SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 17, 1998
FREEPORT-McMoRan COPPER & GOLD INC.
Delaware 1-9916 74-2480931
(State or other (Commission (IRS Empoyer
jurisdiction of File Number) Identification
incorporation or Number)
organization)
1615 Poydras Street
New Orleans, Louisiana 70112
Registrant's telephone number, including area code: (504) 582-4000
Item 7. Financial Statements and Exhibits.
Exhibit 99.1 contains portions of Freeport-McMoRan Copper & Gold
Inc.'s 1997 Annual Report to stockholders.
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
FREEPORT-McMoRan COPPER & GOLD INC.
By: /s/ C. Donald Whitmire
------------------------------
C. Donald Whitmire
Vice President and
Controller - Financial Reporting
(authorized signatory and
Principal Accounting Officer)
Date: March 17, 1998
EXHIBIT 99.1
1997 / ENVIRONMENTAL & SOCIAL RESPONSIBILITY REPORT
ENVIRONMENTAL REPORT
ENVIRONMENTAL POLICY STATEMENT. Freeport-McMoRan Copper &
Gold Inc. (FCX) has a formal Environmental Policy Statement
and Environmental Auditing Policy which provides guidance
and a framework under which these important programs are
conducted. FCX is committed to environmental compliance and
high performance of its environmental programs, a safe
working environment for its employees and a healthy socio-
economic environment for the local people in the areas in
which the company operates.
In last year's Annual Report, FCX described its
Environmental Policy and programs in some detail. This
year's report will primarily discuss 1997 activities under
these ongoing programs.
1997 FCX ENVIRONMENTAL PROGRAMS UPDATE
P.T. FREEPORT INDONESIA COMPANY (PT-FI). On December 22,
1997, PT-FI received approval from the Government of
Indonesia's (GOI) Minister of Environment for its Regional
AMDAL (Analysis Concerning Environmental Impact) study,
which is a comprehensive environmental assessment that
includes a monitoring and management plan. The Regional
AMDAL approval was necessary to allow PT-FI to expand its
milling rate up to a maximum of 300,000 MTPD (300K). The
300K Regional AMDAL study document was submitted to BAPEDAL
(the Indonesian Environmental Impact Management Agency) and
the governmental AMDAL Commission on September 1, 1997, for
review and revision. The study was the culmination of a
multi-year effort to develop environmental analyses of the
impacts and benefits of the proposed expansion. The 300K
Regional AMDAL study prepared by PT-FI was termed "...the most
comprehensive BAPEDAL has ever seen" by the AMDAL Commission
Chairman. Forty-two specific environmental studies were
conducted during the AMDAL process by Indonesian and
internationally recognized experts. An extensive analysis
of the social situation in PT-FI's area of operations was
also included in the study. PT-FI subjected the most
sensitive studies to peer review to ensure their accuracy
and independence. Additionally, PT-FI and its consultants
presented the findings of these studies at five workshops on
major social and environmental issues, which were attended
by the AMDAL Commissioners and over 600 interested parties.
[Photo]
AMDAL Study / AMDAL studies include monitoring of local
waterways and aquatic fauna by teams of Indonesian and
internationally recognized scientists.
PT-FI has numerous ongoing environmental management programs
that include monitoring, reclamation, waste management and
recycling, all of which are being expanded in accordance
with the 300K Regional AMDAL approval. The following is an
update on 1997 activities under these programs.
LONG TERM ENVIRONMENTAL MONITORING PLAN: In 1997, PT-FI
continued to conduct its Long Term Environmental Monitoring
Plan (LTEMP), which evaluates the potential impact of
operations on water quality, biology, hydrology, sediments
and air quality within its area of operations. Significant
environmental data and analyses have been developed from
this monitoring program over the past seven years. The
centerpiece of the LTEMP program is PT-FI's state-of-the-art
environmental laboratory located in Timika, which, in 1997,
received the GOI's highest certification for analytical
laboratories. The laboratory is also expecting to soon be
certified by the National Association of Testing and
Analysis.
[Photo]
Revegetation / Significant research programs continue to
demonstrate that a wide variety of native plants
and agronomic species, such as pineapples, will
grow on deposited tailings.
TAILINGS MANAGEMENT PLAN: One of PT-FI's key programs is
its Tailings Management Plan (TMP) which manages the river
transport and deposition of tailings, which are the crushed
rock particles that remain following the physical separation
of commercially valuable minerals from the mined ore. This
multimillion-dollar program controls the transport and
deposition of tailings through the use of a levee system on
the flood plain in the Ajkwa River within a defined area
called the Ajkwa Deposition Area (ADA). The levee system
was completed in January 1997 under a plan approved by the
GOI. The updated plan was again approved in late 1997 as a
key element in the comprehensive 300K Regional AMDAL
process. The performance of the TMP has been
comprehensively studied and will be continuously monitored
in the future. Information to date indicates that the
system is working well within engineering expectations and,
as discussed later, tailings reclamation studies show that
the ADA can readily be revegetated once mining is completed.
OVERBURDEN MANAGEMENT PLAN: The Overburden Management Plan
(OMP) controls the relocation of non-commercial rock
(overburden) generated by the Grasberg open-pit mining
operation. The latest OMP was submitted to the GOI in
conjunction with the 300K Regional AMDAL study and was
approved. The OMP includes a program to manage potential
acid rock drainage (ARD) in the Grasberg overburden disposal
areas through a combination of prevention and mitigation
techniques. Significant activities continued in 1997 to
successfully reduce and/or prevent ARD.
WASTE MANAGEMENT AND RECYCLING PLAN: PT-FI's comprehensive
waste management and recycling plan, which conforms with GOI
regulations and PT-FI's waste management policies, continued
with success in 1997. The plan provides a practical means
of managing all wastes in an environmentally acceptable
manner, with an emphasis on recycling or re-use of wastes
and substitution of materials where feasible.
RECLAMATION AND REVEGETATION PLAN: Programs to revegetate
and reclaim the ADA have been in place for several years and
there were a number of achievements in 1997 including the
demonstration that additional species of native plants,
agricultural crops and fruit trees grow well in deposited
tailings. PT-FI has other successful reclamation and
revegetation projects that involve wetlands and lakes, as
well as forest and agricultural areas.
PT-FI has also developed a program, which continued in 1997,
to manage and monitor the reclamation of overburden
placement areas that includes, among other things, a topsoil
salvaging program, hydro-mulching, and the collection and
planting of local plants and seeds. The reclamation program
will provide a stable vegetative cover for the impacted
areas and form an ecosystem for suitable land use following
mining operations.
PT-FI has now established a fund designed to accumulate at
least $100 million by the end of its mine's life for
eventual mine closure and reclamation. The fund, to which
PT-FI continues to contribute, will be used to restore
properties and related facilities to a state required to
comply with current Indonesian environmental and other
regulations.
ENVIRONMENTAL AUDITING: In 1997, PT-FI completed the
implementation of all of the 33 recommendations made from
the external environmental audit conducted by Dames & Moore
in 1996. An internal environmental audit of PT-FI's
operations was conducted for 1997 in accordance with the FCX
Environmental Auditing Policy. This program an annual
internal audits, as well as external audits every three
years, will continue throughout the life of the mining
operations to ensure that PT-FI's environmental programs
remain sound.
ATLANTIC COPPER, S.A. (ATLANTIC). As part of the follow-up
to the completion of the 1996 environmental improvement
project, additional water collection and discharge treatment
system enhancements were completed in 1997.
Furthermore, an Environmental Management System (EMS) was
developed and fully implemented in 1997. An environmental
training and awareness plan was also fully developed and an
internal site auditing system was established to ensure
conformance to the EMS. The EMS will allow Atlantic to be
certified under the International Standards Organization
(ISO) 14001 Standard. The ISO 14001 Standard is a
management standard that provides an internationally
recognized blueprint for managing the environmental aspects
and impacts of a business. Atlantic expects to have
completed ISO 14001 certification in 1998 and is already
certified under the ISO 9000 Standard for Quality
Management. Atlantic continued to maintain excellent
relations with local and regional environmental authorities
in 1997 and worked closely with their representatives in
monitoring and interpreting data from emissions and
effluents.
SOCIAL RESPONSIBILITY REPORT
P.T. FREEPORT INDONESIA COMPANY (PT-FI). FCX and PT-FI
recognize the importance of establishing strong
relationships with the people in the area of its operations
and the important role that those relationships have in
defining a truly world-class mining operation. FCX also
recognizes the need for thoughtful and sensitive
developmental programs, in conjunction with local and
national government and non-governmental organizations
(NGOs), to support the relationship building and development
process. When PT-FI initiated operations in Irian Jaya
nearly 30 years ago, there were only approximately 400 local
Amungme and Kamoro people living in the highlands and
lowlands areas near our mining operations. Today, over
60,000 people have moved into the area because of the
opportunities offered by our mine and other businesses now
operating in the area. In last year's Annual Report, FCX
described the social situation around its operations in some
detail. During 1997 and early 1998, several events occurred
and processes begun which will enhance the social and
economic development of the local people and their
relationship with PT-FI.
THE FREEPORT FUND FOR IRIAN JAYA DEVELOPMENT AND THE GOI'S
DEVELOPMENT PLANS: In 1997, PT-FI and the GOI continued to
work with expert consultants and the local people within its
area of operations to create comprehensive land use and
human resource development plans. An integral part of that
plan is the Freeport Fund for Irian Jaya Development
(FFIJD), by which PT-FI would make available funding and
expertise to support the economic and social development of
the area. As with many large-scale developmental projects,
the implementation of the plan proved to be a complex
undertaking. In the fourth quarter of 1997 and with the
support of the government and the recommendation of the
LABAT-Anderson Social Audit (discussed in detail below), PT-
FI has undertaken a restructuring of its part of the GOI's
development plan for the Timika (Mimika) area. PT-FI is
setting up the mechanism to become an independent fund
provider for developmental projects in and around its
operations area. A local community oversight board is being
actively recruited and trained to evaluate and monitor
developmental projects. The oversight board is being
actively recruited and trained to evaluate and monitor
development projects. The oversight board will be made up
of local and church leaders, NGO's, local government
officials and representatives of PT-FI.
To improve the administration of the FFIJD, project funding
is being changed from an ethno-linguistic group (tribal)
basis to one that is village-based (geographic). The
village-based method is "bottom-up" development recommended
by most international developmental agencies. The FFIJD
will work closely with the GOI's local and regional planning
boards to coordinate developmental projects and activities.
PT-FI remains committed to providing one percent of its
revenue for the development of the local people through the
FFIJD.
LABAT-ANDERSON INDEPENDENT SOCIAL AUDIT: In early 1996, the
international consulting firm of LABAT-Anderson undertook a
comprehensive independent audit of social programs at PT-
FI's operations in Irian Jaya. The team included LABAT-
Anderson personnel as well as nationally recognized
Indonesian scientists and other experts from around the
world. In July 1997, the LABAT-Anderson
[Photo]
Social Audit / Local leaders discuss social issues with
Willy Tjen (far left), LABAT-Andersen team
leaders, as part of the independent social audit.
team submitted its final report to the Minister of the
Environment and PT-FI. It noted the remarkable complexity
of the issues in Irian Jaya and especially those in the
Mimika district caused by rapid social and economic
development, unceasing migration into the area and the
mixing of ethno-linguistic groups. The report further noted
that PT-FI had gone beyond requirements or expectations in
providing assistance for the development of the local
people. Nevertheless, the report made a number of
recommendations designed to make PT-FI's programs more
effective, all of which have been accepted and are being
implemented. LABAT-Anderson recommended that (1) PT-FI's
participation in the GOI's developmental plan for the area
be restructured to provide for more direct input by local
people through their leaders, (2) input be village-based
rather than tribe-based and (3) programs for "capacity-
building" among the local people be enhanced. As discussed
above, PT-FI is restructuring its FFIJD program and several
international and local NGOs as well as the United Nations
Development Program have been invited to undertake village
development and capacity-building for the local people.
LAND RIGHTS AGREEMENT WITH KAMORO VILLAGES: In 1997, land
use agreements with two separate Kamoro villages were
reached. The agreements cover land used for tailing
deposition and the expanded portsite. The agreements
established programs in the respective villages for
education, enhanced health care, social and economic
development, and infrastructure enhancement. The agreements
stipulate a multi-year timetable for implementation.
Public Health / A Young child is treated at one of the
public health clinics in our COW area.
[Photo]
PUBLIC HEALTH AND MALARIA CONTROL: PT-FI continues to
be proud of the work of its Public Health and Malaria
Control Department which has become internationally
recognized for its remarkable record in the control of
mortality and morbidity from malaria and other tropical
diseases. Beginning in late 1997 and continuing into 1998,
the department has been actively supporting the work of the
GOI, the Indonesian Red Cross and the International
Committee of the Red Cross in providing famine relief to
areas east of our operations area that were severely
affected by drought conditions.
In early 1998, PT-FI initiated discussions with the Roman
Catholic diocese of Jayapura to establish an independent
hospital in Timika, funded substantially by the FFIJD, to
provide primary medical care to all local people who were
not PT-FI employees or employee dependents. This would be
the first independent medical facility in the area. PT-FI
would continue to accept case referrals from the hospital
(as it currently does from the government's clinic) for
patients whose condition requires additional care.
INSTITUTIONAL AND COMMUNITY DEVELOPMENT: One of the major
developmental challenges for the local people is the
establishment of institutions that can help them relate to
government as well as to PT-FI and each other. Tribal
culture has intended to be very individual, which has made
effective communication between the people and other
institutions difficult. As the entire area develops and
changes, helping the people create the institutions
necessary for communication, negotiation and problem solving
is essential. In addition, villages such as Kwamki Lama
have residents of several different tribes which has not
been typical in the past. These "mixed villages" require a
geographic rather than a tribal identity. Through the
expertise of the government, NGOs, including churches and
church groups in the region, and others, positive steps are
being taken to foster institution and community development
throughout the area.
RESEARCH PROJECTS: The people of Irian Jaya have a rich
cultural heritage and traditions which are different from
"western" societies. Often, problems are caused by
misunderstandings about cultures and cultural change. To
address this issue, PT-FI has enhanced its anthropological
expertise by the addition of staff anthropologists. To
supplement their work, a joint team from University
Cenderawasih in Jayapura, Irian Jaya and Australian National
University in Canberra has undertaken a project to establish
a "social mapping" and to collect other ethnographic data
about all local residents. The multi-year project is
currently approximately 50 percent complete.
HUMAN RIGHTS: PT-FI and FCX have strongly condemned human
rights violations in Irian Jaya and believe in protecting
the human rights of all people and especially those who live
and work in the area in which PT-FI has operations. PT-FI
works actively with KOMNAS-Ham, the official human rights
organization in Indonesia, to monitor and resolve situations
which might impinge upon the human rights of individuals and
groups.
ATLANTIC COMMUNITY PROGRAMS. Atlantic has a continuing
Program of Support and Protection of the Arts and Sciences,
Public Communication and Community Relations. This program
is carried out both individually and in conjunction with the
Association of Chemical Industries in Huelva. In 1997,
Atlantic completed two significant programs, the restoration
of the Church of La Milagrossa in Huelva and donation of
significant support for the Latin American Film Festival
held in Huelva.
FREEPORT-McMoRan COPPER & GOLD INC.
SELECTED FINANCIAL AND OPERATING DATA
1997 1996 1995 1994 1993
---------- ---------- ----------- ---------- ----------
(Financial Data In Thousands, Except Per Share Amounts)
FCX FINANCIAL DATA
Years Ended December 31:
Revenues $2,000,904 $1,905,036 $1,834,335 $1,212,284 $ 925,932
Operating income 664,215a 638,261b 596,432c 280,134d 155,319e
Net income
applicable to
common stock 208,541a 174,680b 199,465c 78,403d 21,862e,f
Net income per
common share 1.06a .90b .98c .38d .11e,f
Dividends paid
per common share .90 .90 .675 .60 .60
Average
common shares
outstanding 196,392 194,910 203,536 205,755 197,929
At December 31:
Property,
plant and
equipment, net 3,521,715 3,088,644 2,845,625 2,360,489 1,646,603
Total assets 4,152,209 3,865,534 3,581,746 3,040,197 2,116,653
Long-term debt,
including current
portion and
short-term
borrowings 2,388,982 1,562,916 1,167,232 549,710 260,659
Mandatory
redeemable
preferred stock 500,007 500,007 500,007 500,007 232,620
Stockholders'
equity 278,892 675,379 881,674 994,975 947,927
PT-FI OPERATING DATA
Ore milled (metric
tons per day) 128,600 127,400 111,900 72,500 62,300
Copper grade
(percent) 1.37 1.35 1.32 1.51 1.57
Gold grade
Grams per
metric ton 1.51 1.52 1.39 1.31 1.46
Ounce per
metric ton .049 .049 .045 .042 .047
Silver grade
Grams per
metric ton 3.11 3.10 3.17 3.02 4.02
Ounce per
metric ton .100 .100 .102 .097 .129
Recovery rates (percent)
Copper 85.4 83.8 85.0 83.7 87.0
Gold 81.4 77.1 74.3 72.8 76.2
Silver 65.6 64.6 63.2 64.7 67.2
Copper
Production
(000s of
recoverable
pounds) 1,166,500 1,118,800 978,000 710,300 658,400
Sales
000s of
recoverable
pounds) 1,188,600 1,097,000 985,100 700,800 645,700
Average
realized
price g $.94 $1.02 $1.22 $1.02 $.90
Gold
Production
(recoverable
ounces) 1,798,300 1,695,200 1,310,400 784,000 786,700
Sales
(recoverable
ounces) 1,888,100 1,698,900 1,353,400 794,700 762,900
Average
realized
price $ 346.14h $390.96h $383.73h $381.13 $361.74
Silver
Production
(recoverable
ounces) 2,568,700 2,360,600 2,303,000 1,305,400 1,541,200
Sales
(recoverable
ounces) 2,724,300 2,532,000 2,349,400 1,335,400 1,480,900
Average
realized
price $4.68 $4.95 $4.99 $5.08 $4.15
ATLANTIC COPPER OPERATING DATA (since acquisition)
Concentrate
treated
(metric tons) 929,700 804,500 434,400i 485,300 330,200
Anodes (000s of pounds)
Production 639,800 547,900 296,000 347,500 299,300
Sales 133,500 77,300 44,600 38,300 3,300
Cathodes (000s of pounds)
Production 505,600 462,900 258,200 312,100 227,300
Sales
(including
wire rod) 505,300 461,100 280,200 309,400 294,800
Cathode cash
production cost
per pound $.12 $.15 $.18 $.17 $.18
FREEPORT-McMoRan COPPER & GOLD INC.
SELECTED FINANCIAL AND OPERATING DATA
NOTES
a. Includes a $25.3 million gain ($12.3 million to net income or
$0.06 per share) for the reversal of stock appreciation rights
costs caused by the decline in FCX's common stock price in
1997.
b. Includes charges totaling $17.4 million ($8.0 million to net
income or $0.04 per share) consisting of $12.7 million for
costs of stock appreciation rights caused by the increase in
FCX's common stock price in 1996, $3.0 million for costs
related to a civil disturbance and $1.7 million for an early
retirement program.
c. Includes charges totaling $49.6 million ($26.9 million to net
income or $0.13 per share) consisting of $29.8 million for
costs of stock appreciation rights caused by the increase in
FCX's common stock price in 1995, $12.5 million for a materials
and supplies inventory reserve adjustment in connection with
the completion of PT-FI's 118,000 metric tons per day expansion
program and $7.3 million for an early retirement program.
d. Includes a $32.6 million insurance settlement gain ($17.4
million to net income or $0.08 per share).
e. Includes charges totaling $37.1 million ($20.5 million to net
income or $0.10 per share) for restructuring and other related
costs.
f. Includes a $9.9 million cumulative charge ($0.05 per share) for
changes in accounting principle.
g. Amounts were $0.90 in 1997, $0.97 in 1996, $1.28 in 1995, $1.15
in 1994 and $0.82 in 1993 before hedging adjustments.
h. Amounts were $326.08 in 1997, $382.62 in 1996 and $380.85 in
1995 before hedging adjustments.
i. Reflects shutdowns caused by a strike at an adjacent plant,
expansion equipment tie-ins and normal maintenance turnarounds.
FREEPORT-McMoRan COPPER & GOLD INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
To enhance understanding of Freeport-McMoRan Copper & Gold Inc.'s
(FCX) financial results, the components of Management's Discussion
and Analysis are presented adjacent to the pertinent financial data.
Accordingly, in addition to the discussion that begins on this page
and continues through page 22, further analyses of consolidated
results of operations can be found on page 25, cash flows and
liquidity on page 27, and capital resources and financial condition
on page 29, as well as the Environmental & Social Responsibility
Report on pages 8 through 13. The results of operations reported and
summarized throughout are not necessarily indicative of future
operating results.
FCX operates through its majority-owned subsidiaries, P.T. Freeport
Indonesia Company (PT-FI) and P.T. IRJA Eastern Minerals Corporation
(Eastern Mining), and through Atlantic Copper, S.A. (Atlantic), a
wholly owned subsidiary. PT-FI's operations involve mineral
exploration and development, mining and milling of ore containing
copper, gold and silver in Irian Jaya, Indonesia and the worldwide
marketing of concentrates containing those metals. PT-FI also has a
25 percent interest in P.T. Smelting Co. (PT Smelting), an
Indonesian company formed to construct and operate a copper smelter
and refinery in Gresik, Indonesia. Eastern Mining conducts mineral
exploration activities in Irian Jaya. Atlantic is engaged in the
smelting and refining of copper concentrates in Spain and marketing
refined copper products.
In 1996, FCX and Rio Tinto plc (Rio Tinto) established exploration
and expansion joint ventures. Pursuant to the exploration joint
ventures, Rio Tinto has a 40 percent interest in future development
projects under PT-FI's Contract of Work (COW) and Eastern Mining's
COW. Rio Tinto also has a 40 percent interest in certain assets and
future production exceeding specified annual amounts of copper, gold
and silver through 2021.
The FCX/Rio Tinto exploration joint ventures are continuing their
exploration activities within the original 24,700 acre PT-FI Block A
area, the adjacent approximate 3.25 million acre PT-FI Block B area
and the approximate 1.8 million acre Eastern Mining area. As
required by the applicable COW, PT-FI has relinquished its rights to
approximately 3.25 million acres in Block B and is required to make
one final relinquishment of approximately 1.6 million acres no later
than December 1998. Eastern Mining has relinquished an approximate
0.7 million acre area and must relinquish an additional
approximately 1.2 million acres in two equal installments no later
than August 1998 and August 2001. For a discussion of exploration
cost sharing arrangements with Rio Tinto, see "Exploration Expenses"
on page 25.
FCX and Rio Tinto are expected to complete construction on the "fourth
concentrator mill expansion" of PT-FI's facilities during the first
half of 1998. The expanded mill facilities provide FCX an opportunity
to increase throughput beyond 200,000 metric tons of ore per day (MTPD)
and improve profitability by optimizing the ore available from PT-FI's
mines. See Note 2 of the Notes to Financial Statements for a discussion of
the joint venture arrangements. In December 1997, PT-FI received approval
from the Indonesian authorities to expand its milling rate up to a maximum of
300,000 MTPD. FCX and Rio Tinto have initiated pre-feasibility studies
to consider further expansion of the mining and milling facilities beyond
the current fourth concentrator mill expansion.
In December 1997, FCX signed a letter of intent to acquire an ownership
interest in P.T. Iriana Mutiara Mining (Iriana). Iriana holds a COW area
covering approximately 1.2 million acres in central Irian Jaya, in part
contiguous to Eastern Mining's COW area. The transaction is subject to
execution of definitive documentation pursuant to which FCX would become
operator of the Iriana COW area. As operator, FCX would be required to
spend at least $0.5 million on exploration in 1998. If FCX elects to
continue participation beyond June 30, 1999, it would acquire a 90 percent
ownership interest and would fund all exploration cost up to and including
a feasibility study. FCX would also be responsible for arranging
construction financing for Iriana for any economically feasible projects
in the Iriana COW area. Pursuant to the joint venture arrangements with
Rio Tinto, Rio Tinto has the option to participate with respect to 40 percent
of FCX's interest in this 1.2 million acre COW area.
During 1997, additions and revisions to the aggregate proved and
probable reserves of the Grasberg and other Block A ore bodies
totaled approximately 204.8 million metric tons of ore representing
5.0 billion recoverable pounds of copper, 9.2 million recoverable
ounces of gold and 22.3 million recoverable ounces of silver.
December 31, 1997 aggregate proved and probable recoverable
reserves, net of 1997 production, totaled 2.17 billion metric tons
of ore averaging 1.20 percent copper, 1.20 grams of gold per metric
ton and 3.95 grams of silver per metric ton representing 47.1
billion pounds of copper, 62.7 million ounces of gold and 138.4
million ounces of silver. Pursuant to joint venture arrangements,
Rio Tinto has a 40 percent interest in future production exceeding
specified annual amounts of copper, gold and silver through 2021
calculated by reference to PT-FI's proved and probable reserves as
of December 31, 1994. Rio Tinto's 40 percent share of joint venture
proved and probable reserves as of December 31, 1997 was
approximately 9.3 billion pounds of copper, 11.4 million ounces of
gold and 27.1 million ounces of silver. Net of Rio Tinto's share,
additions and revisions to PT-FI's proved and probable copper, gold
and silver reserves represent 2.6 times 1997 copper production, over
3 times 1997 gold production and over 5 times 1997 silver
production. Net of Rio Tinto's share, PT-FI's share of proved and
probable recoverable copper, gold and silver reserves was 37.8
billion pounds of copper, 51.3 million ounces of gold and 111.3
million ounces of silver as of December 31, 1997 (Note 14).
Estimated recoverable reserves were assessed using a copper price of
$0.90 per pound and a gold price of $325 per ounce. Using prices of
$0.75 per pound of copper and $280 per ounce of gold would reduce
estimated recoverable reserves by approximately 12 percent for
copper, 9 percent for gold and 15 percent for silver.
RESULTS OF OPERATIONS
FCX has two operating segments: "mining and exploration" and
"smelting and refining." The mining and exploration segment
includes PT-FI's copper and gold mining operations in Indonesia and
the Indonesian exploration activities of both PT-FI and Eastern
Mining. The smelting and refining segment includes Atlantic's
operations in Spain and PT-FI's equity investment in PT Smelting.
Summary operating results by segment follow (in millions):
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- --------
Mining and exploration $ 630.8 $ 648.0 $675.7
Smelting and refining 30.6 6.4 (24.1)
Intercompany eliminations and other a 2.8 (16.1) (55.2)
---------- ---------- --------
Operating income $ 664.2 $ 638.3 $596.4
========== ========== ========
a. Profit on PT-FI sales to Atlantic is not reflected in FCX's
consolidated results until completion of the smelting and
refining process. The eliminations totaled $19.0 million
in 1997, $2.7 million in 1996 and $(40.4) million in 1995.
The increased level of PT-FI concentrate sales to Atlantic
at the end of 1995 to support the expanded smelter capacity
resulted in significant intercompany eliminations.
MINING AND EXPLORATION
A summary of increases (decreases) in PT-FI revenues follows (in
millions):
1997 1996
---------- ----------
Sales volumes:
Copper $ 93.4 $ 136.7
Gold 74.0 132.6
Price realizations:
Copper (88.8) (222.7)
Gold (84.6) 12.3
Adjustments to prior year open sales 59.0 (4.7)
Treatment charges, royalties and other (33.5) (46.3)
---------- ----------
Net increase in revenues
over prior year $ 19.5 $ 7.9
========== ==========
PT-FI Operating Results - 1997 Compared with 1996. PT-FI's
1997 revenues were slightly higher than 1996 revenues as record
sales volumes were substantially offset by a decline in price
realizations. Copper sales volumes rose 8 percent and gold sales
volumes rose 11 percent primarily as a result of improvements in
recovery rates (see Selected Financial and Operating Data). Average
copper realizations declined 8 percent from $1.02 per pound in 1996
to $0.94 per pound in 1997. PT-FI's revenues include net additions
totaling $42.6 million in 1997 and $38.2 million in 1996 recognized
under PT-FI's copper price protection program. Average 1997 gold
realizations declined 11 percent or nearly $45 per ounce compared to
1996. PT-FI's revenues also include additions totaling $37.6 million
in 1997 and $14.1 million in 1996 recognized on gold forward sales
contracts. Adjustments to prior year open sales totaled $54.9
million in 1997 compared with $(4.1) million in 1996. Treatment
charges increased in 1997 because of higher sales volumes and
tighter market conditions. Royalties and a portion of treatment
charges vary with the price of copper.
PT-FI Gross Profit Per Pound of Copper(cents)
Years Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- --------
Average realized price a 94.4 101.9 122.2
---------- ---------- --------
Production costs:
Site production and delivery 50.6 52.4 54.0b
Gold and silver credits (55.5) (61.3) (53.8)
Treatment charges 24.4 22.9 19.6
Royalty on metals 2.6 2.8 4.3
---------- ---------- --------
Cash production costs 22.1 16.8 24.1
Depreciation and amortization 15.0 13.0 10.4
---------- ---------- --------
Total production costs 37.1 29.8 34.5
---------- ---------- --------
Revenue adjustments c 3.7 (2.0) (2.1)
---------- ---------- --------
61.0 70.1 85.6
========== ========== ========
a. Amounts were $0.90 in 1997, $0.97 in 1996 and $1.28 in 1995
before hedging adjustments.
b. Excludes an inventory reserve adjustment of $12.5 million (1.3
cents per pound).
c. Reflects adjustments for prior year concentrate sales and
amortization of the price protection program cost.
Average cash production costs in 1997 of 22.1 cents per pound
of copper were higher than the comparable 1996 average primarily
because of lower gold credits. Lower gold realizations offset
record gold sales and reduced unit gold credits by 9 percent. Site
production and delivery costs per pound declined primarily because
of lower labor costs offset by higher treatment charges that
reflected tightened smelter capacity. Treatment charge rates for a
significant portion of PT-FI's 1998 projected sales were negotiated
in the fourth quarter of 1997 based on then current market
conditions. As a result of a continued tight smelter market,
treatment charges are expected to increase slightly in 1998. PT-
FI's copper royalty rate varies from 1.5 percent, at a copper price
of $0.90 or less, to 3.5 percent, at a copper price over $1.10, on
the value of copper sold (after delivery costs, treatment charges
and other selling costs); the gold and silver royalty rate is 1.0
percent. PT-FI has agreed with the Government of Indonesia (GOI)
that on metal production from mill throughput in excess of 200,000
MTPD it will pay a second royalty.
PT-FI's 1997 depreciation rate of 15.0 cents per pound of
copper reflects an increase over the 1996 rate because of the first
phase of the enhanced infrastructure program (EIP) and other 1997
capital additions. The EIP is designed to provide the
infrastructure needed for PT-FI's growing operations and expected
future growth, to enhance the living conditions of PT-FI's
employees, and to develop and promote the growth of local and third
party activities and enterprises in Irian Jaya. The first phase of
the EIP was completed in 1996; therefore, the 1996 rate of 13.0
cents per pound did not include the EIP for a full year. The 1998
depreciation rate is expected to increase to 17.0 cents per pound of
copper to reflect a half year of depreciation on the fourth
concentrator mill expansion and other capital additions.
PT-FI Outlook. PT-FI's copper concentrates are sold primarily
under dollar-denominated long-term sales agreements, mostly to
companies in Asia and Europe. PT-FI has commitments from various
parties, including Atlantic, to purchase virtually all of its
estimated 1998 production at market prices. With PT-FI's fourth
concentrator mill expansion set to begin operations during the first
half of 1998, PT-FI's share of sales for 1998 is expected to
approximate 1.4 billion pounds of copper and 2.2 million ounces of
gold. Strong 1998 copper and gold sales reflect the expectation of
producing at higher mill throughput rates than in 1997 because of
the fourth concentrator mill expansion, partially offset by lower
average grades than during 1997. PT-FI has a long-term contract to
provide Atlantic with approximately 60 percent of its copper
concentrate requirements at market prices.
Exploration. FCX continues an aggressive exploration program in
Irian Jaya, in the Block A, Block B, and Eastern Mining blocks. In
Block A, delineation drilling is currently under way in seven
underground drill stations at Kucing Liar. In addition, two surface
drills are working to test deep Kucing Liar-type targets on the west
and northeast flanks of the Grasberg intrusive complex. Delineation
drilling at the Grasberg and DOZ ore bodies is scheduled to continue
throughout 1998. In Block B, drilling and trenching continues at
the Wabu Ridge Gold Project. A pre-feasibility study is ongoing
with all aspects of a potential commercial operation being studied.
Elsewhere in Block B, condemnation work, geology and drilling
continues in anticipation of the final land relinquishment. In the
Eastern Mining COW areas, geologic mapping and sampling have
identified several new targets which will be scheduled for drilling
during early 1998.
PT-FI Operating Results - 1996 Compared with 1995. PT-FI's 1996
revenues were slightly higher than 1995 revenues as higher sales
volumes were substantially offset by a decline in copper
realizations. Copper sales volumes rose 11 percent and gold sales
volumes rose 26 percent as a result of a 14 percent increase in
average mill throughput and improvements in copper and gold ore
grades and gold recovery rates. Copper realizations declined from
$1.22 per pound in 1995 to $1.02 per pound in 1996. PT-FI's 1996
revenues include net additions totaling $38.2 million recognized
under PT-FI's copper price protection program, compared with net
reductions totaling $68.6 million in 1995. Average 1996 gold
realizations were slightly higher compared to 1995. PT-FI's revenues
also include additions totaling $14.1 million in 1996 and $3.9
million in 1995 recognized on gold forward sales contracts.
Treatment charges increased in 1996 because of the increased sales
volumes coupled with higher negotiated rates because of tighter
market conditions. Despite higher sales volumes, royalties were
lower because of lower copper prices.
Average cash production costs in 1996 of 16.8 cents per pound
of copper were 30 percent lower than the comparable 1995 average.
Higher gold sales and realizations resulted in improved gold
credits. Higher treatment charges reflect tightening smelter
capacity. PT-FI's 1996 depreciation rate of 13.0 cents per pound of
copper reflects depreciation for the expanded operations and a half
year of depreciation for the first phase of the EIP. The 1995 rate
did not include the EIP costs.
SMELTING AND REFINING
Atlantic Operating Results - 1997 Compared with 1996. Atlantic
reported higher revenues ($874.5 million compared to $778.1 million
in 1996) and cost of sales ($831.2 million compared to $759.4
million in 1996) because of increases in production from its newly
expanded facilities. Atlantic reached its full production capacity
of 270,000 metric tons of metal per year in June 1996 and completed
a $13.0 million "debottlenecking" project in June 1997 which
increased annual production capacity by 20,000 metric tons.
Atlantic also benefited from higher treatment and refining rates in
1997 ($0.26 per pound compared with $0.23 per pound in 1996).
Cathode cash production costs ($0.12 per pound) in 1997 were 20
percent lower than in 1996. Higher treatment charges, which
negatively affect PT-FI, benefit Atlantic. The effect of an
equivalent change in treatment charges on PT-FI and Atlantic largely
offset in FCX's consolidated financial results, after taking into
account income taxes and minority interests.
PT Smelting Operating Results - 1997. PT-FI accounts for its 25
percent interest in PT Smelting under the equity method (Note 10).
Construction of PT Smelting's smelting and refining facilities in
Gresik, Indonesia is expected to be completed in mid-1998 and first
production is expected in the fourth quarter of 1998. PT-FI's share
of PT Smelting's 1997 operating loss totaled $1.5 million,
consisting of administrative costs.
Atlantic Operating Results - 1996 Compared with 1995. Atlantic
completed the expansion of its smelter from 150,000 to 270,000
metric tons of metal per year and reached full production capacity
in June 1996. For 1996, Atlantic reported higher revenues ($778.1
million compared to $541.3 million in 1995) and cost of sales
($759.4 million compared to $546.5 million in 1995) primarily
because of increases in production. Shutdowns in 1995 caused by a
strike at an adjacent plant, expansion equipment tie-ins and normal
maintenance turnarounds impacted results adversely. Atlantic also
benefited from lower cathode cash production costs, $0.15 per pound
in 1996 compared with $0.18 per pound in 1995.
DISCLOSURES ABOUT MARKET RISKS
Commodity Price Risk. FCX's revenues are derived primarily
from PT-FI's sale of copper concentrates, which also contain
significant amounts of gold, and the sale of copper cathodes and
wire rod by Atlantic. FCX's net income can vary significantly with
fluctuations in the market prices of copper and gold. At various
times, in response to market conditions, FCX has entered into copper
and gold price protection contracts for some portion of its expected
future mine production to mitigate the risk of adverse price
fluctuations. Based on PT-FI's projected 1998 sales volumes, each
$0.01 per pound change in the average price realized on copper sales
would have an approximate $14 million impact on revenues and an
approximate $7 million impact on net income. Each $10 per ounce
change in the average price realized on PT-FI annual gold sales
would have an approximate $22 million impact on revenues and an
approximate $11 million impact on net income.
The significant decline in gold prices in early 1997 increased
the value of PT-FI's forward gold sales contracts covering 876,000
ounces of gold sales at an average price of $376.08 per ounce from
February 1997 through August 1997. In February 1997, PT-FI closed
these contracts and received $30.1 million cash. As a result, PT-FI
reported gold revenues through August 1997 at a higher price than
realized under its contract terms with customers, but no longer has
any forward gold sales positions. PT-FI has suspended its program
of selling gold forward on a six-month basis but may reinstate the
program in the future. Future gold sales will be priced at then
current market prices as long as the forward sales program is
suspended.
The significant decline in copper prices during 1996 increased
the value of put option contracts that PT-FI purchased under its
price protection program to provide a floor price of $0.90 per pound
for essentially all copper sales through the second quarter of 1997
at an average cost of approximately $0.02 per pound. During the
third quarter of 1996, PT-FI sold all of its put option contracts
covering approximately 1.2 billion pounds of copper for $97.2
million cash. As a result, PT-FI reported copper revenues through
June 30, 1997 at a higher price than realized under its copper
concentrate sales contracts, but PT-FI no longer has any price
protection on its copper sales. As conditions warrant, PT-FI may
enter into new contracts for its future copper sales.
PT-FI's concentrate sales agreements, with regard to copper,
provide for provisional billings when shipped with final settlement
generally based on the average London Metal Exchange (LME) price for
a specified future month. Copper revenues on provisionally priced
open pounds are adjusted monthly based on then current prices. At
December 31, 1997, FCX had consolidated copper sales totaling 323.3
million pounds recorded at an average price of $0.74 per pound
remaining to be finally priced. Approximately 70 percent of these
open pounds are expected to be finally priced during the first
quarter of 1998 with the remaining pounds to be priced during the
second quarter of 1998. A one cent movement in the average price
used for these open pounds will have an approximate $1.6 million
impact on FCX's 1998 net income.
FCX has redeemable preferred stock indexed to gold and silver
prices which hedge future production and are carried at their
original issue value. As redemption payments occur, differences
between the carrying value and the redemption payment will be
recorded as an adjustment to revenues. Future mandatory redemption
payments in ounces and equivalent value in dollars based on December
31, 1997 gold and silver prices follow (dollars in millions):
Gold Silver
(Ozs.) Amount (Ozs.) Amount
---------- ---------- ---------- ----------
1998 - $- - $-
1999 - - 2,380,000 14.3
2000 - - 2,380,000 14.3
2001 - - 2,380,000 14.3
2002 - - 2,380,000 14.3
Thereafter 1,030,000 297.9 9,520,000 57.1
At December 31, 1997:
Fair value $242.0 $92.2
========== ==========
Carrying value $400.0 $100.0
========== ==========
Atlantic's purchases of copper concentrate are priced at
approximately the same time as its sales of the refined copper,
thereby protecting Atlantic from most copper price risk. Atlantic
enters into futures contracts to hedge its price risk whenever its
physical purchases and sales pricing periods do not match. At
December 31, 1997, Atlantic had contracts, with a fair value of less
than $0.1 million, to sell 2.0 million pounds of copper at an
average price of $0.80 per pound in January 1998 and contracts, with
a fair value of $(1.5) million, to purchase 20.3 million pounds of
copper at an average price of $0.87 per pound through December 1999.
Foreign Currency Exchange Risk. FCX conducts the majority of its
operations in Indonesia and Spain where its functional currencies
are U.S. dollars. All of FCX's revenues are denominated in U.S.
dollars; however, some costs are denominated in either Indonesian
rupiah or Spanish pesetas. FCX's results are positively affected
when the U.S. dollar strengthens against these foreign currencies
and adversely affected when the U.S. dollar weakens against these
foreign currencies.
Over the past several years, and more dramatically in the
second half of 1997, the Indonesian rupiah has weakened against the
U.S. dollar and PT-FI has benefited primarily through lower labor
costs. PT-FI previously has not entered into financial contracts for
the rupiah; however, it is currently reviewing its rupiah hedging
policy in view of current circumstances.
Assuming estimated 1998 rupiah payments of 500 billion and an
exchange rate of 7,500 rupiah to one U.S. dollar, each one thousand
rupiah change in the exchange rate could result in an approximate
$4.5 million change in FCX's annual net income. PT-FI had net
rupiah-denominated monetary assets at December 31,1997 totaling
$14.2 million recorded at an exchange rate of 7,450 rupiah to one
U.S. dollar. Adjustments to these net assets to reflect changes in
the exchange rate are recorded as currency transaction gains or
(losses) in production costs and totaled $(6.3) million in 1997.
A portion of Atlantic's operating costs and certain Atlantic
assets and liabilities are denominated in Spanish pesetas. Based on
estimated 1998 pesetas payments of 15 billion and an exchange rate
of 150.7 pesetas to one U.S. dollar, each ten peseta change in the
U.S. dollar and Spanish peseta exchange rate results in an
approximate $6 million change in FCX's annual net income before any
hedging effects. Atlantic had net peseta-denominated monetary
liabilities at December 31, 1997 totaling $70.3 million recorded at
an exchange rate of 150.7 pesetas to one U.S. dollar. Adjustments
to these net liabilities to reflect changes in the exchange rate are
recorded as currency transaction gains or (losses) in Other Income
and totaled $16.6 million in 1997 and $10.3 million in 1996.
During 1996, Atlantic implemented a currency hedging program to
reduce its exposure to changes in the U.S. dollar and Spanish peseta
exchange rate that involves foreign exchange option and forward
contracts. These contracts currently hedge approximately 80 percent
of Atlantic's projected net peseta cash outflows through January
1999 (Note 11). In addition to the currency transaction gains noted
above, Atlantic recorded losses to Other Income related to its
forward currency contracts, which under current accounting do not
qualify for hedge accounting, totaling $6.5 million in 1997 and $1.0
million in 1996.
At December 31, 1997, Atlantic had contracts, with a fair value
of $(2.0) million, to purchase 6.3 billion Spanish pesetas at an
average exchange rate of 143.8 pesetas to one U.S. dollar through
January 1999 and option contracts, with a fair value of $0.5
million, to purchase 6.3 billion Spanish pesetas at an average
strike price of 140.6 pesetas to one U.S. dollar through January
1999.
Interest Rate Risk. FCX has interest rate swap contracts to fix
interest rates on a portion of its floating rate debt. The costs
associated with these contracts are amortized to interest expense over
the terms of the agreements. The table below presents future maturities of
principal (or notional amount) for outstanding debt and interest swaps
at December 31, 1997 and fair value at December 31, 1997 (dollars in
millions):
1998 1999 2000 2001 2002 Thereafter Fair Value
----- ------ ------ ------ ------ ---------- ---------
Long-term debt (Note 8):
Fixed rate $7.0 $7.0 $7.0 $148.0 $- $450.0 $632.9
Average interest
rate 8.1% 8.1% 8.1% 9.4% -% 7.3% 7.9%
Variable rate $73.9 $69.1 $104.3 $74.0 $380.0 $1,068.2 $1,770.0
Average interest
rate 7.8% 9.6% 8.9% 9.0% 8.3% 9.1% 8.9%
Interest rate swaps (Note 11):
Amount $32.1 $32.1 $97.8 $- $- $- $(1.2)
Average interest
rate 7.0% 7.0% 6.1% -% -% -% 6.4%
RECENT DEVELOPMENTS IN INDONESIA
Recently, unfavorable economic developments have negatively impacted
Southeast Asia in general and Indonesia in particular. Indonesia's
national debt ratings have been downgraded, the Indonesian rupiah
has devalued significantly and the Indonesian economic growth rate
and stock market values have declined. The International Monetary
Fund and certain countries are making loans and other commitments to
Indonesia, as well as certain other Asian nations, to stabilize
their currencies' values and their ability to service debt. In
return, changes in these countries' financial and regulatory
practices are being required. Repercussions of these and other
economic developments have also negatively affected commodity
markets, including copper and gold prices, because of anticipated
declines in Asian demand.
PT-FI and Eastern Mining believe there are a number of factors which
mitigate the above concerns related to their operations, all of
which are in Indonesia. PT-FI's and Eastern Mining's operations are
conducted through the PT-FI and Eastern Mining COWs, both of which
have 30-year terms, provide for two 10-year extensions under certain
conditions, and govern PT-FI's and Eastern Mining's rights and
obligations relating to taxes, exchange controls, repatriation and
other matters. Both COWs were concluded pursuant to the 1967 Foreign
Capital Investment Law, which expresses Indonesia's foreign
investment policy and provides basic guarantees of remittance rights
and protection against nationalization, a framework for economic
incentives and basic rules regarding other rights and obligations of
foreign investors. Specifically, the COWs provide that the GOI will
not nationalize or expropriate PT-FI's or Eastern Mining's mining
operations. Any disputes under the COWs are subject to
international arbitration.
The Company has had positive relations with the GOI since it
commenced business activities in Indonesia in 1967 and contributes
significantly to the economy of Irian Jaya and Indonesia. PT-FI is
one of the largest taxpayers in Indonesia and is a significant
employer in a remote and undeveloped area of the country. PT-FI
intends to continue to maintain positive working relationships with
the central, provincial and local branches of the GOI regarding its
operations and development efforts.
All PT-FI sales revenues and all debt and debt service are
denominated in U.S. dollars; whereas, a portion of PT-FI's
expenditures are paid in rupiah. As a result, the decline in the
value of the rupiah has benefited current operating results by
reducing certain operating costs in terms of U.S. dollars.
OTHER MATTERS
In March 1997, P.T. Nusamba Mineral Industri (NMI), a subsidiary of
P.T. Nusantara Ampera Bakti, acquired from a third party
approximately 51 percent of the capital stock of P.T. Indocopper
Investama Corporation (PT-II). FCX owns the remaining 49 percent of
PT-II, which is a 9.4 percent owner of PT-FI. NMI financed $254.0
million of the $315.0 million purchase price with a variable rate
commercial loan maturing in March 2002. The purchase price was
based in part on FCX's market value using its publicly traded common
stock price at the time of the transaction. FCX has agreed that if
NMI defaults on the loan, FCX will purchase the PT-II stock or the
lenders' interest in the commercial loan for the amount then due by
NMI under the loan. FCX also agreed to lend to NMI any shortfalls
between the interest payments due on the commercial loan and the
dividends received by NMI from PT-II. At December 31, 1997, $7.6
million was due in March 2002 from NMI because of interest payment
shortfalls. The amount of any future shortfalls will depend
primarily on the level of PT-FI's dividends to PT-II.
FCX believes that PT-FI's operations are being conducted
pursuant to applicable permits and are in compliance in all
material respects with applicable Indonesian environmental
laws, rules and regulations. In 1996, PT-FI began contributing
to a fund designed to accumulate at least $100 million by the
end of its Indonesian mine's life for eventual mine closure and
reclamation. Although the ultimate amount of reclamation and
closure costs to be incurred is currently indeterminable, based
on recent analyses PT-FI estimates that ultimate reclamation
and closure costs may require as much as $100 million but would
not exceed $150 million. These costs will be incurred
throughout the remaining life of the mine, which is currently
estimated to exceed 30 years. FCX had $5.5 million accrued on
a unit-of-production basis at December 31, 1997 for mine
closure and reclamation costs, included in other liabilities.
An increasing emphasis on environmental issues and future
changes in regulations could require FCX to incur additional
costs which would be charged against future operations.
Estimates involving environmental matters are by their nature
imprecise and can be expected to be revised over time because
of changes in government regulations, operations, technology
and inflation. See FCX's Environmental Report beginning on
page 8 for information about FCX's environmental programs.
Since early 1996, PT-FI has participated in an independent
social/cultural audit of its Irian Jaya operations under a voluntary
program monitored by the GOI. The audit was conducted by LABAT-
Anderson, an internationally recognized consulting firm, and their
final report was made public in August 1997. All of the
recommendations in LABAT-Anderson's report have been agreed to by
PT-FI and are in the process of being implemented. See FCX's Social
Responsibility Report beginning on page 10 for information about
FCX's social programs.
FCX has assessed its year 2000 information systems cost issues
and believes that its current plans for system upgrades will
adequately address these issues internally at no material cost.
CAUTIONARY STATEMENT
Management's discussion and analysis contains forward-looking
statements regarding market risks, mineral reserves, treatment
charge rates, depreciation rates, copper and gold grades and sales
volumes, exploration activities, capital expenditures, expansion
costs, Gresik smelter costs, the availability of financing, future
environmental costs and relations with the indigenous population of
Irian Jaya. Important factors that might cause future results to
differ from these projections are described in more detail in FCX's
Form 10-K for the year ended December 31, 1997 filed with the
Securities and Exchange Commission.
________________________
REPORT OF MANAGEMENT
Freeport-McMoRan Copper & Gold Inc. (the Company) is
responsible for the preparation of the financial statements and all
other information contained in this Annual Report. The financial
statements have been prepared in conformity with generally accepted
accounting principles and include amounts that are based on
management's informed judgments and estimates.
The Company maintains a system of internal accounting controls
designed to provide reasonable assurance at reasonable costs that
assets are safeguarded against loss or unauthorized use, that
transactions are executed in accordance with management's
authorization and that transactions are recorded and summarized
properly. The system is tested and evaluated on a regular basis by
the Company's internal auditors, Price Waterhouse LLP. In
accordance with generally accepted auditing standards, the Company's
independent public accountants, Arthur Andersen LLP, have developed
an overall understanding of our accounting and financial controls
and have conducted other tests as they consider necessary to support
their opinion on the financial statements.
The Board of Directors, through its Audit Committee composed
solely of non-employee directors, is responsible for overseeing the
integrity and reliability of the Company's accounting and financial
reporting practices and the effectiveness of its system of internal
controls. Arthur Andersen LLP and Price Waterhouse LLP meet
regularly with, and have access to, this committee, with and without
management present, to discuss the results of their audit work.
/s/ James R. Moffett /s/Richard C. Adkerson
James R. Moffett Richard C. Adkerson
Chairman of the Board and President, Chief Operating Officer
Chief Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
FREEPORT-McMoRan COPPER & GOLD INC.:
We have audited the accompanying balance sheets of Freeport-
McMoRan Copper & Gold Inc. (the Company), a Delaware Corporation, as
of December 31, 1997 and 1996, and the related statements of income,
cash flow and stockholders' equity for each of the three years in
the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
the Company as of December 31, 1997 and 1996 and the results of its
operations and its cash flow for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
New Orleans, Louisiana,
January 20, 1998
FREEPORT-McMoRan COPPER & GOLD INC.
STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- -----------
(In Thousands, Except Per Share Amounts)
Revenues $2,000,904 $1,905,036 $1,834,335
Cost of sales:
Production and delivery 1,008,604 951,863 934,707
Depreciation and
amortization 213,855 173,978 124,055
---------- ---------- ----------
Total cost of sales 1,222,459 1,125,841 1,058,762
Exploration expenses 17,629 - 13,888
General and administrative
expenses 96,601 140,934 165,253
---------- ---------- ----------
Total costs and
expenses 1,336,689 1,266,775 1,237,903
---------- ---------- ----------
Operating income 664,215 638,261 596,432
Interest expense, net (151,720) (117,291) (50,080)
Other income (expense),
net 4,271 976 (1,590)
---------- ---------- ----------
Income before income
taxes and minority
interests 516,766 521,946 544,762
Provision for income
taxes (231,315) (247,168) (234,044)
Minority interests in
net income of
consolidated subsidiaries (40,343) (48,529) (57,100)
---------- ---------- ----------
Net income 245,108 226,249 253,618
Preferred dividends (36,567) (51,569) (54,153)
---------- ---------- ----------
Net income applicable
to common stock $ 208,541 $ 174,680 $ 199,465
========== ========== ==========
Net income per share of common stock:
Basic $1.06 $.90 $.98
===== ==== ====
Diluted $1.06 $.89 $.98
====== ==== ====
Average common shares outstanding:
Basic 196,392 194,910 203,536
======= ======= =======
Diluted 197,653 196,682 204,406
======= ======= =======
Dividends paid per
common share $.90 $.90 $.675
==== ==== =====
The accompanying Notes to Financial Statements are an integral part
of these financial statements.
FREEPORT-McMoRan COPPER & GOLD INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED RESULTS OF OPERATIONS
Revenues. Increased production from expansions resulted in higher
sales volumes in each of the past three years. Lower copper and
gold realizations in 1997 compared with 1996 and lower copper
realizations in 1996 compared with 1995 have partially offset the
impact of higher sales volumes.
Cost of Sales. Production and delivery costs have risen with the
corresponding increases in production volumes; however, cost
reduction efforts and efficiencies from the expansions partially
offset some of those increases. Increases in depreciation and
amortization were caused by additions to property, plant and
equipment to support the expanded operating levels, and by increased
production as certain assets are depreciated on the unit-of-
production method.
Exploration Expenses. The FCX/Rio Tinto joint ventures incurred
exploration costs of $44.6 million in 1997 and $39.2 million in 1996
as they continued to aggressively explore the COW areas. During
1997, FCX reported $17.6 million of exploration expense primarily
for costs incurred in the Eastern Mining and PT-FI Block B areas.
Costs in these areas are now being shared 60 percent by FCX and 40
percent by Rio Tinto. All 1996 exploration costs and 1995
exploration costs after May 1995 were reimbursed by Rio Tinto's $100
million exploration funding received in 1996. Approximately $11.4
million in PT-FI's Block A remains to be applied to the Rio Tinto
$100 million exploration funding. The FCX/Rio Tinto joint ventures'
1998 exploration budgets total approximately $40 million, most of
which will be shared 60 percent by FCX and 40 percent by Rio Tinto.
General and Administrative Expenses. General and
administrative expenses declined 31 percent from 1996 to 1997
primarily because of the reversal of $25.3 million of costs of stock
appreciation rights caused by the decline in FCX's common stock
price during the fourth quarter of 1997. General and administrative
expenses for 1996 and 1995 include $13.2 million and $37.1 million,
respectively, for costs of stock appreciation rights when FCX's
stock price rose and early retirement charges. As a percentage of
revenues, general and administrative expenses were 4.8 percent in
1997, 7.4 percent in 1996 and 9.0 percent in 1995.
Interest Expense, Net. FCX's total interest cost (before
capitalization) rose to $174.7 million in 1997, compared to $140.3
million in 1996 and $99.9 million in 1995, because of an overall
increase in debt levels associated with the expansions and the FCX
share purchase programs. Capitalized interest relating primarily to
the fourth concentrator mill expansion totaled $23.0 million in 1997
and capitalized interest related to the PT-FI and Atlantic
expansions and the first phase of the EIP in 1996 and 1995 totaled
$23.0 million and $49.8 million, respectively. Interest expense is
expected to increase during 1998 because of higher debt levels and
reduced capitalized interest. Additionally, in connection with
rating agency downgrades of Indonesia's national debt ratings, FCX's
credit ratings were also downgraded in early 1998. As a result of
the downgrade, the spread on the FCX/PT-FI revolver borrowings
increased by 112.5 basis points.
Provision for Income Taxes. FCX's effective tax rate was 45 percent
in 1997, 47 percent in 1996 and 43 percent in 1995 (Note 7). PT-
FI's COW provides a 35 percent corporate income tax rate for PT-FI
and a 10 percent withholding on dividends paid to FCX by PT-FI and
on interest for debt incurred after the signing of the COW. The
withholding rate declined from 15 percent to 10 percent beginning
February 1997 because of an amendment to the United States/Indonesia
tax treaty. Included in the 1997 provision for income taxes is $9.6
million representing additional amounts payable pursuant to an
Indonesian Presidential Decree. No income taxes are recorded at
Atlantic, which is subject to taxation in Spain, because it has not
generated taxable income in recent years.
The FCX United States federal income tax returns for the years
1990-1992 and PT-FI's 1994 Indonesian income tax return are
currently under examination. In January 1998, PT-FI settled and
paid assessments from the Indonesian tax authorities for the years
1989-1993 with no material adverse effect on the financial condition
or results of operations of FCX.
Minority Interests and Preferred Dividends. Minority interests in
net income of consolidated subsidiaries is primarily related to net
income levels at PT-FI. Preferred dividends declined in 1997
primarily because in December 1996 FCX's Convertible Exchangeable
Preferred Stock was converted to FCX common stock or redeemed for
cash (Note 6).
FREEPORT-McMoRan COPPER & GOLD INC.
STATEMENTS OF CASH FLOW
Years Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
Cash flow from operating activities:
Net income $ 245,108 $ 226,249 $ 253,618
Adjustments to reconcile
net income to net cash provided by
operating activities:
Depreciation and
amortization 213,855 173,978 124,055
Deferred income taxes 61,717 54,194 22,735
Deferral of unearned
income 30,102 97,173 -
Recognition of unearned
income (76,595) (51,066) (36,207)
Minority interests'
share of net income 40,343 48,529 57,100
Deferred stock
appreciation rights
costs, mining costs
and other (53,131) (9,625) 35,492
(Increase) decrease in working capital:
Accounts receivable 80,611 6,860 2,095
Inventories 51,957 (6,474) (47,308)
Prepaid expenses and
other 32 3,906 (4,593)
Accounts payable and
accrued liabilities (8,963) 42,155 (86,747)
Accrued income taxes (71,484) 14,645 72,876
---------- ---------- ----------
(Increase) decrease in
working capital 52,153 61,092 (63,677)
---------- ---------- ----------
Net cash provided by
operating activities 513,552 600,524 393,116
---------- ---------- ----------
Cash flow from investing activities:
Capital expenditures:
PT-FI (530,191) (401,538) (435,475)
Investment in
PT Smelting (36,243) (38,845) (4,101)
Atlantic Copper (18,478) (51,855) (141,742)
Other (9,575) - (2,168)
Investment in Freeport
Copper Company - - (25,000)
Other 1,870 3,535 (9,656)
---------- ---------- ----------
Net cash used in
investing activities (592,617) (488,703) (618,142)
---------- ---------- ----------
Cash flow from financing activities:
Proceeds from sale of:
7.50% Senior notes - 197,525 -
7.20% Senior notes - 248,045 -
Borrowings from Rio Tinto 371,040 75,360 -
Proceeds from debt 831,927 241,640 617,535
Repayment of debt (723,398) (372,633) (259,885)
Net proceeds from
infrastructure financing 265,843 - 242,775
Purchase of FCX common
shares (438,388) (220,997) (177,755)
Cash dividends paid:
Common stock (178,341) (175,766) (137,563)
Preferred stock (40,543) (52,437) (50,591)
Minority interests (33,773) (44,045) (38,897)
Other (3,461) 1,722 12,038
---------- ---------- ----------
Net cash provided by
(used in) financing
activities 50,906 (101,586) 207,657
---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents (28,159) 10,235 (17,369)
Cash and cash equivalents
at beginning of year 37,118 26,883 44,252
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 8,959 $ 37,118 $ 26,883
========== ========== ==========
Interest paid $ 155,658 $ 142,170 $ 91,291
========== ========== ==========
Income taxes paid $ 259,434 $ 178,328 $ 138,433
========== ========== ==========
The accompanying Notes to Financial Statements, which include
information in Notes 1 and 6 regarding noncash transactions, are an
integral part of these financial statements.
FREEPORT-McMoRan COPPER & GOLD INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CASH FLOWS AND LIQUIDITY
FCX's primary sources of cash are operating cash flows and
borrowings, while its primary cash outflows over the last three
years have been capital expenditures, dividends and purchases of its
common stock. PT-FI is on schedule to complete construction of the
fourth concentrator mill expansion in the first half of 1998, a
project that is being funded almost entirely with nonrecourse
borrowings from Rio Tinto. In December 1997, the FCX Board of
Directors announced a reduction in FCX's regular quarterly cash
dividend on its common stock to $0.05 per share, or $0.20 per share
annually, from the 1997 annual dividend of $0.90 per share. This
reduction reflects the impact of significantly lower copper and gold
prices and is effective for 1998. The reduced dividend and other
cost containment measures undertaken by FCX are expected to provide
FCX the financial flexibility to continue to invest in operations
and maintain its aggressive exploration program.
Operating Activities. Operating cash flow declined 14 percent or
$87.0 million in 1997. Record copper and gold sales volumes in 1997
were offset by lower realizations. FCX received $97.2 million of
cash proceeds from the sale of copper put option contracts in 1996
and recognized $46.1 million in 1997 revenues and $51.1 million in
1996 revenues. Working capital, excluding cash, decreased $52.2
million in 1997 primarily because decreases in accounts receivable
offset decreases in taxes payable. The $61.1 million decrease in
1996 primarily relates to exploration advances from Rio Tinto and an
increase in accrued income taxes payable because of higher taxable
income. Net cash provided by operating activities during 1996 rose
53 percent or $207.4 million over 1995, primarily reflecting the
proceeds from the sale of copper put option contracts and working
capital changes.
Investing Activities. FCX's 1997 capital expenditures increased
compared to 1996 primarily because of PT-FI's fourth concentrator
mill expansion. Atlantic completed its $225 million expansion to
270,000 metric tons per year in 1996 and its $13.0 million
debottlenecking project in June 1997. Atlantic received grants from
the Spanish government of $7.5 million in 1997, $29.5 million in
1996 and a total of $52.8 million through December 31, 1997. These
grants are recorded as a reduction of capital expenditures and are
contingent on Atlantic meeting specified conditions.
FCX's capital expenditures declined by $91.2 million in 1996
compared with 1995 primarily because of the completion of PT-FI's
118,000 MTPD expansion during 1995, the completion of Atlantic's
smelter expansion during 1996 and the completion of the first phase
of PT-FI's EIP during 1996. Partially offsetting the reduction in
PT-FI's other capital expenditures was an increase in expenditures
for the fourth concentrator mill expansion. In 1995, FCX purchased
Freeport Copper Company from Freeport-McMoRan Inc., FCX's former
parent, for $25.0 million.
Financing Activities. Nonrecourse borrowings from Rio Tinto totaled
$371.0 million in 1997 and $75.4 million in 1996. In 1996, FCX sold
publicly its 7.50% and 7.20% Senior Notes for net proceeds of $445.6
million. Net proceeds from debt totaled $108.5 million and net
proceeds from infrastructure financing totaled $265.8 million in
1997 while net repayments of debt totaled $131.0 million in 1996.
The net proceeds from infrastructure financing in 1997 included
$36.5 million from the sale of PT-FI's ownership interest in the
related joint ventures (see "Infrastructure Asset Sales" under
Capital Resources and Financial Condition). The 1995 period
included $357.7 million of net proceeds from debt and $242.8 million
of proceeds from infrastructure financing.
In 1995, FCX announced an open market share purchase program
for up to 20 million shares of its Class A and Class B common shares
and in August 1997 FCX announced a new program for an additional 20
million shares. During 1997, FCX acquired 18.3 million of its
shares for $439.8 million (an average of $24.07 per share). From
inception through February 20, 1998, FCX has purchased a total of
33.5 million shares for $818.2 million (an average of $24.41 per
share) and approximately 6.5 million shares remain available under
FCX's 40 million open market share purchase programs. The timing of
purchases is dependent upon many factors, including the price of
common shares, FCX's business and financial condition, and general
economic and market conditions. During 1996, FCX acquired 7.6
million of its shares for $221.6 million (an average of $29.24 per
share). During 1995, FCX acquired 7.7 million of its shares for
$177.8 million (an average of $23.13 per share).
As discussed above, the 1998 regular quarterly cash dividend on
common stock is expected to be $0.05 per share. The 1996 increase in
cash dividends paid on common stock compared with 1995 results from
the fourth-quarter 1995 increase in the regular quarterly dividend
from $0.15 to $0.225 per share.
FREEPORT-McMoRan COPPER & GOLD INC.
BALANCE SHEETS
December 31,
--------------------------
1997 1996
---------- ----------
ASSETS (In Thousands)
Current assets:
Cash and cash equivalents $ 8,959 $ 37,118
Accounts receivable:
Customers 89,599 176,920
Other 40,012 59,830
Inventories:
Product 120,794 161,901
Materials and supplies 194,006 213,811
Prepaid expenses and other 9,719 11,636
---------- ----------
Total current assets 463,089 661,216
Property, plant and equipment, net 3,521,715 3,088,644
Investment in PT Smelting 83,061 46,817
Other assets 84,344 68,857
---------- ----------
Total assets $4,152,209 $3,865,534
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 261,866 $ 311,797
Unearned customer receipts 101,428 46,458
Current portion of long-term
debt and short-term borrowings 80,852 136,617
Accrued income taxes 31,519 103,003
---------- ----------
Total current liabilities 475,665 597,875
Long-term debt, less current portion 1,843,770 1,350,099
Note payable to Rio Tinto 464,360 76,200
Accrued postretirement benefits
and other liabilities 125,980 200,646
Deferred income taxes 403,047 359,684
Minority interests 60,488 105,644
Mandatory redeemable preferred stock 500,007 500,007
Stockholders' equity:
Step-up convertible preferred stock 349,990 349,990
Class A common stock, par value $0.10,
97,071,944 shares issued and outstanding 9,707 9,707
Class B common stock, par value $0.10,
121,404,858 shares and 120,979,123 shares
issued and outstanding, respectively 12,140 12,098
Capital in excess of par value of
common stock 649,792 636,100
Retained earnings 107,679 77,479
Cumulative foreign currency translation
adjustment 10,244 10,244
Common stock held in treasury -
34,221,720 shares and
15,930,693 shares, at cost, respectively (860,660) (420,239)
---------- ----------
Total stockholders' equity 278,892 675,379
---------- ----------
Total liabilities and stockholders'
equity $4,152,209 $3,865,534
========== ==========
The accompanying Notes to Financial Statements are an integral part
of these financial statements.
FREEPORT-McMoRan COPPER & GOLD INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CAPITAL RESOURCES AND FINANCIAL CONDITION
Assets. FCX's assets increased by $286.7 million over 1996
primarily because of expenditures for property, plant and equipment.
Accounts receivable from customers decreased 49 percent primarily
because of lower copper and gold prices. Other assets increased
during 1997 primarily because of a $19.6 million increase in
deferred mining costs partially offset by PT-FI's sale of its
ownership interest in certain infrastructure asset joint ventures,
discussed below.
PT-FI's 1998 capital expenditures are expected to approximate
$225 million (other than for the fourth concentrator mill expansion
discussed below), representing mine and mill sustaining capital and
other long-term enhancement projects. Funding is expected to be
provided by operating cash flow, PT-FI's bank credit facilities
($641.0 million commitment available at February 20, 1998, subject
to $547.4 million borrowing base availability) and other financing
sources. Capital expenditures in 1998 for the fourth concentrator
mill expansion are expected to approximate $160 million, including
the coal-fired power plant and related facilities. The new power
plant facilities will not only provide the required power for the
expanded operations but also improve the profitability of existing
operations, which currently use power generated by higher cost
diesel-fueled facilities. Rio Tinto will finance approximately $60
million of these capital expenditures in accordance with the joint
venture arrangements (Note 2). Incremental cash flow attributable
to such expansion projects will be shared 60 percent PT-FI and 40
percent Rio Tinto. PT-FI has assigned its interest in such
incremental cash flow to Rio Tinto until Rio Tinto has received an
amount equal to the funds loaned to PT-FI plus interest based on Rio
Tinto's cost of borrowing. The incremental production from the
expansion, as well as production from PT-FI's existing operations,
will share proportionately in operating and administrative costs.
PT-FI will continue to receive 100 percent of cash flow from
specified annual amounts of copper, gold and silver through 2021
calculated by reference to its proved and probable reserves as of
December 31, 1994.
Construction began in 1996 on PT Smelting's 200,000 metric tons of
metal per year copper smelter/refinery complex in Gresik, Indonesia.
The estimated aggregate project cost, before working capital
requirements, is approximately $625 million. The project is being
financed with a $300 million nonrecourse term loan and a $110
million working capital facility from a group of commercial banks.
The remaining funding is being provided pro-rata by PT-FI (25
percent) and the other owners (75 percent). PT-FI expects its 1998
cash investment in the smelter to total approximately $3 million.
Upon completion of the Gresik smelter in mid-1998 and the PT-FI
fourth concentrator mill expansion, FCX anticipates that
approximately 50 percent of PT-FI's annual concentrate production
will be sold to Atlantic and PT Smelting at market prices.
Infrastructure Asset Sales. In March 1997, PT-FI completed the
final $75 million sale of infrastructure assets to joint ventures
owned one-third by PT-FI and two-thirds by P.T. ALatieF Nusakarya
Corporation (ALatieF), an Indonesian investor. The sales to the
ALatieF joint ventures totaled $270.0 million during the period from
December 1993 to March 1997. PT-FI subsequently sold its one-third
interest in the joint ventures to ALatieF and is leasing the assets
under infrastructure asset financing arrangements. PT-FI continues
to guarantee an approximate $50 million bank loan associated with
the purchases. PT-FI no longer consolidates the joint ventures.
Because of PT-FI's sale of its interest in the joint ventures and
the resulting change in accounting for these transactions as
infrastructure asset financings rather than consolidation, PT-FI's
interest expense is higher and minority interest charges are lower.
In December 1997, PT-FI completed a $366.4 million sale, including
$74.4 million for the remaining costs expected to be incurred to
complete construction, of the new power plant facilities associated
with the fourth concentrator mill expansion to the joint venture
that owns the assets which already provide electricity to PT-FI.
The purchase price included $123.2 million for Rio Tinto's share of
the new power plant facilities. Sales to the power joint venture
totaled $581.4 million through 1997 including $458.2 million of PT-
FI owned assets. PT-FI subsequently sold its 30 percent interest in
the joint venture to the other partners and is purchasing power
under infrastructure asset financing arrangements pursuant to a
power sales agreement.
Liabilities and Stockholders' Equity. FCX's liabilities rose by
$683.2 million over 1996, primarily reflecting an increase in total
debt. Current liabilities decreased primarily because of a $45.7
million decrease in the current portion of long-term debt at
Atlantic and a $71.5 million decrease in accrued income taxes
partially offset by an increase in unearned customer receipts
because of lower copper and gold prices. Deferred income taxes
increased $43.4 million because of timing differences related to tax
and book depreciation of property, plant and equipment. Equity
declined by $396.5 million from 1996 primarily because of $439.8
million of FCX common stock purchases.
FREEPORT-McMoRan COPPER & GOLD INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
Convertible Exchangeable Preferred Stock:
Balance at beginning
of year $ - $ 223,900 $ 223,900
Conversions to Class A
common stock - (221,093) -
Redemptions - (2,807) -
---------- ---------- ----------
Balance at end of year - - 223,900
---------- ---------- ----------
Step-Up Convertible Preferred Stock:
Balance at beginning
of year 349,990 350,000 350,000
Conversions to Class A
common stock - (10) -
---------- ---------- ----------
Balance at end of year 349,990 349,990 350,000
---------- ---------- ----------
Class A common stock:
Balance at beginning
of year 9,707 8,804 6,597
Conversions of preferred
stock and Class B
common stock - 903 2,207
---------- ---------- ----------
Balance at end of year 9,707 9,707 8,804
---------- ---------- ----------
Class B common stock:
Balance at beginning
of year 12,098 11,862 13,998
Conversions to Class A
common stock - - (2,207)
Exercised stock options 42 236 71
---------- ---------- ----------
Balance at end of year 12,140 12,098 11,862
---------- ---------- ----------
Capital in excess of par value of common stock:
Balance at beginning
of year 636,100 376,054 362,557
Conversions of preferred
stock - 220,073 -
Exercised stock options 13,692 39,973 13,497
---------- ---------- ----------
Balance at end of year 649,792 636,100 376,054
---------- ---------- ----------
Retained earnings:
Balance at beginning
of year 77,479 78,565 41,663
Net income 245,108 226,249 253,618
Cash dividends on
common stock (178,341) (175,766) (137,563)
Dividends on preferred
stock (36,567) (51,569) (54,153)
Purchase of Freeport
Copper Company - - (25,000)
---------- ---------- ----------
Balance at end of year 107,679 77,479 78,565
---------- ---------- ----------
Cumulative foreign currency translation adjustment:
Balance at beginning
of year 10,244 10,244 (3,740)
Adjustment - - 13,984
---------- ---------- ----------
Balance at end of year 10,244 10,244 10,244
---------- ---------- ----------
Common stock held in treasury:
Balance at beginning
of year (420,239) (177,755) -
Purchase of 18,270,500,
7,576,500 and 7,685,100
shares, respectively (439,827) (221,565) (177,755)
Tender of 20,527 and
669,093 shares,
respectively, to FCX to
exercise stock options (594) (20,919) -
---------- ---------- ----------
Balance at end of year (860,660) (420,239) (177,755)
---------- ---------- ----------
Total stockholders'
equity $ 278,892 $ 675,379 $ 881,674
========== ========== ==========
The accompanying Notes to Financial Statements are an integral part
of these financial statements.
FREEPORT-McMoRan COPPER & GOLD INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements of
Freeport-McMoRan Copper & Gold Inc. (FCX) include its majority-owned
subsidiaries, P.T. Freeport Indonesia Company (PT-FI) and P.T. IRJA
Eastern Minerals Corporation (Eastern Mining), as well as its wholly
owned subsidiary, Atlantic Copper, S.A. (Atlantic). FCX's
unincorporated joint ventures with Rio Tinto plc (Rio Tinto) are
reflected using the proportionate consolidation method in accordance
with standard industry practice (Note 2). PT-FI's investment in
P.T. Smelting Co. (PT Smelting) is accounted for under the equity
method (Note 10). All significant intercompany transactions have
been eliminated. Certain prior year amounts have been reclassified
to conform to the 1997 presentation.
Use of Estimates. The preparation of FCX's financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes. The
more significant areas requiring the use of management estimates
include the pricing of open concentrate sales, useful lives for
depreciation and amortization, allowances for obsolete inventory,
reclamation and environmental obligations, postretirement and other
employee benefits, valuation allowances for deferred tax assets,
future cash flow associated with assets and proved and probable
reserves. Actual results could differ from those estimates.
Cash and Cash Equivalents. Highly liquid investments purchased with
a maturity of three months or less are considered cash equivalents.
Inventories. Inventories are stated at the lower of cost or market.
PT-FI uses the average cost method and Atlantic uses the first-in,
first-out (FIFO) cost method.
Property, Plant and Equipment. Property, plant and equipment are
carried at cost. Mineral exploration costs are expensed as
incurred, except in the year a property is deemed to contain a
viable mineral deposit, in which case they are capitalized.
Development costs, including interest incurred during the
construction and development period, are capitalized. Expenditures
for replacements and improvements are capitalized. Depreciation for
mining and milling life-of-mine assets is determined using the unit-
of-production method based on estimated recoverable copper reserves.
Other assets are depreciated on a straight-line basis over estimated
useful lives of 15 to 20 years for buildings and 3 to 25 years for
machinery and equipment.
Income Taxes. FCX accounts for income taxes pursuant to Statement
of Financial Accounting Standards No. 109 (SFAS 109). Deferred income
taxes are provided to reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their reported
amounts in the financial statements.
Reclamation and Mine Closure. Estimated reclamation and mine
closure costs for PT-FI's current mining operations in Indonesia are
accrued and charged to income over the estimated life of the mine by
the unit-of-production method based on estimated recoverable copper
reserves. Expenditures resulting from the remediation of conditions
caused by past operations which do not contribute to future revenue
generation are expensed.
Financial Contracts. FCX has entered into financial contracts to
manage certain market risks resulting from fluctuations in commodity
prices (primarily copper and gold), foreign exchange rates and
interest rates by creating offsetting market exposures. FCX views
all of its financial contracts as hedges as it does not engage in
speculative activity. Costs or premiums and gains or losses on the
contracts, including closed contracts, are recognized with the
hedged transaction. Also, gains or losses are recognized if the
hedged transaction is no longer expected to occur or if deferral
criteria are not met. FCX monitors its credit risk on an ongoing
basis and considers this risk to be minimal because its contracts
are with a diversified group of financially strong counterparties.
At December 31, 1997, FCX had redeemable preferred stock indexed to
commodities, deferred costs on foreign exchange option contracts, open
foreign exchange forward contracts, open forward copper sales and
purchase contracts, and interest rate swap contracts (Note 11).
Redeemable preferred stock indexed to commodities is treated as a
hedge of future produciton and is carried at its original issue value.
As redemption payments occur, differences between the carrying value
and the redemption payment will be recorded as an adjustment to revenues.
Atlantic hedges its anticipated Spanish peseta cash flows with
foreign exchange option contracts and foreign exchange forward
contracts. Gains and losses, including costs, on option contracts
that qualify as hedges for accounting purposes are recognized in
income when the underlying hedged transaction is recognized or when
a previously anticipated transaction is no longer expected to occur.
Changes in market value of forward exchange contracts which protect
anticipated transactions are recognized in the period incurred.
Atlantic's purchases of copper concentrate are priced at
approximately the same time as its sales of the refined copper,
thereby protecting Atlantic from most copper price risk. Atlantic
enters into futures contracts to hedge its price risk whenever its
physical purchases and sales pricing periods do not match. Gains and
losses on futures contracts are recognized with the hedged
transaction.
FCX has interest rate swap contracts to fix the interest rates
on a portion of its floating rate debt. The costs associated with
these contracts are amortized to interest expense over the terms of
the agreements.
Concentrate Sales. Revenues from PT-FI's concentrate sales are
recorded net of royalties, treatment costs and the impact of the
price protection program (Note 11). PT-FI's concentrate sales
agreements, including its sales to Atlantic, provide for provisional
billings based on world metals prices when shipped, primarily using
then current prices on the London Metal Exchange (LME), with actual
settlement on the copper portion generally based on the average LME
price for a specified future month (quotational period). Copper
revenues on provisionally priced open pounds are adjusted monthly
based on then current prices. At December 31, 1997, FCX had
consolidated copper sales totaling 323.3 million pounds recorded at
an average price of $0.74 per pound remaining to be finally priced.
Approximately 70 percent of these open pounds are expected to be
finally priced during the first quarter of 1998 with the remaining
pounds to be priced during the second quarter of 1998. A one cent
movement in the average price used for these open pounds will have
an approximate $1.6 million impact on FCX's 1998 net income. Gold
sales are priced according to individual contract terms, generally
the average London Bullion Market Association price for the month of
shipment.
In December 1991, PT-FI and the Government of Indonesia (GOI)
signed a Contract of Work (COW) with a 30-year term and two 10-year
extensions permitted. Under the COW PT-FI pays the GOI a royalty of
1.5 percent to 3.5 percent on the value of copper sold, net of
delivery costs, treatment charges and other selling costs, and a 1.0
percent royalty on gold and silver sales. The royalties totaled
$31.4 million in 1997, $30.4 million in 1996 and $42.0 million in
1995. PT-FI has agreed with the GOI that on production in excess of
200,000 metric tons of ore per day (MTPD) it will pay a second
royalty.
Foreign Currencies. Effective January 1, 1996, Atlantic changed its
functional currency from the Spanish peseta to the U.S. dollar.
This resulted from the significant changes in Atlantic's operations
related to its expansion and the sale of its mining operations in
Spain. Previously, Atlantic's assets and liabilities that were
denominated in pesetas were translated to U.S. dollars using the
exchange rate in effect at the balance sheet date, with translation
adjustments recorded as a component of stockholders' equity.
Transaction gains and losses associated with Atlantic's peseta-
denominated and PT-FI's rupiah-denominated monetary assets and
liabilities are included in net income. Net Atlantic transaction
gains totaled $16.6 million in 1997 and $10.3 million in 1996.
Atlantic's net peseta-denominated monetary liabilities totaled $70.3
million at December 31, 1997 based on an exchange rate of 150.7
pesetas to one dollar. PT-FI's net rupiah-denominated monetary
assets totaled $14.2 million at December 31, 1997 based on an
exchange rate of 7,450 rupiah to one dollar. Net PT-FI transaction
losses related to these net rupiah-denominated monetary assets
totaled $6.3 million in 1997, and were not material in 1996 and
1995.
Earnings Per Share. In February 1997, the Financial Accounting
Standards Board (FASB) issued SFAS 128, "Earnings Per Share," which
simplifies the computation of earnings per share (EPS). FCX adopted
SFAS 128 in the fourth quarter of 1997 and restated prior years' EPS
data as required by SFAS 128.
Basic net income per share of common stock was calculated by
dividing net income applicable to common stock by the weighted-
average number of common shares outstanding during the year. From
January 1, 1998 through January 20, 1998, FCX purchased 3.3 million
shares under its open market share purchase program. Diluted net
income per share of common stock was calculated by dividing net
income applicable to common stock by the weighted-average number of
common shares outstanding during the year plus dilutive stock
options which represented 1.3 million shares in 1997, 1.8 million
shares in 1996 and 0.9 million shares in 1995.
Options to purchase common stock that were outstanding during
the years presented but were not included in the computation of
diluted EPS totaled 2.3 million options at an average exercise price
of approximately $33 per share in 1997 and 1.8 million options at an
average exercise price of approximately $35 per share in 1996. These
were excluded because the options' exercise price was greater than
the average market price of the common shares. The FCX preferred
stock outstanding was not included in the computation of diluted EPS
because including them would have increased EPS. The preferred
stock was convertible into 11.7 million shares of common stock in
1997 and 1996, and 20.8 million shares of common stock in 1995.
Dividends accrued on convertible preferred stock totaled $21.0
million in 1997 and 1996, and $36.7 million in 1995.
2. OWNERSHIP AND JOINT VENTURES WITH RIO TINTO
In 1995, Freeport-McMoRan Inc. (FTX), the former parent of FCX,
completed its restructuring by distributing all the shares of FCX
Class B common stock which it owned to FTX common stockholders. As a
result of this distribution, FTX no longer owns any interest in FCX.
Prior to the distribution, Rio Tinto purchased 23.9 million shares
of FCX Class A common stock (approximately 12 percent of the then
outstanding common stock of FCX) from FTX.
FCX's direct ownership in PT-FI totaled 81.3 percent at
December 31, 1997 and 1996. FCX also owns 49 percent of P.T.
Indocopper Investama Corporation (PT-II), a 9.4 percent owner of PT-
FI, bringing FCX's total ownership in PT-FI to 85.9 percent at
December 31, 1997 and 1996. At December 31, 1997, PT-FI's net
assets totaled $485.5 million, including $281.9 million of retained
earnings. FCX has various intercompany loans to PT-FI totaling
$982.5 million at December 31, 1997. In March 1997, PT Nusamba
Mineral Industri (NMI), a subsidiary of P.T. Nusantara Ampera Bakti,
acquired from a third party approximately 51 percent of the capital
stock of PT-II. NMI financed $254.0 million of the $315.0 million
purchase price with a variable rate commercial loan maturing in
March 2002. The purchase price was based in part on FCX's market
value using its publicly traded common stock price at the time of
the transaction. FCX has agreed that if NMI defaults on the loan,
FCX will purchase the PT-II stock or the lenders' interest in the
commercial loan for the amount then due by NMI under the loan. FCX
also agreed to lend to NMI any shortfalls between the interest
payments due on the commercial loan and the dividends received by
NMI from PT-II. At December 31, 1997, $7.6 million was due in March
2002 from NMI because of interest payment shortfalls. The amount of
any future shortfalls will depend primarily on the level of PT-FI's
dividends to PT-II.
FCX's direct ownership in Eastern Mining totaled 90
percent at December 31, 1997 and 1996. PT-II owns the remaining 10
percent of Eastern Mining, bringing FCX's total ownership in Eastern
Mining to 94.9 percent at December 31, 1997 and 1996.
FCX owns 100 percent of the outstanding Atlantic stock. At December
31, 1997, Atlantic's net assets totaled $47.3 million and FCX had
outstanding advances to Atlantic totaling $30.3 million. Atlantic is
not expected to pay dividends in the near future.
Joint Ventures With Rio Tinto. FCX and Rio Tinto have established
exploration and expansion joint ventures. Pursuant to the
exploration joint ventures, Rio Tinto has a 40 percent interest in
future development projects under PT-FI's COW and Eastern Mining's
COW. Under the arrangements, Rio Tinto funded $100 million in 1996
for approved exploration costs in the areas covered by the PT-FI COW
and Eastern Mining COW. As of December 31, 1997, $11.4 million in
PT-FI's Block A remains to be applied to the $100 million Rio Tinto
exploration funding and is classified as a current liability.
Mutually agreed upon exploration costs in PT-FI's Block B and
Eastern Mining's COW areas are now being shared 60 percent by FCX
and 40 percent by Rio Tinto.
Pursuant to the expansion joint venture, Rio Tinto has a 40
percent interest in certain assets and future production exceeding
specified annual amounts of copper, gold and silver through 2021.
FCX and Rio Tinto are expected to complete construction on the
"fourth concentrator mill expansion" of PT-FI's facilities during
the first half of 1998. Costs for the expansion are expected to
approximate $960 million, including both working capital and a coal-
fired power plant and related facilities. The new power plant
facilities were sold in December 1997 to a joint venture that owns
assets which provide electricity to PT-FI (Note 8).
To finance the expansion, Rio Tinto agreed to make available
to PT-FI a nonrecourse loan of up to $450 million. Through December
31, 1997, Rio Tinto has funded $744.0 million of expansion costs
($446.4 million loaned to PT-FI and the remainder funded directly by
Rio Tinto). Expansion costs above $750 million will be funded 60
percent by PT-FI and 40 percent by Rio Tinto except for
approximately $80 million for costs to be funded by PT-FI to enhance
the profitability of PT-FI's existing operations. Incremental cash
flow attributable to such expansion projects will be shared 60
percent PT-FI and 40 percent Rio Tinto. PT-FI has assigned its
interest in such incremental cash flow to Rio Tinto until Rio Tinto
has received an amount equal to the funds lent to PT-FI plus
interest based on Rio Tinto's cost of borrowing. The incremental
production from the expansion, as well as production from PT-FI's
existing operations, will share proportionately in operating and
administrative costs. PT-FI will continue to receive 100 percent of
cash flow from specified annual amounts of copper, gold and silver
through 2021 calculated by reference to its proved and probable
reserves as of December 31, 1994 (Note 14).
3. INVENTORIES
The components of product inventories follow (in thousands):
December 31,
-------------------
1997 1996
-------- --------
PT-FI: Concentrates - Average Cost $ 16,118 $ 36,043
Atlantic: Concentrates -FIFO 72,088 78,374
Work in process - FIFO 26,501 40,719
Finished goods - FIFO 6,087 6,765
-------- --------
Total product inventories $120,794 $161,901
======== ========
The average cost method was used to determine the cost of
essentially all materials and supplies inventory at December 31,
1997 and 1996. Materials and supplies inventory is net of
obsolescence reserves totaling $29.5 million at December 31, 1997
and $19.3 million at December 31, 1996.
4. PROPERTY, PLANT AND EQUIPMENT, NET
The components of net property, plant and equipment follow (in
thousands):
December 31,
-----------------------
1997 1996
---------- ----------
Exploration, development and other $ 929,844 $ 815,869
Buildings and infrastructure 717,518 973,850
Machinery and equipment 1,281,903 1,217,872
Mobile equipment 355,802 256,570
Infrastructure assets 930,399 368,612
Construction in progress 397,272 344,580
---------- ---------
Property, plant and equipment 4,612,738 3,977,353
Accumulated depreciation and
amortization (1,091,023) (888,709)
---------- ----------
Property, plant and equipment, net $3,521,715 $3,088,644
========== ==========
Exploration, development and other include $124.8 million of excess
costs related to investments in consolidated subsidiaries which are
amortized over the lives of the related assets. Property, plant and
equipment are net of grants from the Spanish government totaling
$52.8 million. The grants are contingent on Atlantic meeting
specified conditions.
5. REDEEMABLE PREFERRED STOCK
FCX has outstanding 6.0 million depositary shares representing
300,000 shares of its Gold-Denominated Preferred Stock. Each
depositary share has a cumulative quarterly cash dividend equal to
the value of 0.000875 ounce of gold and will be redeemed in August
2003 for the cash value of 0.1 ounce of gold.
FCX has outstanding 4.3 million depositary shares representing
215,279 shares of its Gold-Denominated Preferred Stock, Series II.
Each depositary share has a cumulative quarterly cash dividend equal
to the value of 0.0008125 ounce of gold and will be redeemed in
February 2006 for the cash value of 0.1 ounce of gold.
FCX has outstanding 4.8 million depositary shares representing
119,000 shares of its Silver-Denominated Preferred Stock. Each
depositary share has a cumulative quarterly cash dividend equal to
the value of 0.04125 ounce of silver. Beginning in August 1999, FCX
will redeem the underlying Silver-Denominated Preferred Stock in
eight equal annual installments.
6. STOCKHOLDERS' EQUITY
Common Stock. FCX has 473.6 million authorized shares of capital
stock consisting of 423.6 million shares of common stock and 50.0
million shares of preferred stock. FCX has two classes of common
stock which differ only as to their voting rights for the directors
of FCX. Holders of Class B common stock elect 80 percent of the FCX
directors while holders of Class A common stock and preferred stock
elect 20 percent.
Preferred Stock. In 1996, FCX called for redemption its
depositary shares representing Convertible Exchangeable Preferred
Stock. Prior to the redemption date, holders of 8.8 million
depositary shares converted their shares into 9.0 million FCX Class
A common shares. FCX paid $2.9 million in January 1997 to redeem
the remaining 0.1 million depositary shares.
FCX has outstanding 14.0 million depositary shares representing
700,000 shares of its Step-Up Convertible Preferred Stock. Each
depositary share has a cumulative $1.75 annual cash dividend
(payable quarterly) and a $25 liquidation preference, and is
convertible at the option of the holder into 0.835 shares of FCX
Class A common stock. Through August 1999, FCX may redeem these
depositary shares for 0.835 shares of FCX Class A common stock per
depositary share if the market price of FCX Class A common stock
exceeds $37.43 per share for 20 trading days within any period of 30
consecutive trading days. Thereafter, FCX may redeem these
depositary shares at $25 per share (payable in FCX Class A common
stock, cash or a combination of both, at FCX's option) plus accrued
and unpaid dividends.
Stock Options. In 1995, FCX's shareholders adopted the Adjusted
Stock Award Plan to provide for the issuance of certain stock awards
to employees, officers and directors of FTX in connection with FTX's
distribution of FCX shares. Under this plan, FCX made a one time
grant of awards to purchase up to 10.7 million Class B common
shares, including stock appreciation rights (SARs), at prices
equivalent to the original FTX price at date of grant as adjusted
for the proportionate market value of FCX shares at the time of the
distribution. All options granted under this plan expire 10 years
from the original FTX date of grant.
FCX's shareholders adopted the 1995 Stock Option Plan (the 1995
Plan) to provide for the issuance of stock options and other stock-
based awards (including SARs) at no less than market value at the
time of grant. Under this plan, FCX can grant options to eligible
participants to purchase up to 10 million Class B common shares.
Options granted under the 1995 Plan expire 10 years after the date
of grant. FCX's shareholders also adopted the 1995 Stock Option Plan
for Non-Employee Directors (the Director Plan) authorizing FCX to
grant options to purchase up to 2 million shares. Options granted
under the Director Plan are exercisable in 25 percent annual
increments beginning one year from the date of grant and expire 10
years after the date of grant. Under certain options, FCX will pay
cash to the optionee equal to an amount based on the maximum
individual federal income tax rate in effect at the time of
exercise. Options for 7.6 million shares under the 1995 Plan and 1.7
million shares under the Director Plan were available for new grants
as of December 31, 1997. A summary of stock options outstanding,
including 1.4 million SARs, follows:
1997 1996 1995
--------------------- -------------------- -----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Option of Option of Option
Options Price Options Price Options Price
---------- ---------- ---------- --------- ------- --------
Balance at
January 1 7,990,083 $23.04 9,770,040 $18.59 - $ -
Granted upon
FTX restructuring - - - - 10,715,351 18.53
Granted 856,900 29.18 1,909,200 34.71 170,000 26.69
Exercised (579,612) 18.47 (3,538,945) 17.07 (1,075,868) 19.11
Expired/
Forfeited (201,534) 30.45 (150,212) 22.66 (39,443) 22.49
---------- ---------- ----------
Balance at
December 31 8,065,837 23.84 7,990,083 23.04 9,770,040 18.59
========== ========== ==========
Summary information of fixed stock options outstanding at
December 31, 1997 follows:
Options Outstanding Options Exercisable
----------------------------- -------------------
Weighted Weighted Weighted
Number Average Average Number Average
of Remaining Option of Option
Range of Exercise Prices Options Life Price Options Price
- ------------------------ ---------- ---------- ------ --------- ------
$13.10 to $19.37 1,265,326 3.2 years $17.71 1,265,326 $17.71
$19.93 to $29.19 3,711,767 5.6 years 21.89 2,814,235 20.26
$30.44 to $35.50 1,660,342 8.3 years 34.95 352,183 34.75
---------- ----------
6,637,435 4,431,744
========== ==========
FCX has adopted the disclosure-only provisions of SFAS No. 123
and continues to apply APB Opinion No. 25 and related
interpretations in accounting for its stock-based compensation
plans. FCX recognized a $25.3 million gain in 1997 and charges
totaling $12.7 million in 1996 and $29.8 million in 1995 for the
cost of SARs caused by the fluctuations in FCX's common stock price.
Had compensation cost for FCX's fixed stock option grants been
determined based on the fair value at the grant dates for awards
under those plans consistent with SFAS 123, FCX's stock-based
compensation costs would have increased by $6.3 million ($3.4
million to net income or $0.02 per share) in 1997, $2.4 million
($1.3 million to net income or $0.01 per share) in 1996 and $0.2
million ($0.1 million to net income) in 1995. For the pro forma
computations, the fair values of the fixed option grants were
estimated on the dates of grant using the Black-Scholes option-
pricing model. The weighted average fair value for fixed stock
option grants was $10.24 per option in 1997, $12.09 per option in
1996 and $8.34 per option in 1995. The weighted average assumptions
used include a risk-free interest rate of 6.9 percent in 1997, 6.6
percent in 1996 and 6.4 percent in 1995; expected volatility of 30
percent in 1997, 26 percent in 1996 and 29 percent in 1995; expected
lives of 10 years and an annual dividend of $0.90 per share. The
pro forma effects on net income for 1997, 1996 and 1995 are not
representative of future years because FCX first adopted its stock
option plans in 1995. No other discounts or restrictions related to
vesting or the likelihood of vesting of fixed stock options were
applied.
7. INCOME TAXES
The components of FCX's deferred taxes follow (in thousands):
December 31,
--------------------------
1997 1996
---------- ----------
Deferred tax asset:
Foreign tax credits $ 137,784 $ 103,578
U.S. alternative minimum tax credits 49,946 43,906
Atlantic net operating loss carryforwards 97,400 85,858
Deferred compensation 5,898 16,607
Intercompany profit elimination 8,141 16,217
Obsolescence reserve 8,095 5,089
Valuation allowance (285,130) (233,342)
---------- ----------
Total deferred tax asset 22,134 37,913
---------- ----------
Deferred tax liability:
Property, plant and equipment (423,515) (396,493)
Other (1,666) (1,104)
---------- ----------
Total deferred tax liability (425,181) (397,597)
---------- ----------
Net deferred tax liability $ (403,047) $ (359,684)
========== ==========
FCX has provided a valuation allowance equal to its tax credit
carryforwards ($187.7 million at December 31, 1997 and $147.5
million at December 31, 1996) as these would only be used should
FCX be required to pay regular U.S. tax, which is considered
unlikely for the foreseeable future. Atlantic is subject to
taxation in Spain and FCX has provided a valuation allowance equal
to the future tax benefits resulting from $278.3 million of net
operating losses at December 31, 1997 which expire through the year
2004 and $245.3 million of net operating losses at December 31,
1996, because Atlantic has not generated taxable income in recent
years.
FCX's U.S. federal income tax returns for the years 1990-1992
and PT-FI's 1994 Indonesian income tax return are currently under
examination. In January 1998, PT-FI settled and paid assessments
from the Indonesian tax authorities for the years 1989-1993 with no
material adverse effect on the consolidated financial condition or
results of operations of FCX.
The provision for income taxes consists of the following (in
thousands):
1997 1996 1995
---------- ---------- ----------
Current income taxes:
Indonesian $ 159,713 $ 182,354 $ 197,409
United States and other 9,885 10,620 13,900
---------- ---------- ----------
169,598 192,974 211,309
Deferred Indonesian taxes 61,717 54,194 22,735
---------- ---------- ----------
$ 231,315 $ 247,168 $ 234,044
========== ========== ==========
Reconciliations of the differences between income taxes
computed at the contractual Indonesian tax rate and income taxes
recorded follow (dollars in thousands):
1997 1996 1995
--------------------- ------------------ ----------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- -------- -------
Income taxes
computed at the
contractual
Indonesian
tax rate $ 180,868 35% $ 182,681 35% $190,667 35%
Indonesian withholding tax on:
Earnings/
dividends 21,886 4 37,097 7 24,025 4
Interest 6,818 1 7,590 1 8,256 2
Increase (decrease)
attributable to:
Intercompany
interest
expense (24,192) (5) (21,260) (4) (23,780) (4)
Parent company
costs 24,926 5 11,498 2 5,978 1
Indonesian
presidential
decree 9,643 2 - - - -
U.S. alternative
minimum tax 8,500 2 9,500 2 13,900 3
Atlantic net
loss (income) (1,187) - 8,378 2 13,225 2
Other, net 4,053 1 11,684 2 1,773 -
---------- ------- ---------- ------- --------- ------
Provision for
income taxes $ 231,315 45% $ 247,168 47% $234,044 43%
========== ======= ========== ======= ========= ======
8. LONG-TERM DEBT
December 31,
-------------------------
1997 1996
---------- ----------
(In Thousands)
Notes payable:
FCX and PT-FI credit facilities,
average rate 6.4% in 1997
and 6.2% in 1996 $ 250,000 $ 95,000
Rio Tinto loan including accrued
interest, average rate 5.8%
in 1997 and 5.7% in 1996 (Note 2) 464,360 76,200
Atlantic facility, average rate
7.2% in 1997 and 7.3% in 1996 291,276 277,500
Equipment loan, average rate
8.1% in 1997 and 1996 49,000 56,000
ALatieF loan, average rate
8.2% in 1996 - 51,000
Other, primarily Atlantic borrowings 78,273 103,697
9 3/4% Senior Notes due 2001 120,000 120,000
7.50% Senior Notes due 2006 200,000 200,000
7.20% Senior Notes due 2026 250,000 250,000
Infrastructure asset financings, net 686,073 333,519
---------- ----------
2,388,982 1,562,916
Less current portion and
short-term borrowings 80,852 136,617
---------- ----------
$2,308,130 $1,426,299
========== ==========
Notes Payable. In 1996, the FCX and PT-FI credit facilities were
amended to increase the availability under the facilities by $250
million to a combined total of $1 billion. PT-FI retained its $550
million facility ($485.0 million of additional borrowings available
at December 31, 1997) and FCX and PT-FI now have a separate $450
million facility ($265.0 million of additional borrowings available
at December 31, 1997). These credit facilities are also subject to a
borrowing base, scheduled to be redetermined during the second quarter
by the banks, which had $656.0 million available at December 31, 1997.
These variable rate revolving facilities are available until
December 2002, provide for minimum working capital requirements,
specified cash flow to interest coverage and restrictions on other
borrowings. PT-FI assigned its existing and future sales contracts
and pledged its rights under the COW and most of its assets as
security for its borrowings.
In October 1997, Atlantic restructured its variable rate
project financing (the Atlantic Facility) to include the balance of
the original $225 million term loan ($206.3 million balance), the
original $65 million working capital facility ($65 million balance)
and a new $20 million term loan, all nonrecourse to FCX. The term
portion of the facility will be repaid quarterly beginning April
1999 and matures October 2004. The working capital facility matures
April 2003. The Atlantic Facility requires certain hedging
arrangements, restricts other borrowings and specifies certain
minimum coverage ratios. The Atlantic Facility is secured by 51
percent of Atlantic's capital stock.
In 1994, FCX entered into a $70 million variable rate equipment
loan secured by certain PT-FI assets. In 1995, FCX fixed the
interest rate on the loan at 8.1 percent. Principal payments total
$7.0 million annually with a final payment in December 2001.
Senior Notes. In 1996, FCX sold publicly its 7.50% Senior Notes Due
2006 (the 2006 Notes) for net proceeds of $197.5 million and its
7.20% Senior Notes Due 2026 (the 2026 Notes) for net proceeds of
$248.0 million. Interest is payable semiannually in May and
November of each year. The holder of each 2026 Note may elect early
repayment in November 2003. The Notes are redeemable at the option
of FCX at the greater of (a) their principal amount or (b) the
remaining scheduled payments of principal and interest discounted to
the date of redemption on a semiannual basis at the applicable
treasury rate plus 30 basis points, together with, in either case,
accrued interest to the date of redemption.
Infrastructure Asset Financings. In March 1997, PT-FI
completed the final $75.0 million sale of infrastructure assets to
joint ventures owned one-third by PT-FI and two-thirds by P.T.
ALatieF Nusakarya Corporation (ALatieF), an Indonesian investor.
The sales to the ALatieF joint ventures totaled $270.0 million
during the period from December 1993 to March 1997. PT-FI
subsequently sold its one-third interest in the joint ventures to
ALatieF and is leasing the infrastructure assets under
infrastructure asset financing arrangements. PT-FI continues to
guarantee an approximate $50 million bank loan associated with the
purchases. PT-FI no longer consolidates the joint ventures. At
December 31, 1997, the ALatieF infrastructure asset financings
totaled $141.0 million.
In December 1997, PT-FI completed a $366.4 million sale, including
$74.4 million for the remaining costs expected to be incurred to
complete construction, of the new power plant facilities associated
with the fourth concentrator mill expansion to the joint venture
that owns the assets which already provide electricity to PT-FI.
The purchase price included $123.2 million for Rio Tinto's share of
the new power plant facilities. Sales to the power joint venture
totaled $581.4 million through 1997 including $458.2 million of PT-
FI owned assets. PT-FI subsequently sold its 30 percent interest in
the joint venture to the other partners and is purchasing power
under infrastructure asset financing arrangements. At December 31,
1997, the infrastructure asset financing obligations pursuant to the
power sales agreement totaled $436.7 million.
In 1995, PT-FI sold certain of its port, marine, logistics and
construction equipment and facilities for $100.0 million and sold
$48.0 million of its aviation assets to a joint venture, 25 percent
owned by PT-FI. PT-FI guarantees certain of the bank loans totaling
approximately $80 million associated with these sales. PT-FI is
leasing these assets under infrastructure asset financing
arrangements. At December 31, 1997, the obligations under these
infrastructure asset financings totaled $103.1 million.
Maturities. Maturities of debt instruments and infrastructure asset
financings based on the amounts and terms outstanding at December
31, 1997 totaled $80.9 million in 1998, $76.1 million in 1999,
$111.3 million in 2000, $222.5 million in 2001, $380.0 million in
2002 and $1,518.2 million thereafter.
Capitalized Interest. Capitalized interest totaled $23.0 million in
1997, $23.0 million in 1996 and $49.8 million in 1995.
9. TRANSACTIONS WITH FTX AND FMS, AND EMPLOYEE BENEFITS
Management Services Agreement. Through December 31, 1995, FTX
furnished certain management and administrative services to FCX
under a management services agreement. These costs, which included
related overhead, totaled $55.5 million in 1995. In 1996, FM
Services Company (FMS), a newly formed entity owned 40 percent by
FCX, began providing certain administrative, financial and other
services that were previously provided by FTX on a similar cost-
reimbursement basis. These costs totaled $44.7 million in 1997 and
$45.2 million in 1996. Management believes these costs do not
differ materially from the costs that would have been incurred had
the relevant personnel providing these services been employed
directly by FCX. Through December 31, 1995, all U.S.-based
employees as well as expatriate employees overseas were employed by
FTX. In 1996, all U.S. and expatriate employees performing direct
services for FCX or its affiliates other than those employed by FMS
became FCX employees.
Pension Plans. In 1996, FCX and FMS established defined benefit
pension plans to cover substantially all U.S. and certain overseas
employees. Employees transferred from FTX retained their accumulated
benefits. In 1996, FCX and FMS changed the pension benefit formula
to a cash balance formula from the prior benefit calculation based
on years of service and final average pay. Under the amended plan,
FCX and FMS credit each participant's account annually with at least
4 percent of the participant's qualifying compensation.
Additionally, interest is credited annually to each participant's
account balance. FCX and FMS fund their respective pension
liabilities in accordance with Internal Revenue Service guidelines.
Additionally, for those employees in the qualified defined benefit
plan whose benefits are limited under federal income tax laws, FCX
and FMS sponsor unfunded, nonqualified plans. Information on the
FCX plans follows (in thousands):
December 31,
-------------------
1997 1996
------- ---------
Actuarial present value of benefit obligations
(projected unit credit method):
Vested $10,889 $ 6,993
Nonvested 787 293
------- --------
Accumulated benefit obligations $11,676 $ 7,286
======= ========
Projected benefit obligations
(projected unit credit method) $(13,652) $(12,292)
Less plan assets at fair value 7,660 6,639
-------- --------
Projected benefit obligations
in excess of plan assets (5,992) (5,653)
Unrecognized net loss 328 1,615
Unrecognized prior service costs (927) (1,075)
Unrecognized transition asset (402) (460)
-------- --------
Accrued pension cost $ (6,993) $ (5,573)
======== ========
In determining the present value of benefit obligations, FCX used
discount rates of 7.25 percent in 1997 and 7.75 percent in 1996, a
5 percent annual increase in future compensation levels and a 9
percent average expected rate of return on assets. Net periodic
pension costs for the FCX plans totaled $1.4 million for 1997 and
$2.1 million for 1996.
PT-FI has a defined benefit plan denominated in Indonesian
rupiah covering substantially all of its Indonesian national
employees. PT-FI funds the plan in accordance with Indonesian
pension guidelines. The actuarial present value of the accumulated
benefit obligation, determined by the projected credit method, was
$3.9 million and $9.2 million at December 31, 1997 and 1996,
respectively, based on corresponding exchange rates of 7,450 rupiah
to one U.S. dollar and 2,342 rupiah to one U.S. dollar. The
projected benefit obligation at December 31, 1997 and 1996, was $7.2
million and $18.0 million, respectively, based on a discount rate of
11 percent and a 9 percent annual increase in future compensation
levels on both dates. PT-FI's plan assets totaled $2.0 million at
December 31, 1997 and $1.7 million at December 31, 1996.
Atlantic has an unfunded contractual obligation denominated in
Spanish pesetas to supplement amounts paid to retired employees.
The accrued liability totaled $69.4 million and $80.4 million at
December 31, 1997 and 1996, respectively, based on corresponding
exchange rates of 150.7 pesetas to one U.S. dollar and 131.4 pesetas
to one U.S. dollar. Atlantic expensed $5.8 million in 1997, $6.8
million in 1996 and $7.1 million in 1995 for interest on this
obligation. Cash payments were $7.5 million in 1997, $8.5 million in
1996 and $8.9 million in 1995. Under Spanish law, Atlantic is
required to fund this obligation by mid-1999. The actuarial
valuation of this obligation was $87.9 million at December 31, 1997
and $93.7 million at December 31, 1996, based on discount rates of
6 percent and 7 percent, respectively.
Other Benefits. FCX and FMS provide certain health care and life
insurance benefits for retired employees, the cost of which was not
material to the financial statements. The actuarial present value
of FCX's accumulated postretirement obligation totaled $1.0 million
at December 31, 1997 and $1.1 million at December 31, 1996. The
initial health care cost trend rate used was 8.5 percent for 1997,
decreasing 0.5 percent per year until reaching 5 percent. Based on
the current plan provisions, a change in the trend rate would have
no impact. The discount rate used was 7.25 percent for 1997 and
7.75 percent for 1996. FCX has the right to modify or terminate
these benefits. FCX and FMS have other employee benefit plans,
certain of which are related to FCX's performance, which costs are
recognized currently in general and administrative expense.
10. COMMITMENTS AND CONTINGENCIES
Environmental, Reclamation and Mine Closure. FCX believes that its
operations are being conducted pursuant to applicable permits
and are in compliance in all material respects with applicable
environmental laws, rules and regulations. FCX incurs
significant costs for environmental programs and projects.
In 1996, FCX began contributing to a fund designed to
accumulate at least $100 million by the end of its Indonesian
mine's life for eventual mine closure and reclamation.
Although the ultimate amount of reclamation and closure costs
to be incurred is currently indeterminable, based on recent
analyses PT-FI estimates that ultimate reclamation and closure
costs may require as much as $100 million but would not exceed
$150 million. These costs will be incurred throughout the
remaining life of the mine, which is currently estimated to
exceed 30 years. FCX had $5.5 million accrued on a unit-of-
production basis at December 31, 1997 for mine closure and
reclamation costs, included in other liabilities. An
increasing emphasis on environmental issues and future changes
in regulations could require FCX to incur additional costs
which would be charged against future operations. Estimates
involving environmental matters are by their nature imprecise
and can be expected to be revised over time because of changes
in government regulations, operations, technology and inflation.
Long-Term Contracts and Operating Leases. Atlantic has commitments
with parties other than PT-FI to purchase concentrate totaling
425,000 metric tons in 1998, 405,000 metric tons in 1999, 370,000
metric tons in 2000, 340,000 metric tons in 2001, 270,000 metric
tons in 2002 and a total of 220,000 metric tons thereafter, at
market prices.
FCX's minimum annual contractual charges under noncancelable
long-term contracts and operating leases which extend to 2000 total
$1.7 million, with $1.4 million in 1998, $0.2 million in 1999 and
$0.1 million in 2000. Total rental expense under long-term
contracts and operating leases amounted to $2.2 million in 1997,
$3.8 million in 1996 and $7.2 million in 1995.
Gresik Smelter. PT Smelting, an Indonesian company, commenced
construction in 1996 on a copper smelter in Gresik, Indonesia having
a design capacity of 200,000 metric tons of copper cathode per year.
PT-FI, Mitsubishi Materials Corporation (Mitsubishi Materials),
Mitsubishi Corporation (Mitsubishi) and Nippon Mining & Metals Co.,
Ltd. (Nippon) own 25 percent, 60.5 percent, 9.5 percent and 5
percent, respectively, of the outstanding PT Smelting stock. The
estimated aggregate project cost, before working capital
requirements, is approximately $625 million. PT Smelting has a $300
million nonrecourse term loan and a $110 million working capital
facility with a group of banks. The remaining funding will be
provided by PT-FI, Mitsubishi Materials, Mitsubishi and Nippon in
accordance with their interests. Construction is expected to be
completed in mid-1998. It is anticipated that PT-FI would provide
all of the smelter's copper concentrate requirements at market
rates; however, for the first fifteen years of operations the
treatment and refining charges would not fall below a certain
minimum rate. PT-FI has also agreed to assign, if necessary, its
earnings in PT Smelting to support a 13 percent cumulative annual
return to Mitsubishi Materials, Mitsubishi and Nippon for the first
20 years of commercial operations.
11. FINANCIAL INSTRUMENTS
Summarized below are financial instruments whose carrying
amounts are not equal to their fair value at December 31, 1997 and
1996. Fair values are based on quoted market prices and other
available market information.
1997 1996
---------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ---------- ----------
(In Thousands)
Price protection program:
Open contracts
in asset
position $ - $ 16 $ - $ 17,314
Open contracts
in liability position - (1,494) - -
Debt:
Long-term debt (Note 8) (2,388,982) (2,402,862) (1,562,916) (1,575,929)
Interest rate swaps - (1,210) - (1,331)
Foreign exchange contracts:
$U.S./Deutsche marks - - - (30)
$U.S./Spanish pesetas 1,148 471 908 300
Redeemable preferred stock
(Note 5) (500,007) (334,177) (500,007) (405,855)
Price Protection Program. From time to time, PT-FI enters into
forward and option contracts to hedge the market risk associated
with fluctuations in the prices of commodities it sells. At
December 31, 1997, PT-FI had no outstanding forward or option
contracts. FCX's revenues include net additions totaling $42.6
million in 1997 and $38.2 million in 1996, and net reductions
totaling $68.6 million in 1995 related to PT-FI's copper price
protection program. Revenues also include net additions totaling
$37.6 million in 1997, $14.1 million in 1996 and $3.9 million in
1995 from gold forward contracts.
At December 31, 1997, Atlantic had sold forward 2.0 million
pounds of copper at an average price of $0.80 per pound and
purchased forward 20.3 million pounds of copper at an average price
of $0.87 per pound to minimize the copper price risk of its
concentrate inventory.
Debt. PT-FI entered into an interest rate swap in 1991 and Atlantic
entered into interest rate swaps in 1995 to manage exposure to
interest rate changes on a portion of their variable rate debt. PT-
FI pays 8.3 percent on $28.6 million of financing at December 31,
1997, reducing annually through 1999. Atlantic pays an average of
6.1 percent on $133.3 million of financing at December 31, 1997,
reducing annually through 2000. Interest on comparable floating rate
debt averaged 5.7 percent in 1997, 5.6 percent in 1996 and 6.1
percent in 1995, resulting in additional interest costs of $1.5
million, $2.2 million and $1.5 million, respectively.
Foreign Exchange Contracts. During 1996, Atlantic implemented a
currency hedging program to reduce its exposure to changes in the
U.S. dollar and Spanish peseta exchange rate. As of December 31,
1997, Atlantic has options through January 1999 on a total of 6.3
billion Spanish pesetas with an average strike price of 140.6
pesetas at a cost of $1.1 million. Atlantic also has entered into
foreign exchange contracts which mature through January 1999,
totaling $43.8 million on another 6.3 billion Spanish pesetas.
Atlantic is a party to letters of credit totaling $8.5 million
at December 31, 1997. Fair value of these letters of credit is not
material at December 31, 1997.
12. BUSINESS SEGMENTS
FCX has adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information" which requires that companies
disclose segment data based on how management makes decisions about
allocating resources to segments and measuring their performance.
FCX has two operating segments: "mining and exploration" and
"smelting and refining." The mining and exploration segment
includes PT-FI's copper and gold mining operations in Indonesia and
the Indonesian exploration activities of both PT-FI and Eastern
Mining. The smelting and refining segment includes Atlantic's
operations in Spain and PT-FI's equity investment in PT Smelting in
Gresik, Indonesia. The segment data presented below were prepared
on the same basis as the consolidated FCX financial statements.
Mining Smelting
and and Eliminations FCX
Exploration Refining and Other Total
---------- ---------- ---------- ----------
(In Thousands)
1997
Revenues $1,505,295 $ 874,514 $ (378,905) $2,000,904
Production and delivery 604,851 800,997a (397,244) 1,008,604
Depreciation and
amortization 178,289 31,693 3,873 213,855
Exploration expense 14,758 - 2,871 17,629
General and administrative
expenses 76,549 11,197 8,855 96,601
---------- ---------- ---------- ----------
Operating income $ 630,848 $ 30,627 $ 2,740 $ 664,215
========== ========== ========== ==========
Capital expenditures $ 529,731 $ 54,721 $ 10,035 $ 594,487
========== ========== ========== ==========
Total assets $3,406,539 $ 742,184a $ 3,486 $4,152,209
========== ========== ========== ==========
1996
Revenues $1,485,848 $ 778,120 $ (358,932) $1,905,036
Production and delivery 575,781 731,651 (355,569) 951,863
Depreciation and
amortization 142,605 27,783 3,590 173,978
General and administrative
expenses 119,492 12,301 9,141 140,934
---------- ---------- ---------- ----------
Operating income $ 647,970 $ 6,385 $ (16,094) $ 638,261
========== ========== ========== ==========
Capital expenditures $ 398,986 $ 90,086 $ 3,166 $ 492,238
========== ========== ========== ==========
Total assets $3,168,837 $ 775,336a $ (78,639) $3,865,534
========== ========== ========== ==========
1995
Revenues $1,477,919 $ 541,291 $ (184,875) $1,834,335
Production and delivery 547,716 528,904 (141,913) 934,707
Depreciation and
amortization 102,664 17,572 3,819 124,055
Exploration expenses 10,828 2,248 812 13,888
General and administrative
expenses 141,014 16,705 7,534 165,253
---------- ---------- ---------- ----------
Operating income (loss) $ 675,697 $ (24,138) $ (55,127) $ 596,432
========== ========== ========== ==========
Capital expenditures $ 434,383 $ 143,958 $ 5,145 $ 583,486
========== ========== ========== ==========
Total assets $2,888,535 $ 783,123a $ (89,912) $3,581,746
========== ========== ========== ==========
a. PT-FI recorded losses related to PT Smelting totaling $1.5 million in
1997. Total assets include PT-FI's equity investment in PT Smelting totaling
$83.1 million at December 31, 1997, $46.8 million at December 31, 1996 and
$8.0 million at December 31, 1995.
FCX markets its products worldwide primarily pursuant to the
terms of long-term contracts. The following table details the
percentage of consolidated revenues attributable to various
contracts:
1997 1996 1995
---------- ---------- ----------
Long-term contracts:
Japanese companies 16% 17% 16%
Swiss firm 8 10 11
German firm 4 5 14
Other 64 62 47
Spot sales 8 6 12
PT-FI's contracts with a group of Japanese companies, the Swiss
firm and the German firm extend through 2000, 2003 and 1999,
respectively. There are several other long-term agreements in
place, each representing less than ten percent of sales. Certain
terms of these long-term contracts are negotiated annually.
FCX revenues attributable to foreign countries based on the
location of the customer follows (in thousands):
1997 1996 1995
---------- ----------- ----------
Japan $ 470,373 $ 474,443 $ 383,635
Spain 402,276 342,373 313,949
Switzerland 297,821 353,776 302,726
Germany 108,519 98,076 263,137
Others 721,915 636,368 570,888
---------- ---------- ----------
Total $2,000,904 $1,905,036 $1,834,335
========== ========== ==========
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Net Income Net Income
Applicable Per Share
Operating to Common --------------
Revenues Income Stock Basic Diluted
---------- ---------- ---------- ----- -----
(In Thousands, Except Per Share Amounts)
1997
1st Quarter $ 523,780 $ 197,608 $ 62,451 $.31 $.31
2nd Quarter 566,950 213,701 69,852 .35 .35
3rd Quarter 489,522 136,417 36,577 .19 .19
4th Quarter a 420,652 116,489 39,661 .21 .21
---------- ---------- ----------
$2,000,904 $ 664,215 $ 208,541 1.06 1.06
========== ========== ==========
1996
1st Quarter b $ 388,392 $ 105,543 $ 22,450 $.11 $.11
2nd Quarter 424,348 111,627 29,045 .15 .15
3rd Quarter 474,664 170,322 46,126 .24 .24
4th Quarter 617,632 250,769 77,059 .40 .39
---------- ---------- ----------
$1,905,036 $ 638,261 $ 174,680 .90 .89
========== ========== ==========
a. Includes a $25.3 million gain ($12.3 million to net income or
$0.06 per share) for the reversal of SAR costs caused by the
decline in FCX's common stock price.
b. Includes charges totaling $18.7 million ($8.6 million to net
income or $0.04 per share) consisting of $12.7 million for
costs of SARs caused by the increase in FCX's common stock
price, $3.0 million (reduced to $1.7 million in the second
quarter) for an early retirement program and $3.0 million for
costs related to a civil disturbance.
14. SUPPLEMENTARY MINERAL RESERVE INFORMATION (UNAUDITED)
Total estimated proved and probable mineral reserves at the Grasberg
and other Block A ore bodies in Indonesia follow:
Average Ore Grade Per Ton Recoverable Reserves
---------------------------------- --------------------
Year-End Ore Copper Gold Silver Copper Gold Silver
- --------------------- ---------------------------------- --------------------
(Metric Tons) (%) (Grams)(Ounce)(Grams)(Ounce) (Billions (Millions
of Lbs.) of Ozs.)
1993 1,074,100,000 1.31 1.47 .047 4.04 .130 26.8 39.1 76.7
1994 1,125,640,000 1.30 1.42 .046 4.06 .131 28.0 39.6 80.8
1995 1,899,244,000 1.17 1.18 .038 3.78 .121 40.3 52.1 111.1
1996 2,008,285,000 1.19 1.18 .038 3.80 .122 43.2 55.3 118.7
1997 2,166,212,000 1.20 1.20 .039 3.95 .127 47.1 62.7 138.4
By Deposit at December 31, 1997
Grasberg:
Open pit1,087,800,000 1.06 1.27 .041 2.90 .093 20.9 33.3 50.8
Under-
ground 670,846,000 1.22 1.09 .035 3.73 .120 14.8 17.7 40.3
Kucing
Liar 221,871,000 1.42 1.57 .050 5.12 .165 5.7 8.4 18.3
DOZ 79,306,000 1.41 0.83 .027 7.04 .226 2.1 1.7 9.5
IOZ 38,148,000 1.18 0.45 .014 7.65 .246 0.9 0.4 5.0
Big Gossan 37,349,000 2.69 1.02 .033 16.42 .528 1.8 0.9 9.9
DOM 30,892,000 1.67 0.42 .014 9.63 .310 0.9 0.3 4.6
--------------------------------------------------------------------
Total 2,166,212,000 1.20 1.20 .039 3.95 .127 47.1 62.7 138.4
Estimated recoverable reserves were assessed using a copper
price of $0.90 per pound and a gold price of $325 per ounce. Using
prices of $0.75 per pound of copper and $280 per ounce of gold would
reduce estimated recoverable reserves by approximately 12 percent
for copper, 9 percent for gold and 15 percent for silver.
In PT-FI's Block A, Rio Tinto agreed to make available to PT-FI
a nonrecourse loan of up to $450 million to fund the cost of the
fourth concentrator mill expansion (Note 2). Incremental cash flow
attributable to such expansion projects will be shared 60 percent
PT-FI and 40 percent Rio Tinto. PT-FI has assigned its interest in
such incremental cash flow to Rio Tinto until Rio Tinto has received
an amount equal to the funds lent to PT-FI plus interest based on
Rio Tinto's cost of borrowing. Incremental cash flow consists of
amounts generated from production in excess of specified annual
amounts based on the December 31, 1994 reserves and mine plan. The
incremental production from the expansion, as well as production
from PT-FI's existing operations, will share proportionately in
operating and administrative costs. FCX will continue to receive
100 percent of cash flow from its existing production facilities as
specified by the contractual arrangements. PT-FI's estimated net
share of recoverable reserves follows:
Year-End Copper Gold Silver
---------- ---------- ---------- ------------
(Billions of Lbs.) (Millions of Ozs.) (Millions of Ozs.)
1993 26.8 39.1 76.7
1994 28.0 39.6 80.8
1995 34.6 46.0 96.7
1996 35.9 47.4 100.4
1997 37.8 51.3 111.3
1997 / SHAREHOLDER INFORMATION
FCX CLASS A COMMON SHARES. Our Class A common shares trade
on the New York Stock Exchange (NYSE) under the symbol
"FCX.A." The FCX.A share price is reported daily in the
financial press under "FMCGA" in most listings of NYSE
securities. At year-end 1997, the number of holders of
record of our Class A common shares was 9,819. NYSE
composite tape Class A common share price ranges during 1997
and 1996:
1997 1996
High Low High Low
First Quarter $33.50 $25.38 $32.88 $27.50
Second Quarter 30.38 25.88 34.88 28.75
Third Quarter 28.75 25.75 31.25 26.63
Fourth Quarter 28.88 14.63 31.25 26.38
FCX CLASS B COMMON SHARES. Our Class B common shares trade
on the NYSE under the symbol "FCX." The FCX share price is
reported daily in the financial press under "FMCG" in most
listings of NYSE securities. At year-end 1997, the number
of holders of record of our Class B common shares was
15,103.
NYSE composite tape Class B common share price ranges during
1997 and 1996:
1997 1996
High Low High Low
First Quarter $34.88 $27.50 $33.75 $27.38
Second Quarter 31.88 26.50 36.13 30.00
Third Quarter 30.75 27.19 33.00 28.38
Fourth Quarter 29.94 14.94 32.88 28.00
COMMON SHARE DIVIDENDS. FCX Class A and Class B common
share cash dividends declared and paid for the quarterly
periods of 1997 and 1996 were:
1997
Amount
Per Record Payment
Share Date Date
First Quarter $.225 Apr. 15, 1997 May 1, 1997
Second Quarter .225 Jul. 15, 1997 Aug. 1, 1997
Third Quarter .225 Oct. 15, 1997 Nov. 1, 1997
Fourth Quarter .05 Jan. 16, 1998 Feb. 1, 1998
1996
Amount
Per Record Payment
Share Date Date
First Quarter $.225 Apr. 15, 1996 May 1, 1996
Second Quarter .225 Jul. 15, 1996 Aug. 1, 1996
Third Quarter .225 Oct. 15, 1996 Nov. 1, 1996
Fourth Quarter .225 Jan. 15, 1997 Feb. 1, 1997
