What drove the large increase in FCX's 2005 earnings?

Earnings rose mainly because of higher copper realizations ($1.85 per pound versus $1.37 in 2004) and gold realizations ($456 per ounce versus $412), combined with much higher sales volumes as Grasberg ore grades and mill throughput recovered from the 2003 pit slippage. Income tax and minority interest charges absorbed a meaningful share of the gain.

What are the main risks to the Indonesian operations?

The mine is located in a remote area of Papua where separatist groups have sought independence, and there were sporadic attacks and a February 2006 protest that halted mining and milling for about four days. Terrorism in Indonesia, the risk of forced contract modifications, and seismic and geotechnical hazards are also disclosed. Insurance does not cover expropriation.

Does the company have enough reserves given the Contract of Work expiration?

The initial Contract of Work term expires in 2021 and can be extended twice by 10 years, subject to Indonesian government approval. Reserves are estimated through 2041 on the assumption that extensions are granted, but management expects to mine only about 44% of aggregate reserves before 2021. There is no assurance the extensions will be approved.

How will the accounting change affect future reported earnings?

Under EITF 04-6, adopted January 1, 2006, stripping costs are expensed as incurred rather than deferred. This produced a $135.9 million after-tax cumulative-effect reduction to retained earnings and is expected to reduce net income on an ongoing basis. Had it been applied, 2005 net income would have been $35.3 million lower. Cash flows are unaffected.

How sensitive is the company to commodity prices?

Very sensitive. Management estimates that a $0.10 per pound change in copper prices would change 2006 consolidated revenues by about $130 million and net income by about $65 million, and a $25 per ounce change in gold would change net income by about $21 million. FCX currently has no price protection contracts on mine production.

FCX 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed March 16, 2006. Cited figures are marked; the original filing is the authoritative source.

Freeport-McMoRan Copper & Gold (FCX) reported a transformational 2005 for shareholders, driven by a sharp rise in copper and gold prices and record operating volumes at PT Freeport Indonesia (PT FI), its 90.64%^a-owned Grasberg operation in Papua.

Consolidated revenues nearly doubled to $4.18 billion^b from $2.37 billion, operating income rose to $2.18 billion from $704 million, and net income applicable to common stock reached $934.6 million ($4.67 diluted EPS), versus $156.8 million ($0.85) in 2004. Copper sales rose 47% to 1.46 billion pounds and gold sales rose 93% to a record 2.8 million ounces, reflecting higher ore grades and mill throughput of 216,200 tons per day. Unit net cash costs fell to $0.07 per pound from $0.40, though the company expects these to rise in 2006 as sales volumes decline.

The company used its cash flow to strengthen its balance sheet and return capital. Total debt fell to about $1.26 billion^c from $1.95 billion, cash rose to $764 million, and stockholders' equity more than doubled to $1.84 billion. Shareholders received $2.50 per share in dividends during 2005, including three $0.50 supplemental payments, and the quarterly dividend was raised to $1.25 annually.

Management also disclosed an additional $0.50^d supplemental dividend for March 2006. Operating cash flow was $1.55 billion. Investors should weigh several risks.

The business is concentrated in a single mine in Indonesia's Papua province, which faces separatist tensions, a February 2006 illegal-miner protest that halted operations for about four days, and terrorism concerns. Its Contract of Work expires in 2021 unless extended, and about 56% of reserves lie beyond that date.

The company also adopted EITF 04-6 on January 1, 2006, which reduces 2006 reported earnings by charging stripping costs as incurred, with a $135.9 million after-tax cumulative effect reducing retained earnings. Results remain highly sensitive to copper and gold prices, with a $0.10 per pound move in copper estimated to change 2006 net income by about $65 million.

02—Key points

Key Highlights

Revenue rose 76% to $4.18 billion in 2005 and operating income more than tripled to $2.18 billion, driven by higher copper and gold prices and record gold volumes.
Net income applicable to common stock was $934.6 million, or $4.67 per diluted share, compared with $156.8 million, or $0.85 per diluted share, in 2004.
Copper sales reached 1.46 billion pounds (up 47%) and gold sales reached a record 2.8 million ounces (up 93%) from PT Freeport Indonesia's Grasberg mine.
Average unit net cash costs fell to $0.07 per pound of copper from $0.40 in 2004, though management expects costs to rise in 2006 with lower volumes.
Total debt was reduced to $1.26 billion from $1.95 billion, and cash reached $764 million at year-end.
Dividends paid totaled $2.50 per share in 2005, and the regular annual dividend was increased to $1.25 per share, with a further $0.50 supplemental dividend declared for March 2006.
Proven and probable reserves at year-end 2005 were 56.6 billion pounds of copper and 58.0 million ounces of gold on a consolidated basis, with FCX's equity share at 36.5 billion pounds and 39.8 million ounces.

03—Questions

Frequently Asked Questions

What drove the large increase in FCX's 2005 earnings?
Earnings rose mainly because of higher copper realizations ($1.85 per pound versus $1.37 in 2004) and gold realizations ($456 per ounce versus $412), combined with much higher sales volumes as Grasberg ore grades and mill throughput recovered from the 2003 pit slippage. Income tax and minority interest charges absorbed a meaningful share of the gain.
What are the main risks to the Indonesian operations?
The mine is located in a remote area of Papua where separatist groups have sought independence, and there were sporadic attacks and a February 2006 protest that halted mining and milling for about four days. Terrorism in Indonesia, the risk of forced contract modifications, and seismic and geotechnical hazards are also disclosed. Insurance does not cover expropriation.
Does the company have enough reserves given the Contract of Work expiration?
The initial Contract of Work term expires in 2021 and can be extended twice by 10 years, subject to Indonesian government approval. Reserves are estimated through 2041 on the assumption that extensions are granted, but management expects to mine only about 44% of aggregate reserves before 2021. There is no assurance the extensions will be approved.
How will the accounting change affect future reported earnings?
Under EITF 04-6, adopted January 1, 2006, stripping costs are expensed as incurred rather than deferred. This produced a $135.9 million after-tax cumulative-effect reduction to retained earnings and is expected to reduce net income on an ongoing basis. Had it been applied, 2005 net income would have been $35.3 million lower. Cash flows are unaffected.
How sensitive is the company to commodity prices?
Very sensitive. Management estimates that a $0.10 per pound change in copper prices would change 2006 consolidated revenues by about $130 million and net income by about $65 million, and a $25 per ounce change in gold would change net income by about $21 million. FCX currently has no price protection contracts on mine production.

04—Continue

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