UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
To
Commission File Number: 1-9916
 
 
Freeport-McMoRan Copper & Gold Inc.
(Exact name of registrant as specified in its charter)

Delaware
74-2480931
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
 
   
1615 Poydras Street
 
New Orleans, Louisiana
70112
(Address of principal executive offices)
(Zip Code)
 
 
(504) 582-4000
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. R Yes ÿ No

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

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

On September 30, 2006, there were issued and outstanding 196,927,613 shares of the registrant’s Class B Common Stock, par value $0.10 per share.



 
FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS

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

Item 1. Financial Statements.

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

   
September 30,
   
December 31,
 
   
2006
   
2005
 
   
(In Thousands)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
 
$
698,890
   
$
763,599
 
Accounts receivable
   
551,371
     
687,969
 
Inventories
   
751,534
     
565,019
 
Prepaid expenses and other
   
31,169
     
5,795
 
Total current assets
   
2,032,964
     
2,022,382
 
Property, plant, equipment and development costs, net
   
3,112,618
     
3,088,931
 
Deferred mining costs
   
-
     
285,355
 
Other assets
   
108,182
     
119,999
 
Investment in PT Smelting
   
26,625
     
33,539
 
Total assets
 
$
5,280,389
   
$
5,550,206
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
601,397
   
$
573,560
 
Accrued income taxes
   
169,489
     
327,041
 
Current portion of long-term debt and short-term borrowings
   
72,577
     
253,350
 
Unearned customer receipts
   
41,756
     
57,184
 
Rio Tinto share of joint venture cash flows
   
30,425
     
125,809
 
Accrued interest payable
   
10,974
     
32,034
 
Total current liabilities
   
926,618
     
1,368,978
 
Long-term debt, less current portion:
               
Senior notes
   
612,900
     
624,365
 
Equipment and other loans
   
44,394
     
54,529
 
Atlantic Copper debt
   
37,571
     
37
 
Convertible senior notes
   
7,071
     
323,667
 
Total long-term debt, less current portion
   
701,936
     
1,002,598
 
Accrued postretirement benefits and other liabilities
   
247,242
     
210,259
 
Deferred income taxes
   
803,695
     
902,386
 
Minority interests
   
208,649
     
222,991
 
Stockholders’ equity:
               
Convertible perpetual preferred stock
   
1,100,000
     
1,100,000
 
Class B common stock
   
30,988
     
29,696
 
Capital in excess of par value of common stock
   
2,660,523
     
2,212,246
 
Retained earnings
   
1,346,462
     
1,086,191
 
Accumulated other comprehensive income
   
3,224
     
10,749
 
Common stock held in treasury
   
(2,748,948
)
   
(2,595,888
)
Total stockholders’ equity
   
2,392,249
     
1,842,994
 
Total liabilities and stockholders’ equity
 
$
5,280,389
   
$
5,550,206
 
                 
The accompanying notes are an integral part of these financial statements.

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

 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2006
 
2005
 
2006
 
2005
 
   
(In Thousands, Except Per Share Amounts)
 
Revenues
$
1,636,049
 
$
983,270
 
$
4,148,373
 
$
2,689,244
 
Cost of sales:
                       
Production and delivery
 
791,385
   
434,368
   
1,874,907
   
1,189,960
 
Depreciation and amortization
 
60,827
   
61,646
   
147,432
   
172,731
 
Total cost of sales
 
852,212
   
496,014
   
2,022,339
   
1,362,691
 
Exploration expenses
 
3,341
   
2,159
   
8,695
   
6,421
 
General and administrative expenses
 
45,062
   
25,546
   
110,828
   
72,539
 
Total costs and expenses
 
900,615
   
523,719
   
2,141,862
   
1,441,651
 
Operating income
 
735,434
   
459,551
   
2,006,511
   
1,247,593
 
Equity in PT Smelting earnings
 
1,508
   
1,315
   
7,073
   
6,473
 
Interest expense, net
 
(18,556
)
 
(33,330
)
 
(62,251
)
 
(106,170
)
Losses on early extinguishment and
                       
conversion of debt
 
(29,886
)
 
(38,416
)
 
(32,126
)
 
(38,379
)
Gains on sales of assets
 
21,078
   
-
   
29,689
   
-
 
Other income, net
 
6,252
   
3,605
   
17,215
   
19,700
 
Income before income taxes and minority
                       
interests
 
715,830
   
392,725
   
1,966,111
   
1,129,217
 
Provision for income taxes
 
(303,844
)
 
(186,712
)
 
(835,810
)
 
(539,424
)
Minority interests in net income of
                       
consolidated subsidiaries
 
(46,199
)
 
(25,083
)
 
(115,359
)
 
(72,971
)
Net income
 
365,787
   
180,930
   
1,014,942
   
516,822
 
Preferred dividends
 
(15,125
)
 
(15,125
)
 
(45,375
)
 
(45,375
)
Net income applicable to common stock
$
350,662
 
$
165,805
 
$
969,567
 
$
471,447
 
                         
Net income per share of common stock:
                       
Basic
 
$1.85
   
$0.93
   
$5.14
   
$2.64
 
Diluted
 
$1.67
   
$0.86
   
$4.64
   
$2.48
 
                         
Average common shares outstanding:
                       
Basic
 
189,554
   
177,895
   
188,659
   
178,513
 
Diluted
 
221,077
   
219,824
   
221,434
   
220,285
 
                         
Dividends paid per share of common stock
 
$1.0625
   
$0.75
   
$2.9375
   
$1.75
 
                         
The accompanying notes are an integral part of these financial statements.
 
 
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FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

   
Nine Months Ended
 
   
September 30,
 
   
2006
   
2005
 
   
(In Thousands)
 
Cash flow from operating activities:
               
Net income
 
$
1,014,942
   
$
516,822
 
Adjustments to reconcile net income to net cash provided by
     
operating activities:
               
Depreciation and amortization
   
147,432
     
172,731
 
Minority interests’ share of net income
   
115,359
     
72,971
 
Deferred income taxes
   
12,660
     
(24,085
)
Stock-based compensation
   
39,075
     
13,255
 
Long-term compensation and postretirement benefits
   
12,207
     
3,082
 
Losses on early extinguishment and conversion of debt
   
32,126
     
38,379
 
Gains on sales of assets
   
(29,689
)
   
-
 
Equity in PT Smelting earnings
   
(7,073
)
   
(6,473
)
Increase in deferred mining costs
   
-
     
(68,610
)
Elimination of profit on PT Freeport Indonesia
               
sales to PT Smelting
   
7,368
     
3,120
 
Provision for inventory obsolescence
   
4,500
     
4,500
 
Other
   
19,380
     
2,606
 
(Increases) decreases in working capital:
               
Accounts receivable
   
131,465
     
5,582
 
Inventories
   
(182,055
)
   
7,772
 
Prepaid expenses and other
   
(24,462
)
   
(5,696
)
Accounts payable and accrued liabilities
   
18,199
     
56,084
 
Rio Tinto share of joint venture cash flows
   
(95,384
)
   
8,068
 
Accrued income taxes
   
(147,595
)
   
82,919
 
(Increase) decrease in working capital
   
(299,832
)
   
154,729
 
Net cash provided by operating activities
   
1,068,455
     
883,027
 
                 
Cash flow from investing activities:
               
PT Freeport Indonesia capital expenditures
   
(165,070
)
   
(85,793
)
Atlantic Copper and other capital expenditures
   
(12,942
)
   
(9,814
)
Sales of assets
   
32,613
     
-
 
Investment in PT Smelting
   
(1,855
)
   
-
 
Proceeds from insurance settlement
   
-
     
2,016
 
Net cash used in investing activities
   
(147,254
)
   
(93,591
)
                 
Cash flow from financing activities:
               
Proceeds from debt
   
125,363
     
47,308
 
Repayments of debt
   
(322,181
)
   
(460,309
)
Purchases of FCX common shares
   
(99,783
)
   
(80,227
)
Cash dividends paid:
               
Common stock
   
(558,818
)
   
(312,936
)
Preferred stock
   
(45,375
)
   
(45,376
)
Minority interests
   
(113,526
)
   
(104,773
)
Net proceeds from exercised stock options
   
14,446
     
8,508
 
Excess tax benefit from exercised stock options
   
20,663
     
-
 
Other
   
(6,699
)
   
(236
)
Net cash used in financing activities
   
(985,910
)
   
(948,041
)
Net decrease in cash and cash equivalents
   
(64,709
)
   
(158,605
)
Cash and cash equivalents at beginning of year
   
763,599
     
551,450
 
Cash and cash equivalents at end of period
 
$
698,890
   
$
392,845
 
                 
The accompanying notes are an integral part of these financial statements.
 
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Table of Contents
 
FREEPORT-McMoRan COPPER & GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

As a result of adopting SFAS No. 123R on January 1, 2006, FCX’s income before income taxes and minority interests for the three months ended September 30, 2006, was $5.7 million lower and net income was $3.3 million ($0.02 per basic share and $0.01 per diluted share) lower, and FCX’s income before income taxes and minority interests for the nine months ended September 30, 2006, was $21.6 million


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lower and net income was $12.5 million ($0.07 per basic share and $0.06 per diluted share) lower than if it had continued to account for share-based compensation under APB Opinion No. 25.

Prior to the adoption of SFAS No. 123R, FCX presented all tax benefits resulting from the exercise of stock options as operating cash flows in its Consolidated Statements of Cash Flows. SFAS No. 123R requires the cash flows generated by tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $20.7 million excess tax benefit classified as a financing cash inflow in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2006, would have been classified as an operating cash inflow if FCX had not adopted SFAS No. 123R.

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

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

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

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

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

   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2006
 
2005
 
2006
 
2005
 
Stock options awarded to employees (including directors)
 
$
5,729
 
$
516
a
$
21,606
 
$
1,550
a
Stock options awarded to nonemployees
   
1,291
   
271
   
2,150
   
858
 
Restricted stock units in lieu of cash awards
   
7,270
   
4,454
   
14,099
   
10,517
 
Restricted stock units awarded to directors
   
192
   
123
   
1,220
   
330
 
Stock appreciation rights
   
(127
)
 
1,537
   
825
   
1,636
 
Total stock-based compensation costb
   
14,355
   
6,901
   
39,900
   
14,891
 
Tax benefit
   
(5,283
)
 
(2,226
)
 
(14,238
)
 
(4,445
)
Minority interest share
   
(781
)
 
(331
)
 
(2,100
)
 
(662
)
Impact on net income
 
$
8,291
 
$
4,344
 
$
23,562
 
$
9,784
 
                           
 
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a.  
Represents amortization of the intrinsic value of FCX’s Class A stock options that were converted to Class B stock options in 2002.
b.  
Amounts are before Rio Tinto’s share of the cost of employee exercises of in-the-money stock options which increased consolidated general and administrative expenses by $1.0 million in the 2006 quarter and which decreased consolidated general and administrative expenses by $2.9 million in the 2005 quarter, $6.1 million in the 2006 nine-month period and $5.9 million in the 2005 nine-month period.

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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2005
   
September 30, 2005
 
Net income applicable to common stock, as reported
   
$165,805
     
$471,447
 
Add: Stock-based employee compensation expense
               
included in reported net income for stock option
               
conversions, SARs and restricted stock units,
               
net of taxes and minority interests
   
4,675
     
9,132
 
Deduct: Total stock-based employee compensation
               
expense determined under fair value-based method
               
for all awards, net of taxes and minority interests
   
(7,892
)
   
(18,646
)
Pro forma net income applicable to common stock
   
$162,588
     
$461,933
 
                 
Earnings per share:
               
Basic - as reported
   
$0.93
     
$2.64
 
Basic - pro forma
   
$0.91
     
$2.59
 
                 
Diluted - as reported
   
$0.86
     
$2.48
 
Diluted - pro forma
   
$0.86
     
$2.45
 
                 
For the pro forma computations, the values of option grants were calculated on the dates of grant using the Black-Scholes-Merton option pricing model and amortized to expense on a straight-line basis over the options’ vesting periods. No other discounts or restrictions related to vesting or the likelihood of vesting of stock options were applied. The following table summarizes the calculated average fair values and weighted-average assumptions used to determine the fair value of FCX’s stock option grants under SFAS No. 123 during the 2005 periods presented.

 
Three Months Ended
   
Nine Months Ended
 
 
September 30, 2005
   
September 30, 2005
 
Fair value per stock option
 
$14.52
     
$13.97
 
Risk-free interest rate
 
3.8
%
   
3.9
%
Expected volatility rate
 
45
%
   
46
%
Expected life of options (in years)
 
6
     
6
 
Assumed annual dividend
 
$1.00
     
$1.00
 
 
 
8

Table of Contents

Options and SARs. A summary of options outstanding as of September 30, 2006, including 142,593 SARs, and changes during the nine months ended September 30, 2006 follow:

         
Weighted
     
         
Average
 
Aggregate
 
     
Weighted
 
Remaining
 
Intrinsic
 
 
Number of
 
Average
 
Contractual
 
Value
 
 
Options
 
Option Price
 
Term (years)
 
($000)
 
Balance at January 1
7,355,612
 
$
31.43
           
Granted
1,126,250
   
62.88
           
Exercised
(2,578,059
)
 
26.56
           
Expired/Forfeited
(65,873
)
 
39.12
           
Balance at September 30
5,837,930
   
39.60
 
8.04
 
$
90,484
 
                     
Vested and exercisable at September 30
628,415
   
22.53
 
5.36
 
$
19,315
 
                     
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option valuation model. The assumptions used to value stock option awards during the nine months ended September 30, 2006, are noted in the following table. Expected volatility is based on implied volatilities from traded options on FCX’s stock and historical volatility of FCX’s stock. FCX uses historical data to estimate future option exercises, forfeitures and expected life of the options. When appropriate, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected dividend rate is calculated as the annual dividend (excludes supplemental dividends) at the date of grant divided by the average stock price for the one-year period preceding the grant date. The risk-free interest rate is based on Federal Reserve rates in effect for bonds with maturity dates equal to the expected term of the option at the grant date.

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

The average grant-date fair value of options granted during the first nine months of 2006, was $17.67 per option. The total intrinsic value of options exercised during the first nine months of 2006 was $94.8 million. As of September 30, 2006, FCX had $52.3 million of total unrecognized compensation cost related to unvested stock options expected to be recognized over a weighted average period of 1.2 years.

The following table includes amounts related to exercises of stock options and SARs and vesting of restricted stock units during the first nine months of 2006 (in millions, except shares tendered):

FCX shares tendered to pay the exercise price
     
and/or the minimum required taxesa
 
809,926
 
Cash received from stock option exercises
$
36.0
 
Actual tax benefit realized for the tax deductions
     
from stock option exercises
$
30.6
 
Amounts FCX paid for employee taxes related
     
to stock option exercises
$
21.5
 
Amounts FCX paid for exercised SARs
$
2.1
 

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

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

FCX granted 354,677 restricted stock units in the first nine months of 2006. A summary of outstanding unvested restricted stock units as of September 30, 2006, and activity during the nine months ended September 30, 2006 is presented below:

     
Weighted
     
     
Average
 
Aggregate
 
 
Number of
 
Remaining
 
Intrinsic
 
 
Restricted
 
Contractual
 
Value
 
 
Stock Units
 
Term (years)
 
($000)
 
Balance at January 1
317,258
           
Granted
354,677
           
Vested
(140,362
)
         
Forfeited
-
           
Balance at September 30
531,573
 
1.99
 
$
28,312
 
               
The grant-date fair value of restricted stock units granted to FCX senior executives during the nine months ended September 30, 2006, was $21.2 million. Because this is a performance-based award and the requisite service period under SFAS No. 123R is considered to be the calendar year prior to the grant date, the entire value of this award on the date of grant was charged to expense during the calendar year prior to the date of grant.

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

3.   
DEFERRED MINING COSTS
On January 1, 2006, FCX adopted Emerging Issues Task Force Issue No. 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry” (EITF 04-6), which requires that stripping costs incurred during production be considered costs of the extracted minerals and included as a component of inventory to be recognized in cost of sales in the same period as the revenue from the sale of inventory. Upon adoption of EITF 04-6, FCX recorded its deferred mining costs asset ($285.4 million) at December 31, 2005, net of taxes, minority interest share and inventory effects ($135.9 million), as a cumulative effect adjustment to reduce its retained earnings on January 1, 2006. In addition, stripping costs incurred in 2006 and later periods are now charged to cost of sales as incurred. As a result of adopting EITF 04-6 on January 1, 2006, FCX’s income before income taxes and minority interests for the three months ended September 30, 2006, was $9.6 million lower and net income was $5.1 million ($0.03 per basic share and $0.02 per diluted share) lower, and FCX’s income before income taxes and minority interests for the nine

 
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months ended September 30, 2006, was $48.3 million lower and net income was $25.6 million ($0.14 per basic share and $0.12 per diluted share) lower than if it had not adopted EITF 04-6 and continued to defer stripping costs. Adoption of the new guidance has no impact on FCX’s cash flows.

4.   
EARNINGS PER SHARE
FCX’s basic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the year. The following is a reconciliation of net income and weighted-average common shares outstanding for purposes of calculating diluted net income per share (in thousands, except per share amounts):

   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2006
 
2005
 
2006
 
2005
 
Net income before preferred dividends
 
$
365,787
 
$
180,930
 
$
1,014,942
 
$
516,822
 
Preferred dividends
   
(15,125
)
 
(15,125
)
 
(45,375
)
 
(45,375
)
Net income applicable to common stock
   
350,662
   
165,805
   
969,567
   
471,447
 
Plus income impact of assumed conversion of:
                         
5½% Convertible Perpetual Preferred Stock
   
15,125
   
15,125
   
45,375
   
45,375
 
7% Convertible Senior Notes
   
2,871
   
9,177
   
12,994
   
29,786
 
Diluted net income applicable to common stock
 
$
368,658
 
$
190,107
 
$
1,027,936
 
$
546,608
 
                           
Weighted average common shares outstanding
   
189,554
   
177,895
   
188,659
   
178,513
 
Add:
                         
Shares issuable upon conversion, exercise or vesting of:
                         
5½% Convertible Perpetual Preferred Stock
   
22,365
   
21,224
   
22,034
   
21,097
 
7% Convertible Senior Notes
   
7,590
   
18,410
   
9,248
   
18,553
 
Dilutive stock options
   
1,037
   
1,817
   
990
   
1,642
 
Restricted stock
   
531
   
478
   
503
   
480
 
Weighted average common shares outstanding for
                         
purposes of calculating diluted net income per share
   
221,077
   
219,824
   
221,434
   
220,285
 
                           
Diluted net income per share of common stock
 
$
1.67
 
$
0.86
 
$
4.64
 
$
2.48
 
                           
Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period are excluded from the computation of diluted net income per share of common stock. FCX’s convertible instruments are also excluded when including the conversion of these instruments increases reported diluted net income per share. A recap of the excluded amounts follows (in thousands, except exercise prices):

 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2006
 
2005
 
2006
 
2005
 
Weighted average options
1,004
 
-
 
896
 
1,821
 
Weighted average exercise price
$63.77
 
-
 
$63.77
 
$36.98
 
                 

11

 
5.   
INVENTORIES
The components of inventories follow (in thousands):

     
September 30,
 
December 31,
 
     
2006
 
2005
 
PT Freeport Indonesia:
Concentrates and stockpiles -
             
 
Average cost
 
$
13,484
 
$
14,723
 
Atlantic Copper:
Concentrates - First in, first out (FIFO)
   
213,729
   
137,740
 
 
Work in process - FIFO
   
183,091
   
144,951
 
 
Finished goods - FIFO
   
7,782
   
2,975
 
Total product inventories
   
418,086
   
300,389
 
Total materials and supplies, net
   
333,448
   
264,630
 
Total inventories
 
$
751,534
 
$
565,019
 
               
The average cost method was used to determine the cost of essentially all materials and supplies inventory. Materials and supplies inventory is net of obsolescence reserves totaling $17.0 million at September 30, 2006, and $16.6 million at December 31, 2005.

6.   
DEBT AND EQUITY TRANSACTIONS
As of September 30, 2006, FCX had total outstanding debt of $774.5 million. Total debt was reduced by a net $481.4 million during the first nine months of 2006, including the following transactions:

·  
$286.1 million for the completion of a tender offer to induce conversion of FCX’s 7% Convertible Senior Notes due 2011 into 9.3 million shares of FCX common stock in the third quarter;

·  
$167.4 million for the mandatory redemption of FCX’s Gold-Denominated Preferred Stock, Series II in the first quarter for $236.4 million;

·  
$12.5 million for the final mandatory redemption of FCX’s Silver-Denominated Preferred Stock in the third quarter for $25.8 million;

·  
$30.5 million for privately negotiated transactions to induce conversion of FCX’s 7% Convertible Senior Notes due 2011 into 1.0 million shares of FCX common stock; and

·  
$11.5 million for purchase in an open market transaction of FCX’s 10⅛% Senior Notes due 2010 for $12.4 million.

FCX recorded charges of $43.1 million ($35.9 million to net income, net of related reduction of interest expense, or $0.16 per share) in the third quarter of 2006 and $114.3 million ($74.0 million to net income, net of related reduction of interest expense, or $0.33 per share) in the first nine months of 2006 in connection with these transactions. The portion of these charges related to the mandatory redemptions of FCX’s gold- and silver-denominated preferred stock are recorded in revenues in accordance with FCX’s accounting policy for these instruments and totaled $13.3 million in the third quarter of 2006 and $82.2 million in the first nine months of 2006.

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

7.   
INTEREST COST
Interest expense excludes capitalized interest of $2.8 million in the third quarter of 2006, $1.1 million in the third quarter of 2005, $6.9 million in the first nine months of 2006 and $2.9 million in the first nine months of 2005.

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

 
FCX
 
PT Freeport Indonesia
 
Atlantic Copper
 
 
2006
 
2005
 
2006
 
2005
 
2006
 
2005
 
Service cost
$
99
 
$
180
 
$
953
 
$
850
 
$
-
 
$
-
 
Interest cost
 
459
   
480
   
1,235
   
888
   
1,636
   
1,199
 
Expected return on plan assets
 
(33
)
 
(118
)
 
(614
)
 
(333
)
 
-
   
-
 
Amortization of prior service cost
 
1,051
   
1,057
   
236
   
212
   
-
   
-
 
Amortization of net actuarial loss
 
13
   
-
   
136
   
168
   
233
   
224
 
Net periodic benefit cost
$
1,589
 
$
1,599
 
$
1,946
 
$
1,785
 
$
1,869
 
$
1,423
 
                                     
The components of net periodic pension benefit cost for the nine months ended September 30, 2006 and 2005 follow (in thousands):

 
FCX
 
PT Freeport Indonesia
 
Atlantic Copper
 
 
2006
 
2005
 
2006
 
2005
 
2006
 
2005
 
Service cost
$
191
 
$
524
 
$
2,858
 
$
2,681
 
$
-
 
$
-
 
Interest cost
 
1,320
   
1,594
   
3,701
   
2,800
   
3,914
   
3,727
 
Expected return on plan assets
 
346
   
(374
)
 
(1,841
)
 
(1,052
)
 
-
   
-
 
Amortization of prior service cost
 
3,153
   
3,020
   
708
   
668
   
-
   
-
 
Amortization of net actuarial loss
 
41
   
-
   
406
   
531
   
684
   
696
 
Net periodic benefit cost
$
5,051
 
$
4,764
 
$
5,832
 
$
5,628
 
$
4,598
 
$
4,423
 
                                     

9.   
BUSINESS SEGMENTS
FCX has two operating segments: “mining and exploration” and “smelting and refining.” The mining and exploration segment consists of FCX’s Indonesian activities including PT Freeport Indonesia’s copper and gold mining operations, PT Puncakjaya Power’s power-generating operations (after eliminations with PT Freeport Indonesia) and FCX’s Indonesian exploration activities. The smelting and refining segment includes Atlantic Copper’s operations in Spain and PT Freeport Indonesia’s equity investment in PT Smelting in Gresik, Indonesia. The segment data presented below were prepared on the same basis as FCX’s consolidated financial statements.

   
Mining
and Exploration
 
Smelting and Refining
 
Eliminations 
and Other
 
FCX Total
 
   
(In Thousands)
 
Three months ended September 30, 2006:
                         
Revenues
 
$
1,262,364
a
$
613,089
 
$
(239,404
)
$
1,636,049
 
Production and delivery
   
363,478
   
581,357
   
(153,450
)b
 
791,385
 
Depreciation and amortization
   
49,954
   
8,071
   
2,802
   
60,827
 
Exploration expenses
   
3,233
   
-
   
108
   
3,341
 
General and administrative expenses
   
36,290
c
 
3,598
   
5,174
c
 
45,062
 
Operating income (loss)
 
$
809,409
 
$
20,063
 
$
(94,038
)
$
735,434
 
Equity in PT Smelting earnings
 
$
-
 
$
1,508
 
$
-
 
$
1,508
 
Interest expense, net
 
$
877
 
$
6,852
 
$
10,827
 
$
18,556
 
Provision for income taxes
 
$
271,757
 
$
-
 
$
32,087
 
$
303,844
 
Capital expenditures
 
$
62,358
 
$
6,760
 
$
(1,451
)
$
67,667
 
Total assets
 
$
3,945,830
d
$
1,044,705
e
$
289,854
 
$
5,280,389
 
                           
 
 
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Table of Contents

   
Mining
and Exploration
 
Smelting and Refining
 
Eliminations 
and Other
 
FCX Total
 
   
(In Thousands)
 
Three months ended September 30, 2005:
                         
Revenues
 
$
771,190
a
$
378,412
 
$
(166,332
)
$
983,270
 
Production and delivery
   
247,001
   
351,517
   
(164,150
)b
 
434,368
 
Depreciation and amortization
   
51,143
   
7,415
   
3,088
   
61,646
 
Exploration expenses
   
2,099
   
-
   
60
   
2,159
 
General and administrative expenses
   
38,394
c
 
2,268
   
(15,116
)c
 
25,546
 
Operating income
 
$
432,553
 
$
17,212
 
$
9,786
 
$
459,551
 
Equity in PT Smelting earnings
 
$
-
 
$
1,315
 
$
-
 
$
1,315
 
Interest expense, net
 
$
5,342
 
$
4,140
 
$
23,848
 
$
33,330
 
Provision for income taxes
 
$
146,610
 
$
-
 
$
40,102
 
$
186,712
 
Capital expenditures
 
$
32,447
 
$
1,444
 
$
2,425
 
$
36,316
 
Total assets
 
$
3,889,800
d
$
723,149
e
$
264,832
 
$
4,877,781
 
                           
Nine months ended September 30, 2006:
                         
Revenues
 
$
3,094,315
a
$
1,722,327
 
$
(668,269
)
$
4,148,373
 
Production and delivery
   
931,463
   
1,633,169
   
(689,725
)b
 
1,874,907
 
Depreciation and amortization
   
117,637
   
22,887
   
6,908
   
147,432
 
Exploration expenses
   
8,479
   
-
   
216
   
8,695
 
General and administrative expenses
   
174,285
c
 
10,902
   
(74,359
)c
 
110,828
 
Operating income
 
$
1,862,451
 
$
55,369
 
$
88,691
 
$
2,006,511
 
Equity in PT Smelting earnings
 
$
-
 
$
7,073
 
$
-
 
$
7,073
 
Interest expense, net
 
$
5,758
 
$
17,123
 
$
39,370
 
$
62,251
 
Provision for income taxes
 
$
653,449
 
$
-
 
$
182,361
 
$
835,810
 
Capital expenditures
 
$
167,690
 
$
12,942
 
$
(2,620
)
$
178,012
 
                           
Nine months ended September 30, 2005:
                         
Revenues
 
$
2,136,974
a
$
982,425
 
$
(430,155
)
$
2,689,244
 
Production and delivery
   
664,234
   
937,003
   
(411,277
)b
 
1,189,960
 
Depreciation and amortization
   
142,285
   
21,645
   
8,801
   
172,731
 
Exploration expenses
   
6,263
   
-
   
158
   
6,421
 
General and administrative expenses
   
90,001
c
 
8,173
   
(25,635
)c
 
72,539
 
Operating income (loss)
 
$
1,234,191
 
$
15,604
 
$
(2,202
)
$
1,247,593
 
Equity in PT Smelting earnings
 
$
-
 
$
6,473
 
$
-
 
$
6,473
 
Interest expense, net
 
$
16,966
 
$
12,332
 
$
76,872
 
$
106,170
 
Provision for income taxes
 
$
429,936
 
$
-
 
$
109,488
 
$
539,424
 
Capital expenditures
 
$
85,955
 
$
7,307
 
$
2,345
 
$
95,607
 
                           
a.  
Includes PT Freeport Indonesia’s sales to PT Smelting totaling $457.6 million in the 2006 quarter, $214.1 million in the 2005 quarter, $1,065.5 million in the 2006 nine-month period and $643.1 million in the 2005 nine-month period.
b.  
Includes deferral of intercompany profits on 25 percent of PT Freeport Indonesia’s sales to PT Smelting, for which the final sale to third parties has not occurred, totaling $20.3 million in the 2006 quarter, $3.1 million in the 2005 quarter, $7.4 million in the 2006 nine-month period and $3.1 million in the 2005 nine-month period.
c.  
Includes charges to the mining and exploration segment for the in-the-money value of FCX stock option exercises which are eliminated in consolidation totaling $2.1 million in the 2006 quarter, $16.7 million in the 2005 quarter, $87.5 million in the 2006 nine-month period and $34.1 million in the 2005 nine-month period.
d.  
Includes PT Freeport Indonesia’s trade receivables with PT Smelting totaling $166.1 million at September 30, 2006, and $98.2 million at September 30, 2005.
e.  
Includes PT Freeport Indonesia’s equity investment in PT Smelting totaling $26.6 million at September 30, 2006, and $51.2 million at September 30, 2005.

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

   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2006
 
2005
 
2006
 
2005
 
Net income
 
$
365,787
 
$
180,930
 
$
1,014,942
 
$
516,822
 
Other comprehensive income (loss):
                         
Change in unrealized derivatives’ fair value, net of taxes
                         
of $(0.5) million for the three months ended September
                         
30, 2006, $1.8 million for the three months ended
                         
September 30, 2005, $(0.7) million for the nine months
                         
ended September 30, 2006 and $2.9 million for
                         
the nine months ended September 30, 2005
   
1,435
   
(2,387
)
 
(9,370
)a
 
(3,732
)
Reclass to earnings, net of taxes of $0.5 million
                         
for the three months ended September 30, 2006, $1.5
                         
million for the nine months ended September 30, 2006
                         
and $0.2 million for the nine months ended September
                         
30, 2005
   
1,590
   
(20
)
 
1,929
   
(115
)
Total comprehensive income
 
$
368,812
 
$
178,523
 
$
1,007,501
 
$
512,975
 
                           
a.   
Includes unrealized losses on PT Smelting’s hedging contracts to fix a portion of its revenues through 2007. At September 30, 2006, FCX had unrealized losses of $7.5 million in accumulated other comprehensive income related to these contracts.

11.  
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the first nine months of 2006 was 28.7 to 1 compared with 11.1 to 1 for the 2005 period. For this calculation, earnings consist of income from continuing operations before income taxes, minority interests and fixed charges. Fixed charges include interest and that portion of rent deemed representative of interest.
 
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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


ERNST & YOUNG LLP


New Orleans, Louisiana
October 31, 2006
 
 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

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

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

PT Freeport Indonesia, our principal operating subsidiary, operates under an agreement, called a Contract of Work, with the Government of Indonesia. The Contract of Work allows us to conduct exploration, mining and production activities in a 24,700-acre area called Block A located in Papua, Indonesia. Under the Contract of Work, PT Freeport Indonesia also conducts exploration activities (which are currently suspended, but are under review for resumption) in an approximate 500,000-acre area called Block B in Papua. All of our proven and probable mineral reserves and current mining operations are located in Block A.

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

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

In 1996, we established joint ventures with Rio Tinto, an international mining company with headquarters in London, England. One joint venture covers PT Freeport Indonesia’s mining operations in Block A and gives Rio Tinto, through 2021, a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver in Block A, and, after 2021, a 40 percent interest in all production from Block A. Operating, nonexpansion capital and administrative costs are shared proportionately between PT Freeport Indonesia and Rio Tinto based on the ratio of (a) the incremental revenues from production from our expansion completed in 1998 to (b) total revenues from Block A, including production from PT Freeport Indonesia’s previously existing reserves. PT Freeport Indonesia receives 100 percent of the cash flow from specified annual amounts of copper, gold and silver through 2021, calculated by reference to its proven and probable reserves as of December 31, 1994, and 60 percent of all remaining cash flow.

 
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Outlook
PT Freeport Indonesia’s share of annual sales in 2006 is currently projected to approximate 1.2 billion pounds of copper and 1.7 million ounces of gold. We expect our fourth-quarter operations to benefit from access to higher grade material, providing estimated sales of approximately 415 million pounds of copper and 470 thousand ounces of gold. At the Grasberg open-pit mine, the sequencing in mining areas with varying ore grades causes fluctuations in the timing of ore production, resulting in varying quarterly and annual sales of copper and gold. The achievement of PT Freeport Indonesia’s sales estimates will be dependent, among other factors, on the achievement of targeted mining rates, the successful operation of PT Freeport Indonesia production facilities, the impact of weather conditions at the end of fiscal periods on concentrate loading activities and other factors.

Sales volumes may vary from these estimates depending on the areas being mined within the Grasberg open pit. Based on current estimated sales volumes for the fourth quarter of 2006 and copper prices of approximately $3.25 per pound and gold prices of approximately $575 per ounce, we expect to generate operating cash flows approximating $1.7 billion in 2006. The impact on our projected 2006 cash flows for each $0.10 per pound change in copper prices in the balance of the year would approximate $20 million, including the effects of price changes on related royalty costs, and for each $25 per ounce change in gold prices in the balance of the year would approximate $6 million.

Our mine plans are based on latest available data and studies, which take into account factors such as mining and milling rates, ore grades and recoveries, economic conditions and geological/geotechnical considerations. We update these plans to incorporate new data and conditions, with the objective of operating safely, managing risks and maximizing economic values. While ongoing analyses may alter current expectations, average annual sales for the period 2006 - 2010 are estimated to approximate 1.24 billion pounds of copper and 1.9 million ounces of gold.

We are continuing to analyze our longer range mine plans to assess the optimal design of the Grasberg open pit, which may affect the timing of development of the Grasberg underground block cave ore body. The analysis is incorporating the latest geological and geotechnical studies, costs and other economic factors to develop the optimal timing for transitioning from the open pit to the Grasberg block cave. Our previous plan included the transition from the Grasberg open pit to the Grasberg block cave ore body in 2015. We expect to complete the current studies on longer range plans by year-end 2006.

Copper and Gold Markets
As shown in the graphs below, world metal prices for copper have fluctuated during the period from 1992 through October 2006 with the London Metal Exchange (LME) spot copper price varying from a low of approximately $0.60 per pound in 2001 to a record high of approximately $4.00 per pound on May 12, 2006, and world gold prices have fluctuated during the period from 1998 through October 2006 from a low of approximately $250 per ounce in 1999 to a high of approximately $725 per ounce on May 12, 2006. Current copper and gold prices reflect significantly higher levels of direct investment by commodity investors. This can be expected to result in higher levels of volatility in copper and gold prices and in the share prices of FCX and other commodity producers. Copper and gold prices are affected by numerous factors beyond our control as described further in our Form 10-K for the year ended December 31, 2005.
 

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

The graph above presents LME spot copper prices and reported stocks of copper at the LME and New York Commodity Exchange (COMEX) through October 31, 2006. Since 2003 and through 2005, global demand exceeded supply, evidenced by the decline in exchange warehouse inventories. LME and COMEX inventories have risen from the 2005 lows in recent months but combined stocks of approximately 135,000 metric tons at September 29, 2006 represent less than three days of global consumption. Copper prices averaged $3.48 per pound in the third quarter of 2006, with prices ranging from $3.28 per pound to $3.73 per pound. The LME spot price closed at $3.36 per pound on October 31, 2006. Disruptions associated with strikes, unrest and other operational issues have resulted in a continuation of low levels of inventory. Future copper prices are expected to continue to be influenced by demand from China, economic performance in the United States (U.S.) and other industrialized countries, the timing of the development of new supplies of copper, production levels of mines and copper smelters and the level of direct participation by investors. We consider the current underlying supply and demand conditions in the global copper markets to be positive for our company.
 
 
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After reaching new 25-year highs above $700 per ounce in the second quarter of 2006, prices declined in the third quarter to an average of $622 per ounce, with prices ranging from $574 per ounce to $672 per ounce. Gold prices continued to be supported by increased investment demand for gold, ongoing geopolitical tensions, a weak U.S. dollar, inflationary pressures, falling production from older mines, limited development of new mines and actions by gold producers to reduce hedge positions. The London gold price closed at $604 per ounce on October 31, 2006.

CONSOLIDATED RESULTS

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

 
Third Quarter
 
Nine Months
 
 
2006
 
2005
 
2006
 
2005
 
Revenues
$
1,636.0
 
$
983.3
 
$
4,148.4
 
$
2,689.2
 
Operating income
 
735.4
   
459.6
   
2,006.5
   
1,247.6
 
Net income applicable to common stock
 
350.7
   
165.8
   
969.6
   
471.4
 
Diluted net income per share of common stock
 
1.67
   
0.86
   
4.64
   
2.48
 

Consolidated revenues include PT Freeport Indonesia’s sale of copper concentrates, which also contain significant quantities of gold and silver, and the sale by Atlantic Copper of copper anodes, copper cathodes, and gold in anodes and slimes. Consolidated revenues for the third quarter of 2006 and the first nine months of 2006 were higher than consolidated revenues for the 2005 periods, reflecting substantially higher copper and gold prices than the 2005 periods, partly offset by lower PT Freeport Indonesia sales volumes. PT Freeport Indonesia mined lower grade ore and reported lower production and sales in the third quarter of 2006 (except for gold sales which were only slightly higher in the third quarter) and the first nine months of 2006, compared with the 2005 periods.


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At September 30, 2006, our consolidated concentrate sales included 231.6 million pounds of copper recorded at an average price of $3.43 per pound, subject to final pricing. Final prices on these sales will be established over the next several months pursuant to terms of sales contracts. We estimate that a five-cent change in the price realized from the September price would have an approximate $12 million impact on our 2006 consolidated revenues and an approximate $6 million impact on our 2006 consolidated net income.

Third-quarter 2006 consolidated revenues included net additions of $33.3 million ($17.6 million to net income or $0.08 per share) primarily for final pricing of concentrates sold in prior quarters, compared with net additions of $48.8 million ($25.9 million to net income or $0.12 per share) to third-quarter 2005 revenues. Nine-month 2006 consolidated revenues included net additions of $138.5 million ($73.5 million to net income or $0.33 per share) compared with net additions of $8.6 million ($4.5 million to net income or $0.02 per share) for the nine-month 2005 period, primarily for final pricing of concentrates sold in prior years.

Consolidated revenues and net income vary significantly with fluctuations in the market prices of copper and gold, sales volumes and other factors. Based on PT Freeport Indonesia’s projected share of copper sales for the fourth quarter of 2006 (415 million pounds) and assuming an average price of $3.25 per pound of copper, each $0.10 per pound change in the average price realized in the fourth quarter of 2006 would have an approximate $40 million impact on our annual revenues and an approximate $21 million impact on our annual net income. A $25 per ounce change in the average price realized in the fourth quarter of 2006 on PT Freeport Indonesia’s projected share of gold sales for the fourth quarter of 2006 (470 thousand ounces) would have an approximate $12 million impact on our annual revenues and an approximate $6 million impact on our annual net income.

We currently have no copper or gold price protection contracts relating to our mine production. We had outstanding gold-denominated and silver-denominated preferred stock with dividends and redemption amounts determined by commodity prices. Our Gold-Denominated Preferred Stock, Series II was redeemed in February 2006, resulting in a $69.0 million reduction in revenues ($36.6 million to net income or $0.17 per share); and the final scheduled redemption of our Silver-Denominated Preferred Stock occurred on August 1, 2006, resulting in a $13.3 million reduction in revenues ($7.0 million to net income or $0.03 per share) (see “Capital Resources and Liquidity - Financing Activities”).

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

Consolidated depreciation and amortization expense decreased to $60.8 million in the third quarter of 2006 and $147.4 million in the first nine months of 2006, compared with $61.6 million in the third quarter of 2005 and $172.7 million in the first nine months of 2005, primarily because of lower copper sales volumes at PT Freeport Indonesia during the 2006 periods. Exploration expenses increased to $3.3 million in the third quarter of 2006 and $8.7 million in the first nine months of 2006 from $2.2 million in the third quarter of 2005 and $6.4 million in the first nine months of 2005 (see “Mining and Exploration - PT Freeport Indonesia Exploration Activities”). Consolidated general and administrative expenses increased to $45.1 million in the third quarter of 2006 and $110.8 million in the first nine months of 2006 from $25.5 million in the third quarter of 2005 and $72.5 million in the first nine months of 2005 (see “Other Financial Results”).

Net interest expense decreased to $18.6 million in the third quarter of 2006 and $62.3 million in the first nine months of 2006 from $33.3 million in the third quarter of 2005 and $106.2 million in the first nine months of 2005 primarily because of lower debt levels. In September 2006, we completed a tender offer for our 7% Convertible Senior Notes due 2011, resulting in the conversions of $286.1 million of the notes into 9.3 million shares of FCX common stock. In the first nine months of 2006, we also induced conversion of $30.5 million of the 7% Convertible Senior Notes due 2011 into 1.0 million shares of FCX common

 
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stock and purchased in an open market transaction $11.5 million of our 10⅛% Senior Notes due 2010 for $12.4 million. As a result of the induced conversions and open market transactions, we recorded losses on early extinguishment and conversion of debt totaling $29.9 million ($28.9 million to net income, net of related reduction of interest expense, or $0.13 per share) in the third quarter of 2006 and $32.1 million ($30.4 million to net income, net of related reduction of interest expense, or $0.14 per share) in the first nine months of 2006 (see “Capital Resources and Liquidity - Financing Activities”).

Atlantic Copper recorded gains on sales of assets totaling of $21.1 million ($21.1 million to net income or $0.10 per share) in the third quarter of 2006 and $29.7 million ($29.7 million to net income or $0.13 per share) in the first nine months of 2006 for the disposition of land and certain royalty rights.

Other income includes interest income of $7.6 million in the third quarter of 2006, $4.7 million in the third quarter of 2005, $19.4 million in the first nine months of 2006 and $11.7 million in the first nine months of 2005. Other income also includes the impact of translating into U.S. dollars Atlantic Copper’s net euro-denominated liabilities, primarily its retiree pension obligations. Changes in the U.S. dollar/euro exchange rate require us to adjust the dollar value of our net euro-denominated liabilities and record the adjustment in earnings. The exchange rate was $1.18 per euro at December 31, 2005, and $1.27 per euro at June 30, 2006 and September 30, 2006. Exchange rate effects on our net income from euro-denominated liabilities were gains (losses) of $(0.3) million in the third quarter of 2006, $(1.3) million in the third quarter of 2005, $(1.9) million in the first nine months of 2006 and $4.9 million in the first nine months of 2005.

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

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

 
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Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2006
 
2005
 
2006
 
2005
 
Mining and exploration segment operating incomea
$
811,460
 
$
449,248
 
$
1,949,964
 
$
1,268,335
 
Mining and exploration segment interest expense, net
 
(877
)
 
(5,342
)
 
(5,758
)
 
(16,966
)
Intercompany operating profit recognized (deferred)
 
(83,696
)
 
(1,904
)
 
24,723
   
(17,124
)
Income before taxes
 
726,887
   
442,002
   
1,968,929
   
1,234,245
 
Indonesian corporate income tax rate
 
35
%
 
35
%
 
35
%
 
35
%
Corporate income taxes
 
254,410
   
154,701
   
689,125
   
431,986
 
                         
Approximate PT Freeport Indonesia net income
 
472,477
   
287,301
   
1,279,804
   
802,259
 
Withholding tax on FCX’s equity share
 
9.064
%
 
9.064
%
 
9.064
%
 
9.064
%
Withholding taxes
 
42,825
   
26,041
   
116,001
   
72,717
 
                         
PT Indocopper Investama corporate income tax
 
16,869
   
9,840
   
33,739
   
30,921
 
Other, net
 
(10,260
)b
 
(3,870
)
 
(3,055
)b
 
3,800
 
FCX consolidated provision for income taxes
$
303,844
 
$
186,712
 
$
835,810
 
$
539,424
 
                         
FCX consolidated effective tax rate
 
42
%
 
48
%
 
43
%
 
48
%
                         
a.  
Excludes charges for the in-the-money value of FCX stock option exercises, which are eliminated in consolidation, totaling $2.1 million for the 2006 quarter, $16.7 million for the 2005 quarter, $87.5 million for the 2006 nine-month period and $34.1 million for the 2005 nine-month period.
b.  
Includes $15.5 million related to the reversal of a tax reserve following the outcome of a recent tax decision.
 
RESULTS OF OPERATIONS

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

 
Third Quarter
 
Nine Months
 
 
2006
 
2005
 
2006
 
2005
 
Mining and explorationa
$
809.4
 
$
432.6
 
$
1,862.4
 
$
1,234.2
 
Smelting and refining
 
20.1
   
17.2
   
55.4
   
15.6
 
Intercompany eliminations and othera, b
 
(94.1
)
 
9.8
   
88.7
   
(2.2
)
FCX operating income
$
735.4
 
$
459.6
 
$
2,006.5
 
$
1,247.6
 
                         
a.  
Includes charges to the mining and exploration segment for the in-the-money value of FCX stock option exercises, which are eliminated in consolidation, totaling $2.1 million in the third quarter of 2006, $16.7 million in the third quarter of 2005, $87.5 million in the first nine months of 2006 and $34.1 million in the first nine months of 2005.
b.  
We defer recognizing profits on PT Freeport Indonesia’s sales to Atlantic Copper and on 25 percent of PT Freeport Indonesia’s sales to PT Smelting until their sales of final products to third parties. Changes in the amount of these deferred profits impacted operating income by $(83.7) million in the third quarter of 2006, $(1.9) million in the third quarter of 2005, $24.7 million in the first nine months of 2006 and $(17.1) million in the first nine months of 2005. Our consolidated earnings can fluctuate materially depending on the timing and prices of these sales. At September 30, 2006, our deferred profits to be recognized in future periods’ operating income totaled $197.9 million, $104.9 million to net income, after taxes and minority interest sharing.

 
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MINING AND EXPLORATION

PT Freeport Indonesia Operating Results

     
Third Quarter
 
Nine Months
 
     
2006
 
2005
 
2006
 
2005
 
PT Freeport Indonesia Operating Data, Net of Rio Tinto’s Interest
           
Copper (recoverable)
                   
Production (000s of pounds)
   
307,600
 
344,500
 
766,000
 
982,400
 
Production (metric tons)
   
139,600
 
156,300
 
347,500
 
445,600
 
Sales (000s of pounds)
   
323,600
 
346,300
 
768,900
 
988,100
 
Sales (metric tons)
   
146,800
 
157,100
 
348,800
 
448,200
 
Average realized price per pound
   
$3.43
 
$1.73
 
$3.38
 
$1.67
 
Gold (recoverable ounces)
                   
Production
   
448,700
 
472,100
 
1,217,800
 
1,672,800
 
Sales
   
478,000
 
475,000
 
1,228,500
 
1,686,700
 
Average realized price per ounce
   
$608.57
 
$445.79
 
$540.67
a
$431.88
 
                     
PT Freeport Indonesia, 100% Aggregate Operating Data
               
Ore milled (metric tons per day)
   
230,100
 
216,300
 
223,600
 
209,200
 
Average ore grade
                   
Copper (percent)
   
0.85
 
1.06
 
0.76
 
1.06
 
Gold (grams per metric ton)
   
0.83
 
1.16
 
0.81
 
1.40
 
Recovery rates (percent)
                   
Copper
   
85.9
 
87.8
 
84.3
 
88.3
 
Gold
   
80.5
 
80.6
 
79.4
 
82.5
 
Copper (recoverable)
                   
Production (000s of pounds)
   
325,300
 
394,700
 
830,700
 
1,134,200
 
Production (metric tons)
   
147,600
 
179,100
 
376,800
 
514,500
 
Sales (000s of pounds)
   
342,900
 
396,600
 
834,100
 
1,140,500
 
Sales (metric tons)
   
155,500
 
179,900
 
378,300
 
517,300
 
Gold (recoverable ounces)
                   
Production
   
456,400
 
590,700
 
1,252,800
 
2,082,000
 
Sales
   
486,800
 
594,400
 
1,266,900
 
2,096,200
 

a.   
Amount was $597.07 before a loss resulting from redemption of FCX’s Gold-Denominated Preferred Stock, Series II.

PT Freeport Indonesia’s share of third-quarter 2006 sales totaled 323.6 million pounds of copper and 478,000 ounces of gold, exceeding previous estimates reported in July 2006 of 280.0 million pounds of copper and 320,000 ounces of gold. The higher than previously projected third-quarter sales reflect the mining of a high-grade section of the Grasberg pit previously scheduled to be mined in future periods. PT Freeport Indonesia will continue to seek to advance metal production when opportunities are available within safety and long-term productivity criteria. For the nine-month periods, copper and gold sales volumes totaled 768.9 million pounds of copper and 1,228,500 ounces of gold in 2006, compared with sales of 988.1 million pounds of copper and 1,686,700 ounces of gold in 2005.

Mill throughput, which varies depending on ore types being processed, averaged 230,100 metric tons of ore per day in the third quarter of 2006, 216,300 metric tons in the third quarter of 2005, 223,600 metric tons in the first nine months of 2006 and 209,200 metric tons in the first nine months of 2005. Operations were temporarily suspended for an approximate four-day period in February 2006 when illegal miners (“gold panners”) blocked a road leading to our mill. While this situation was resolved peacefully by Indonesian government authorities, we continue to work with the government to resolve the legal and security concerns presented by the increased presence of gold panners in our area of operations.

 
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Approximate average daily throughput processed at our mill facilities from each of our producing mines follows (metric tons of ore per day):

 
Third Quarter
 
Nine Months
 
 
2006
 
2005
 
2006
 
2005
 
Grasberg open pit
182,900
 
174,500
 
177,500
 
167,200
 
Deep Ore Zone underground mine
47,200
 
41,800
 
46,100
 
42,000
 
Total mill throughput
230,100
 
216,300
 
223,600
 
209,200
 
                 
In the third quarter of 2006, copper ore grades averaged 0.85 percent and recovery rates averaged 85.9 percent, compared with 1.06 percent and 87.8 percent for the third quarter of 2005. Gold ore grades averaged 0.83 grams per metric ton (g/t) and recovery rates averaged 80.5 percent in the third quarter of 2006, compared with 1.16 g/t and 80.6 percent for the third quarter of 2005. The 2006 ore grades and recoveries for copper and gold reflect the mining of lower grade material compared with the extraordinarily high grades mined in 2005. Average ore grades improved during the third quarter of 2006, compared to the first half of 2006. The highest grades of 2006 are expected to be mined in the fourth quarter.

Production from the DOZ underground mine averaged 47,200 metric tons of ore per day in the third quarter of 2006, representing 21 percent of mill throughput. DOZ continues to perform above design capacity of 35,000 metric tons of ore per day. PT Freeport Indonesia is expanding the capacity of the DOZ underground operation to a sustained rate of 50,000 metric tons of ore per day with the installation of a second crusher and additional ventilation, expected to be completed in mid-2007. PT Freeport Indonesia’s 60 percent share of capital expenditures for the DOZ expansion totaled approximately $12 million in the first nine months of 2006 (cumulative $29 million through September 30, 2006) and is expected to approximate $37 million through the projected 2007 ramp-up. PT Freeport Indonesia anticipates a further expansion of the DOZ mine to 80,000 metric tons of ore per day. The success of the development of the DOZ mine, one of the world’s largest underground mines, provides confidence in the future development of PT Freeport Indonesia’s large-scale undeveloped ore bodies.

In 2004, PT Freeport Indonesia commenced its “Common Infrastructure” project, which will provide access to its large undeveloped underground ore bodies located in the Grasberg minerals district through a tunnel system located approximately 400 meters deeper than its existing underground tunnel system. In addition to providing access to our underground ore bodies, the tunnel system will enable PT Freeport Indonesia to conduct future exploration in prospective areas associated with currently identified ore bodies. The tunnel system has reached the Big Gossan terminal and PT Freeport Indonesia is proceeding with development of the lower Big Gossan infrastructure. PT Freeport Indonesia has also advanced development of the Deep Grasberg spur and has completed 60 percent of the tunneling required to reach the Grasberg underground ore body. PT Freeport Indonesia expects the Deep Grasberg spur to reach the Grasberg underground ore body and to initiate multi-year mine development activities in the second half of 2007. PT Freeport Indonesia’s share of capital expenditures for its Common Infrastructure project totaled approximately $8 million in the first nine months of 2006 and is estimated to total approximately $9 million in 2006. The Common Infrastructure project is progressing according to plan. Work on the Grasberg underground ore body has begun with PT Freeport Indonesia’s share of capital expenditures totaling approximately $11 million in the first nine months of 2006. Projected 2006 capital expenditures for the Grasberg underground ore body approximate $30 million.

The Big Gossan underground mine is a high-grade deposit located near the existing milling complex. We are currently developing the Big Gossan project, with aggregate capital expenditures from 2005 to 2009 expected to total approximately $225 million ($195 million net to PT Freeport Indonesia, with approximately $58 million in 2006). PT Freeport Indonesia’s share of capital expenditures for Big Gossan totaled approximately $40 million in the first nine months of 2006. Production is expected to ramp up to 7,000 metric tons per day by 2010 (average annual aggregate incremental production of 135 million pounds of copper and 65,000 ounces of gold, with PT Freeport Indonesia receiving 60 percent of these amounts). The Big Gossan mine is being developed as an open-stope mine with cemented backfill, an established mining methodology expected to be higher-cost than the block-cave method used at the DOZ mine.

 
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PT Freeport Indonesia Revenues

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

 
Third
 
Nine
 
 
Quarter
 
Months
 
PT Freeport Indonesia revenues - prior year period
$
771.2
 
$
2,137.0
 
Price realizations:
           
Copper
 
550.4
   
1,313.3
 
Gold
 
77.8
   
133.6
 
Sales volumes:
           
Copper
 
(39.2
)
 
(366.9
)
Gold
 
1.3
   
(197.9
)
Adjustments, primarily for copper pricing on prior period open sales
 
(27.3
)
 
195.8
 
Treatment charges, royalties and other
 
(71.8
)
 
(120.6
)
PT Freeport Indonesia revenues - current year period
$
1,262.4
 
$
3,094.3
 
             
Realized copper prices nearly doubled to an average of $3.43 per pound in the third quarter of 2006 from $1.73 in the third quarter of 2005. Realized gold prices improved by 37 percent to an average of $608.57 per ounce from $445.79 in the third quarter of 2005. Realized copper prices more than doubled to an average of $3.38 per pound in the first nine months of 2006 from $1.67 in the 2005 period. Realized gold prices in the first nine months of 2006 averaged $540.67 per ounce; including a reduction of $56.40 per ounce for revenue adjustments associated with the first-quarter 2006 redemption of our Gold-Denominated Preferred Stock, Series II; compared to $431.88 in the first nine months of 2005.

As discussed above, PT Freeport Indonesia’s share of third-quarter 2006 copper sales of 323.6 million pounds was lower than third-quarter 2005 copper sales of 346.3 million pounds. PT Freeport Indonesia’s share of third-quarter 2006 gold sales of 478,000 ounces was slightly higher than third-quarter 2005 gold sales of 475,000 ounces. For the nine-month periods, copper and gold sales volumes totaled 768.9 million pounds of copper and 1,228,500 ounces of gold in 2006, compared with sales of 988.1 million pounds of copper and 1,686,700 ounces of gold in 2005.

Treatment charges vary with the volume of metals sold and the price of copper, and royalties vary with the volume of metals sold and the prices of copper and gold. Market rates for treatment and refining charges began to increase significantly in late 2004. A large part of the increase relates to the price participation component of our concentrate sales agreements. Royalties totaled $37.0 million in the third quarter of 2006 and $79.9 million in the first nine months of 2006 compared with $20.3 million in the third quarter of 2005 and $56.9 million in the first nine months of 2005, reflecting higher metal prices partly offset by lower sales volumes.

Substantially all of PT Freeport Indonesia’s concentrate sales contracts provide final copper pricing in a specified future period based on prices quoted on the LME. PT Freeport Indonesia records revenues and invoices its customers based on LME prices at the time of shipment. Under accounting rules, these terms create an “embedded derivative” in our concentrate sales contracts which must be adjusted to fair value through earnings each period until the date of final copper pricing. PT Freeport Indonesia’s third-quarter 2006 revenues include net additions of $29.6 million for adjustments to the fair value of embedded copper derivatives in concentrate sales contracts, compared with $74.6 million in the third quarter of 2005. PT Freeport Indonesia’s nine-month 2006 revenues included net additions of $481.7 million for adjustments to the fair value of embedded derivatives in concentrate sales contracts, compared with $111.8 million in the 2005 period.

PT Freeport Indonesia has long-term contracts to provide approximately 60 percent of Atlantic Copper’s copper concentrate requirements at market prices and nearly all of PT Smelting’s copper concentrate requirements. Under the PT Smelting contract, for the first 15 years of PT Smelting’s operations beginning December 1998, the treatment and refining charges on the majority of the concentrate PT Freeport Indonesia provides will not fall below specified minimum rates, subject to renegotiation in 2008. The rate

 
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was $0.23 per pound during the period from the commencement of PT Smelting’s operations in 1998 until April 2004, when it declined to a minimum of $0.21 per pound. PT Smelting’s rates for 2006 are expected to exceed the minimum $0.21 per pound (see “Smelting and Refining”). Current rates are substantially higher than the minimum rate.

PT Freeport Indonesia Costs

Gross Profit per Pound of Copper/per Ounce of Gold and Silver
 
   
Three Months Ended September 30, 2006
                       
Pounds of copper sold (000s)
 
323,600
   
323,600
             
Ounces of gold sold
             
478,000
       
Ounces of silver sold
                   
1,096,100
 
             
   
By-Product
   
Co-Product Method
 
   
Method
   
Copper
   
Gold
   
Silver
 
Revenues, after adjustments shown below
 
$3.43
   
$3.43
   
$608.57
   
$5.25
a
                         
Site production and delivery, before net non-
                       
cash and nonrecurring costs shown below
 
1.10
   
0.86
   
155.90
   
2.91
 
Gold and silver credits
 
(0.95
)
 
-
   
-
   
-
 
Treatment charges
 
0.44
b
 
0.34
c
 
62.19
c
 
1.16
c
Royalty on metals
 
0.11
   
0.09
   
16.24
   
0.30
 
Unit net cash costsd
 
0.70
   
1.29
   
234.33
   
4.37
 
Depreciation and amortization
 
0.15
   
0.12
   
21.94
   
0.41
 
Noncash and nonrecurring costs, net
 
0.03
   
0.02
   
3.75
   
0.07
 
Total unit costs
 
0.88
   
1.43
   
260.02
   
4.85
 
Revenue adjustments, primarily for pricing on
                       
prior period open sales
 
0.07
e
 
0.12
   
8.11
   
(5.84
)
PT Smelting intercompany profit elimination
 
(0.06
)
 
(0.05
)
 
(8.94
)
 
(0.17
)
Gross profit (loss) per pound/ounce
 
$2.56
   
$2.07
   
$347.72
   
$(5.61
)
                         
a.  
Amount was $11.68 before a loss resulting from redemption of FCX’s Silver-Denominated Preferred Stock.
b.  
Includes $6.7 million or $0.02 per pound for adjustments to prior quarters’ concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since June 30, 2006.
c.  
Includes $5.2 million or $0.02 per pound for copper, $1.4 million or $2.95 per ounce for gold and $0.1 million or $0.05 per ounce for silver for adjustments to prior quarters’ concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since June 30, 2006.
d.  
For a reconciliation of unit net cash costs to production and delivery costs applicable to sales reported in FCX’s consolidated financial statements refer to “Product Revenues and Production Costs.”
e.  
Includes a $13.3 million or $0.04 per pound loss on the redemption of FCX’s Silver-Denominated Preferred Stock.
 
 
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Three Months Ended September 30, 2005
                       
Pounds of copper sold (000s)
 
346,300
   
346,300
             
Ounces of gold sold
             
475,000
       
Ounces of silver sold
                   
1,065,500
 
             
   
By-Product
   
Co-Product Method
 
   
Method
   
Copper
   
Gold
   
Silver
 
Revenues, after adjustments shown below
 
$1.73
   
$1.73
   
$445.79
   
$5.25
a
                         
Site production and delivery, before net non-
                       
cash and nonrecurring costs shown below
 
0.71
b
 
0.52
c
 
133.52
c
 
2.09
c
Gold and silver credits
 
(0.63
)
 
-
   
-
   
-
 
Treatment charges
 
0.25
   
0.18
   
47.06
   
0.74
 
Royalty on metals
 
0.06
   
0.04
   
11.11
   
0.17
 
Unit net cash costsd
 
0.39
   
0.74
   
191.69
   
3.00
 
Depreciation and amortization
 
0.14
   
0.11
   
27.92
   
0.44
 
Noncash and nonrecurring costs, net
 
0.01
   
0.01
   
1.35
   
0.02
 
Total unit costs
 
0.54
   
0.86
   
220.96
   
3.46
 
Revenue adjustments, primarily for pricing on
                       
prior period open sales
 
0.18
e
 
0.19
   
(2.90
)
 
(2.95
)
PT Smelting intercompany profit elimination
 
(0.01
)
 
-
   
(1.69
)
 
(0.03
)
Gross profit (loss) per pound/ounce
 
$1.36
   
$1.06
   
$220.24
   
$(1.19
)
                         
a.   
Amount was $6.98 before a loss resulting from redemption of FCX’s Silver-Denominated Preferred Stock.
b.   
Net of deferred mining costs totaling $15.8 million or $0.05 per pound. Following adoption of EITF 04-6 on January 1, 2006 (see Note 3 and “New Accounting Standards”), stripping costs are no longer deferred.
c.   
Net of deferred mining costs totaling $11.6 million or $0.03 per pound for copper, $4.1 million or $8.63 per ounce for gold and $0.1 million or $0.14 per ounce for silver (see Note b above).
d.   
See Note d above.
e.   
Includes a $5.0 million or $0.01 per pound loss on the redemption of FCX’s Silver-Denominated Preferred Stock.

&