
|
Dividends paid per common share
|
|
|
|
|
|
|
0.27
|
|
|
|
1.10
|
|
|
|
2.50
|
|
|
|
4.75
|
|
Basic average shares outstanding
|
|
|
144.6
|
|
|
|
155.8
|
|
|
|
182.3
|
|
|
|
180.3
|
|
|
|
190.7
|
|
Diluted average shares outstanding
|
|
|
146.4
|
|
|
|
159.1
|
|
|
|
184.9
|
|
|
|
220.5
|
|
|
|
221.5
|
|
Balance sheet data at end of
year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(i)
|
|
$
|
115.8
|
|
|
$
|
498.6
|
|
|
$
|
552.0
|
|
|
$
|
763.6
|
|
|
$
|
907.5
|
|
Total assets
|
|
|
4,192.2
|
|
|
|
4,718.4
|
|
|
|
5,087.0
|
|
|
|
5,550.2
|
(g)
|
|
|
5,389.8
|
(g)
|
Total
debt(j)
|
|
|
2,038.4
|
|
|
|
2,228.3
|
(c)
|
|
|
1,951.9
|
|
|
|
1,255.9
|
|
|
|
680.1
|
|
Redeemable preferred stock
|
|
|
450.0
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
266.8
|
|
|
|
776.0
|
|
|
|
1,163.6
|
|
|
|
1,843.0
|
|
|
|
2,445.1
|
(g)
|
|
|
S-54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2002
|
|
2003
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PT Freeport Indonesia operating
data, net of Rio Tintos interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper (recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (000s of pounds)
|
|
|
1,524,200
|
|
|
1,291,600
|
|
|
|
996,500
|
|
|
1,455,900
|
|
|
1,201,200
|
|
Production (metric tons)
|
|
|
691,400
|
|
|
585,900
|
|
|
|
452,000
|
|
|
660,400
|
|
|
544,900
|
|
Sales (000s of pounds)
|
|
|
1,522,300
|
|
|
1,295,600
|
|
|
|
991,600
|
|
|
1,456,500
|
|
|
1,201,400
|
|
Sales (metric tons)
|
|
|
690,500
|
|
|
587,700
|
|
|
|
449,800
|
|
|
660,700
|
|
|
544,900
|
|
Average realized price per pound
|
|
$
|
0.71
|
|
$
|
0.82
|
|
|
$
|
1.37
|
|
$
|
1.85
|
|
$
|
3.13
|
|
Gold (recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
2,296,800
|
|
|
2,463,300
|
|
|
|
1,456,200
|
|
|
2,789,400
|
|
|
1,731,800
|
|
Sales
|
|
|
2,293,200
|
|
|
2,469,800
|
|
|
|
1,443,000
|
|
|
2,790,200
|
|
|
1,736,000
|
|
Average realized price per ounce
|
|
$
|
311.97
|
|
$
|
366.60(k
|
)
|
|
$
|
412.32
|
|
$
|
456.27
|
|
$
|
566.51(l
|
)
|
Atlantic Copper operating
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrate and scrap treated
(metric tons)
|
|
|
1,016,700
|
|
|
964,400
|
|
|
|
768,100
|
|
|
975,400
|
|
|
953,700
|
|
Anodes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (000s of pounds)
|
|
|
657,000
|
|
|
640,000
|
|
|
|
494,400
|
|
|
626,600
|
|
|
581,300
|
|
Production (metric tons)
|
|
|
298,000
|
|
|
290,300
|
|
|
|
224,300
|
|
|
284,200
|
|
|
263,700
|
|
Sales (000s of pounds)
|
|
|
101,200
|
|
|
97,000
|
|
|
|
36,700
|
|
|
85,100
|
|
|
59,800
|
|
Sales (metric tons)
|
|
|
45,900
|
|
|
44,000
|
|
|
|
16,600
|
|
|
38,600
|
|
|
27,100
|
|
Cathodes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (000s of pounds)
|
|
|
552,200
|
|
|
544,700
|
|
|
|
454,700
|
|
|
545,300
|
|
|
518,900
|
|
Production (metric tons)
|
|
|
250,500
|
|
|
247,100
|
|
|
|
206,200
|
|
|
247,300
|
|
|
235,400
|
|
Sales (including wire rod and
wire)
(000s of pounds)
|
|
|
556,500
|
|
|
546,800
|
|
|
|
479,200
|
|
|
548,600
|
|
|
529,200
|
|
(metric tons)
|
|
|
252,400
|
|
|
248,000
|
|
|
|
217,400
|
|
|
248,800
|
|
|
240,000
|
|
Gold sales in anodes and slimes
(ounces)
|
|
|
813,900
|
|
|
929,700
|
|
|
|
316,700
|
|
|
542,800
|
|
|
666,500
|
|
|
|
|
|
|
(a)
|
|
Effective January 1, 2002,
Freeport-McMoRan changed the methodology used in the
determination of depreciation associated with PT Freeport
Indonesias mining and milling
life-of-mine
assets.
|
|
(b)
|
|
Includes losses on early
extinguishment and conversion of debt totaling
$31.9 million ($0.20 per share), net of related
reduction of interest expense.
|
|
(c)
|
|
Effective January 1, 2003,
Freeport-McMoRan adopted Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations, and recorded a $9.1 million
($0.06 per share) cumulative effect gain. Effective
July 1, 2003, Freeport-McMoRan adopted
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, and recorded a $24.7 million ($0.16 per
share) cumulative effect charge. Freeport-McMoRans
mandatorily redeemable preferred stock was classified as debt
effective July 1, 2003. SFAS No. 150 does not
allow restatement of prior periods.
|
|
(d)
|
|
Includes a $95.0 million
($48.8 million to net income or $0.26 per share) gain
on insurance settlement related to the fourth-quarter 2003
slippage and debris flow events at the Grasberg open pit and a
$12.0 million ($12.0 million to net income or
$0.06 per share) charge related to Atlantic Coppers
workforce reduction plan.
|
|
(e)
|
|
Includes a $20.4 million
($0.11 per share) gain from the sale of a parcel of land in
Arizona held by a Freeport-McMoRan joint venture, a
$7.5 million ($0.04 per share) gain from Atlantic
Coppers sale of its wire rod and wire assets, and
$7.4 million ($0.04 per share) of losses on early
extinguishment and conversion of debt, net of related reduction
of interest expense.
|
|
(f)
|
|
Includes $40.2 million
($0.18 per share) of losses on early extinguishment and
conversion of debt, net of related reduction of interest
expense, and a $4.9 million ($0.02 per share) gain
from the sale of a parcel of land in Arizona held by a
Freeport-McMoRan joint venture.
|
|
(g)
|
|
Effective January 1, 2006,
Freeport-McMoRan adopted Emerging Issues Task Force Issue
No. 04-6,
Accounting for Stripping Costs Incurred during Production
in the Mining Industry (EITF
04-6) and
recorded its deferred mining costs asset ($285.4 million)
at December 31, 2005, net of taxes, minority interest share
and inventory effects ($135.9 million), as a cumulative
effect adjustment to reduce retained earnings on January 1,
2006. As a result of adopting EITF
04-6, income
before income taxes
|
S-55
|
|
|
|
|
and minority interests for 2006 was
$35.4 million lower and net income was $18.8 million
($0.08 per share) lower than if Freeport-McMoRan had not
adopted EITF
04-6.
Effective January 1, 2006, Freeport-McMoRan adopted
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment or
SFAS No. 123R. As a result of adopting
SFAS No. 123R, income before income taxes and minority
interests for 2006 was $27.8 million lower and net income
was $16.1 million ($0.07 per share) lower than if
Freeport-McMoRan had not adopted SFAS No. 123R.
Results for prior years have not been restated.
|
|
(h)
|
|
Includes $30.3 million
($0.14 per share) of losses on early extinguishment and
conversion of debt, net of related reduction of interest
expense, and gains of $29.7 million ($0.13 per share)
at Atlantic Copper from the disposition of land and certain
royalty rights.
|
|
(i)
|
|
For 2002 and 2003, values include
$107.9 million and $35.0 million, respectively, of
restricted cash and investments.
|
|
(j)
|
|
Includes current portion and
short-term borrowings.
|
|
(k)
|
|
Amount was $357.61 before a gain
resulting from redemption of Freeport-McMoRans
Gold-Denominated Preferred Stock.
|
|
(l)
|
|
Amount was $606.36 before a loss
resulting from redemption of Freeport-McMoRans
Gold-Denominated Preferred Stock, Series II.
|
S-56
Selected
consolidated historical financial and
operating data of Phelps
Dodge
The following selected historical consolidated financial data,
as of and for the years ended December 31, 2002, 2003,
2004, 2005 and 2006, have been derived from the audited
consolidated financial statements of Phelps Dodge for those
periods. The historical results presented below are not
necessarily indicative of results that you can expect for any
future period. You should read the table below in conjunction
with the sections entitled Use of proceeds,
Capitalization, Unaudited pro forma condensed
combined financial statements, Summary historical
financial and operating data of Phelps Dodge,
Managements discussion and analysis of financial
condition and results of operations of Phelps Dodge and
the consolidated financial statements of Phelps Dodge and the
related notes contained in Phelps Dodges annual report on
Form 10-K
for the year ended December 31, 2006 filed with the
Securities and Exchange Commission and incorporated by reference
herein. See Where you can find more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,(f)
|
|
(Dollars
in millions, except per share amounts)
|
|
2002(a)
|
|
|
2003(b)
|
|
|
2004(c)
|
|
2005(d)
|
|
|
2006(e)
|
|
|
|
|
Statement of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and other operating revenues
|
|
$
|
3,173.2
|
|
|
$
|
3,498.5
|
|
|
$
|
6,415.2
|
|
$
|
8,287.1
|
|
|
$
|
11,910.4
|
|
Operating income (loss)
|
|
|
(257.4
|
)
|
|
|
142.8
|
|
|
|
1,474.9
|
|
|
1,764.9
|
|
|
|
4,226.9
|
|
Income (loss) from continuing
operations before extraordinary item and cumulative effect of
accounting changes
|
|
|
(356.5
|
)
|
|
|
(21.1
|
)
|
|
|
1,023.6
|
|
|
1,583.9
|
|
|
|
3,035.9
|
|
Income (loss) from discontinued
operations, net of
taxes(g)
|
|
|
41.3
|
|
|
|
39.2
|
|
|
|
22.7
|
|
|
(17.4
|
)
|
|
|
(18.1
|
)
|
Income (loss) before extraordinary
item and cumulative effect of accounting changes
|
|
|
(315.2
|
)
|
|
|
18.1
|
|
|
|
1,046.3
|
|
|
1,566.5
|
|
|
|
3,017.8
|
|
Net income (loss)
|
|
|
(338.1
|
)
|
|
|
94.8
|
|
|
|
1,046.3
|
|
|
1,556.4
|
|
|
|
3,017.8
|
|
Basic earnings (loss) per common
share from continuing
operations(h)
|
|
|
(2.17
|
)
|
|
|
(0.19
|
)
|
|
|
5.41
|
|
|
8.06
|
|
|
|
15.00
|
|
Diluted earnings (loss) per common
share from continuing
operations(h)
|
|
|
(2.17
|
)
|
|
|
(0.19
|
)
|
|
|
5.18
|
|
|
7.82
|
|
|
|
14.92
|
|
Basic earnings (loss) per common
share from discontinued operations, extraordinary item and
cumulative effect of accounting
changes(h)
|
|
|
0.11
|
|
|
|
0.65
|
|
|
|
0.12
|
|
|
(0.14
|
)
|
|
|
(0.09
|
)
|
Diluted earnings (loss) per common
share from discontinued operations, extraordinary item and
cumulative effect of accounting
changes(h)
|
|
|
0.11
|
|
|
|
0.65
|
|
|
|
0.11
|
|
|
(0.13
|
)
|
|
|
(0.09
|
)
|
Basic earnings (loss) per common
share(h)
|
|
|
(2.06
|
)
|
|
|
0.46
|
|
|
|
5.53
|
|
|
7.92
|
|
|
|
14.91
|
|
Diluted earnings (loss) per common
share(h)
|
|
|
(2.06
|
)
|
|
|
0.46
|
|
|
|
5.29
|
|
|
7.69
|
|
|
|
14.83
|
|
Cash dividends declared per common
share(i)
|
|
|
|
|
|
|
|
|
|
|
0.25
|
|
|
3.125
|
|
|
|
4.788
|
|
Balance sheet data at end of
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
349.8
|
|
|
$
|
683.8
|
|
|
$
|
1,200.1
|
|
$
|
1,916.7
|
|
|
$
|
4,947.4
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.8
|
|
|
|
25.4
|
|
Current assets (including cash)
|
|
|
1,428.2
|
|
|
|
1,790.0
|
|
|
|
2,661.7
|
|
|
4,070.7
|
|
|
|
7,600.9
|
|
Total assets
|
|
|
7,029.0
|
|
|
|
7,272.9
|
|
|
|
8,594.1
|
|
|
10,358.0
|
|
|
|
14,632.3
|
|
Total debt
|
|
|
2,110.6
|
|
|
|
1,959.0
|
|
|
|
1,096.9
|
|
|
694.5
|
|
|
|
891.9
|
|
Long-term debt
|
|
|
1,948.4
|
|
|
|
1,703.9
|
|
|
|
972.2
|
|
|
677.7
|
|
|
|
770.1
|
|
Shareholders equity
|
|
|
2,813.6
|
|
|
|
3,063.8
|
|
|
|
4,343.1
|
|
|
5,601.6
|
|
|
|
7,690.4
|
|
|
|
S-57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,(f)
|
(Dollars
in millions, except per share amounts)
|
|
2002(a)
|
|
2003(b)
|
|
2004(c)
|
|
2005(d)
|
|
2006(e)
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper production (thousand short
tons)(j)
|
|
|
1,012.1
|
|
|
1,042.5
|
|
|
1,260.6
|
|
|
1,228.0
|
|
|
1,218.7
|
Copper sales from own mines
(thousand short
tons)(j)
|
|
|
1,034.5
|
|
|
1,052.6
|
|
|
1,268.9
|
|
|
1,238.4
|
|
|
1,214.5
|
COMEX copper price (per
pound)(k)
|
|
$
|
0.72
|
|
$
|
0.81
|
|
$
|
1.29
|
|
$
|
1.68
|
|
$
|
3.09
|
LME copper price (per
pound)(l)
|
|
$
|
0.71
|
|
$
|
0.81
|
|
$
|
1.30
|
|
$
|
1.67
|
|
$
|
3.05
|
|
|
|
|
|
(a)
|
|
Reported amounts for 2002 included
after-tax, net special charges of $153.5 million, or 91
cents per common share, for PDMC asset impairment charges and
closure provisions; $53.0 million, or 31 cents per common
share, for historical lawsuit settlements; $45.0 million,
or 27 cents per common share, for a historical arbitration
award; $26.6 million, or 16 cents per common share, for
early debt extinguishment costs; $23.0 million, or 14 cents
per common share, for restructuring activities;
$22.9 million, or 13 cents per common share, for the
cumulative effect of an accounting change; $14.0 million,
or 8 cents per common share, for environmental provisions
(included a gain of $0.6 million for discontinued
operations); $1.2 million, or 1 cent per common share, for
the write-off of two cost-basis investments; and
$1.0 million, or 1 cent per common share, for the
settlement of legal matters; partially offset by after-tax, net
special gains of $66.6 million, or 40 cents per common
share, for the tax benefit relating to the net operating loss
carryback prior to 2002 resulting from a change in U.S. tax
legislation; $29.1 million, or 17 cents per common share,
for environmental insurance recoveries; $22.6 million, or
13 cents per common share, for the gain on the sale of a
non-core parcel of real estate; and $13.0 million, or 8
cents per common share, for the release of deferred taxes
previously provided with regard to Plateau Mining Corporation.
|
|
(b)
|
|
Reported amounts for 2003 included
after-tax, net special gains of $68.3 million, or 38 cents
per common share, for an extraordinary gain associated with the
acquisition of Phelps Dodges partners one-third
interest in Chino Mines Company; $8.4 million, or 5 cents
per common share, for the cumulative effect of an accounting
change; $6.4 million, or 4 cents per common share, for the
sale of a cost-basis investment; $2.4 million, or 1 cent
per common share, for the termination of a foreign
postretirement benefit plan associated with discontinued
operations; $1.0 million, or 1 cent per common share, for
the tax benefit relating to additional 2001 net operating
loss carryback; $0.5 million for environmental insurance
recoveries; and $0.2 million for the reassessment of prior
restructuring programs; partially offset by after-tax, net
special charges of $27.0 million, or 16 cents per common
share, for environmental provisions (included a gain of
$0.5 million for discontinued operations);
$8.0 million or 4 cents per common share, for a potential
Texas franchise tax matter; $2.9 million, or 2 cents per
common share, for the settlement of historical legal matters;
and $2.6 million, or 1 cent per common share, for asset and
goodwill impairments.
|
|
(c)
|
|
Reported amounts for 2004 included
after-tax, net special charges of $44.7 million, or 23
cents per common share, for environmental provisions;
$30.9 million (net of minority interests), or 15 cents per
common share, for early debt extinguishment costs;
$9.9 million, or 5 cents per common share, for the
write-down of two cost-basis investments; $9.6 million, or
5 cents per common share, for taxes on anticipated foreign
dividends; $9.0 million, or 5 cents per common share, for a
deferred tax asset valuation allowance at Phelps Dodges
Brazilian wire and cable operation; $7.6 million, or 4
cents per common share, for Phelps Dodge Magnet Wire
restructuring activities; $5.9 million, or 3 cents per
common share, for asset impairments (included $4.5 million,
or 2 cents per common share, for discontinued operations); and
$0.7 million for interest on a Texas franchise tax matter;
partially offset by after-tax, net special gains of
$30.0 million, or 15 cents per common share, for the
reversal of a U.S. deferred tax asset valuation allowance;
$15.7 million (net of minority interest), or 8 cents per
common share, for the reversal of an El Abra deferred tax asset
valuation allowance; $10.1 million, or 5 cents per common
share, for the gain on the sale of uranium royalty rights;
$7.4 million, or 4 cents per common share, for
environmental insurance recoveries; and $4.7 million, or 3
cents per common share, for the settlement of historical legal
matters.
|
|
(d)
|
|
Reported amounts for 2005 included
after-tax, net special charges of $331.8 million, or
$1.64 per common share, for asset impairments; tax expense
of $88.1 million, or 44 cents per common share, for foreign
dividend taxes; $86.4 million, or 42 cents per common
share, for environmental provisions; $42.6 million, or 21
cents per common share, associated with discontinued operations
in connection with the sale of Columbian; $41.3 million, or
20 cents per common share, for early debt extinguishment costs;
$34.5 million (net of minority interest), or 17 cents per
common share, for tax on unremitted foreign earnings;
$23.6 million, or 12 cents per common share, for a tax
charge associated with minimum pension liability reversal;
$10.1 million, or 5 cents per common share, for cumulative
effect of accounting change; $5.9 million, or 3 cents per
common share, for transaction and employee-related costs
associated with the sale of substantially all of Phelps
Dodges North American magnet wire assets; partially offset
by after-tax, net special gains of $388.0 million, or
$1.92 per common share, for the
|
S-58
|
|
|
|
|
sale of a cost-basis investment;
$181.7 million, or 89 cents per common share, for change in
interest gains at Cerro Verde and Ojos del Salado;
$15.6 million, or 8 cents per common share, for legal
matters; $11.9 million, or 6 cents per common share, for
the reversal of Phelps Dodge Brazils deferred tax asset
valuation allowance; $8.5 million, or 4 cents per common
share, for the sale of non-core real estate; $4.0 million,
or 2 cents per common share, for the reversal of
U.S. deferred tax asset valuation allowance;
$0.4 million for environmental insurance recoveries; and
$0.1 million for Phelps Dodge Magnet Wire restructuring
activities. The after-tax, net special charges of
$42.6 million associated with discontinued operations
consisted of $67.0 million (net of minority interests), or
33 cents per common share, for a goodwill impairment charge;
taxes of $7.6 million, or 4 cents per common share,
associated with the sale and dividends paid in 2005; and
$5.0 million, or 2 cents per common share, for a loss on
disposal of Columbian associated with transaction and
employee-related costs; partially offset by a deferred income
tax effect of $37.0 million, or 18 cents per common share.
|
|
(e)
|
|
Reported amounts for 2006 included
after-tax, net special gains of $330.7 million, or
$1.62 per common share, for the Inco termination fee;
$127.5 million, or 63 cents per common share, for the
reversal of U.S. deferred tax asset valuation allowance;
$2.0 million, or 1 cent per common share, for legal
matters; $0.4 million for sale of non-core real estate; and
$0.2 million for the reversal of Minera PD Peru deferred
tax asset valuation allowance; partially offset by after-tax,
net special charges of $54.5 million, or 27 cents per
common share, for environmental provisions; $30.9 million,
or 15 cents per common share, for charges associated with
discontinued operations in connection with the sale of
Columbian; $9.6 million, or 5 cents per common share, for
asset impairment charges; $7.6 million (net of minority
interest), or 4 cents per common share, for tax on unremitted
foreign earnings; $5.1 million, or 3 cents per common
share, for transaction and employee-related charges and loss on
disposal in connection with the sale of substantially all of
Phelps Dodges North American magnet wire assets;
$4.7 million, or 2 cents per common share, for transaction
and employee-related charges and loss on the disposal in
connection with the sale of Phelps Dodges HPC;
$3.0 million, or 1 cent per common share, for a lease
termination settlement; and $1.2 million associated with
dissolution of an international wire and cable entity.
|
|
(f)
|
|
2004, 2005 and 2006 reflected full
consolidation of El Abra and Candelaria; 2002 and 2003 reflected
El Abra and Candelaria on a pro rata basis (51 percent and
80 percent, respectively).
|
|
(g)
|
|
As a result of Phelps Dodges
sale of Columbian, the operating results for Columbian have been
reported separately from continuing operations and shown as
discontinued operations for all periods presented in the
consolidated statement of income data.
|
|
(h)
|
|
Basic and diluted earnings per
common share have been adjusted to reflect the March 10,
2006, two-for-one stock split for all periods presented.
|
|
(i)
|
|
All periods presented reflect
dividends per common share on a post-March 10, 2006,
two-for-one
stock split basis.
|
|
(j)
|
|
2004, 2005 and 2006 reflected
copper production and copper sales on a consolidated basis; 2002
and 2003 reflected that information on a pro rata basis.
|
|
(k)
|
|
New York Commodity Exchange average
spot price per poundcathodes.
|
|
(l)
|
|
London Metal Exchange average spot
price per poundcathodes.
|
S-59
Ratio of earnings
to fixed charges
Freeport-McMoRans ratio of earnings to fixed charges was
as follows for the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Ratio of earnings to fixed charges
|
|
|
3.4
|
x
|
|
|
3.9
|
x
|
|
|
4.7
|
x
|
|
|
15.7
|
x
|
|
|
32.8x
|
Ratio of earnings to fixed charges
and preferred stock dividends
|
|
|
2.5
|
x
|
|
|
3.0
|
x
|
|
|
2.8
|
x
|
|
|
8.1
|
x
|
|
|
14.2x
|
|
|
For the ratio of earnings to fixed charges calculation, earnings
consist of pre-tax income from continuing operations before
minority interests in consolidated subsidiaries, income or loss
from equity investees and fixed charges. Fixed charges include
interest and that portion of rent deemed representative of
interest. For the ratio of earnings to fixed charges and
preferred stock dividends calculation, we assumed that our
preferred stock dividend requirements were equal to the pre-tax
earnings that would be required to cover those dividend
requirements. We computed those pre-tax earnings using actual
tax rates for each year.
S-60
Overview of
financial condition,
liquidity and capital resources
of the combined company
As more fully discussed in Managements discussion
and analysis of financial condition and results of operations of
Freeport-McMoRan, our financial policy has been to reduce
debt and return cash to shareholders through dividends and share
purchases. Our proposed acquisition of Phelps Dodge will require
that we incur significant debt. As of December 31, 2006, on
a pro forma basis after giving effect to the transactions, the
combined company had approximately $17.6 billion in total
debt, including $10.0 billion of debt under its new senior
credit facilities, and $6.0 billion in aggregate principal
amount of the new senior notes offered hereby. In addition,
approximately $1.6 billion of existing debt of
Freeport-McMoRan and Phelps Dodge will remain outstanding
following the transactions. The combined company will also have
a new $1.5 billion senior secured revolving credit
facility. Our availability under our revolving credit facility
is anticipated to be approximately $1,400.0 million at
closing after giving effect to outstanding letters of credit.
Following the closing, we may be required to issue additional
letters of credit in connection with financial assurances with
respect to our reclamation obligations. See Risk
factors Risks related to Phelps Dodges
business Mine closure regulations may impose
substantial costs. The combined companys cash and
cash equivalents, on a pro forma basis, after giving effect to
the transactions, totaled approximately $3.4 billion at
December 31, 2006. The combined company expects to have
capital expenditures of approximately $1.9 billion in 2007.
This debt could limit the combined companys financial and
operating flexibility, including by requiring the combined
company to dedicate a substantial portion of its cash flows from
operations and the proceeds of any equity issuances to the
repayment of its debt and the interest on its debt, making it
more difficult for the combined company to obtain additional
financing on favorable terms, limiting the combined
companys ability to capitalize on significant business
opportunities and making the combined company more vulnerable to
economic downturns. Additionally, the combined companys
ability to satisfy financial tests or utilize third-party
guarantees for financial assurance with respect to reclamation
obligations may be adversely impacted. See Risk
factors Risks related to the notes Our substantial
indebtedness could adversely affect our financial condition and
prevent us from fulfilling our obligations under our outstanding
indebtedness and the notes.
Following the transactions, the combined company will be
required to comply with various covenants contained in the
agreements governing its indebtedness. These covenants will
limit our discretion in the operation of our business. See
Risk factors Risks related to the notes
for further discussion of these factors.
Upon completion of the transactions, our business strategy will
be focused on continuing to maximize free cash flow and
strengthen our financial profile through continued pursuit of
active programs to maximize production volumes, aggressively
manage costs and use available cash flow to reduce debt. At the
same time, we will continue to focus on maximizing the long-term
value of our mineral deposits through development programs to
grow our production and ore reserves. In addition, we will
consider opportunities to reduce debt of the combined company
shortly following the closing of the transaction through
issuances of equity and equity-linked securities and possibly
through asset sales.
S-61
Combined company debt maturities. Below is a
summary of long-term debt maturities, on a pro forma basis after
giving effect to the consummation of the transactions, for the
combined company based on loan balances as of December 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
|
Existing debt of
Freeport-McMoRan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment loans and other
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
10.2
|
|
$
|
3.8
|
|
$
|
|
|
$
|
|
Atlantic Copper debt
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101/8%
senior notes due 2010
|
|
|
|
|
|
|
|
|
|
|
|
272.4
|
|
|
|
|
|
|
|
|
|
7% convertible senior notes due 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.1
|
|
|
|
|
|
|
67/8%
senior notes due 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340.3
|
7.20% senior notes due 2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Freeport-McMoRan
|
|
$
|
19.1
|
|
$
|
13.5
|
|
$
|
13.5
|
|
$
|
282.6
|
|
$
|
10.9
|
|
$
|
|
|
$
|
340.5
|
Existing debt of Phelps
Dodge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.375% notes due 2007
|
|
$
|
60.6
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
8.75% notes due 2011
|
|
|
0.1
|
|
|
0.3
|
|
|
0.2
|
|
|
0.2
|
|
|
108.0
|
|
|
|
|
|
|
9.50% notes due 2031
|
|
|
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
196.5
|
6.125% notes due 2034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149.8
|
7.125% debentures due 2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115.0
|
Cerro Verde project financing and
subsidiary debt financing
|
|
|
25.4
|
|
|
25.3
|
|
|
25.2
|
|
|
25.2
|
|
|
25.2
|
|
|
25.3
|
|
|
50.6
|
Various pollution control and
industrial development revenue bonds due through 2009
|
|
|
2.0
|
|
|
|
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Phelps Dodge
|
|
$
|
121.8
|
|
$
|
25.7
|
|
$
|
48.5
|
|
$
|
25.5
|
|
$
|
133.2
|
|
$
|
25.3
|
|
$
|
511.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Tranche A term loan facility
|
|
|
125.0
|
|
|
250.0
|
|
|
250.0
|
|
|
250.0
|
|
|
250.0
|
|
|
1,375.0
|
|
|
|
Tranche B term loan facility
|
|
|
56.3
|
|
|
75.0
|
|
|
75.0
|
|
|
75.0
|
|
|
75.0
|
|
|
75.0
|
|
|
7,068.7
|
Senior notes offered hereby
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new debt
|
|
$
|
181.3
|
|
$
|
325.0
|
|
$
|
325.0
|
|
$
|
325.0
|
|
$
|
325.0
|
|
$
|
1,450.0
|
|
$
|
13,068.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
322.2
|
|
$
|
364.2
|
|
$
|
387.0
|
|
$
|
633.1
|
|
$
|
469.1
|
|
$
|
1,475.3
|
|
$
|
13,921.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-62
Combined company other contractual
obligations. In addition to the debt maturities
shown above, the combined company will have other contractual
obligations and commitments, which it expects to fund with
projected operating cash flows, available credit facilities or
future financing transactions, if necessary. These obligations
and commitments for each company are more fully described in
Managements discussion and analysis of financial
condition and results of operations of Freeport-McMoRan
and Managements discussion and analysis of financial
condition and results of operations of Phelps Dodge
included elsewhere in this prospectus supplement which are
subject to the disclosures included therein and should be
referred to for additional information. The following table
summarizes these obligations and commitments as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
Years
|
|
Years
|
|
More than 5
|
(Dollars
in millions, except concentrates)
|
|
Total
|
|
or
Less
|
|
2-3
|
|
4-5
|
|
Years
|
|
|
Freeport-McMoRan
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PT Freeport Indonesia mine closure
and reclamation fund
|
|
$
|
20.1
|
|
$
|
0.8
|
|
$
|
1.4
|
|
$
|
1.4
|
|
$
|
16.5
|
Atlantic Copper contractual
obligation to insurance company
|
|
$
|
94.9
|
|
$
|
9.5
|
|
$
|
19.0
|
|
$
|
19.0
|
|
$
|
47.4
|
Atlantic Copper contracts to
purchase concentrates at market prices (in thousand metric tons)
|
|
|
1,425
|
|
|
505
|
|
|
700
|
|
|
220
|
|
|
|
Aggregate operating leases,
including Rio Tintos share
|
|
$
|
29.9
|
|
$
|
8.9
|
|
$
|
14.3
|
|
$
|
6.4
|
|
$
|
0.3
|
Open purchase orders at December
31, 2006
|
|
$
|
216.5
|
|
$
|
216.5
|
|
|
|
|
|
|
|
|
|
Phelps Dodge obligations &
commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled interest payment
obligations
|
|
$
|
979.5
|
|
$
|
61.2
|
|
$
|
112.9
|
|
$
|
99.9
|
|
$
|
705.5
|
Asset retirement obligations
|
|
$
|
106.0
|
|
$
|
58.2
|
|
$
|
45.2
|
|
$
|
2.3
|
|
$
|
0.3
|
Take-or-pay contracts
|
|
$
|
1,502.3
|
|
$
|
1,295.5
|
|
$
|
126.2
|
|
$
|
49.4
|
|
$
|
31.2
|
Operating lease obligations
|
|
$
|
73.6
|
|
$
|
16.6
|
|
$
|
28.8
|
|
$
|
21.4
|
|
$
|
6.8
|
Mineral royalty obligations
|
|
$
|
18.1
|
|
$
|
1.9
|
|
$
|
3.8
|
|
$
|
3.0
|
|
$
|
9.4
|
Standby letters of credit
|
|
$
|
186.3
|
|
$
|
56.0
|
|
$
|
9.0
|
|
$
|
3.0
|
|
$
|
118.3
|
Corporate guarantees
|
|
$
|
412.4
|
|
$
|
0.8
|
|
$
|
0.4
|
|
|
|
|
$
|
411.2
|
Sales performance guarantees
|
|
$
|
74.5
|
|
$
|
49.5
|
|
$
|
24.5
|
|
$
|
0.2
|
|
$
|
0.3
|
Surety bonds
|
|
$
|
97.4
|
|
$
|
2.1
|
|
$
|
2.0
|
|
|
|
|
$
|
93.3
|
Asset pledges
|
|
$
|
74.2
|
|
$
|
0.1
|
|
|
|
|
|
|
|
$
|
74.2
|
|
S-63
Managements
discussion and analysis of
financial condition and results of
operations of Freeport-McMoRan
The information contained in the following section does not
reflect Freeport-McMoRans acquisition of Phelps Dodge and
is substantially reproduced from Freeport-McMoRans Annual
Report on
Form 10-K
for the year ended December 31, 2006, which is incorporated
by reference in this prospectus supplement. This
Managements discussion and analysis of financial
condition and results of operations of Freeport-McMoRan
should be read in conjunction with the financial statements and
related notes of Freeport-McMoRan, which are included elsewhere
or incorporated by reference in this prospectus supplement. For
further information about the combined company, see
Prospectus supplement summary Our
business.
Overview
Through its majority-owned subsidiary, PT Freeport Indonesia,
Freeport-McMoRan has one of the worlds largest copper and
gold mining and production operations in terms of reserves and
production. Freeport-McMoRans principal asset is the
Grasberg minerals district, which based on available year-end
2005 reserve data provided by third-party industry consultants,
contains the largest single copper reserve and the largest
single gold reserve of any mine in the world.
PT Freeport Indonesia, Freeport-McMoRans principal
operating subsidiary, operates under an agreement, called a
Contract of Work, with the Government of Indonesia. The Contract
of Work allows PT Freeport Indonesia to conduct exploration,
mining and production activities in a
24,700-acre
area called Block A located in Papua, Indonesia. Under the
Contract of Work, PT Freeport Indonesia also conducts
exploration activities (which had been suspended, but expects to
resume in 2007) in an approximate
500,000-acre
area called Block B in Papua. All of Freeport-McMoRans
proven and probable mineral reserves and current mining
operations are located in Block A.
Freeport-McMoRan owns 90.64 percent of PT Freeport
Indonesia, including 9.36 percent owned through its wholly
owned subsidiary, PT Indocopper Investama. The Government of
Indonesia owns the remaining 9.36 percent of PT Freeport
Indonesia. In July 2004, Freeport-McMoRan received a request
from the Indonesian Department of Energy and Mineral Resources
that it offer to sell shares in PT Indocopper Investama to
Indonesian nationals at fair market value. In response to this
request and in view of the potential benefits of having
additional Indonesian ownership in its operations,
Freeport-McMoRan has agreed to consider a potential sale of an
interest in PT Indocopper Investama at fair market value.
Neither its Contract of Work nor Indonesian law requires
Freeport-McMoRan to divest any portion of its ownership interest
in PT Freeport Indonesia or PT Indocopper Investama.
Freeport-McMoRan also conducts mineral exploration activities
(which had been suspended in recent years) in Papua, Indonesia
through one of its wholly owned subsidiaries, PT Irja Eastern
Minerals (Eastern Minerals). Eastern Minerals holds an
additional Contract of Work originally covering a
2.5-million-acre
area. Under the terms of Eastern Minerals Contract of
Work, we have already relinquished 1.3 million acres and
must relinquish an additional 0.6 million acres at the end
of a three-year exploration period, which can be extended by the
Government of Indonesia for as many as two additional years. In
December 2006, Eastern Minerals received approval from the
Government of Indonesia to resume exploration activities in 2007.
S-64
In addition to the PT Freeport Indonesia and Eastern Minerals
exploration acreage, Freeport-McMoRan has the right to conduct
other mineral exploration activities in Papua pursuant to a
joint venture through PT Nabire Bakti Mining. Field exploration
activities outside of its current mining operations in Block A
had been suspended in recent years because of safety and
security issues and regulatory uncertainty relating to a
possible conflict between its mining and exploration rights in
certain forest areas and an Indonesian Forestry law enacted in
1999 prohibiting open-pit mining in forest preservation areas.
Recent Indonesian legislation permits open-pit mining in PT
Freeport Indonesias Block B area, subject to certain
requirements. Following an assessment of these requirements and
a review of security issues, Freeport-McMoRan plans to resume
exploration activities in certain prospective areas outside of
Block A in 2007.
Freeport-McMoRan also operates through a majority-owned
subsidiary, PT Puncakjaya Power (Puncakjaya Power), and through
Atlantic Copper, S.A. (Atlantic Copper), a wholly owned
subsidiary. Freeport-McMoRan acquired an 85.7 percent
ownership in Puncakjaya Power in 2003. Puncakjaya Powers
sole business is to supply power to PT Freeport Indonesias
operations. Atlantic Coppers operations are in Spain and
involve the smelting and refining of copper concentrates and the
marketing of refined copper and precious metals in slimes. PT
Freeport Indonesia owns a 25 percent interest in PT
Smelting, an Indonesian company which operates a copper smelter
and refinery in Gresik, Indonesia.
Joint ventures
with Rio Tinto plc (Rio Tinto)
In 1996, Freeport-McMoRan established joint ventures with Rio
Tinto, an international mining company with headquarters in
London, England. One joint venture covers PT Freeport
Indonesias mining operations in Block A and gives Rio
Tinto, through 2021, a 40 percent interest in certain
assets and future production exceeding specified annual amounts
of copper, gold and silver in Block A and, after 2021, a
40 percent interest in all production from Block A.
Operating, nonexpansion capital and administrative costs are
shared proportionately between PT Freeport Indonesia and Rio
Tinto based on the ratio of (a) the incremental revenues
from production from expansion completed in 1998 to
(b) total revenues from production from Block A, including
production from PT Freeport Indonesias previously existing
reserves. PT Freeport Indonesia receives 100 percent of the
cash flow from specified annual amounts of copper, gold and
silver through 2021, calculated by reference to its proven and
probable reserves as of December 31, 1994, and
60 percent of all remaining cash flow.
The joint venture agreement provides for adjustments to the
specified annual metal sharing amounts upon the occurrence of
certain events that cause an extended interruption in production
to occur, including events such as the fourth-quarter 2003
Grasberg open-pit slippage and debris flow. As a result of the
Grasberg slippage and debris flow events, the 2004 specified
amounts attributable 100 percent to PT Freeport Indonesia
were reduced by 172 million recoverable pounds for copper
and 272,000 recoverable ounces for gold. Pursuant to agreements
in 2005 and early 2006 with Rio Tinto, these reductions were
offset by increases in the specified amounts attributable
100 percent to PT Freeport Indonesia totaling
62 million recoverable pounds for copper and 170,000
recoverable ounces for gold in 2005, and 110 million
recoverable pounds for copper and 102,000 recoverable ounces for
gold in 2021.
Under the joint venture arrangements, Rio Tinto has a
40 percent interest in PT Freeport Indonesias
Contract of Work and in Eastern Minerals Contract of Work.
Rio Tinto also has the option to participate in 40 percent
of any of Freeport-McMoRans other future exploration
S-65
projects in Papua. Rio Tinto has elected to participate in
40 percent of Freeport-McMoRans interest and cost in
the PT Nabire Bakti Mining exploration joint venture covering
approximately 0.5 million acres contiguous to Block B and
one of Eastern Minerals blocks.
Outlook
Annual sales totaled 1.2 billion pounds of copper and
1.7 million ounces of gold in 2006, compared with
1.5 billion pounds of copper and 2.8 million ounces of
gold in 2005. At the Grasberg open-pit mine, the sequencing in
mining areas with varying ore grades causes fluctuations in the
timing of ore production, resulting in varying quarterly and
annual sales of copper and gold. The 2006 sales volumes were
impacted by lower ore grades compared to the higher-grade
material mined in 2005.
During the fourth quarter of 2006, PT Freeport Indonesia
completed an analysis of its longer-range mine plans to assess
the optimal design of the Grasberg open pit and the timing of
development of the Grasberg underground block cave ore body. The
analysis incorporated the latest geological and geotechnical
studies, costs and other economic factors in developing the
optimal timing for transitioning from the open pit to
underground. The revised long-range plan includes changes to the
expected final Grasberg open-pit design, which will result in a
section of high-grade ore previously expected to be mined in the
open pit to be mined in the Grasberg underground block cave
mine. Approximately 100 million metric tons of high-grade
ore in the southwest corner (located in the 8 South
pushback) of the open pit, with aggregate recoverable metal
approximating 4 billion pounds of copper and 5 million
ounces of gold, is expected to be mined through PT Freeport
Indonesias large scale block caving operations rather than
from open-pit mining. The revised mine plan reflects a
transition from the Grasberg open pit to the Grasberg
underground block cave ore body currently estimated to occur in
mid-2015.
The mine plan revisions alter the timing of metal production in
the period of 2015 and beyond but do not have a significant
effect on ultimate recoverable reserves. The success of PT
Freeport Indonesias underground operations and the
significant progress to establish underground infrastructure
provides confidence in developing the high-grade, large-scale
underground ore bodies in the Grasberg minerals district. PT
Freeport Indonesia will continue to assess opportunities to
optimize the long-range mine plans and net present values of the
Grasberg minerals district.
Based on its current mine plan, PT Freeport Indonesia estimates
its share of sales for 2007 will approximate 1.1 billion
pounds of copper and 1.8 million ounces of gold. Average
annual sales volumes over the five-year period from 2007 through
2011 are expected to approximate 1.24 billion pounds of
copper and 1.8 million ounces of gold. The achievement of
PT Freeport Indonesias sales estimates will be dependent,
among other factors, on the achievement of targeted mining
rates, the successful operation of PT Freeport Indonesia
production facilities, the impact of weather conditions at the
end of fiscal periods on concentrate loading activities and
other factors.
Sales volumes may vary from these estimates depending on the
areas being mined within the Grasberg open pit. Quarterly sales
volumes are expected to vary significantly. Based on current
estimates of average annual sales volumes over the next five
years and copper prices of approximately $2.50 per pound
and gold prices of approximately $600 per ounce, the impact
on our annual cash flow for each $0.10 per pound change in
copper prices would approximate
S-66
$62 million, including the effects of price changes on
related royalty costs, and for each $25 per ounce change in
gold prices would approximate $23 million.
Copper and gold
markets
As shown in the graphs below, world metal prices for copper have
fluctuated during the period from 1992 through January 2007 with
the London Metal Exchange (LME) spot copper price varying from a
low of approximately $0.60 per pound in 2001 to a record
high of approximately $4.00 per pound on May 12, 2006.
World gold prices have fluctuated during the period from 1998
through January 2007 from a low of approximately $250 per
ounce in 1999 to a high of approximately $725 per ounce on
May 12, 2006. Current copper and gold prices reflect
significantly higher levels of direct investment by commodity
investors. This can be expected to result in higher levels of
volatility in copper and gold prices and in the share prices of
Freeport-McMoRan
and other commodity producers. Copper and gold prices are
affected by numerous factors beyond our control. See Risk
factors Risks related to the combined
company Declines in the market prices of
copper, gold and molybdenum could adversely affect the combined
companys earnings and cash flows, and therefore its
ability to repay its debt.
Historical LME
spot copper price
through January 31, 2007
|
|
|
*
|
|
Excludes Shanghai stocks, producer,
consumer and merchant stocks.
|
The graph above presents LME spot copper prices and reported
stocks of copper at the LME and New York Commodity Exchange
(COMEX) through January 31, 2007. Since 2003 and through
2005, global demand exceeded supply, evidenced by the decline in
exchange warehouse inventories. LME and COMEX inventories have
risen from the 2005 lows in recent months and combined stocks of
approximately 214,000 metric tons at December 29, 2006,
represent less than one week of global consumption. Prices
ranged from $2.06 per pound to a record high of
approximately $4.00 per pound in 2006. Disruptions
associated with strikes, unrest and other operational issues
resulted in low levels of inventory throughout 2006. However, in
December 2006 and early 2007, prices declined on concerns about
reduced demand, especially in the United States, and rising
inventories. The LME spot price closed at $2.56 per pound
on January 31, 2007. Future copper prices are expected to
continue to be influenced by demand
S-67
from China, economic performance in the U.S. and other
industrialized countries, the timing of the development of new
supplies of copper, production levels of mines and copper
smelters and the level of direct participation by investors.
Freeport-McMoRan considers the current underlying supply and
demand conditions in the global copper markets to be positive.
London gold
prices
Through January 31, 2007
After reaching new
25-year
highs above $700 per ounce in the second quarter of 2006,
prices declined in the second half of 2006. Gold prices averaged
$604 per ounce in 2006, with prices ranging from
$521 per ounce to approximately $725 per ounce. Gold prices
continued to be supported by increased investment demand for
gold, ongoing geopolitical tensions, a weak U.S. dollar,
inflationary pressures, falling production from older mines,
limited development of new mines and actions by gold producers
to reduce hedge positions. The London gold price closed at
approximately $651 per ounce on January 31, 2007.
Critical
accounting estimates
Managements discussion and analysis of
Freeport-McMoRans financial condition and results of
operations are based on its consolidated financial statements,
which have been prepared in conformity with accounting
principles generally accepted in the United States. The
preparation of these statements requires that Freeport-McMoRan
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. Freeport-McMoRan
bases these estimates on historical experience and on
assumptions that it considers reasonable under the
circumstances; however, reported results could differ from those
based on the current estimates under different assumptions or
conditions. Management has reviewed the following discussion of
its development and selection of critical accounting estimates
with the Audit Committee of the Board of Directors.
Mineral reserves and depreciation and
amortization. Freeport-McMoRan depreciates its
life-of-mine
mining and milling assets using the
unit-of-production
method based on estimates
S-68
of proven and probable recoverable copper reserves.
Freeport-McMoRan has other assets that it depreciates on a
straight-line basis over their estimated useful lives.
Freeport-McMoRans estimates of proven and probable
recoverable copper reserves and of the useful lives of its
straight-line assets impact Freeport-McMoRans depreciation
and amortization expense. These estimates affect the operating
results of both its mining and exploration and
smelting and refining segments.
The accounting estimates related to depreciation and
amortization are critical accounting estimates because
(1) the determination of copper reserves involves
uncertainties with respect to the ultimate geology of reserves
and the assumptions used in determining the economic feasibility
of mining those reserves, including estimated copper and gold
prices and costs of conducting future mining activities, and
(2) changes in estimated proven and probable recoverable
copper reserves and useful asset lives can have a material
impact on net income. Freeport-McMoRan performs annual
assessments of its existing assets, including a review of asset
costs and depreciable lives, in connection with the review of
mine operating and development plans. When Freeport-McMoRan
determines that assigned asset lives do not reflect the expected
remaining period of benefit, it makes prospective changes to
those depreciable lives.
There are a number of uncertainties inherent in estimating
quantities of reserves, including many factors beyond
Freeport-McMoRans control. Ore reserves estimates are
based upon engineering evaluations of samplings of drill holes,
tunnels and other underground workings. Freeport-McMoRans
estimates of proven and probable recoverable reserves are
prepared by its employees and reviewed and verified by
independent experts in mining, geology and reserve
determination. As of December 31, 2006, aggregate proven
and probable recoverable copper reserves totaled
54.8 billion pounds and PT Freeport Indonesias
estimated share totaled 38.8 billion pounds. These
estimates involve assumptions regarding future copper and gold
prices, the geology of Freeport-McMoRans mines, the mining
methods Freeport-McMoRan uses, and the related costs it incurs
to develop and mine its reserves. Changes in these assumptions
could result in material adjustments to Freeport-McMoRan reserve
estimates, which could result in changes to depreciation and
amortization expense in future periods, with corresponding
adjustments to net income. If aggregate estimated copper
reserves were 10 percent higher or lower at
December 31, 2006, and based on current sales projections
for 2007, Freeport-McMoRan estimates that its annual
depreciation expense for 2007 would change by approximately
$12 million, changing net income by approximately
$6 million.
Freeport-McMoRan reviews and evaluates its long-lived assets for
impairment when events or changes in circumstances indicate that
the related carrying amounts may not be recoverable. Changes to
estimates of proven and probable recoverable copper and gold
reserves could have an impact on Freeport-McMoRans
assessment of asset impairment. However, Freeport-McMoRan
believes it is unlikely that revisions to estimates of proven
and probable recoverable copper and gold reserves would give
rise to an impairment of its assets because of the significant
size of reserves in relation to asset carrying values.
Reclamation and closure
costs. Freeport-McMoRans mining operations
involve activities that have a significant effect on the
surrounding area. Freeport-McMoRans reclamation and
closure costs primarily involve reclamation and revegetation of
a large area in the lowlands of Papua where mill tailings are
deposited, reclamation of overburden stockpiles and
decommissioning of operating assets.
Effective January 1, 2003, Freeport-McMoRan adopted
Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations.
SFAS No. 143 requires that
S-69
Freeport-McMoRan record the fair value of its estimated asset
retirement obligations in the period incurred. Freeport-McMoRan
measures fair value as the present value of multiple cash flow
scenarios that reflect a range of possible outcomes after
considering inflation and then applying a market risk premium.
The accounting estimates related to reclamation and closure
costs are critical accounting estimates because
(1) Freeport-McMoRan will not incur most of these costs for
a number of years, requiring it to make estimates over a long
period; (2) reclamation and closure laws and regulations
could change in the future or circumstances affecting its
operations could change, either of which could result in
significant changes to current plans; (3) calculating the
fair value of asset retirement obligations in accordance with
SFAS No. 143 requires management to assign
probabilities to projected cash flows, to make long-term
assumptions about inflation rates, to determine our
credit-adjusted, risk-free interest rates and to determine
market risk premiums that are appropriate for its operations;
and (4) given the magnitude of estimated reclamation and
closure costs, changes in any or all of these estimates could
have a material impact on net income.
In 2002, Freeport-McMoRan engaged an independent environmental
consulting and auditing firm to assist in estimating PT Freeport
Indonesias aggregate asset retirement obligations, and
worked with other consultants in estimating Atlantic
Coppers asset retirement obligations. Freeport-McMoRan
estimated these obligations using an expected cash flow
approach, in which multiple cash flow scenarios were used to
reflect a range of possible outcomes. To calculate the fair
value of these obligations, Freeport-McMoRan applied an
estimated long-term inflation rate of 2.5 percent, except
for Indonesian rupiah-denominated labor costs with respect to PT
Freeport Indonesias obligations, for which an estimated
inflation rate of 9.0 percent was applied. The projected
cash flows were discounted at Freeport-McMoRans estimated
credit-adjusted, risk-free interest rates, which ranged from
9.4 percent to 12.6 percent for the corresponding time
periods over which these costs would be incurred. The inflation
rates and discount rates Freeport-McMoRan used to calculate the
fair value of PT Freeport Indonesias asset retirement
obligation are critical factors in the calculation of future
value and discounted present value costs. An increase of one
percent in the inflation rates used results in an approximate
17 percent increase in the discounted present value costs.
A decrease of one percent in the discount rates used has a
similar effect resulting in an approximate 16 percent
increase in the discounted present value costs. After
discounting the projected cash flows, a market risk premium of
10 percent was applied to the total to reflect what a third
party might require to assume these asset retirement
obligations. The market risk premium was based on market-based
estimates of rates that a third party would have to pay to
insure its exposure to possible future increases in the value of
these obligations.
At least annually, PT Freeport Indonesia reviews its estimates
for (1) changes in the projected timing of certain
reclamation costs, (2) changes in cost estimates, and
(3) additional asset retirement obligations incurred during
the period. Freeport-McMoRan estimated PT Freeport
Indonesias aggregate asset retirement obligations to be
approximately $157 million at
S-70
December 31, 2006, and $156 million at
December 31, 2005. An analysis of PT Freeport
Indonesias asset retirement obligation calculated under
SFAS No. 143 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
Asset retirement obligation at
beginning of year
|
|
$
|
26.5
|
|
$
|
22.0
|
|
$
|
25.7
|
|
Accretion expense
|
|
|
3.1
|
|
|
2.7
|
|
|
2.8
|
|
Revisions for changes in estimates
|
|
|
|
|
|
|
|
|
(6.5
|
)
|
Liabilities incurred
|
|
|
0.4
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation at end
of year
|
|
$
|
30.0
|
|
$
|
26.5
|
|
$
|
22.0
|
|
|
|
Consolidated
results of operations
Consolidated revenues include PT Freeport Indonesias sale
of copper concentrates, which also contain significant
quantities of gold and silver, and the sale by Atlantic Copper
of copper anodes, copper cathodes and gold in anodes and slimes.
Consolidated revenues and net income vary significantly with
fluctuations in the market prices of copper and gold, sales
volumes and other factors. Consolidated revenues of
$5.8 billion for 2006 were higher than consolidated
revenues of $4.2 billion for 2005, reflecting substantially
higher copper and gold prices in 2006, partly offset by lower PT
Freeport Indonesia sales volumes. PT Freeport Indonesia mined
lower grade ore and reported lower production and sales in 2006,
compared with 2005. Consolidated revenues in 2005 were
significantly higher compared with 2004 revenues of
$2.4 billion, reflecting substantially higher copper and
gold sales volumes and prices in 2005. The 2004 results were
adversely affected by lower ore grades and reduced mill
throughput as PT Freeport Indonesia completed efforts to restore
safe access to the higher-grade ore areas in its Grasberg
open-pit mine following the fourth-quarter 2003 slippage and
debris flow events (see Mining and exploration
operationsPT Freeport Indonesia operating results).
In addition, Atlantic Coppers scheduled major maintenance
turnaround adversely affected its 2004 revenues (see
Smelting and refining operationsAtlantic
Copper operating results).
Consolidated production and delivery costs were higher in 2006
at $2.5 billion compared with $1.6 billion for 2005
and $1.5 billion for 2004. The increases in 2006 and 2005
were primarily because of higher costs of concentrate purchases
at Atlantic Copper caused by rising metals prices and partly
because of higher production costs at PT Freeport Indonesia
primarily resulting from higher energy and other input costs.
The adoption of Emerging Issues Task Force Issue
No. 04-6,
Accounting for Stripping Costs Incurred during Production
in the Mining Industry (EITF
04-6) also
impacted 2006 costs. See New accounting
standards. Consolidated depreciation and amortization
expense was $227.6 million in 2006, $251.5 million in
2005 and $206.4 million in 2004. Depreciation and
amortization expense decreased in 2006 compared with 2005,
primarily because of lower copper sales volumes at PT Freeport
Indonesia during 2006. Depreciation and amortization expense was
higher in 2005 than in 2004, primarily because of higher copper
sales volumes at PT Freeport Indonesia during 2005. Certain of
PT Freeport Indonesias assets are depreciated using the
unit-of-production
method and depreciation and amortization expense varies with the
level of copper sales volumes.
Exploration expenses increased to $12.3 million in 2006
compared with $8.8 million in 2005 and $8.7 million in
2004. Freeport-McMoRans exploration program for 2006
focused on testing extensions of the Deep Grasberg and Kucing
Liar mine complex and other targets in Block A (see
Mining and exploration operationsexploration
and reserves). All approved exploration costs in the joint
venture areas with Rio Tinto are shared 60 percent by
Freeport-McMoRan
S-71
and 40 percent by Rio Tinto. The FCX/Rio Tinto joint
ventures 2007 exploration budgets total approximately
$31 million (approximately $25 million for
Freeport-McMoRans share).
Consolidated general and administrative expenses increased to
$157.1 million in 2006 from $103.9 million in 2005,
primarily reflecting higher incentive compensation costs
associated with stronger financial performance and pursuant to
established plans and legal fees. Incentive compensation costs
were higher primarily because of programs based on financial
results and stock-based compensation following adoption of
SFAS No. 123 (revised 2004), Share-Based
Payment or SFAS No. 123R on
January 1, 2006 (see New accounting
standards.) Freeport-McMoRans parent company charges
PT Freeport Indonesia for the
in-the-money
value of exercised employee stock options. These charges are
eliminated in consolidation; however, PT Freeport Indonesia
shares a portion of these charges with Rio Tinto and Rio
Tintos reimbursements reduce its consolidated general and
administrative expenses. General and administrative expenses are
net of Rio Tintos share of the cost of employee stock
option exercises, which decreased general and administrative
expenses by $6.5 million in 2006 and $9.2 million in
2005. In accordance with the joint venture agreement, Rio
Tintos percentage share of PT Freeport Indonesias
general and administrative expenses varies with metal sales
volumes and prices and totaled 7 percent in 2006 compared
with approximately 16 percent in 2005. Estimated general
and administrative expenses for 2007 are expected to be slightly
lower than the 2006 level.
General and administrative expenses increased to
$103.9 million in 2005 from $89.9 million in 2004,
primarily reflecting higher incentive compensation costs
associated with stronger financial performance and pursuant to
established plans under which certain compensation plans are
based on annual operating cash flow results, which were
significantly higher in 2005 compared with 2004. General and
administrative expenses in 2005 also include $3.4 million
in administrative costs incurred following Hurricane Katrina and
for contributions to hurricane-relief efforts. As a percentage
of revenues, general and administrative expenses were
2.7 percent in 2006, 2.5 percent in 2005 and
3.8 percent in 2004.
PT Freeport Indonesia maintains property damage and business
interruption insurance related to its operations. In December
2004, PT Freeport Indonesia entered into an insurance settlement
agreement and settled all claims that arose from the
fourth-quarter 2003 slippage and debris flow events in the
Grasberg open-pit mine. PT Freeport Indonesias insurers
agreed to pay an aggregate of $125.0 million in connection
with its claims. After considering the joint venture
partners interest in the proceeds, PT Freeport
Indonesias share of proceeds totaled $95.0 million.
As a result of the settlement, Freeport-McMoRan recorded in its
consolidated statements of income an $87.0 million gain on
insurance settlement for the business interruption recovery and
an $8.0 million gain to production costs for the property
loss recovery for a net gain of $48.8 million
($0.26 per share), after taxes and minority interest
sharing, in 2004.
Total consolidated interest cost (before capitalization) was
$86.4 million in 2006, $135.8 million in 2005 and
$151.0 million in 2004. Interest costs decreased from 2004
through 2006 primarily because Freeport-McMoRan reduced average
debt levels during the three-year period with significant
reductions in 2005 and 2006. Over the past three years,
Freeport-McMoRan completed a number of transactions that
resulted in total debt reductions, including redemptions of
mandatorily redeemable preferred stock, of $1.5 billion.
Capitalized interest totaled $10.8 million in 2006,
$4.1 million in 2005 and $2.9 million in 2004. The
higher capitalized interest level in 2006 reflects ongoing
development projects at the Deep Ore Zone (DOZ) underground mine
and the Common Infrastructure project (see Mining
and exploration operations).
S-72
Net losses on early extinguishment and conversion of debt
totaled $32.0 million ($30.3 million to net income or
$0.14 per share) in 2006, $52.2 million
($40.2 million to net income or $0.18 per share in
2005) and $14.0 million ($7.4 million to net
income or $0.04 per share) in 2004. See Capital
resources and liquidityFinancing activities for
further discussion.
Atlantic Copper recorded gains on sales of assets totaling
$29.7 million ($29.7 million to net income or
$0.13 per share) in 2006 for the disposition of land and
certain royalty rights. Other gains on sales of assets in 2006
totaled $0.9 million. Gains on sales of assets totaled
$6.6 million ($4.9 million to net income or
$0.02 per share) in 2005 from the sale of land in Arizona
held by a joint venture in which Freeport-McMoRan owns a
50 percent interest. The joint venture previously was
engaged in a copper mining research project. Gains on sales of
assets totaled $28.8 million in 2004 as a result of two
transactions. The first transaction was the sale to a real
estate developer of a parcel of land in Arizona owned by the
joint venture mentioned above resulting in a gain of
$21.3 million ($20.4 million to net income or
$0.11 per share). In the second transaction, Atlantic
Copper completed a sale of its wire rod and wire assets for
$18.3 million cash and recorded a gain of $7.5 million
($7.5 million to net income or $0.04 per share).
Other income includes interest income of $30.6 million in
2006, $16.8 million in 2005 and $5.9 million in 2004.
Interest income has risen because of higher cash balances and
higher interest rates. Other income also includes the impact of
translating into U.S. dollars Atlantic Coppers net
euro-denominated liabilities, primarily its retiree pension
obligations. Changes in the U.S. dollar/euro exchange rate
require Freeport-McMoRan to adjust the dollar value of its net
euro-denominated liabilities and record the adjustment in
earnings. Exchange rate effects on net income from
euro-denominated liabilities were gains (losses) of
$(2.3) million in 2006, $5.8 million in 2005 and
$(1.6) million in 2004. The gains reflect a stronger
U.S. dollar in relation to the euro and the losses reflect
a stronger euro in relation to the U.S. dollar in the
respective periods (see Disclosures about market
risks).
PT Freeport Indonesias Contract of Work provides for a
35 percent corporate income tax rate. PT Indocopper
Investama pays a 30 percent corporate income tax on
dividends it receives from its 9.36 percent ownership in PT
Freeport Indonesia. In addition, the tax treaty between
Indonesia and the U.S. provides for a withholding tax rate
of 10 percent on dividends and interest that PT Freeport
Indonesia and PT Indocopper Investama pay to their parent
company. Prior to 2005, Freeport-McMoRan also incurred a
U.S. alternative minimum tax at an effective rate of two
percent based primarily on consolidated income, net of smelting
and refining results. As a result of the enactment of the
American Jobs Creation Act of 2004, the 90 percent
limitation on the use of foreign tax credits to offset the
U.S. federal alternative minimum tax liability was repealed
effective January 1, 2005. The removal of this limitation
significantly reduced U.S. federal taxes beginning in 2005.
The U.S. federal alternative minimum tax liability totaled
$8.2 million in 2004. Freeport-McMoRan currently records no
income taxes at Atlantic Copper, which is subject to taxation in
Spain, because it is not expected to generate taxable income in
the foreseeable future and has substantial tax loss
carryforwards for which Freeport-McMoRan has provided no net
financial statement benefit. Freeport-McMoRan receives no
consolidated tax benefit from these losses because they cannot
be used to offset PT Freeport Indonesias profits in
Indonesia, but can be utilized to offset Atlantic Coppers
future profits.
Parent company costs consist primarily of interest, depreciation
and amortization, and general and administrative expenses.
Freeport-McMoRan receives minimal, if any, tax benefit from
these costs, including interest expense, primarily because the
parent company normally generates no
S-73
taxable income from U.S. sources. As a result, the
provision for income taxes as a percentage of consolidated
income before income taxes and minority interests will vary as
PT Freeport Indonesias income changes, absent changes in
Atlantic Copper and parent company costs. The provision for
income taxes as a percentage of consolidated income before
income taxes and minority interests totaled 43 percent for
2006, 45 percent for 2005 and 58 percent for 2004.
Summaries of the approximate significant components of the
calculation of consolidated provision for income taxes are shown
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
(Dollars
in thousands, except percentages)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Mining and exploration segment
operating
income(a)
|
|
$
|
2,797,963
|
|
|
$
|
2,312,771
|
|
|
$
|
832,112
|
|
Mining and exploration segment
interest expense, net
|
|
|
(19,833
|
)
|
|
|
(22,386
|
)
|
|
|
(22,209
|
)
|
Intercompany operating profit
recognized (deferred)
|
|
|
32,426
|
|
|
|
(144,986
|
)
|
|
|
(24,683
|
)
|
|
|
|
|
|
|
Income before taxes
|
|
|
2,810,556
|
|
|
|
2,145,399
|
|
|
|
785,220
|
|
Indonesian corporate income tax
rate (35%) plus U.S. alternative minimum tax rate (2%) for
2004
|
|
|
35%
|
|
|
|
35%
|
|
|
|
37%
|
|
|
|
|
|
|
|
Corporate income taxes
|
|
|
983,695
|
|
|
|
750,890
|
|
|
|
290,531
|
|
Approximate PT Freeport Indonesia
net income
|
|
|
1,826,861
|
|
|
|
1,394,509
|
|
|
|
494,689
|
|
Withholding tax on
Freeport-McMoRans equity share
|
|
|
9.064%
|
|
|
|
9.064%
|
|
|
|
9.064%
|
|
|
|
|
|
|
|
Withholding taxes
|
|
|
165,587
|
|
|
|
126,398
|
|
|
|
44,839
|
|
PT Indocopper Investama corporate
income tax
|
|
|
47,797
|
|
|
|
36,544
|
|
|
|
3,005
|
|
Other, net
|
|
|
4,096
|
|
|
|
1,236
|
|
|
|
(7,695
|
)
|
|
|
|
|
|
|
Freeport-McMoRan consolidated
provision for income taxes
|
|
$
|
1,201,175
|
|
|
$
|
915,068
|
|
|
$
|
330,680
|
|
|
|
|
|
|
|
Freeport-McMoRan consolidated
effective tax rate
|
|
|
43%
|
|
|
|
45%
|
|
|
|
58%
|
|
|
|
|
|
|
(a)
|
|
Excludes charges for the
in-the-money
value of Freeport-McMoRan stock option exercises, which are
eliminated in consolidation, totaling $88.3 million in
2006, $64.5 million in 2005 and $87.3 million in 2004.
|
Freeport-McMoRan has two operating segments: mining and
exploration and smelting and refining. The
mining and exploration segment consists of Indonesian activities
including PT Freeport Indonesias copper and gold mining
operations, Puncakjaya Powers power generating operations
(after eliminations with PT Freeport Indonesia) and Indonesian
exploration activities, including those of Eastern Minerals. The
smelting and refining segment includes Atlantic Coppers
operations in Spain and PT Freeport Indonesias equity
investment in PT Smelting. Summary comparative operating income
(loss) data by segment follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
2004
|
|
|
|
|
Mining and
exploration(a)
|
|
$
|
2,709.7
|
|
$
|
2,248.3
|
|
|
$
|
744.8
|
|
Smelting and refining
|
|
|
74.5
|
|
|
34.8
|
|
|
|
(83.5
|
)
|
Intercompany eliminations and
other(a)(b)
|
|
|
84.5
|
|
|
(105.8
|
)
|
|
|
42.3
|
|
|
|
|
|
|
|
Freeport-McMoRans operating
income
|
|
$
|
2,868.7
|
|
$
|
2,177.3
|
|
|
$
|
703.6
|
|
|
|
|
|
|
(a)
|
|
Includes charges to the mining and
exploration segment for the
in-the-money
value of stock option exercises, which are eliminated in
consolidation, totaling $88.3 million in 2006,
$64.5 million in 2005 and $87.3 million in 2004.
|
|
(b)
|
|
Freeport-McMoRan defers recognizing
profits on PT Freeport Indonesias sales to Atlantic Copper
and on 25 percent of PT Freeport Indonesias sales to
PT Smelting until their sales of final products to third
parties. Changes in the amount of these deferred profits
increased (decreased) operating income by $32.4 million in
2006, $(145.0) million in 2005 and $(24.7) million in
2004. Consolidated earnings can fluctuate materially depending
on the timing and prices of these sales. At December 31,
2006, deferred profits to be recognized in future periods
operating income totaled $190.1 million,
$100.8 million to net income, after taxes and minority
interest sharing.
|
S-74
Mining and
exploration operations
A summary of changes in PT Freeport Indonesia revenues follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
PT Freeport Indonesia
revenuesprior year
|
|
$
|
3,568.0
|
|
|
$
|
1,746.6
|
|
Price realizations:
|
|
|
|
|
|
|
|
|
Copper
|
|
|
1,530.6
|
|
|
|
706.4
|
|
Gold
|
|
|
191.4
|
|
|
|
122.6
|
|
Sales volumes:
|
|
|
|
|
|
|
|
|
Copper
|
|
|
(473.0
|
)
|
|
|
636.4
|
|
Gold
|
|
|
(481.0
|
)
|
|
|
555.5
|
|
Adjustments, primarily for copper
pricing on prior year open sales
|
|
|
194.7
|
|
|
|
(1.4
|
)
|
Treatment charges, royalties and
other
|
|
|
(135.9
|
)
|
|
|
(198.1
|
)
|
|
|
|
|
|
|
PT Freeport Indonesia
revenuescurrent year
|
|
$
|
4,394.8
|
|
|
$
|
3,568.0
|
|
|
|
PT Freeport
Indonesia operating results2006 compared with
2005
Realized copper prices in 2006 improved by 69 percent to an
average of $3.13 per pound from $1.85 per pound in 2005.
Realized gold prices in 2006 averaged $566.51 per ounce,
including a reduction of $39.85 per ounce for revenue
adjustments associated with the first-quarter 2006 redemption of
the Gold-Denominated Preferred Stock, Series II, compared
to $456.27 in 2005. Copper and gold sales totaled
1.2 billion pounds of copper and 1.7 million ounces of
gold in 2006, compared with sales of 1.5 billion pounds of
copper and 2.8 million ounces of gold in 2005.
Mill throughput, which varies depending on ore types being
processed, averaged 229,400 metric tons of ore per day in 2006,
compared with 216,200 metric tons of ore per day in 2005.
Operations were temporarily suspended for an approximate
four-day
period in February 2006 when illegal miners (gold
panners) blocked a road leading to PT Freeport
Indonesias mill. While this situation was resolved
peacefully by Indonesian government authorities,
PT Freeport Indonesia continues to work with the government
to resolve the legal and security concerns presented by the
increased presence of gold panners in its area of operations.
Mill rates will vary during 2007 depending on ore types mined
and are expected to average in excess of 210,000 metric tons of
ore per day for the year. Approximate average daily throughput
processed at the mill facilities from each of PT Freeport
Indonesias producing mines follows:
|
|
|
|
|
|
|
|
Years ended
December 31,
|
(Metric
tons of ore per day)
|
|
2006
|
|
2005
|
|
|
Grasberg open pit
|
|
|
184,200
|
|
|
174,200
|
DOZ underground mine
|
|
|
45,200
|
|
|
42,000
|
|
|
|
|
|
|
Total
|
|
|
229,400
|
|
|
216,200
|
|
|
In 2006, copper ore grades averaged 0.85 percent and
recovery rates averaged 86.1 percent, compared with
1.13 percent and 89.2 percent in 2005. Gold ore grades
averaged 0.85 grams per metric ton (g/t) and recovery rates
averaged 80.9 percent in 2006, compared with 1.65 g/t and
83.1 percent in 2005. The 2006 ore grades and recoveries
for copper and gold reflect the mining of lower grade material
compared with the extraordinarily high grades mined in 2005.
Average annual copper and gold ore grades for 2007 are projected
to approximate the 2006 ore grades, with higher grades projected
in the first half of 2007 than in the second half because of
mine
S-75
sequencing. Approximately 63 percent of copper sales and
approximately 81 percent of gold sales in 2007 are
projected to occur in the first half of the year.
Production from the DOZ underground mine averaged 45,200 metric
tons of ore per day in 2006, representing 20 percent of
mill throughput. DOZ continues to perform above design capacity
of 35,000 metric tons of ore per day. PT Freeport Indonesia is
expanding the capacity of the DOZ underground operation to a
sustained rate of 50,000 metric tons of ore per day with the
installation of a second crusher and additional ventilation,
expected to be completed in mid-2007. PT Freeport
Indonesias 60 percent share of capital expenditures
for the DOZ expansion totaled approximately $17 million in
2006 (cumulative $34 million through December 31,
2006) and is expected to approximate $2 million in
2007. PT Freeport Indonesia anticipates a further expansion of
the DOZ mine to 80,000 metric tons of ore per day, with budgeted
capital of approximately $11 million in 2007 for its
60 percent share. The success of the development of the DOZ
mine, one of the worlds largest underground mines,
provides confidence in the future development of PT Freeport
Indonesias large-scale undeveloped ore bodies.
In 2004, PT Freeport Indonesia commenced its Common
Infrastructure project, which will provide access to its
large undeveloped underground ore bodies located in the Grasberg
minerals district through a tunnel system located approximately
400 meters deeper than its existing underground tunnel system.
In addition to providing access to these underground ore bodies,
the tunnel system will enable PT Freeport Indonesia to conduct
future exploration in prospective areas associated with
currently identified ore bodies. The tunnel system has reached
the Big Gossan terminal and PT Freeport Indonesia is proceeding
with development of the lower Big Gossan infrastructure. PT
Freeport Indonesias share of capital expenditures for its
Common Infrastructure project totaled approximately
$9 million in 2006 and projected 2007 capital expenditures
approximate $8 million. The Common Infrastructure project
is progressing according to plan. PT Freeport Indonesia has also
advanced development of the Grasberg spur and as of
December 31, 2006, has completed 67 percent of the
tunneling required to reach the Grasberg underground ore body.
PT Freeport Indonesia expects the Grasberg spur to reach the
Grasberg underground ore body and to initiate multi-year mine
development activities in the second half of 2007. Work on the
Grasberg underground ore body continues with PT Freeport
Indonesias share of capital expenditures totaling
approximately $23 million in 2006 and projected 2007
capital expenditures approximate $70 million.
The Big Gossan underground mine is a high-grade deposit located
near the existing milling complex. Remaining capital
expenditures for the $260 million Big Gossan project to be
incurred over the next few years total approximately
$185 million ($175 million net to PT Freeport
Indonesia, with approximately $90 million in 2007). PT
Freeport Indonesias share of capital expenditures for Big
Gossan totaled approximately $56 million in 2006.
Production is expected to ramp up to full production of 7,000
metric tons per day by 2010 (average annual aggregate
incremental production of 135 million pounds of copper and
65,000 ounces of gold, with PT Freeport Indonesia receiving
60 percent of these amounts). The Big Gossan mine is being
developed as an open-stope mine with backfill consisting of mill
tailings and cement, an established mining methodology expected
to be higher-cost than the block-cave method used at the DOZ
mine.
Treatment charges vary with the volume of metals sold and the
price of copper, and royalties vary with the volume of metals
sold and the prices of copper and gold. Market rates for
treatment and refining charges began to increase significantly
in late 2004. A large part of the increase relates to the price
participation and price sharing components of concentrate sales
S-76
agreements. Royalties totaled $126.0 million in 2006
compared with $103.7 million in 2005, reflecting higher
metal prices partly offset by lower sales volumes.
PT Freeport Indonesia receives market prices for the copper,
gold and silver contained in its concentrate. Under the
long-established structure of concentrate sales agreements
prevalent in the industry, copper is provisionally priced at the
time of shipment and is subject to final pricing in a specified
future period (generally one to three months from shipment)
based on quoted LME prices. The sales subject to final pricing
are generally settled in the subsequent quarter. Therefore, at
the end of any quarterly period, there will be sales that remain
subject to final pricing. Accounting rules require these sales
be recorded based on the LME future prices at the end of the
reporting period. To the extent final settlements are higher or
lower than what was recorded on a provisional basis, an increase
or decrease to revenues would be recorded when the pricing is
finally settled. PT Freeport Indonesias 2006 revenues
include net additions of $257.0 million for adjustments to
provisional copper prices in concentrate sales contracts,
compared with $238.3 million in 2005.
S-77
Gross profit per
pound of copper/per ounce of gold and silver
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
Pounds of copper sold (000s)
|
|
|
1,201,400
|
|
|
1,201,400
|
|
|
|
|
|
|
Ounces of gold sold
|
|
|
|
|
|
|
|
|
1,736,000
|
|
|
|
Ounces of silver sold
|
|
|
|
|
|
|
|
|
|
|
|
3,806,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By-product
|
|
|
Co-product
method
|
|
|
|
method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
|
|
|
Revenues, after adjustments shown
below
|
|
$
|
3.13
|
|
|
$
|
3.13
|
|
|
$
|
566.51
|
(a)
|
|
$
|
8.59
|
(b)
|
|
|
|
|
|
|
Site production and delivery,
before net noncash and nonrecurring costs shown below
|
|
|
1.03
|
|
|
|
0.79
|
|
|
|
156.24
|
|
|
|
3.11
|
|
Gold and silver credits
|
|
|
(0.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment charges
|
|
|
0.40
|
(c)
|
|
|
0.31
|
(d)
|
|
|
60.41
|
(d)
|
|
|
1.20
|
(d)
|
Royalty on metals
|
|
|
0.10
|
|
|
|
0.08
|
|
|
|
15.94
|
|
|
|
0.32
|
|
|
|
|
|
|
|
Unit net cash
costs(e)
|
|
|
0.60
|
|
|
|
1.18
|
|
|
|
232.59
|
|
|
|
4.63
|
|
Depreciation and amortization
|
|
|
0.15
|
|
|
|
0.12
|
|
|
|
23.25
|
|
|
|
0.46
|
|
Noncash and nonrecurring costs, net
|
|
|
0.04
|
|
|
|
0.03
|
|
|
|
5.60
|
|
|
|
0.11
|
|
|
|
|
|
|
|
Total unit costs
|
|
|
0.79
|
|
|
|
1.33
|
|
|
|
261.44
|
|
|
|
5.20
|
|
Revenue adjustments, primarily for
pricing on prior period open sales
|
|
|
0.10
|
(f)
|
|
|
0.17
|
|
|
|
11.53
|
|
|
|
0.22
|
|
PT Smelting intercompany profit
elimination
|
|
|
|
|
|
|
|
|
|
|
(0.37
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
Gross profit per pound/ounce
|
|
$
|
2.44
|
|
|
$
|
1.97
|
|
|
$
|
316.23
|
|
|
$
|
3.60
|
|
|
|
|
|
|
(a)
|
|
Amount was $606.36 before a loss
resulting from redemption of the Gold-Denominated Preferred
Stock, Series II.
|
|
(b)
|
|
Amount was $11.92 before a loss
resulting from redemption of the Silver-Denominated Preferred
Stock.
|
|
(c)
|
|
Includes $12.4 million or
$0.01 per pound for adjustments to 2005 concentrate sales
subject to final pricing to reflect the impact on treatment
charges resulting from the increase in copper prices since
December 31, 2005.
|
|
(d)
|
|
Includes $9.6 million or
$0.01 per pound for copper, $2.7 million or
$1.57 per ounce for gold and $0.1 million or
$0.03 per ounce for silver for adjustments to 2005
concentrate sales subject to final pricing to reflect the impact
on treatment charges resulting from the increase in copper
prices since December 31, 2005.
|
|
(e)
|
|
For a reconciliation of unit net
cash costs to production and delivery costs applicable to sales
reported in
Freeport-McMoRans
consolidated financial statements refer to Product
revenues and production costs.
|
|
(f)
|
|
Includes a $69.0 million or
$0.06 per pound loss on the redemption of the
Gold-Denominated Preferred Stock, Series II and a
$13.3 million or $0.01 per pound loss on the
redemption of the Silver-Denominated Preferred Stock.
|
S-78
Gross profit per
pound of copper/per ounce of gold and silver
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
|
Pounds of copper sold (000s)
|
|
|
1,456,500
|
|
|
1,456,500
|
|
|
|
|
|
|
Ounces of gold sold
|
|
|
|
|
|
|
|
|
2,790,200
|
|
|
|
Ounces of silver sold
|
|
|
|
|
|
|
|
|
|
|
|
4,734,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By-product
|
|
|
Co-product
method
|
|
|
|
method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
|
|
|
Revenues, after adjustments shown
below
|
|
$
|
1.85
|
|
|
$
|
1.85
|
|
|
$
|
456.27
|
|
|
$
|
6.36
|
(a)
|
|
|
|
|
|
|
Site production and delivery,
before net noncash and nonrecurring costs shown below
|
|
|
0.65
|
(b)
|
|
|
0.44
|
(c)
|
|
|
107.71
|
(c)
|
|
|
1.76
|
(c)
|
Gold and silver credits
|
|
|
(0.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment charges
|
|
|
0.24
|
|
|
|
0.16
|
|
|
|
39.75
|
|
|
|
0.65
|
|
Royalty on metals
|
|
|
0.07
|
|
|
|
0.05
|
|
|
|
11.77
|
|
|
|
0.19
|
|
|
|
|
|
|
|
Unit net cash
costs(d)
|
|
|
0.07
|
|
|
|
0.65
|
|
|
|
159.23
|
|
|
|
2.60
|
|
Depreciation and amortization
|
|
|
0.14
|
|
|
|
0.10
|
|
|
|
23.79
|
|
|
|
0.39
|
|
Noncash and nonrecurring costs, net
|
|
|
|
|
|
|
|
|
|
|
0.52
|
|
|
|
0.01
|
|
|
|
|
|
|
|
Total unit costs
|
|
|
0.21
|
|
|
|
0.75
|
|
|
|
183.54
|
|
|
|
3.00
|
|
Revenue adjustments, primarily for
pricing on prior period open sales
|
|
|
0.01
|
(e)
|
|
|
0.02
|
|
|
|
(1.14
|
)
|
|
|
0.02
|
|
PT Smelting intercompany profit
elimination
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(2.67
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
Gross profit per pound/ounce
|
|
$
|
1.64
|
|
|
$
|
1.11
|
|
|
$
|
268.92
|
|
|
$
|
3.34
|
|
|
|
|
|
|
(a)
|
|
Amount was $7.38 before a loss
resulting from redemption of the Silver-Denominated Preferred
Stock.
|
|
(b)
|
|
Net of deferred mining costs
totaling $64.9 million or $0.05 per pound. Following
adoption of EITF
04-6 on
January 1, 2006 (see New accounting
standards), stripping costs are no longer deferred.
|
|
(c)
|
|
Net of deferred mining costs
totaling $43.8 million or $0.03 per pound for copper,
$20.6 million or $7.37 per ounce for gold and
$0.6 million or $0.12 per ounce for silver (see Note
(b) above).
|
|
(d)
|
|
See Note (e) in previous table
above.
|
|
(e)
|
|
Includes a $5.0 million or
less than $0.01 per pound loss on the redemption of the
Silver-Denominated Preferred Stock.
|
Freeport-McMoRan presents gross profit per pound of copper using
both a by-product method and a
co-product method. Freeport-McMoRan uses the
by-product method in the presentation of gross profit per pound
of copper because (1) the majority of revenues are copper
revenues, (2) PT Freeport Indonesia produces and sells one
product, concentrates, which contains copper, gold and silver,
(3) it is not possible to specifically assign costs to
revenues from the copper, gold and silver produced in
concentrates, (4) it is the method used to compare mining
operations in certain industry publications and (5) it is
the method used by Freeport-McMoRans management and Board
of Directors to monitor operations. In the co-product method
presentation, costs are allocated to the different products
based on their relative revenue values, which will vary to the
extent metals sales volumes and realized prices change.
Because of the fixed nature of a large portion of PT Freeport
Indonesias costs, unit costs vary significantly from
period to period depending on volumes of copper and gold sold
during the period. Higher unit site production and delivery
costs in 2006, compared with 2005, primarily reflected lower
sales volumes resulting from mine sequencing in the Grasberg
open pit, higher input costs (including energy) and the impact
of adopting EITF
04-6 (see
Note (b) above and New accounting standards).
While lower volumes constitute the largest component of variance
on a unit basis, PT Freeport Indonesia has experienced
significant increases in production costs in recent years
primarily as a result of higher energy costs and costs of other
S-79
consumables, higher mining costs and milling rates, labor costs
and other factors. Aggregate energy costs, which approximated
22 percent of PT Freeport Indonesias 2006 production
costs, primarily include purchases of approximately
100 million gallons of diesel per year and approximately
650,000 metric tons of coal per year. Diesel prices have nearly
tripled since the beginning of 2003 and coal costs are
approximately 40 percent higher. The costs of other
consumables, including steel and reagents, also have increased.
Costs also have been affected by the stronger Australian dollar
against the U.S. dollar (approximate 40 percent
increase since the beginning of 2003), which comprised
approximately 15 percent of PT Freeport Indonesias
2006 production costs. PT Freeport Indonesia is pursuing cost
reduction initiatives to mitigate the impacts of these increases.
Unit treatment charges vary with the price of copper, and unit
royalty costs vary with prices of copper and gold. In addition,
market rates for treatment charges have increased significantly
since 2004 and will vary based on PT Freeport Indonesias
customer mix. The copper royalty rate payable by PT Freeport
Indonesia under its Contract of Work varies from
1.5 percent of copper net revenue at a copper price of
$0.90 or less per pound to 3.5 percent at a copper price of
$1.10 or more per pound. The Contract of Work royalty rate for
gold and silver sales is 1.0 percent.
In connection with the fourth concentrator mill expansion
completed in 1998, PT Freeport Indonesia agreed to pay the
Government of Indonesia additional royalties (royalties not
required by the Contract of Work) to provide further support to
the local governments and the people of the Indonesian province
of Papua. The additional royalties are paid on production
exceeding specified annual amounts of copper, gold and silver
expected to be generated when PT Freeport Indonesias
milling facilities operate above 200,000 metric tons of ore per
day. PT Freeport Indonesias royalty rate on copper net
revenues from production above the agreed levels is double the
Contract of Work royalty rate, and the royalty rates on gold and
silver sales from production above the agreed levels are triple
the Contract of Work royalty rates.
Royalty costs totaled $126.0 million in 2006, compared with
$103.7 million in 2005. Additional royalties, discussed
above, totaled $0.1 million in 2006 and $18.1 million
in 2005. If copper prices average $2.50 per pound and gold
prices average $600 per ounce during 2007, Freeport-McMoRan
would expect royalty costs to total approximately
$93 million ($0.09 per pound of copper) in 2007. These
estimates assume 2007 sales volumes of 1.1 billion pounds
of copper and 1.8 million ounces of gold.
As a result of the lower copper production and sales volumes in
2006, PT Freeport Indonesias unit depreciation rate
increased compared with 2005. Because certain assets are
depreciated on a straight-line basis, the unit rate will vary
with the level of copper production and sales. In addition, the
changes to the long-range mine plan discussed above that impact
Grasberg open-pit reserves will impact unit rates. As a result,
for 2007, PT Freeport Indonesia expects its depreciation rate to
average $0.18 per pound compared with $0.15 per pound
for 2006.
PT Freeport Indonesia has a labor agreement covering its hourly
paid Indonesian employees, the key provisions of which are
renegotiated biannually. In June 2005, PT Freeport Indonesia and
its workers agreed to terms for a new labor agreement that
expires in September 2007. PT Freeport Indonesias
relations with the workers union have generally been
satisfactory.
Unit net cash costs: By-product method. Unit net
cash costs per pound of copper calculated using a by-product
method is a measure intended to provide investors with
information about the cash generating capacity of mining
operations expressed on a basis relating to PT Freeport
Indonesias primary metal product, copper. PT Freeport
Indonesia uses this measure for the same
S-80
purpose and for monitoring operating performance by its mining
operations. This information differs from measures of
performance determined in accordance with generally accepted
accounting principles and should not be considered in isolation
or as a substitute for measures of performance determined in
accordance with generally accepted accounting principles. This
measure is presented by other copper and gold mining companies,
although PT Freeport Indonesias measures may not be
comparable to similarly titled measures reported by other
companies.
Unit site production and delivery costs averaged $1.03 per
pound of copper in 2006, $0.38 per pound higher than the
$0.65 reported in 2005. Unit site production and delivery costs
in 2006 were adversely affected by lower volumes, higher input
costs (including energy) and adoption of EITF
04-6 (see
New accounting standards). For 2005, unit
costs benefited from the deferral of stripping costs totaling
$0.05 per pound.
Gold and silver credits averaged $0.93 per pound in 2006,
compared with $0.89 per pound in 2005. The increase for 2006
primarily reflects lower copper sales volumes and higher average
realized gold prices, compared with 2005. Treatment charges
increased to $0.40 per pound in 2006 from $0.24 per
pound in 2005 primarily because of higher market rates and
higher copper prices, including the effects of price
participation under concentrate sales agreements. Royalties of
$0.10 per pound in 2006 were higher than the $0.07 per
pound in 2005 because of higher copper and gold prices.
Assuming 2007 average copper prices of $2.50 per pound and
average gold prices of $600 per ounce and achievement of
current 2007 sales estimates, PT Freeport Indonesia estimates
that its annual 2007 unit net cash costs, including gold
and silver credits, would approximate $0.63 per pound.
Estimated unit net cash costs for 2007 are projected to be
slightly higher than the 2006 average, primarily because of
lower 2007 copper sales volumes partially offset by lower
treatment charges and higher gold credits. Because the majority
of PT Freeport Indonesias costs are fixed, unit costs vary
with the volumes sold.
Unit net cash costs: Co-product method. Using the
co-product method, unit site production and delivery costs in
2006 averaged $0.79 per pound of copper, compared with
$0.44 in 2005. For gold, unit site production and delivery costs
in 2006 averaged $156 per ounce, compared with $108 in
2005. As discussed above, unit site production and delivery
costs in 2006 were primarily impacted by lower volumes, higher
input costs (including energy) and the adoption of EITF
04-6.
Treatment charges per pound and per ounce were higher in 2006
primarily because of higher market rates and copper prices.
Royalties per pound and per ounce were also higher in 2006
because of higher copper and gold prices compared with 2005.
PT
Freeport Indonesia operating results2005 compared with
2004
PT Freeport Indonesia achieved significantly higher production
and sales in 2005, reflecting higher ore grades and milling
rates than in 2004. Copper sales volumes totaled
1.5 billion pounds in 2005, approximately 50 percent
higher than the 1.0 billion pounds reported in 2004. Copper
price realizations of $1.85 per pound in 2005 were
$0.48 per pound higher than the 2004 realizations of
$1.37 per pound. Gold sales volumes totaled a record
2.8 million ounces in 2005, 93 percent higher than the
1.4 million ounces reported in 2004. Gold price
realizations of $456.27 per ounce in 2005 were nearly $44
an ounce higher than 2004 realizations of $412.32 per ounce.
Market rates for treatment and refining charges began to
increase significantly in late 2004, and PT Freeport
Indonesias average 2005 rate exceeded its
average 2004 rate. Royalties totaled
S-81
$103.7 million in 2005 and $43.5 million in 2004,
reflecting higher sales volumes and metal prices.
Mill throughput averaged 216,200 metric tons of ore in 2005,
compared with 185,100 metric tons of ore in 2004. Following the
fourth-quarter 2003 Grasberg open-pit slippage and debris flow
events, PT Freeport Indonesia accelerated the removal of
overburden and mined low-grade ore prior to restoring safe
access to higher-grade ore areas in the second quarter of 2004
and resuming normal milling rates in June 2004. As a result,
mill throughput was lower in 2004. Approximate average daily
throughput processed at the mill facilities from each of PT
Freeport Indonesias producing mines follows:
|
|
|
|
|
|
|
|
Years ended
December 31,
|
(Metric
tons of ore per day)
|
|
2005
|
|
2004
|
|
|
Grasberg open pit
|
|
|
174,200
|
|
|
141,500
|
Deep Ore Zone
|
|
|
42,000
|
|
|
43,600
|
|
|
|
|
|
|
Total
|
|
|
216,200
|
|
|
185,100
|
|
|
Production from the DOZ underground mine averaged 42,000 metric
tons of ore per day in 2005, representing 19 percent of
mill throughput. Copper ore grades averaged 1.13 percent in
2005, compared with 0.87 percent in 2004, and copper
recovery rates were 89.2 percent, compared with
88.6 percent for 2004. In 2005, gold ore grades averaged
1.65 g/t, compared with 0.88 g/t in 2004, and gold recovery
rates averaged 83.1 percent in 2005, compared with
81.8 percent in 2004. The 2005 grades reflect the return to
normal mining operations at Grasberg, including accessing
higher-grade material in accordance with PT Freeport
Indonesias mine plan.
S-82
Gross profit per
pound of copper/per ounce of gold and silver
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
Pounds of copper sold (000s)
|
|
|
991,600
|
|
|
991,600
|
|
|
|
|
|
|
Ounces of gold sold
|
|
|
|
|
|
|
|
|
1,443,000
|
|
|
|
Ounces of silver sold
|
|
|
|
|
|
|
|
|
|
|
|
3,257,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By-product
|
|
|
Co-product
method
|
|
|
|
method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
|
|
|
Revenues, after adjustments shown
below
|
|
$
|
1.37
|
|
|
$
|
1.37
|
|
|
$
|
412.32
|
|
|
$
|
6.10
|
(a)
|
|
|
|
|
|
|
Site production and delivery,
before net noncash and nonrecurring credits shown below
|
|
|
0.77
|
(b)
|
|
|
0.53
|
(c)
|
|
|
159.17
|
(c)
|
|
|
2.56
|
(c)
|
Gold and silver credits
|
|
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment charges
|
|
|
0.20
|
|
|
|
0.14
|
|
|
|
42.12
|
|
|
|
0.68
|
|
Royalty on metals
|
|
|
0.05
|
|
|
|
0.03
|
|
|
|
9.06
|
|
|
|
0.15
|
|
|
|
|
|
|
|
Unit net cash
costs(d)
|
|
|
0.40
|
|
|
|
0.70
|
|
|
|
210.35
|
|
|
|
3.39
|
|
Depreciation and amortization
|
|
|
0.17
|
|
|
|
0.12
|
|
|
|
35.03
|
|
|
|
0.56
|
|
Noncash and nonrecurring credits,
net
|
|
|
|
|
|
|
|
|
|
|
(0.85
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
Total unit costs
|
|
|
0.57
|
|
|
|
0.82
|
|
|
|
244.53
|
|
|
|
3.94
|
|
Revenue adjustments, primarily for
pricing on prior period open sales
|
|
|
0.02
|
(e)
|
|
|
0.02
|
|
|
|
0.15
|
|
|
|
0.10
|
|
|
|
|
|
|
|
PT Smelting intercompany profit
elimination
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(2.87
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
Gross profit per pound/ounce
|
|
$
|
0.81
|
|
|
$
|
0.56
|
|
|
$
|
165.07
|
|
|
$
|
2.21
|
|
|
|
|
|
|
(a)
|
|
Amount was $6.54 before a loss
resulting from redemption of the Silver-Denominated Preferred
Stock.
|
|
(b)
|
|
Net of deferred mining costs
totaling $77.8 million or $0.08 per pound.
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|
(c)
|
|
Net of deferred mining costs
totaling $53.6 million or $0.05 per pound for copper,
$23.4 million or $16.20 per ounce for gold and
$0.8 million or $0.26 per ounce for silver.
|
|
(d)
|
|
For a reconciliation of unit net
cash costs to production and delivery costs applicable to sales
reported in
Freeport-McMoRans
consolidated financial statements refer to Product
revenues and production costs.
|
|
(e)
|
|
Includes a $1.4 million or
less than $0.01 per pound loss on the redemption of the
Silver-Denominated Preferred Stock.
|
Unit net cash costs: By-product method. Unit site
production and delivery costs in 2005 averaged $0.65 per
pound of copper, $0.12 per pound lower than the $0.77
reported in 2004. Unit site production and delivery costs in
2005 benefited from higher copper sales volumes resulting from
higher ore grades, but were adversely affected by higher energy
costs and costs of other consumables, higher mining costs and
milling rates, labor costs and other factors.
Gold and silver credits increased to $0.89 per pound in
2005, compared with $0.62 per pound in 2004, reflecting
higher gold sales volumes and average realized prices in 2005.
Treatment charges increased to $0.24 per pound in 2005 from
$0.20 per pound in 2004 primarily because of higher copper
prices and higher treatment rates. Royalties of $0.07 per
pound in 2005 were higher than the royalties of $0.05 per
pound in 2004 primarily because of higher copper and gold prices
and sales volumes.
Unit net cash costs: Co-product method. Using the
co-product method, unit site production and delivery costs in
2005 averaged $0.44 per pound of copper, compared with
$0.53 in 2004. For gold, unit site production and delivery costs
in 2005 averaged $108 per ounce, compared with $159 in
2004. As discussed above, unit site production and delivery
costs in 2005 benefited from higher sales volumes resulting from
higher ore grades, but were adversely affected by higher energy
costs and costs of other consumables, higher mining costs and
milling rates, labor costs
S-83
and other factors. Treatment charges per pound of copper were
higher in 2005 primarily because of higher rates and copper
prices, while treatment charges per ounce of gold were slightly
lower in 2005 primarily because of the method of allocating
these costs. Royalties per pound and per ounce were higher in
2005 because of higher sales volumes and realized prices
compared with 2004.
PT Freeport
Indonesia sales outlook
PT Freeport Indonesia sells its copper concentrates primarily
under long-term sales agreements denominated in
U.S. dollars, mostly to companies in Asia and Europe and to
international trading companies. PT Freeport Indonesia expects
its share of sales to approximate 1.1 billion pounds of
copper and 1.8 million ounces of gold for 2007 and to
average 1.24 billion pounds of copper and
1.8 million ounces of gold annually over the next five
years (20072011). At the Grasberg mine, the sequencing in
mining areas with varying ore grades causes fluctuations in the
timing of ore production, resulting in varying quarterly and
annual copper and gold sales.
PT Freeport Indonesia has long-term contracts to provide
approximately 60 percent of Atlantic Coppers copper
concentrate requirements at market prices and nearly all of PT
Smeltings copper concentrate requirements. Under the PT
Smelting contract, for the first 15 years of PT
Smeltings operations beginning December 1998, the
treatment and refining charges on the majority of the
concentrate PT Freeport Indonesia provides will not fall below
specified minimum rates, subject to renegotiation in 2008. The
rate was $0.23 per pound during the period from the
commencement of PT Smeltings operations in 1998 until
April 2004, when it declined to a minimum of $0.21 per
pound. PT Smeltings rates for 2007 are expected to exceed
the minimum $0.21 per pound (see Smelting and
refining). Current rates are higher than the minimum rate.
Exploration and
reserves
During 2006, PT Freeport Indonesia added 41.8 million
metric tons of ore averaging 0.66 percent copper and 0.70
g/t gold associated with positive drilling results at the Mill
Level Zone and Deep Mill Level Zone deposits, a
387-million-metric-ton
complex with average grades of 1.02 percent copper and 0.81
g/t gold. PT Freeport Indonesias reserve estimates also
reflect revisions resulting from changes to its long-range mine
plans.
Net of Rio Tintos share, PT Freeport Indonesias
share of proven and probable recoverable reserves as of
December 31, 2006, was 38.8 billion pounds of copper,
41.1 million ounces of gold and 128.0 million ounces
of silver. Freeport-McMoRans equity interest in proven and
probable recoverable reserves as of December 31, 2006, was
35.2 billion pounds of copper, 37.2 million ounces of
gold and 116.0 million ounces of silver. Estimated
recoverable reserves were assessed using a copper price of
$1.00 per pound and a gold price of $400 per ounce. If
Freeport-McMoRan adjusted metal prices used in its reserve
estimates to the approximate average London spot prices for the
past three years ($2.01 per pound of copper and
$486 per ounce of gold), the additions to proven and
probable reserves would not be material to reported reserves.
Freeport-McMoRans aggregate exploration budget for 2007,
including Rio Tintos share, is expected to total
approximately $31 million (approximately $25 million
for Freeport-McMoRans share). PT Freeport Indonesias
exploration efforts in 2007 within Block A of its Contract of
Work will continue to test extensions of the Deep Grasberg and
Kucing Liar mine complex. Engineering studies are under way to
incorporate positive drilling results from 2006 activities at
Deep Grasberg and Kucing Liar. PT Freeport Indonesia also
expects to test the open-pit potential of
S-84
the Wanagon gold prospect and the Ertsberg open-pit resource,
and will begin testing for extensions of the Deep Mill
Level Zone deposit and other targets in the space between
the Ertsberg and Grasberg mineral systems from the new Common
Infrastructure tunnels located at the 2,500 meter level.
During 2007, Freeport-McMoRan plans to resume exploration
activities, which had been suspended in recent years, in certain
prospective areas outside Block A. The Indonesian government
previously approved suspensions of field exploration activities
outside of PT Freeport Indonesias current mining
operations area, which have been in suspension in recent years
because of safety and security issues and regulatory uncertainty
relating to a possible conflict between mining and exploration
rights in certain forest areas and an Indonesian Forestry law
enacted in 1999 prohibiting open-pit mining in forest
preservation areas. The current suspensions were granted for
one-year periods ending February 26, 2007, for Block B and
March 30, 2007, for PT Nabire Bakti Mining. Recent
Indonesian legislation permits open-pit mining in PT Freeport
Indonesias Block B area, subject to certain requirements.
Following an assessment of these requirements and a review of
security issues, Freeport-McMoRan plans to resume exploration
activities in certain prospective Contract of Work areas outside
of Block A in 2007.
Smelting and
refining operations
Freeport-McMoRans investment in smelters serves an
important role in its concentrate marketing strategy. PT
Freeport Indonesia generally sells under long-term contracts
approximately one-half of its concentrate production to its
affiliated smelters, Atlantic Copper and PT Smelting, and the
remainder to other customers. Treatment charges for smelting and
refining copper concentrates represent a cost to PT Freeport
Indonesia and income to Atlantic Copper and PT Smelting. Through
downstream integration, Freeport-McMoRan is assured placement of
a significant portion of its concentrate production. Low smelter
treatment and refining charges prior to 2005 adversely affected
the operating results of Atlantic Copper and benefited the
operating results of PT Freeport Indonesias mining
operations. Smelting and refining charges consist of a base rate
and, in certain contracts, price participation based on copper
prices. Market rates for treatment and refining charges have
increased significantly since late 2004 as worldwide smelter
availability was insufficient to accommodate increased mine
production and because of higher copper prices. However, more
recently, market rates have declined. Higher treatment and
refining charges benefit smelter operations and adversely affect
mining operations. Taking into account taxes and minority
ownership interests, an equivalent change in PT Freeport
Indonesias and Atlantic Coppers smelting and
refining charge rates essentially offsets in
Freeport-McMoRans consolidated operating results.
S-85
Atlantic Copper
operating results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
(Dollars
in millions, except unit cost per pound)
|
|
2006
|
|
|
2005
|
|
2004
|
|
|
|
|