-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HwRUPb4dZk/mFkYxLjHlhxo+a/VQDnae1qqEM8o0bvuONoL3RyLeSnRKNbKeni0m 42HNf+kuHYgzzoIwkwUE4Q== 0000831259-99-000002.txt : 19990322 0000831259-99-000002.hdr.sgml : 19990322 ACCESSION NUMBER: 0000831259-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREEPORT MCMORAN COPPER & GOLD INC CENTRAL INDEX KEY: 0000831259 STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000] IRS NUMBER: 742480931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09916 FILM NUMBER: 99569331 BUSINESS ADDRESS: STREET 1: 1615 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70112 BUSINESS PHONE: 5045824000 FORMER COMPANY: FORMER CONFORMED NAME: FREEPORT MCMORAN COPPER COMPANY INC DATE OF NAME CHANGE: 19910114 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 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 (I.R.S. Employer Identification No.) incorporation or organization) 1615 Poydras Street New Orleans, Louisiana 70112 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (504)582-4000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ------------------------------------------ Class A Common Stock New York Stock Exchange par value $0.10 per share Class B Common Stock New York Stock Exchange par value $0.10 per share Depositary Shares representing New York Stock Exchange 0.05 shares of Step-Up Convertible Preferred Stock, par value $0.10 per share Depositary Shares representing New York Stock Exchange 0.05 shares of Gold-Denominated Preferred Stock, par value $0.10 per share Depositary Shares, Series II, New York Stock Exchange representing 0.05 shares of Gold- Denominated Preferred Stock, Series II, par value $0.10 per share Depositary Shares representing New York Stock Exchange 0.025 shares of Silver- Denominated Preferred Stock, par value $0.10 per share 9-3/4% Senior Notes due 2001 of New York Stock Exchange P.T. ALatieF Freeport Finance Company B.V., guaranteed by the registrant Securities registered pursuant to Section 12(g) of the Act: None 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. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of classes of common stock held by non-affiliates of the registrant on March 8, 1999 was approximately $1,211,000,000. On March 8, 1999, there were issued and outstanding 64,809,423 shares of Class A Common Stock and 98,759,277 shares of Class B Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to stockholders for the year ended December 31, 1998 are incorporated by reference into Parts II and IV of this report and portions of the Proxy Statement submitted to the registrant's stockholders in connection with its 1999 Annual Meeting to be held on May 6, 1999 are incorporated by reference into Part III of this report. TABLE OF CONTENTS Page Part I Items 1. and 2. Business and Properties..........................1 Item 3. Legal Proceedings.......................................13 Item 4. Submission of Matters to a Vote of Security Holders.....13 Executive Officers of the Registrant ...................14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................15 Item 6. Selected Financial Data.................................15 Items 7. and 7A. Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk......................................16 Item 8. Financial Statements and Supplementary Data.............16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................16 Part III Item 10. Directors and Executive Officers of the Registrant.....16 Item 11. Executive Compensation.................................16 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................16 Item 13. Certain Relationships and Related Transactions.........16 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................17 Signatures.....................................................S-1 Index to Financial Statements..................................F-1 Report of Independent Public Accountants.......................F-1 Exhibit Index..................................................E-1 i PART I Items 1. and 2. Business and Properties. General Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (FCX or the Company), is one of the world's largest copper and gold companies in terms of reserves and production, and believes that it has the lowest cost copper producing operations in the world, taking into account customary credits for related gold and silver production. FCX's principal operating subsidiary is P.T. Freeport Indonesia Company (PT-FI), a limited liability company organized under the laws of the Republic of Indonesia and domesticated in Delaware. PT-FI's operations involve the exploration for and development, mining and processing of ore containing copper, gold and silver in Irian Jaya, Indonesia pursuant to an agreement (a Contract of Work or COW) with the government of the Republic of Indonesia (the Indonesian Government) and in the worldwide marketing of concentrates containing those metals. FCX owns directly an 81.28 percent interest in PT-FI. Of the remaining 18.72 percent, 9.36 percent is owned by each of the Indonesian Government and P.T. Indocopper Investama Corporation, an Indonesian limited liability company (PT-II). FCX owns a 49 percent interest in PT-II, giving FCX an aggregate 85.87 percent ownership interest in PT-FI. PT- FI's operations are located in the remote rugged highlands of the Sudirman Mountain Range in the province of Irian Jaya, Indonesia, located on the western half of the island of New Guinea. The PT- FI COW permits extensive exploration, mining and production activities in a 24,700-acre area, referred to as "Block A," and an exploration area currently consisting of approximately 1.6 million acres referred to as "Block B." PT-FI's largest mine, Grasberg, was discovered in Block A in 1988 and contains the largest single gold reserve and one of the three largest open-pit copper reserves of any mine in the world. Through P.T. IRJA Eastern Minerals Corporation (Eastern Mining), FCX holds an additional COW in Irian Jaya covering an approximate 1.25 million-acre exploration area. Eastern Mining was formed in 1994 to explore for copper, gold and silver in the Eastern Mining COW area. FCX owns 90 percent of the outstanding common stock of Eastern Mining through a wholly owned subsidiary, and PT-II owns the remaining 10 percent, giving FCX an aggregate 94.9 percent ownership interest in Eastern Mining. In 1996, FCX and Rio Tinto plc (Rio Tinto) established exploration and expansion joint ventures. Pursuant to the exploration joint ventures, Rio Tinto has a 40 percent interest in future development projects under the PT-FI COW and the Eastern Mining COW. Rio Tinto also has a 40 percent interest in certain assets and production exceeding specified annual amounts of copper, gold and silver through 2021 and 40 percent of all production thereafter through a joint venture covering expanded operations in Block A. FCX has an option through June 1999 to acquire a 90 percent ownership interest in an entity that holds a COW covering an area of approximately 1.2 million acres in central Irian Jaya. Additionally, in June 1998 FCX entered into an exploration joint venture agreement through which it can earn an indirect interest in a COW area covering a total of approximately 1.0 million acres in several blocks contiguous to PT-FI's Block B and Eastern Mining's Block I areas. See "Exploration." FCX's operations also involve the smelting and refining of copper concentrates in Spain and marketing refined copper products through its indirect, wholly owned subsidiary, Atlantic Copper, S.A. (Atlantic). PT-FI has a 25 percent interest in P.T. Smelting Co. (PT-SC), an Indonesian company that completed construction of a copper smelter/refinery in Gresik, East Java, Indonesia during the third quarter of 1998. See "Atlantic Copper, S.A." and "P.T. Smelting Co." Republic of Indonesia The Republic of Indonesia consists of more than 17,000 islands stretching 3,000 miles along the equator from Malaysia to Australia and is the fourth most populous nation in the world with over 200 million people. Following many years of Dutch colonial rule, Indonesia gained independence in 1945 and now has a presidential republic system of government. 1 Maintaining a good working relationship with the Indonesian Government is of particular importance to the Company because all of its mining operations are located in Indonesia. PT-FI's mining complex was Indonesia's first copper mining project and was the first major foreign investment in Indonesia following the economic development program instituted by the Indonesian Government in 1967. PT-FI works closely with the central, provincial and local governments in development efforts in the vicinity of its operations. The Company's current exploration and mining operations in Indonesia are conducted through PT-FI by virtue of the PT-FI COW and through Eastern Mining by virtue of the Eastern Mining COW, both of which have 30-year terms, provide for two 10-year extensions under certain conditions, and govern PT-FI's and Eastern Mining's rights and obligations relating to taxes, exchange controls, royalties, repatriation and other matters. Both COWs were concluded pursuant to the 1967 Foreign Capital Investment Law, which expresses Indonesia's foreign investment policy and provides basic guarantees of remittance rights and protection against nationalization, a framework for economic incentives and basic rules regarding other rights and obligations of foreign investors. Any disputes regarding the provisions of the COWs are subject to international arbitration. The area surrounding PT-FI's mining development is sparsely populated by local tribes and former residents of more populous areas of Indonesia, some of whom have resettled in Irian Jaya under the Indonesian Government's transmigration program. A small segment of the local population has in the past opposed Indonesian rule over Irian Jaya, and several small separatist groups have sought political independence for the province. Public discussion of the degree of political and economic autonomy that may be allowed individual provinces, including Irian Jaya, have been held and likely will continue throughout the 1999 parliamentary and presidential elections. Sporadic attacks on civilians by the separatists and sporadic but highly publicized conflicts between separatists and the Indonesian military have led to previous allegations of human rights violations. PT-FI personnel have not been involved in those conflicts. The Indonesian military occasionally has exercised its right to appropriate transportation and other equipment of PT-FI to use in its security operations. Unfavorable economic conditions continue to affect Southeast Asia, including Indonesia. Since early 1997, Indonesia's economy has contracted, inflation increased dramatically, and the Indonesia rupiah severely weakened initially and then partly recovered and continues to be unpredictable. Financial assistance to Indonesia is being provided by the International Monetary Fund, and various political, financial and regulatory changes are being implemented, including national parliamentary elections scheduled for June 1999 followed by a presidential election currently scheduled for September 1999. International copper and gold markets have been adversely affected by the developments in Southeast Asia. Contracts of Work The PT-FI COW covers both Block A, which was originally the subject of a 1967 COW between PT-FI's predecessor and the Indonesian Government, and Block B, to which PT-FI gained rights in 1991. The initial term of the PT-FI COW expires in December 2021 with provisions for two 10-year extensions under certain conditions. Pursuant to the PT-FI COW, PT-FI to date has relinquished its rights to 4.9 million acres in Block B, including 1.6 million acres in December 1998. PT-FI retains the rights to 1.6 million acres in Block B, which it believes contain the most promising exploration opportunities following extensive geological assessment. In August 1994, the Indonesian Government granted Eastern Mining a COW originally covering approximately 2.5 million acres in three separate blocks. The Eastern Mining COW provides for a four-to-seven year exploratory term and a 30-year term for mining operations, with provisions for two 10-year extensions under certain conditions. Like the PT-FI COW, the Eastern Mining COW requires Eastern Mining to relinquish its right to portions of the COW area determined by Eastern Mining in amounts equal to 25 percent of the original approximately 2.5 million acres at the end of each of three specified periods. Eastern Mining to date has relinquished approximately 1.25 million acres and must relinquish approximately 0.6 million additional acres by August 2001. Ore Reserves All of PT-FI's proved and probable reserves, including the Grasberg deposit, lie within Block A. In 1998, PT-FI increased its aggregate proved and probable reserves by approximately 381 million metric tons of ore representing 6.0 billion recoverable pounds of copper, 4.3 million recoverable ounces of gold and 18.7 million recoverable ounces of silver. December 31, 1998 aggregate proved and probable recoverable reserves, net of 1998 production, totaled 2.48 2 billion metric tons of ore averaging 1.13 percent copper, 1.05 grams of gold per metric ton and 3.83 grams of silver per metric ton, representing 51.3 billion pounds of copper, 64.2 million ounces of gold and 153.1 million ounces of silver. Pursuant to joint venture arrangements, Rio Tinto has a 40 percent interest in production exceeding specified annual amounts of copper, gold and silver through 2021, calculated by reference to PT-FI's proved and probable reserves as of December 31, 1994, and 40 percent of all production thereafter. Net of Rio Tinto's share, PT-FI's share of proved and probable recoverable copper, gold and silver reserves was 40.0 billion pounds of copper, 51.6 million ounces of gold and 119.1 million ounces of silver as of December 31, 1998. Net of Rio Tinto's share, 1998 additions and revisions to PT-FI's proved and probable copper, gold and silver reserves replaced approximately 250 percent of PT-FI's 1998 copper production, 120 percent of gold production and 330 percent of silver production. Estimated recoverable reserves were assessed using a copper price of $0.90 per pound and a gold price of $325 per ounce. Using prices of $0.75 per pound of copper and $280 per ounce of gold would reduce estimated recoverable reserves by approximately 9 percent for copper, 7 percent for gold and 9 percent for silver. The Grasberg deposit contains the largest single gold reserve and is one of the three largest open-pit copper reserves of any mine in the world. The Grasberg deposit contained combined open pit and underground proved and probable ore reserves as of December 31, 1998 of 1.88 billion metric tons at an average grade of 1.04 percent copper, 1.03 grams of gold per metric ton and 3.05 grams of silver per metric ton. As of December 31, 1998, Kucing Liar contained proved and probable ore reserves of 320.5 million metric tons at an average grade of 1.41 percent copper, 1.41 grams of gold per metric ton and 5.30 grams of silver per metric ton. The Company's reserves as of December 31, 1997 and 1998 included in this report have been verified by Independent Mining Consultants, Inc., and this reserve information has been included in this report in reliance upon the authority of Independent Mining Consultants, Inc. as experts in mining, geology and reserve determination. See "Cautionary Statements." Mining Operations Mines in Production. PT-FI currently has two mines in operation: the Grasberg and the Intermediate Ore Zone (IOZ), both within Block A. Open pit mining of the Grasberg ore body commenced in January 1990, and in 1998 the Grasberg mine output totaled approximately 67.0 million metric tons of ore, providing 93 percent of PT-FI's total ore production in 1998. The IOZ is an underground block cave operation that was placed in production in the first half of 1994. Production is at the 3,550 meter elevation level, approximately 300 meters below the Ertsberg East deposit, which was depleted in the second half of 1994. In 1998, output from the IOZ mine totaled 4.9 million metric tons of ore. Mines in Development. Four other significant ore bodies, referred to as the Deep Ore Zone (DOZ), the DOM, the Big Gossan and Kucing Liar are located in Block A. These ore bodies are currently at various stages of development, and are carried as proved and probable reserves. See "Cautionary Statements." The DOZ ore body lies vertically below the IOZ. Initial production from the DOZ ore body commenced in 1989 but was suspended in favor of production from the Grasberg deposit. DOZ production is anticipated to recommence in approximately 2000 as the overlying IOZ reserve nears depletion. The DOM ore body lies approximately 1,200 meters southeast of the depleted Ertsberg East deposit. Pre-production development was completed as the Grasberg ore body began open pit production in 1990, and all maintenance, warehouse and service facilities are in place. Production at the DOM ore body was deferred until after completion of open pit mining as a result of the increasing reserves and production capabilities of the Grasberg ore body. The Big Gossan ore body is located approximately 1,000 meters southwest of the original Ertsberg East deposit. Initial underground development of the ore body began in 1993 when tunnels were driven from the mill area into the ore zone at the 2,900 meter elevation level. A variety of stoping methods will be used to mine the deposit, with production expected to commence within the next ten years as other underground mines are depleted. The Kucing Liar ore body lies on the southern flank of and underneath the southern portion of the Grasberg open pit at the 2,500-2,900 meter elevation level. Two rigs are now drilling in the Kucing Liar ore body. Recent drilling to the west indicates a possible thinning or fault offsets to the mineralization, but continuity of mineralization extends beyond the 3 1998 reserve additions and along favorable horizons toward the Grasberg deposit. Further delineation of this ore body is scheduled for 1999, upon completion of which potential development plans will be assessed. For a detail of PT-FI's proved and probable reserves as of December 31, 1998, see FCX's Annual Report incorporated herein by reference as part of "Item 8. Financial Statements and Supplementary Data." Exploration Block A delineation drilling continues at Kucing Liar (as discussed above), Grasberg Underground and the DOZ underground ore bodies. Drilling at Grasberg Underground is ongoing with two drills working from the Amole drift to delineate the Grasberg Underground deposit below the 1998 reserve additions. Copper- gold mineralization is decreasing with depth where additional drilling is planned for 1999 to fully define the ultimate geometry of the mineralized zone, which extends for over 1,500 meters vertically from the original ore intercepts at the 4,200 meter elevation. Drilling at DOZ continues to return positive results, indicating the potential for additional reserve increases. Other targets in Block A yet to be evaluated include the DOM Deep, fault systems parallel to the Kucing Liar/Idenberg #1 fault system and other intrusive centers and fault intersections. Exploration activities continue in Block B, which includes the Wabu Ridge gold prospect as well as in other COW areas. Activities are primarily focused on prospects that potentially could lead to the discovery of significant porphyry and/or skarn- type copper-gold deposits. Presently, exploration drilling is ongoing with three rigs on several identified geological anomalies. Rio Tinto has elected to participate in 40 percent of FCX's interest and costs in exploration drilling activities now in progress. Pursuant to the exploration joint ventures, Rio Tinto has a 40 percent interest in development projects under the PT-FI COW and the Eastern Mining COW. Under these arrangements, Rio Tinto funded $100 million in 1996 for approved exploration costs in the areas covered by the PT-FI COW and the Eastern Mining COW. As of December 31, 1998, $1.2 million in PT-FI's Block A remained to be applied to the $100 million Rio Tinto exploration funding. Mutually agreed upon exploration costs in PT-FI's Block B and Eastern Mining's COW areas are now being shared 60 percent by FCX and 40 percent by Rio Tinto. In December 1997, FCX signed a letter of intent to acquire an ownership interest in P.T. Iriana Mutiara Mining (PT-IMM). PT- IMM holds a COW covering an area of approximately 1.2 million acres in central Irian Jaya, in part contiguous to Eastern Mining's COW area. Pursuant to the Rio Tinto joint venture arrangements, Rio Tinto has elected not to participate with respect to 40 percent of FCX's interest in this COW area. If FCX elects to continue participation beyond June 30, 1999, it would acquire for $7.0 million a 90 percent ownership interest and would fund all exploration costs up to and including a feasibility study. FCX would also be responsible for arranging construction financing for PT-IMM for any economically feasible projects in the PT-IMM COW area. In June 1998, FCX entered into an exploration joint venture agreement through which it can earn an indirect interest in a COW area covering a total of approximately 1.0 million acres in several blocks contiguous to PT-FI's Block B and one of Eastern Mining's blocks in Irian Jaya. Rio Tinto has elected to participate in 40 percent of FCX's interest and costs in this exploration joint venture. To earn up to a 54 percent interest, FCX and Rio Tinto must spend a total of up to $21 million on exploration and other activities in the joint venture areas ($3.0 million of which was incurred through December 31, 1998). Exploration drilling is ongoing on several identified geological anomalies. Milling and Production The ore from PT-FI's mines moves by a conveyor system to a series of ore passes through which it drops to the mill complex located approximately 2,900 meters above sea level. At the mill, the ore is crushed and ground and mixed in tanks with water and small amounts of chemical reagents where it is continuously agitated with air. During this physical separation process, copper-, gold- and silver-bearing particles rise to the top of the tanks and are collected and thickened. The concentrate leaves the mill complex as a thickened concentrate slurry, consisting of approximately 65 percent solids by weight, and is pumped through three 115 kilometer pipelines to the port site facility at Amamapare where it is filtered, dried and stored for shipping. Ships are loaded at dock facilities at the port until they draw their maximum water, then move to deeper water, where loading is completed from shuttling barges. 4 In early 1998, PT-FI and Rio Tinto completed construction on the "fourth concentrator mill expansion" of PT-FI's facilities. Pursuant to the expansion joint venture agreement, Rio Tinto provided a $450 million nonrecourse loan to PT-FI for PT-FI's share of the cost of the expansion. PT-FI and Rio Tinto began sharing incremental cash flow attributable to the expansion effective January 1, 1998 on the basis of 60 percent to PT-FI and 40 percent to Rio Tinto. PT-FI has assigned its share of incremental cash flow to Rio Tinto until Rio Tinto receives an amount equal to the funds loaned to PT-FI plus interest based on Rio Tinto's cost of borrowing. Through December 31, 1998, PT- FI's share of incremental cash flow totaled $236.4 million of which $188.6 million was paid to Rio Tinto in 1998 and $47.8 million was paid in 1999. The incremental production from the expansion, as well as production from PT-FI's existing operations, share proportionately in operating, nonexpansion capital and administrative costs. PT-FI will continue to receive 100 percent of the cash flow from specified annual amounts of copper, gold and silver through 2021 calculated by reference to its proved and probable reserves as of December 31, 1994 and 60 percent of all cash flow thereafter. PT-FI's copper royalty rate under the COW varies from 1.5 percent, at a copper price of $0.90 or less, to 3.5 percent, at a copper price of $1.10 or more, of copper net revenue. The related rate for gold and silver sales is 1.0 percent. In light of its substantially expanded production capabilities, PT-FI is discussing with the Indonesian Government the payment of voluntary additional royalties on metal from production above 200,000 metric tons of ore per day (MTPD) in amounts for copper equal to the COW royalty and for gold and silver equal to twice the COW royalties. Therefore, including the payment of COW royalties, the total of royalties paid on copper net revenues from production above 200,000 MTPD would be double the amount of the COW royalty; and the total of royalties paid on gold and silver sales from production above 200,000 MTPD would be triple the amount of the COW royalties. The additional royalties would be effective January 1, 1999. Because in large part mineral royalties under Indonesian Government regulations are remitted to the provinces from which the minerals are extracted, PT-FI offered the voluntary additional royalties to provide additional support to the local governments and the people of Irian Jaya. In 1998, PT-FI's production, net of RioTinto's interest, totaled 1.43 billion pounds of copper, approximately 22 percent more than in 1997, and 2,227,700 ounces of gold, approximately 24 percent more than in 1997, resulting from record average ore throughput of 196,400 MTPD, as compared to an average of 128,600 MTPD for 1997. Average cash production costs in 1998, net of customary gold and silver credits, were $0.12 per pound of copper, which were 47 percent lower than the comparable 1997 average primarily because of lower labor costs reflecting the devaluation of the Indonesian rupiah, lower diesel fuel and power costs, economies of scale from the fourth concentrator mill expansion and cost reduction efforts. For more information regarding FCX's operating and financial results, see "Item 6. Selected Financial Data" and "Items 7. and 7A. Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk." Infrastructure Improvements The location of PT-FI's current operations in a remote area requires that its operations be virtually self-sufficient. In addition to the mining facilities described above, the facilities originally constructed by or with the participation of PT-FI include an airport, a port, a 119 kilometer road, an aerial tramway, a hospital and related medical facilities, two town sites with housing, schools and other facilities sufficient to support more than 17,000 persons. In 1996, PT-FI completed the first phase of the Enhanced Infrastructure Program (EIP), which includes various residential, community and commercial facilities. The EIP is designed to provide the infrastructure needed for PT-FI's operations, to enhance the living conditions of PT-FI's employees, and to develop and promote the growth of local and other third party activities and enterprises in Irian Jaya. The full EIP includes plans for various commercial, residential, educational, retail, medical, recreational, environmental and other infrastructure facilities to be constructed over a ten-to-twenty year period. The facilities constructed through the EIP have been and are expected to continue to be developed by PT-FI through joint ventures or direct ownership involving local Indonesian interests and other investors. In March 1997, PT-FI completed the final $75.0 million sale of infrastructure assets to joint ventures then owned one-third by PT-FI and two-thirds by P.T. AlatieF Nusakarya Corporation (AlatieF), an Indonesian investor. The sales to the AlatieF joint ventures totaled $270.0 million during the period from December 1993 to March 1997. PT-FI subsequently sold its one- third interest in the joint ventures to AlatieF in March 1997. In September 1998, PT-FI reacquired for $30.0 5 million an aggregate one-third interest in the joint ventures and continues to lease the infrastructure assets under infrastructure asset financing arrangements. PT-FI guarantees the AlatieF loan associated with the purchases and is consolidating the joint ventures for financial reporting purposes because the financing arrangements provide the joint venture partners with a guaranteed 15 percent after-tax minimum annual return on their investment. In December 1997, PT-FI completed a $366.4 million sale of the new power plant facilities to the joint venture that owns the assets that already provide electricity to PT-FI. The purchase price included $123.2 million for Rio Tinto's share of the new power plant facilities. Asset sales to the power joint venture totaled $581.4 million through 1997 including $458.2 million of PT-FI owned assets. PT-FI subsequently sold its 30 percent interest in the joint venture to the other partners and is purchasing power under infrastructure asset financing arrangements pursuant to a power sales agreement. Marketing PT-FI's copper concentrates, which contain significant quantities of gold and silver, are sold under United States dollar- denominated sales agreements, mostly to companies in Asia and Europe and international trading companies. Substantially all of PT-FI's budgeted production of copper concentrates is sold under long-term contracts, pursuant to which the selling price is based on world metals prices (generally the London Metal Exchange (LME) settlement prices for Grade A copper) less certain allowances. Under these contracts, initial billing occurs at the time of shipment and final settlement on the copper portion generally occurs three months after arrival based on average LME prices for that month. Gold generally is sold at the London Bullion Market Association average price for the month of shipment. Revenues from concentrate sales are recorded net of royalties, treatment and refining costs and the impact of derivative financial instruments, if any, used to hedge against risks from copper and gold price fluctuations. Treatment and refining costs represent payments to smelters and refiners and are either fixed or in certain cases vary with the price of copper. A small portion of PT-FI's forecasted production of copper concentrates, and any production in excess of these amounts, is sold in the spot market. See "Cautionary Statements." PT-FI has obtained commitments, including commitments from Atlantic and PT-SC, for essentially all of its estimated 1999 production at market prices. PT-FI's share of sales for 1999 is expected to approximate 1.4 billion pounds of copper and 2.1 million ounces of gold. PT-FI's estimated 1999 copper and gold sales reflect management's expectation of producing at higher mill throughput rates than in 1998 because of the fourth concentrator mill expansion, offset by expected lower average ore grades and recoveries compared to 1998. See "Cautionary Statements." The lower projected ore grades for 1999 reflect the capability of the expanded mill facilities to process large volumes of lower grade ore material. PT-FI has a long-term contract to provide Atlantic with approximately 60 percent of its copper concentrate requirements at market prices. PT-FI is providing 100 percent of PT-SC's copper concentrate requirements at market prices; however, for the first 15 years of operations the treatment and refining charges will not fall below a specified minimum rate. After PT-SC's operations reach design capacity, FCX anticipates that PT-FI will sell at least 50 percent of its annual concentrate production to Atlantic and PT- SC. Atlantic Copper, S.A. Atlantic's smelter has a design capacity of 290,000 metric tons of metal per year. Atlantic purchased approximately 70 percent of its 1998 concentrate requirements from PT-FI at market prices. Atlantic has a long-term contract through December 2004 to purchase approximately 60 percent of its concentrate requirements from PT-FI at market prices. During 1998, Atlantic treated 973,900 metric tons of concentrate, 5 percent more than the 929,700 metric tons treated in 1997. P.T. Smelting Co. During the third quarter of 1998, PT-SC completed construction of its smelter/refinery in Gresik, East Java, Indonesia, which is designed to produce 200,000 metric tons of metal per year. The smelter furnace was ignited on October 12, 1998 with first production of copper cathode in December 1998. Production is expected to gradually increase to design capacity over an approximate two-year period. PT-SC is a joint venture between PT-FI, Mitsubishi Materials Corporation (Mitsubishi Materials), Mitsubishi Corporation (Mitsubishi) and Nippon Mining & Metals Co., Ltd. (Nippon), which own 25 percent, 60.5 percent, 9.5 percent and 5 percent, respectively, of the outstanding PT-SC stock. PT-FI is providing 100 percent of PT-SC's copper concentrate requirements at market rates; however, for the 6 first 15 years of operations the treatment and refining charges will not fall below a specified minimum rate. PT-FI has also agreed to assign, if necessary, its earnings in PT-SC to support a 13 percent cumulative annual return to Mitsubishi Materials, Mitsubishi and Nippon for the first 20 years of commercial operations. Competition FCX competes with other mining companies in the sale of its mineral concentrates and the recruitment and retention of qualified personnel. Some competing companies possess financial resources equal to or greater than those of FCX. Management believes, however, that FCX is the lowest cost copper producer in the world, taking into account customary credits for related gold and silver production, which serves as a significant competitive advantage. Social Development FCX has a social and human rights policy to ensure it operates in Irian Jaya in compliance with Indonesian laws, in a manner that respects basic human rights and the culture of the people who are indigenous to the area. PT-FI continues to incur significant costs associated with its social and cultural activities. These activities include comprehensive job training programs, basic education programs, extensive malaria control and several public health programs, agricultural assistance programs, a business incubator program to encourage the local people to establish their own small scale businesses, cultural preservation programs, and charitable donations. In April 1996, PT-FI agreed to commit at least one percent of its revenues for the following 10 years to support village-based, bottom-up health, education, economic and social development programs in its area of operations through the Freeport Fund for Irian Jaya Development (FFIJD). This commitment replaced community development programs undertaken by the company that spent a similar amount of money each year. In 1998, PT-FI contributed $13.5 million to the FFIJD. In early 1996, the international consulting firm of LABAT- Anderson undertook a comprehensive independent audit of social programs at PT-FI's operations in Irian Jaya. In July 1997, the LABAT-Anderson team submitted its final report to the Indonesian Government and PT-FI, which noted that PT-FI had gone beyond the usual role and responsibilities of a private company in providing assistance for the development of the local people. The report also made a number of recommendations designed to make PT-FI's programs more effective, including restructuring PT-FI's participation in the Indonesian Government's development plan for the area to provide for more direct input by local people through their leaders. At the end of 1998, discussions with local and church leaders, government representatives and members of interested non-governmental organizations successfully culminated with the restructuring of the FFIJD. The new umbrella structure is called the Lembaga Pengembangan Masyarakat-Irian Jaya (LPM- IRJA), or the People's Development Foundation-Irian Jaya. The LPM-IRJA Board of Directors is made up of the head of the local government, currently a Kamoro, a leader of the Amungme people, a leader of the Kamoro people, leaders of the three local churches and a representative of PT-FI. The Board of Directors makes grants from the FFIJD and has oversight for implementation of local developmental programs, through the implementation Board, which is headed by an Amungme leader and is composed of representatives of all local indigenous groups. The LPM-IRJA Board of Directors has approved a 1999/2000 operational plan and has selected a number of yayasans, or foundations, to implement funded projects. The operational plan provides some type of assistance for all 71 villages in the Mimika district, with the greatest support going to the 29 villages defined by the Amungme and Kamoro as most critically impacted by PT-FI's operations. Another important project will be a new primary care hospital in Timika. Ground has been broken for the 75-bed facility. The team which accomplished the restructuring took care to socialize and communicate the results in all Mimika villages before the implementation of any new programs or projects. While management believes that its efforts to be responsive to the issues relating to the impact of its operations on the local villages and tribes should serve to avoid disruptions of mining operations, social and political instability in the area may, in the future, have an adverse impact on PT-FI's mining operations. Environmental Matters FCX has an environmental policy committing it not only to compliance with federal, state and local environmental statutes and regulations, but also to continuous improvement of its environmental performance at every operational site. Management believes that PT-FI's operations are being conducted pursuant to applicable permits and are in 7 compliance in all material respects with applicable Indonesian environmental laws, rules and regulations. Mining operations on the scale of PT-FI's operations in Irian Jaya involve significant environmental challenges, primarily related to the disposition of tailings, which are the crushed and ground rock material resulting from the physical separation of commercially valuable minerals from the ore. The Company has an extensive, ongoing management system for the disposal of tailings resulting from its milling operations. In January 1997, PT-FI completed an engineered levee system, as part of its Indonesian Government-approved Tailings Management Plan, to minimize the impact of the tailings on the environment through a controlled deposition area that ultimately will be reclaimed and revegetated. In 1995, PT-FI participated in a voluntary independent environmental audit of its Irian Jaya operations under a program monitored by the Indonesian Government. The environmental audit report was completed and released in 1996 and included a total of 33 principal recommendations, all of which have been implemented. The audit team identified the disposal of tailings as the most critical environmental issue facing PT-FI, requiring significant study, engineering and monitoring over the life of the mine. The audit concluded PT-FI's Tailings Management Plan represented the most suitable option for tailings disposal considering the engineering and environmental challenges in Irian Jaya. The audit also confirmed that: the tailings from PT-FI's mining operations are non-toxic; the mining operations do not pose any significant risk to Irian Jaya's biodiversity; and, PT-FI's operations are being conducted in compliance in all material respects with applicable Indonesian environmental laws, rules and regulations. PT-FI has committed to independent external environmental audits by qualified experts every three years, with the results to be made public. The second such audit will be conducted and made public in the second half of 1999. PT-FI is also continuing its annual internal audits, through the life of its mining operations, so that PT-FI's environmental management and monitoring programs will remain sound and the operations will remain in material compliance. In December 1997, PT-FI received environmental approval from the Minister of Environment for its Regional AMDAL (comprehensive Environmental Assessment, Monitoring Plan and Management Plan) study, which was necessary to allow PT-FI to expand its milling rate up to a maximum of 300,000 MTPD. PT-FI's environmental programs were developed, expanded and/or enhanced in accordance with the approved 300,000 MTPD Regional AMDAL study. The ultimate amount of PT-FI's reclamation and closure costs to be incurred cannot currently be projected with precision. Estimates involving environmental matters, such as closure some thirty or more years in the future, are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology and inflation. Ultimate reclamation and closure costs may require as much as $100 million but are not expected to exceed $150 million. These estimates are subject to revision over time as more complete studies are performed and more definitive plans are formulated. Some reclamation costs will be incurred throughout the remaining life of the mine while most closure costs and the remaining reclamation costs will be incurred at the end of the mine's life, which is currently estimated to exceed 30 years. PT-FI had $9.2 million accrued on a unit-of-production basis as of December 31, 1998 for mine closure and reclamation costs. In 1996, PT-FI began contributing to a cash fund ($0.9 million balance at December 31, 1998) designed to accumulate at least $100 million by the end of its Indonesian mine's life. Proceeds from this fund, including accrued interest, will be used to fund costs incurred for mine closure and reclamation. An increasing emphasis on environmental issues and future changes in regulations could require FCX to incur additional costs that would be charged against future operations. Management believes that Atlantic's facilities and operations are in compliance in all material respects with all applicable Spanish environmental laws, rules and regulations. In 1996 and 1997, Atlantic successfully completed the environmental improvement project started in 1994 in conjunction with expansion activities at its copper smelter in Huelva. New technology substantially reduced atmospheric emissions from its operations even with an approximate doubling of production capacity. In addition, dust emissions have decreased as a result of the installation of new facilities for handling ore concentrates and the addition of new bag filters in the concentrate drying and furnace tapping areas. New gas scrubbers have significantly reduced acid mist and particulate emissions. The Indonesian and Spanish governments may periodically revise their environmental laws and regulations or adopt new ones, and the effects on the Company's operations of new or revised regulations cannot be predicted. The Company has expended significant resources, both financial and managerial, to comply with environmental regulations and permitting and approval requirements, and anticipates that it will continue to do so in the future. There can be no assurance that additional significant costs and liabilities will not be incurred to comply with such current and future regulations or that such regulations will not have a material effect on the Company's operations. See "Cautionary Statements." 8 Guarantee of Loan for Purchase of PT-II Stock In March 1997, P.T. Nusamba Mineral Industri (NMI), a subsidiary of P.T. Nusantara Ampera Bakti, acquired from a third party approximately 51 percent of the capital stock of PT-II. NMI financed $254 million of the $315 million purchase price with a variable-rate commercial loan maturing in March 2002. FCX has agreed that if NMI defaults on the loan, FCX will purchase the PT-II stock or the lenders' interest in the commercial loan for the amount then due by NMI under the loan. FCX also agreed to lend to NMI any amounts to cover any shortfalls between the interest payments due on the commercial loan and the dividends received by NMI from PT-II. At December 31, 1998, $25.4 million was due in March 2002 from NMI because of interest payment shortfalls. The amount of any future shortfalls will depend primarily on the level of PT-FI's dividends to PT-II. Employees and Relationship with FM Services Company As of December 31, 1998, PT-FI had 6,349 employees (approximately 97 percent Indonesian). In addition, as of December 31, 1998, PT-FI had approximately 2,252 contract workers, the vast majority of whom were Indonesian. Approximately 57 percent of PT-FI's Indonesian employees are members of the All Indonesia Workers' Union, which operates under Indonesian Government supervision and is party to a labor agreement covering PT-FI's hourly-paid Indonesian employees that expires on September 30, 1999. PT-FI's relations with the workers' union have generally been positive. On August 11, 1998, PT-FI's mining and milling operations at its Grasberg mine were suspended as a result of a wildcat work stoppage by a group of workers, a majority of whom were employees of contractors of PT-FI. On August 14, 1998, the workers voluntarily returned to work and PT-FI began resuming operations. The workers cited economic and other employment issues as the reasons for their work stoppage. The employees of certain contractors expressed a desire to become PT-FI employees, who generally have higher wages and more attractive benefits. PT-FI indicated that it would continue its practice of reviewing its package of wages and benefits to ensure that PT-FI remains competitive with other companies. The workers' union did not authorize the work stoppage. The actions of the workers were peaceful, there were no injuries or property damage and the suspension and resumption of operations were conducted in an orderly fashion. Shipments of concentrates were made from inventory and were not disrupted by the work stoppage. As of December 31, 1998, Atlantic had 773 employees, of which approximately 31 percent are covered by union contracts. Atlantic experienced no work stoppages in 1998 and relations with these unions have also generally been good. Since January 1, 1996, FM Services Company, a Delaware corporation 45 percent owned by FCX (FMS), has furnished executive, administrative, financial, accounting, legal, tax, sales and similar services to FCX, PT-FI, Eastern Mining and Atlantic. FCX reimburses FMS, at its cost, including allocated overhead, for these services on a monthly basis. As of December 31, 1998, FCX had 42 employees and FMS had 207 employees. FMS employees also provide services to two other publicly traded companies. Cautionary Statements This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical fact included in this report, including, without limitation, statements under the headings "Business and Properties," "Market for Registrant's Common Equity and Related Stockholder Matters," and "Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk" regarding the Company's financial position and liquidity, payment of dividends, strategic growth initiatives, future capital needs, development and capital expenditures (including the amount and nature thereof), reclamation and closure costs, exploration efforts, reserve estimates and additions, production levels, ore grades, commodity prices, revenues, business strategies, and other plans and objectives of the Company's management for future operations and activities. 9 Forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate under the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, including the risk factors discussed below and in the Company's other filings with the Securities and Exchange Commission, general economic and business conditions, the business opportunities that may be presented to and pursued by the Company, changes in laws or regulations and other factors, many of which are beyond the Company's control. Readers are cautioned that these statements are not guarantees of future performance, and the actual results or developments may differ materially from those projected, predicted or assumed in the forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Important factors that could cause actual results to differ materially from those projected in the forward-looking statements include, among others: Commodity Price Risk. FCX's revenues are derived primarily from PT-FI's sale of copper concentrates, which also contain significant amounts of gold, and from Atlantic's sale of copper cathodes and wire rod. FCX's net income can vary significantly with fluctuations in the market prices of copper and gold. Prices for copper and gold historically have fluctuated widely and are affected by numerous factors beyond FCX's control. In addition, PT-FI's concentrate sales agreements, with regard to copper, provide for provisional billings when shipped with final settlement generally based on the average LME price for a specified future month. Copper revenues on provisionally priced open pounds are adjusted monthly based on then current prices. Movement in the average price used for these open pounds will have an impact on FCX's net income. Indonesian Political, Economic and Social Risks. President Suharto, who assumed power in 1966, was re-elected in March 1998 to a seventh consecutive five-year term. In May 1998, President Suharto resigned his presidency in the wake of an economic collapse in Indonesia and in the face of growing social unrest and demonstrations. Vice-President B.J. Habibie succeeded Suharto and has since announced new parliamentary elections will be held in June 1999, followed by a presidential election currently scheduled for September 1999. Unfavorable economic conditions continue to affect Southeast Asia, including Indonesia. Since early 1997, Indonesia's economy has contracted, inflation increased dramatically, and the Indonesian rupiah severely weakened initially and then partly recovered and continues to be unpredictable. Financial assistance to Indonesia is being provided by the International Monetary Fund, and various political, financial and regulatory changes are being implemented, including the scheduled June 1999 national parliamentary elections discussed above. International copper and gold markets have been adversely affected by the developments in Southeast Asia. PT-FI's current mining operations are located in the Indonesian province of Irian Jaya, which occupies the western half of the island of New Guinea and became part of Indonesia during the early 1960s. The area surrounding PT-FI's mining development is sparsely populated by primitive local tribes and former residents of more populous areas of Indonesia, some of whom have resettled in Irian Jaya under the Indonesian Government's transmigration program. A small segment of the local population has in the past opposed Indonesian rule over Irian Jaya, and several small separatist groups have sought political independence for the province. Public discussion of the degree of political and economic autonomy that may be allowed individual provinces, including Irian Jaya, have been held and likely will continue throughout the 1999 parliamentary and presidential elections. Sporadic attacks on civilians by the separatists and sporadic but highly publicized conflicts between separatists and the Indonesian military have led to previous allegations of human rights violations. PT-FI personnel have not been involved in those conflicts. The Indonesian military occasionally has exercised its right to appropriate transportation and other equipment of PT-FI. PT-FI's policy is to operate in Irian Jaya in compliance with Indonesian laws, in a manner that respects basic human rights and the culture of the people who are indigenous to the area. PT-FI continues to incur significant costs associated with its social and cultural activities. While management believes that its efforts to be responsive to the issues relating to the impact of its operations on the local tribes should serve to avoid disruptions of mining operations, social and political instability in the area may, in the future, have a material adverse impact on PT-FI's mining operations. 10 Location and Industry Risks. PT-FI's mining operations are located in steeply mountainous terrain in a very remote area of Indonesia, which makes the conduct of its operations difficult and has required PT-FI to overcome special engineering difficulties and develop extensive infrastructure facilities. The area is subject to considerable rainfall, which has led to periodic floods and mud slides. The mine site is also in an active seismic area, and earth tremors have been experienced from time to time. PT-FI also is subject to the usual risks encountered in the mining industry, including unexpected geological conditions resulting in cave-ins, floodings and rock- bursts and unexpected changes in rock stability conditions. PT-FI has substantial insurance involving the amounts and types of coverage as it believes are appropriate for its exploration, development, mining and processing activities in Indonesia. Environmental and Government Regulation. The Company's exploration and mining activities in Irian Jaya involve significant engineering and environmental challenges that relate primarily to the location of the mine in remote, rugged highlands and the disposition of tailings in an engineered, controlled and managed deposition area near the sea. The Company has expended significant resources, both financial and managerial, to comply with environmental regulations and permitting and approval requirements and anticipates that it will continue to do so in the future. There can be no assurance that additional significant costs and liabilities will not be incurred in order to comply with current and future regulations. Foreign Currency Exchange Risk. FCX conducts the majority of its operations in Indonesia and Spain where its functional currency is the U.S. dollar. All of FCX's revenues are denominated in U.S. dollars; however, some costs and certain asset and liability accounts are denominated in Indonesian rupiah, Australian dollars or Spanish pesetas. Generally, FCX's results are adversely affected when the U.S. dollar weakens against these foreign currencies and positively affected when the U.S. dollar strengthens against these foreign currencies. Since early 1997, the Indonesian rupiah exchange rate has been extremely volatile, severely weakening initially and partly recovering later against the U.S. dollar and continuing to be unpredictable. Operationally PT-FI has benefited from a weakened Indonesian rupiah currency, primarily through lower labor costs. During the first quarter of 1998, PT-FI began a currency hedging program to reduce its exposure to changes in the Indonesian rupiah and Australian dollar by entering into foreign currency forward contracts to hedge a portion of its anticipated payments in these currencies. At December 31, 1998, these contracts hedged 120.0 billion of rupiah payments at an average exchange rate of 19,478 rupiah to one U.S. dollar through August 1999, approximately 40 percent of projected rupiah payments, and 79.2 million of Australian dollar payments at an average exchange rate of 1.59 Australian dollars to one U.S. dollar through September 1999, approximately 80 percent of projected Australian dollar payments. A portion of Atlantic's operating costs and certain Atlantic asset and liability accounts are denominated in Spanish pesetas. Atlantic has a currency hedging program to reduce its exposure to changes in the U.S. dollar and Spanish peseta exchange rate that involves foreign currency forward contracts. At December 31, 1998, Atlantic had contracts, with a fair value of $2.0 million, to purchase 10.8 billion Spanish pesetas at an average exchange rate of 144.7 pesetas to one U.S. dollar through January 2000. These contracts currently hedge approximately 70 percent of Atlantic's projected net peseta cash outflows through January 2000. On January 1, 1999, a new common currency (the Euro) was introduced to member states of the European Union, including Spain. A transition period will extend until January 1, 2002. Only a few of Atlantic's customers and none of its suppliers have notified Atlantic of their intent to use the Euro as the currency for commercial transactions beginning January 1, 1999. Atlantic has not yet decided when it will adopt the Euro as its currency for commercial transactions. Atlantic does not expect conversion to the Euro currency to have a material impact on revenues or expenses. A single European currency is expected to improve Atlantic's competitiveness with other European copper smelters and refiners by eliminating exchange rate differences. Atlantic's current management information systems are designed to accommodate multiple currencies and would not require major modifications to process transactions involving the Euro. Atlantic's peseta hedging contracts will be set at a fixed exchange rate to the Euro and would continue to achieve their objectives. There can be no assurance that future movements in foreign currency exchange rates will not have a negative effect on operating results. 11 Risks Associated with the Year 2000 Issue. The Year 2000 (Y2K) issue is the result of computerized systems being written to store and process the year portion of dates using two digits rather than four. Date-aware systems (i.e., any system or component that performs calculations, comparisons, sequencing or other operations involving dates) may fail or produce erroneous results on or before January 1, 2000 because the year 2000 will be interpreted as the year 1900. FCX has been pursuing a strategy to ensure all its significant computer systems will be able to process dates from and after January 1, 2000, including leap years, without critical systems failure (Y2K Compliant or Y2K Compliance). Computerized systems are integral to the operations of FCX, particularly for plant and equipment process control at its mining, milling and smelting production facilities. Certain services are provided to FCX and its subsidiaries by FMS, which is responsible for ensuring Y2K Compliance for the systems it manages. FMS has separately prepared a plan for its Y2K Compliance. Certain PT-FI infrastructure assets within PT-FI's area of operations are operated by third parties. Each respective third party is responsible for its own Y2K Compliance, although PT-FI is coordinating their activities and providing oversight. Progress of the Y2K plan is being monitored by FCX executive management and reported to the Audit Committee of the FCX Board of Directors. In addition, the independent accounting firm functioning as FCX's internal auditors is assisting management in monitoring the progress of the Y2K plan. FCX believes all critical components of the plan are on schedule for completion by the end of the second quarter of 1999. Expenditures for the necessary Y2K-related modifications will largely be funded by routine software and hardware maintenance fees paid by FCX or FMS. Based on current information, FCX believes that the estimated incremental cost of Y2K Compliance not covered by routine software and hardware maintenance fees will total approximately $3 million, most of which is expected to be incurred in 1999. If the necessary software modifications and conversions are not made, or are delayed, the Y2K issue could have a material impact on FCX operations. Additionally, cost estimates are based on management's best estimates, which are derived using numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. There also can be no assurance that the systems of other companies will be converted on a timely basis or that their failure to convert will not have a material adverse effect on FCX. Based on its Y2K risk assessment work, FCX believes the most likely Y2K-related failures would probably be temporary disruption in certain materials and services provided by third parties, which would not be expected to have a material adverse effect on FCX's financial condition or results of operations. FCX believes that these third-party risks will be mitigated through its contingency plans for critical purchased commodities and close monitoring of compliance for other third parties that are important to its operations. Companies, including FCX, cannot make Y2K Compliance certifications because the ability of any organization's systems to operate reliably after midnight on December 31, 1999 is dependent upon factors that may be outside the control of, or unknown to, the organization. Although FCX believes the likelihood of any or all of the above risks occurring is low, specific contingency plans to address certain risk areas will be developed, if needed, beginning in the first quarter of 1999. While there can be no assurance that FCX will not be materially adversely affected by Y2K problems, it is committed to ensuring that it is fully Y2K ready and believes its plans adequately address the above-mentioned risks. Reserves and Exploration Risks. FCX reserve amounts, which are determined in accordance with established mining industry practices and standards, are estimates only. PT-FI's mines, whether in the production or development stages, may not conform to geological concepts or other expectations, so that the volume and grade of reserves recovered and the rates of production may be more or less than anticipated. Because ore bodies do not contain uniform grades of minerals, ore recovery rates will vary from time to time, resulting in variations in volumes of minerals sold from period to period. Further, market price fluctuations in copper, gold and, to a lesser extent, silver, and changes in operating and capital costs may render certain existing ore reserves uneconomic to develop. Further, no assurance can be given that FCX's exploration programs will result in the discovery of additional commercially exploitable mineral deposits. 12 Holding Company Structure. Because FCX is primarily a holding company, conducting business through its subsidiaries, its ability to meet its financial obligations and to pay dividends on its preferred and common stock will depend on the earnings and cash flow of its subsidiaries and the ability of its subsidiaries to pay dividends and to advance funds to the Company. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of PT-FI and the Company's other subsidiaries, could limit the Company's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations and to pay dividends. Any right of the Company to participate in any distribution of the assets of PT-FI , Atlantic and its other subsidiaries upon the liquidation, reorganization or insolvency thereof would, with certain exceptions, be subject to the claims of creditors (including trade creditors) and preferred stockholders (if any) of such subsidiaries. Item 3. Legal Proceedings. Tom Beanal v. Freeport-McMoRan Inc. and Freeport-McMoRan Copper & Gold Inc., Civ. No. 96-1474 (E.D. La. filed Apr. 29, 1996). In March 1998, the U. S. District Court for the Eastern District of Louisiana dismissed with prejudice the plaintiff's third amended complaint. The court held that the plaintiff failed to plead facts underlying his claims against FCX. The plaintiff has appealed the court's decision. The plaintiff alleges environmental, human rights and social/cultural violations in Indonesia and seeks $6 billion in monetary damages and other equitable relief. FCX will continue to defend this action vigorously. Yosefa Alomang v. Freeport-McMoRan Inc. and Freeport-McMoRan Copper & Gold Inc., Civ. No. 96-9962 (Orleans Civ. Dist. Ct. La. filed June 19, 1996). The plaintiff alleges substantially similar violations as those alleged in the Beanal suit and seeks unspecified monetary damages and other equitable relief. In February 1997, the Civil District Court of the Parish of Orleans, State of Louisiana dismissed this purported class action for lack of subject matter jurisdiction because the alleged conduct and damages occurred in Indonesia. In March 1998, the Louisiana Fourth Circuit Court of Appeal reversed the trial court's dismissal and found that subject matter jurisdiction existed over some claims. In July 1998, the Louisiana Supreme Court denied without comment FCX's writ application in which FCX sought a review of the Fourth Circuit's earlier ruling. The plaintiff has amended its complaint. FCX has additional legal defenses to the action it is pursuing. FCX will continue to defend this action vigorously. In addition to the foregoing proceedings, FCX may be from time to time involved in various legal proceedings of a character normally incident to the ordinary course of its business. Management believes that potential liability in any proceedings would not have a material adverse effect on the financial condition or results of operations of FCX. FCX maintains liability insurance to cover some, but not all, potential liabilities normally incident to the ordinary course of its business as well as other insurance coverage customary in its business, with coverage limits as management deems prudent. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 13 Executive Officers of the Registrant. Certain information as of March 1, 1999 about the executive officers of FCX, including their position or office with FCX, PT- FI and Atlantic, is set forth in the following table and accompanying text: Name Age Position or Office - ---- --- ------------------ Richard C. Adkerson 52 President and Chief Operating Officer of FCX. Director and Executive Vice President of PT-FI. Michael J. Arnold 46 Senior Vice President of FCX. Director and Executive Vice President of PT-FI. Stephen M. Jones 40 Senior Vice President and Chief Financial Officer of FCX. Director and Executive Vice President of PT-FI. W. Russell King 49 Senior Vice President of FCX. Adrianto Machribie 57 President Director of PT-FI. John A. Macken 47 Senior Vice President of FCX. Executive Vice President of PT-FI. James R. Moffett 60 Director, Chairman of the Board and Chief Executive Officer of FCX. President Commissioner of PT-FI. Paul S. Murphy 55 Senior Vice President of FCX. Commissioner of PT-FI. Craig E. Saporito 47 Senior Vice President and Treasurer of FCX. Treasurer of PT-FI. Steven D. Van Nort 58 Senior Vice President of FCX. Executive Vice President of PT-FI. Robert M. Wohleber 48 Senior Vice President of FCX. Senior Vice President of PT-FI. Chairman of Atlantic. Richard C. Adkerson has served as FCX's President and Chief Operating Officer since April 1997. Mr. Adkerson is also Executive Vice President and a director of PT-FI, and Co- Chairman of the Board, President and Chief Executive Officer of McMoRan Exploration Co. (MMR). From April 1994 to November 1998 he was Co-Chairman of the Board and Chief Executive Officer of McMoRan Oil & Gas Co. (MOXY), and from November 1997 to November 1998 he was Vice Chairman of the Board of Freeport-McMoRan Sulphur Inc. (FSC). Mr. Adkerson served as Executive Vice President of FCX from July 1995 to April 1997, as Senior Vice President from February 1994 to July 1995 and as Chief Financial Officer from July 1995 to November 1998. He also served as Chairman of the Board of Stratus Properties Inc., a real estate development company, from May 1993 to August 1998, as President from August 1995 to May 1996 and as Chief Executive Officer from May 1996 to May 1998. Mr. Adkerson served as Vice Chairman of the Board of Freeport-McMoRan Inc. (FTX) from August 1995 to December 1997 and as Senior Vice President and Chief Financial Officer of FTX from May 1992 to August 1995. Michael J. Arnold has served as Senior Vice President of FCX since November 1996. Mr. Arnold is also Executive Vice President and a director of PT-FI, and Senior Vice President of MMR. From July 1994 to November 1996, Mr. Arnold was Vice President and Controller - Operations of FCX. Mr. Arnold also served as a Senior Vice President of FTX from November 1996 until December 1997. From October 1991 to November 1996, he was Vice President of FTX, serving as Controller - Operations from May 1993 to November 1996. Stephen M. Jones has served as Senior Vice President and Chief Financial Officer of FCX since November 1998. Mr. Jones is also Executive Vice President and a director of PT-FI. Mr. Jones served as Vice President of FCX from July 1992 to December 1994. He served as Senior Vice President of PT-FI from June 1992 to December 1994. 14 W. Russell King has served as Senior Vice President of FCX since July 1994. Mr. King served as Senior Vice President of FTX from November 1993 to December 1997. Adrianto Machribie has served as President Director of PT-FI since March 1996. From September 1992 to March 1996, Mr. Machribie was a director and Executive Vice President of PT-FI. John A. Macken has served as Senior Vice President of FCX since December 1997. He is also Executive Vice President of PT-FI. From April 1996 to December 1997, Mr. Macken was a Vice President of FCX. From April 1995 to March 1996, Mr. Macken served as a director of PT-FI and from April 1993 to April 1995, he served as a Vice President of PT-FI. James R. Moffett has served as Chairman of the Board and Chief Executive Officer of FCX since July 1995 and has served as a director of FCX since May 1992. He is also President Commissioner of PT-FI and Co-Chairman of the Board of MMR. From November 1994 to November 1998 he was Co-Chairman of the Board of MOXY and from November 1997 to November 1998 he was Co-Chairman of the Board of FSC. Mr. Moffett served as Chairman of the Board of FTX from May 1992 to December 1997. Paul S. Murphy has served as Senior Vice President of FCX since March 1998. Mr. Murphy is also a Commissioner of PT-FI. Mr. Murphy served as Executive Vice President of PT-FI from September 1992 to May 1998. Craig E. Saporito has served as Senior Vice President and Treasurer of FCX since November 1997. Mr. Saporito is also Treasurer of PT-FI and Senior Vice President and Treasurer of MMR. From July 1994 to November 1997, Mr. Saporito was a Vice President of FCX and from May 1988 to December 1997, he was a Vice President of FTX. Steven D. Van Nort has served as Senior Vice President of FCX since December 1997. Mr. Van Nort also serves as Executive Vice President of PT-FI. From March 1995 to December 1997, Mr. Van Nort was a Vice President of FCX and from June 1992 to June 1997, he served as a Senior Vice President of PT-FI. Robert M. Wohleber has served as Senior Vice President of the Company since November 1997. He is also Senior Vice President of PT-FI, Chairman of Atlantic, and Executive Vice President, Chief Financial Officer and a director of MMR. He served as a Vice President of FCX from July 1994 to November 1997, as Vice President and Treasurer of FCX from July 1993 to July 1994. Mr. Wohleber served as President and Chief Executive Officer of FSC from November 1997 to November 1998 and as a director of FSC from August 1997 to November 1998. Mr. Wohleber served as Senior Vice President and Chief Financial Officer of FTX from November 1996 to December 1997. He was Vice President of FTX from June 1994 to November 1996 and Vice President and Treasurer of FTX from May 1992 to June 1994. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information set forth under the captions "FCX Class A Common Shares," "FCX Class B Common Shares" and "Common Share Dividends," on the inside back cover of the Annual Report is incorporated herein by reference. As of March 8, 1999, there were 8,120 and 12,936 holders of record of FCX's Class A and Class B common stock, respectively. Item 6. Selected Financial Data. The information set forth under the caption "Selected Financial and Operating Data," on page 18 of the Annual Report is incorporated herein by reference. FCX's ratio of earnings to fixed charges for each of the years 1994 through 1998, inclusive, was 7.5x, 5.9x, 4.5x, 3.8x, and 2.5x, respectively. 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 15 interest. FCX's ratio of earnings to fixed charges and preferred stock dividends for each of the years 1994 through 1998, inclusive, was 2.1x, 3.0x, 2.6x, 2.8x and 1.9x, respectively. For this calculation, the preferred stock dividend requirements were assumed to be equal to the pre-tax earnings which would be required to cover such dividend requirements. The amount of such pre-tax earnings required to cover preferred stock dividends was computed using tax rates for the applicable years. Items 7. and 7A. Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk. The information set forth under the caption "Management's Discussion and Analysis" on pages 19 through 27, inclusive, 29, 31 and 33, as well as the "Working Toward Sustainable Development" report on pages 6 through 17 of the Annual Report are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The financial statements of FCX appearing on pages 28, 30, 32 and 34, the notes thereto appearing on pages 35 through 50, inclusive, the report thereon of Arthur Andersen LLP appearing on page 51, and the report of management on page 51 of the Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Items 10. Directors and Executive Officers of the Registrant. The information set forth under the caption "Information About Nominees and Directors" of the Proxy Statement submitted to the stockholders of the registrant in connection with its 1999 Annual Meeting to be held on May 6, 1999 is incorporated herein by reference. Items 11. Executive Compensation. The information set forth under the captions "Director Compensation" and "Executive Officer Compensation" of the Proxy Statement submitted to the stockholders of the registrant in connection with its 1999 Annual Meeting to be held on May 6, 1999 is incorporated herein by reference. Items 12. Security Ownership of Certain Beneficial Owners and Management. The information set forth under the captions "Stock Ownership of Directors and Executive Officers" and "Stock Ownership of Certain Beneficial Owners" of the Proxy Statement submitted to the stockholders of the registrant in connection with its 1999 Annual Meeting to be held on May 6, 1999 is incorporated herein by reference. Items 13. Certain Relationships and Related Transactions. The information set forth under the caption "Certain Transactions" of the Proxy Statement submitted to the stockholders of the registrant in connection with its 1999 Annual Meeting to be held on May 6, 1999 is incorporated herein by reference. 16 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1). Financial Statements. Reference is made to the Index to Financial Statements appearing on page F-1 hereof. (a)(2). Financial Statement Schedules. Reference is made to the Index to Financial Statements appearing on page F-1 hereof. (a)(3). Exhibits. Reference is made to the Exhibit Index beginning on page E-1 hereof. (b). Reports on Form 8-K. During the last quarter of the period covered by this report, FCX filed one Current Report on Form 8-K dated December 9, 1998 reporting information under Item 5. 17 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 19, 1999. Freeport-McMoRan Copper & Gold Inc. By: /s/ James R. Moffett ------------------------- James R. Moffett Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 19, 1999. Signatures - ---------- Chairman of the Board, Chief Executive Officer and /s/ James R. Moffett Director (Principal Executive Officer) - -------------------- James R. Moffett * President and Chief Operating Officer - ---------------------- Richard C. Adkerson Senior Vice President and Chief Financial Officer * (Principal Financial Officer) - --------------------- Stephen M. Jones Vice President and Controller - Financial Reporting * (Principal Accounting Officer) - ---------------------- C. Donald Whitmire * Director - ---------------------- Robert W. Bruce III * Director - --------------------- Leon A. Davis * Director - -------------------- Robert A. Day * Director - ------------------------ William B. Harrison, Jr. S-1 * Director - ------------------------ J. Bennett Johnston * Director - ------------------------ Henry A. Kissinger * Director - ----------------------- Bobby Lee Lackey * Director - ----------------------- Rene L. Latiolais * Director - ----------------------- Jonathan C. A. Leslie * Director - ----------------------- Gabrielle K. McDonald * Director - ---------------------- George A. Mealey * Director - ---------------------- George Putnam * Director - ---------------------- B. M. Rankin * Director - ---------------------- J. Taylor Wharton *By: /s/ James R. Moffett --------------------- James R. Moffett Attorney-in-Fact S-2 FREEPORT-McMoRan COPPER & GOLD INC. INDEX TO FINANCIAL STATEMENTS The financial statements of FCX appearing on pages 28, 30, 32, and 34, the notes thereto appearing on pages 35 through 50, inclusive, and the report thereon of Arthur Andersen LLP appearing on page 51 of FCX's 1998 Annual Report to stockholders are incorporated herein by reference. The financial statements in schedule I listed below should be read in conjunction with such financial statements contained in FCX's 1998 Annual Report to stockholders. Page Report of Independent Public Accountants F-1 Schedule I-Condensed Financial Information of Registrant F-2 Schedule II-Valuation and Qualifying Accounts F-4 Schedules other than the ones listed above have been omitted since they are either not required, not applicable or the required information is included in the financial statements or notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited, in accordance with generally accepted auditing standards, the financial statements as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 included in Freeport-McMoRan Copper & Gold Inc.'s Annual Report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 19, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the index above are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP New Orleans, Louisiana, January 19, 1999 F-1 FREEPORT-McMoRan COPPER & GOLD INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
December 31, ---------------------- 1998 1997 ---------- ---------- (In Thousands) Assets: Cash and cash equivalents $ 802 $ 1,501 Interest receivable 7,996 12,597 Due from affiliates 41,766 88,098 Notes receivable from PT-FI 832,492 982,492 Note receivable from NMI 25,438 7,614 Investment in PT-FI and PT-II 610,234 455,610 Investment in Atlantic Copper 51,418 46,744 Other assets 43,118 40,497 ---------- ---------- Total assets $1,613,264 $1,635,153 ========== ========== Liabilities and Stockholders' Equity: Accounts payable and accrued liabilities $ 17,300 $ 18,999 Long-term debt 967,251 825,250 Other liabilities and deferred credits 2,457 5,785 Deferred income taxes 22,833 6,220 Redeemable preferred stock 500,007 500,007 Stockholders' equity 103,416 278,892 ---------- ---------- Total liabilities and stockholders' equity $1,613,264 $1,635,153 ========== ==========
STATEMENTS OF INCOME
Years Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (In Thousands) Income from investment in PT-FI and PT-II, net of PT-FI tax provision $211,232 $218,752 $253,895 Net income (loss) from investment in Atlantic Copper 4,674 3,391 (24,258) Intercompany charges and eliminations (7,700) 53,117a 7,244 Exploration expenses (8,958) (11,198) - General and administrative expenses (7,082) (8,855) (9,141) Depreciation and amortization (4,384) (3,873) (3,590) Interest expense, net (66,141) (59,626) (21,191) Interest income on PT-FI notes receivable: Promissory notes 29,273 47,219 29,150 8.235% debenture 8,101 11,723 12,353 Step-up debenture - 3,083 6,327 Gold and silver production payment loans 19,212 20,451 23,696 Other income (expense), net 1,326 878 (1,698) Provision for income taxes (25,705) (29,954) (46,538) -------- -------- -------- Net income 153,848 245,108 226,249 Preferred dividends (35,531) (36,567) (51,569) -------- -------- -------- $118,317 $208,541 $174,680 ======== ======== ========
(a)Includes amounts for elimination of intercompany profit totaling $(7.7) million in 1998, $9.3 million in 1997 and $7.2 million in 1996 as well as intercompany charges for stock-based incentive compensation totaling $43.8 million in 1997. The footnotes to the consolidated financial statements of FCX contained in FCX's 1998 Annual Report to stockholders are an integral part of these statements. F-2 FREEPORT-McMoRan COPPER & GOLD INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOW
Years Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (In Thousands) Cash flow from operating activities: Net income $153,848 $245,108 $226,249 Adjustments to reconcile net income to net cash provided by operating activities: Income from investment in PT-FI and PT-II (211,232) (218,293) (253,895) Deferred income taxes 16,613 1,400 4,820 Net (income) loss from investment in Atlantic Copper (4,674) (3,391) 24,258 Elimination of intercompany profit 7,700 (9,271) (7,244) Dividends received from PT-FI and PT-II 48,832 205,092 220,916 Depreciation and amortization 4,384 3,873 3,590 Decrease (increase) in interest receivable and due from affiliates 50,933 (44,358) (5,214) Increase (decrease) in accounts payable and accrued liabilities (1,699) (1,898) 4,501 Other 3,208 7,536 (1,087) -------- -------- -------- Net cash provided by operating activities 67,913 185,798 216,894 -------- -------- -------- Cash flow from investing activities: Other (9,583) (11,895) (11,138) -------- -------- -------- Net cash used in investing activities (9,583) (11,895) (11,138) -------- -------- -------- Cash flow from financing activities: Cash dividends paid: Class A common stock (14,157) (73,309) (69,425) Class B common stock (21,225) (105,032) (106,341) Convertible exchangeable preferred stock - - (15,498) Step-up convertible preferred stock (24,500) (24,642) (19,250) Mandatory redeemable preferred stock (14,657) (15,901) (17,689) Proceeds from sale of Senior notes - - 445,570 Proceeds from debt 161,506 180,000 31,561 Repayment of debt (19,504) (17,310) (137,000) Loans to PT-FI - - (244,682) Repayment from PT-FI 150,000 325,320 147,315 Loans to NMI (17,824) (7,614) - Purchase of FCX common shares (259,213) (438,388) (220,997) Other 545 4,232 829 -------- -------- -------- Net cash used in financing activities (59,029) (172,644) (205,607) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (699) 1,259 149 Cash and cash equivalents at beginning of year 1,501 242 93 -------- -------- -------- Cash and cash equivalents at end of year $ 802 $ 1,501 $ 242 ======== ======== ======== Interest paid $ 68,950 $ 59,798 $ 28,249 ======== ======== ======== Taxes paid $ 8,629 $ 28,286 $ 41,586 ======== ======== ========
The footnotes to the consolidated financial statements of FCX contained in FCX's 1998 Annual Report to stockholders are an integral part of these statements. F-3 FREEPORT-McMoRan COPPER & GOLD INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E - ----------------- ---------- ---------------------- ------- --------- Additions ---------------------- Balance at Charged to Charged to Other Balance at Beginning Costs and Other Add End of of Period Expense Accounts (Deduct) Period --------- ---------- ---------- -------- --------- (In Thousands) Reserves and allowances deducted from asset accounts: 1998 Materials and supplies reserves $29,513 $ 3,000 $ - $(7,880) $24,633 Allowance for uncollectible value-added taxes 3,825 833 833 - 5,491 1997 Materials and supplies reserves 19,340 12,000 - (1,827) 29,513 Allowance for uncollectible value-added taxes 5,337 1,809 289 (3,610) 3,825 1996 Materials and supplies reserves 26,040 3,000 - (9,700) 19,340 Allowance for uncollectible value-added taxes 3,438 1,813 201 (115) 5,337 Reclamation and mine shutdown reserves: 1998 PT-FI $ 5,466 $3,763 $ - $ - $9,229 1997 PT-FI 500 4,966 - - 5,466 1996 PT-FI - 500 - - 500
F-4 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Exhibit Number Description 2.1 Agreement, dated as of May 2, 1995 by and between Freeport- McMoRan Inc. (FTX) and FCX and The RTZ Corporation PLC, RTZ Indonesia Limited, and RTZ America, Inc. (the Rio Tinto Agreement). Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of FTX dated as of May 26, 1995. 2.2 Amendment dated May 31, 1995 to the Rio Tinto Agreement. Incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q of FTX for the quarter ended June 30, 1995. 2.3 Distribution Agreement dated as of July 5, 1995 between FTX and FCX. Incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q of FTX for the quarter ended September 30, 1995 (the FTX 1995 Third Quarter Form 10-Q). 3.1 Composite copy of the Certificate of Incorporation of FCX. Incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of FCX for the quarter ended June 30, 1995 (the FCX 1995 Second Quarter Form 10-Q). 3.2 Amended By-Laws of FCX dated as of March 12, 1999. 4.1 Certificate of Designations of the Step-Up Convertible Preferred Stock of FCX. Incorporated by reference to Exhibit 4.2 to the FCX 1995 Second Quarter Form 10-Q. 4.2 Deposit Agreement dated as of July 1, 1993 among FCX, ChaseMellon Shareholder Services, L.L.C. (ChaseMellon), as Depositary, and holders of depositary receipts (Step-Up Depositary Receipts) evidencing certain Depositary Shares, each of which, in turn, represents 0.05 shares of Step-Up Convertible Preferred Stock. Incorporated by reference to Exhibit 4.5 to the Annual Report on Form 10-K of FCX for the fiscal year ended December 31, 1993 (the FCX 1993 Form 10- K). 4.3 Form of Step-Up Depositary Receipt. Incorporated by reference to Exhibit 4.6 to the FCX 1993 Form 10-K. 4.4 Certificate of Designations of the Gold-Denominated Preferred Stock of FCX. Incorporated by reference to Exhibit 4.3 to the FCX 1995 Second Quarter Form 10-Q. 4.5 Deposit Agreement dated as of August 12, 1993 among FCX, ChaseMellon, as Depositary, and holders of depositary receipts (Gold-Denominated Depositary Receipts) evidencing certain Depositary Shares, each of which, in turn, represents 0.05 shares of Gold-Denominated Preferred Stock. Incorporated by reference to Exhibit 4.8 to the FCX 1993 Form 10-K. 4.6 Form of Gold-Denominated Depositary Receipt. Incorporated by reference to Exhibit 4.9 to the FCX 1993 Form 10-K. 4.7 Certificate of Designations of the Gold-Denominated Preferred Stock, Series II (the Gold-Denominated Preferred Stock II) of FCX. Incorporated by reference to Exhibit 4.4 to the FCX 1995 Second Quarter Form 10-Q. 4.8 Deposit Agreement dated as of January 15, 1994, among FCX, ChaseMellon, as Depositary, and holders of depositary receipts (Gold-Denominated II Depositary Receipts) evidencing certain Depositary Shares, each of which, in turn, represents 0.05 shares of Gold-Denominated Preferred Stock II. Incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of FCX for the quarter ended March 31, 1994 (the FCX 1994 First Quarter Form 10-Q). E-1 4.9 Form of Gold-Denominated II Depositary Receipt. Incorporated by reference to Exhibit 4.3 to the FCX 1994 First Quarter Form 10-Q. 4.10 Certificate of Designations of the Silver-Denominated Preferred Stock of FCX. Incorporated by reference to Exhibit 4.5 to the FCX 1995 Second Quarter Form 10-Q. 4.11 Deposit Agreement dated as of July 25, 1994 among FCX, ChaseMellon, as Depositary, and holders of depositary receipts (Silver-Denominated Depositary Receipts) evidencing certain Depositary Shares, each of which, in turn, initially represents 0.025 shares of Silver-Denominated Preferred Stock. Incorporated by reference to Exhibit 4.2 to the July 15, 1994 Form 8-A. 4.12 Form of Silver-Denominated Depositary Receipt. Incorporated by reference to Exhibit 4.1 to the July 15, 1994, Form 8-A. 4.13 $550 million Composite Restated Credit Agreement dated as of July 17, 1995 (the PT-FI Credit Agreement) among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, Chemical Bank, as administrative agent and FCX collateral agent, and The Chase Manhattan Bank (National Association), as documentary agent. Incorporated by reference to Exhibit 4.16 to the Annual Report of FCX on Form 10-K for the year ended December 31, 1995 (the FCX 1995 Form 10-K). 4.14 Amendment dated as of July 15, 1996 to the PT-FI Credit Agreement among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, Chemical Bank, as administrative agent and FCX collateral agent, and The Chase Manhattan Bank (National Association), as documentary agent. Incorporated by reference to Exhibit 4.2 to the Quarterly Report of FCX on Form 10-Q for the quarter ended September 30, 1996 (the FCX 1996 Third Quarter Form 10-Q). 4.15 Amendment dated as of October 9, 1996 to the PT-FI Credit Agreement among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, The Chase Manhattan Bank (formerly Chemical Bank), as administrative agent, security agent and JAA security agent, and The Chase Manhattan Bank (as successor to The Chase Manhattan Bank (National Association)), as documentary agent. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of FCX dated and filed November 13, 1996 (the FCX November 13, 1996 Form 8-K). 4.16 Amendment dated as of March 7, 1997 to the PT-FI Credit Agreement among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, The Chase Manhattan Bank, as administrative agent, security agent and JAA security agent, and The Chase Manhattan Bank, as documentary agent. Incorporated by reference to Exhibit 4.16 to the Annual Report of FCX on Form 10-K for the year ended December 31, 1997 (the FCX 1997 Form 10-K). 4.17 Amendment dated as of July 24, 1997 to the PT-FI Credit Agreement among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, The Chase Manhattan Bank, as administrative agent, security agent and JAA security agent, and The Chase Manhattan Bank, as documentary agent. Incorporated by reference to Exhibit 4.17 to the FCX 1997 Form 10-K. 4.18 $200 million Credit Agreement dated as of June 30, 1995 (the CDF) among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, Chemical Bank, as administrative agent and FCX collateral agent, The Chase Manhattan Bank (National Association), as documentary agent. Incorporated by reference to Exhibit 4.2 to the FCX 1995 Third Quarter Form 10-Q. 4.19 Amendment dated as of July 15, 1996 to the CDF among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, Chemical Bank, as administrative agent and FCX collateral agent, and The Chase Manhattan Bank (National Association), as documentary agent. Incorporated by reference to Exhibit 4.1 to the FCX 1996 Third Quarter Form 10-Q. E-2 4.20 Amendment dated as of October 9, 1996 to the CDF among PT- FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, The Chase Manhattan Bank (formerly Chemical Bank), as administrative agent, security agent and JAA security agent, and The Chase Manhattan Bank (as successor to The Chase Manhattan Bank (National Association)), as documentary agent. Incorporated by reference to Exhibit 10.1 to the FCX November 13, 1996 Form 8-K. 4.21 Amendment dated as of March 7, 1997 to the CDF among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, The Chase Manhattan Bank, as administrative agent, security agent and JAA security agent, and The Chase Manhattan Bank, as documentary agent. Incorporated by reference to Exhibit 4.21 to the FCX 1997 Form 10-K. 4.22 Amendment dated as of July 24, 1997 to the CDF among PT-FI, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT-FI Trustee, The Chase Manhattan Bank, as administrative agent, security agent and JAA security agent, and The Chase Manhattan Bank, as documentary agent. Incorporated by reference to Exhibit 4.22 to the FCX 1997 Form 10-K. 4.23 Senior Indenture dated as of November 15, 1996 from FCX to The Chase Manhattan Bank, as Trustee. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of FCX dated November 13, 1996 and filed November 15, 1996. 4.24 First Supplemental Indenture dated as of November 18, 1996 from FCX to The Chase Manhattan Bank, as Trustee, providing for the issuance of the Senior Notes and supplementing the Senior Indenture dated November 15, 1996 from FCX to such Trustee, providing for the issuance of Debt Securities. Incorporated by reference to Exhibit 4.20 to the FCX 1996 Form 10-K. 10.1 Contract of Work dated December 30, 1991 between The Government of the Republic of Indonesia and PT-FI. Incorporated by reference to Exhibit 10.2 to the FCX 1995 Form 10-K. 10.2 Contract of Work dated August 15, 1994 between The Government of the Republic of Indonesia and P.T. Irja Eastern Minerals Corporation. Incorporated by reference to Exhibit 10.2 to the FCX 1995 Form 10-K. 10.3 Agreement dated as of October 11, 1996 to Amend and Restate Trust Agreement among PT-FI, FCX, the RTZ Corporation PLC, P.T. RTZ-CRA Indonesia, RTZ Indonesian Finance Limited and First Trust of New York, National Association, and The Chase Manhattan Bank, as Administrative Agent, JAA Security Agent and Security Agent. Incorporated by reference to Exhibit 10.3 to the FCX November 13, 1996 Form 8-K. 10.4 Credit Agreement dated October 11, 1996 between PT-FI and RTZ Indonesian Finance Limited. Incorporated by reference to Exhibit 10.4 to the FCX November 13, 1996 Form 8-K. 10.5 Participation Agreement dated as of October 11, 1996 between PT-FI and P.T. RTZ-CRA Indonesia with respect to a certain contract of work. Incorporated by reference to Exhibit 10.5 to the FCX November 13, 1996 Form 8-K. 10.6 Second Amended and Restated Joint Venture and Shareholders' Agreement dated as of December 11, 1996 among Mitsubishi Materials Corporation, Nippon Mining and Metals Company, Limited and PT-FI. Incorporated by reference to Exhibit 10.3 of the FCX 1996 Form 10-K. 10.7 Put and Guaranty Agreement dated as of March 21, 1997 between FCX and The Chase Manhattan Bank. Incorporated by reference to Exhibit 10.7 to the FCX 1997 Form 10-K. 10.8 Subordinated Loan Agreement dated as of March 21, 1997 between FCX and PT Nusamba Mineral Industri. Incorporated by reference to Exhibit 10.8 to the FCX 1997 Form 10-K. 10.9 Amended and Restated Power Sales Agreement dated as of December 18, 1997 between PT-FI and P.T. Puncakjaya Power. Incorporated by reference to Exhibit 10.9 to the FCX 1997 Form 10-K. E-3 10.10 Option, Mandatory Purchase and Right of First Refusal Agreement dated as of December 19, 1997 among PT-FI, P.T. Puncakjaya Power, Duke Irian Jaya, Inc., Westcoast Power, Inc. and P.T. Prasarana Nusantara Jaya. Incorporated by reference to Exhibit 10.10 to the FCX 1997 Form 10-K. Executive Compensation Plans and Arrangements (Exhibits 10.11 through 10.30) 10.11 Annual Incentive Plan of FCX as amended effective February 2, 1999. 10.12 1995 Long-Term Performance Incentive Plan of FCX. Incorporated by reference to Exhibit 10.9 to the FCX 1996 Form 10-K. 10.13 FCX Performance Incentive Awards Program as amended effective February 2, 1999. 10.14 FCX President's Award Program. Incorporated by reference to Exhibit 10.8 to the FCX 1995 Form 10-K. 10.15 FCX Adjusted Stock Award Plan, as amended. Incorporated by reference to Exhibit 10.15 to the 1997 FCX Form 10-K. 10.16 FCX 1995 Stock Option Plan. Incorporated by reference to Exhibit 10.13 to the FCX 1996 Form 10-K. 10.17 FCX 1995 Stock Option Plan for Non-Employee Directors, as amended. Incorporated by reference to Exhibit 10.17 to the FCX 1997 Form 10-K. 10.18 Financial Counseling and Tax Return Preparation and Certification Program of FCX. Incorporated by reference to Exhibit 10.12 to the FCX 1995 Form 10-K. 10.19 FM Services Company Performance Incentive Awards Program as amended effective February 2, 1999. 10.20 FM Services Company Financial Counseling and Tax Return Preparation and Certification Program. Incorporated by reference to Exhibit 10.14 to the FCX 1995 Form 10-K. 10.21 Consulting Agreement dated as of December 22, 1988 between FTX and Kissinger Associates, Inc. (Kissinger Associates). Incorporated by reference to Exhibit 10.21 to the FCX 1997 Form 10-K. 10.22 Letter Agreement dated May 1, 1989 between FTX and Kent Associates, Inc. (Kent Associates, predecessor in interest to Kissinger Associates). Incorporated by reference to Exhibit 10.22 to the FCX 1997 Form 10-K. 10.23 Letter Agreement dated January 27, 1997 among Kissinger Associates, Kent Associates, FTX, FCX and FMS. Incorporated by reference to Exhibit 10.20 to the FCX 1996 Form 10-K. 10.24 Agreement for Consulting Services between FTX and B. M. Rankin, Jr. effective as of January 1, 1991 (assigned to FMS as of January 1, 1996). Incorporated by reference to Exhibit 10.24 to the FCX 1997 Form 10-K. 10.25 Supplemental Agreement between FMS and B. M. Rankin Jr. dated December 15, 1997. Incorporated by reference to Exhibit 10.25 to the FCX 1997 Form 10-K. 10.26 Supplemental Agreement between FMS and B.M. Rankin Jr. dated December 7, 1998. 10.27 Letter Agreement dated March 8, 1996 between George A. Mealey and FCX. Incorporated by reference to Exhibit 10.22 of the FCX 1996 Form 10-K. 10.28 Letter Agreement effective as of January 4, 1997 between Senator J. Bennett Johnston, Jr. and FCX. Incorporated by reference to Exhibit 10.25 of the FCX 1996 Form 10-K. 10.29 Letter Agreement dated December 22, 1997 between FMS and Rene L. Latiolais. Incorporated by reference to Exhibit 10.28 to the FCX 1997 Form 10-K. E-4 10.30 Letter Agreement dated January 25, 1999 between FMS and Rene L. Latiolais. 12.1 FCX Computation of Ratio of Earnings to Fixed Charges. 13.1 Those portions of the 1998 Annual Report to stockholders of FCX that are incorporated herein by reference. 21.1 Subsidiaries of FCX. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Independent Mining Consultants, Inc. 24.1 Certified resolution of the Board of Directors of FCX authorizing this report to be signed on behalf of any officer or director pursuant to a Power of Attorney. 24.2 Powers of Attorney pursuant to which this report has been signed on behalf of certain officers and directors of FCX. 27.1 FCX Financial Data Schedule. E-5 EX-3 2 Exhibit 3.2 Freeport-McMoRan Copper & Gold Inc. By-Laws ARTICLE I Name The name of the corporation is Freeport-McMoRan Copper & Gold Inc. ARTICLE II Offices 1. The location of the registered office of the corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle, and the name of its registered agent at such address is The Corporation Trust Company. 2. The corporation shall in addition to its registered office in the State of Delaware establish and maintain an office or offices at such place or places as the Board of Directors may from time to time find necessary or desirable. ARTICLE III Corporate Seal The corporate seal of the corporation shall have inscribed thereon the name of the corporation and the year of its creation (1987) and the words "Corporate Seal Delaware". Such seal may be used by causing it or a facsimile thereof to be impressed, affixed, printed or otherwise reproduced. ARTICLE IV Meeting of Stockholders 1. Meetings of the stockholders shall be held at the registered office of the corporation in the State of Delaware, or at such other place as shall be determined, from time to time, by the Board of Directors. 2. The annual meeting of stockholders shall be held on the Monday immediately preceding the third Tuesday of April at one o'clock in the afternoon, or on such other day or at such other time as may be determined from time to time by resolution of the Board of Directors. At each annual meeting of the stockholders they shall elect by plurality vote, by written ballot, and subject to the voting powers set forth in the Certificate of Incorporation, the successors of the class of directors whose term expires at such meeting, to hold office until the annual meeting of the stockholders held in the third year following the year of their election and their successors are respectively elected and qualified or until their earlier resignation or removal. Any other proper business may be transacted at the annual meeting. 3. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute, by the Certificate of Incorporation or by these By-Laws. If, however, such majority shall not be present or represented at any meeting of the stock- holders, the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time without notice other than announcement at the meeting (except as otherwise provided by statute), until the requisite amount of voting stock shall be present. At such adjourned meeting at which the requisite amount of voting stock shall be represented any business may be transacted which might have been transacted at the meeting as originally notified. 4. At all meetings of the stockholders, each stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than six months prior to said meeting, unless such instrument provides for a longer period. All proxies shall be filed with the secretary of the meeting before being voted. 5. At each meeting of the stockholders each stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the corporation at the record date fixed in accordance with these By-Laws, or otherwise determined, with respect to such meeting. Except as otherwise expressly provided by statute, by the Certificate of Incorporation or by these By-Laws, all matters coming before any meeting of the stockholders shall be decided by the vote of a majority of the number of shares of stock present in person or represented by proxy at such meeting and entitled to vote thereat, a quorum being present. 6. Notice of each meeting of the stockholders shall be given to each stockholder entitled to vote thereat not less than 10 nor more than 60 days before the date of the meeting. Such notice shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 7. Subject to such rights to call special meetings of stock- holders under specified circumstances as may be granted to holders of any shares of Preferred Stock of the corporation pursuant to the provisions of Section (c) of Article FOURTH of the Certificate of Incorporation, special meetings of the stockholders may be called only by the Chairman of the Board, the Vice Chairman of the Board or the President of the corporation, or at the request in writing or by a vote of a majority of the Board of Directors, and not by any other persons. Any request for a special meeting made by the Board of Directors shall state the purpose or purposes of the proposed meeting. 8. Business transacted at each special meeting shall be confined to the purpose or purposes stated in the notice of such meeting. 9. The order of business at each meeting of the stockholders shall be determined by the chairman of such meeting. 10. At an annual meeting of the stockholders, only business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the corporation who complies with the notice procedures set forth in this Section 10. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 120th day nor earlier than the close of business on the 210th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 90 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the stockholder and (d) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 10. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of the By-Laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 10, a stockholder seeking to have a proposal included in the corporation's proxy statement shall comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended (including, but not limited to, Rule 14a-8 or its successor provision). 11. Only persons who are nominated in accordance with the procedures set forth in the By-Laws shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 11. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 120th day nor earlier than the close of business on the 210th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 90 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in the By-Laws. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 12. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by stockholders having not less than a minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE V Directors 1. The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors which may exercise all such powers and authority for and on behalf of the corporation as shall be permitted by law, the Certificate of Incorporation or these By-Laws. 2. The directors may hold their meeting and have one or more offices, and, subject to the laws of the State of Delaware, keep the stock ledger and other books and records of the corporation outside of said State, at such place or places as they may from time to time determine. 3. Any director may resign at any time by giving written notice of his resignation to the Board of Directors, to the Chairman of the Board, the Vice Chairman of the Board or the President. Any such resignation shall take effect upon receipt thereof by the Board, the Chairman of the Board, the Vice Chairman of the Board or the President, as the case may be, or at such later date as may be specified therein. Any such notice to the Board shall be addressed to it in care of the Secretary. ARTICLE VI Committees of Directors 1. By resolutions adopted by a majority of the whole Board of Directors, the Board may designate an Executive Committee, an Audit Committee, a Corporate Personnel Committee, a Nominating Committee and a Public Policy Committee, and may designate one or more other committees, each such committee to consist of one or more directors of the corporation. The Executive Committee shall have and may exercise all the powers of the Board in the management of the business and affairs of the corporation (except as otherwise expressly limited by statute), including the power and authority to declare dividends and to authorize the issuance of stock, and may authorize the seal of the corporation to be affixed to all papers which may require it. The Audit Committee, the Corporate Personnel Committee, the Nominating Committee, the Public Policy Committee and each such other committee shall have such of the powers and authority of the Board as may be provided from time to time in resolutions adopted by a majority of the whole Board. Each committee shall report its proceedings to the Board when required. 2. The requirements with respect to the manner in which the Executive Committee and each such other committee shall hold meetings and take actions shall be set forth in the resolutions of the Board of Directors designating the Executive Committee or such other committee. ARTICLE VII Compensation of Directors The directors shall receive such compensation for their services as may be authorized by resolution of the Board of Directors, which compensation may include an annual fee and a fixed sum and expenses for attendance at regular or special meetings of the Board or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE VIII Meetings of Directors; Action Without a Meeting 1. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as may be determined from time to time by resolution of the Board. 2. Special meetings of the Board of Directors may be called by the Chairman of the Board, by the Vice Chairman of the Board or by the President on at least 24 hours' notice to each director, and shall be called by the President or the Secretary on like notice on the request in writing of any director. Except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these By-Laws, the purpose or purposes of any such special meeting need not be stated in such notice. 3. At all meetings of the Board of Directors the presence in person of a majority of the total number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business and, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these By-Laws, if a quorum shall be present the act of a majority of the directors present at any meeting shall be the act of the Board. 4. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all the members of the Board or such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board or committee. Any director may participate in a meeting of the Board, or of any committee designated by the Board, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this sentence shall constitute presence in person at such meeting. ARTICLE IX Officers 1. The officers of the corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board, a President, one or more Vice Presidents, a Secretary, and a Treasurer. The Board of Directors may also choose a Vice Chairman of the Board, one or more Executive Vice Presidents, one or more Senior Vice Presidents, a General Counsel, one or more Assistant Vice Presidents, a Controller and one or more Assistant Secretaries, Assistant Treasurers or Assistant Controllers, and such other officers as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be prescribed from time to time by the Board or by the Chairman of the Board. Any number of offices may be held by the same person. 2. Annually, the Board of Directors shall choose a Chairman of the Board from among the directors, and shall choose the remaining officers who need not be members of the Board except in the event they choose a Vice Chairman of the Board. 3. The salaries of all officers of the corporation shall be fixed by the Board of Directors, or in such manner as the Board may prescribe. 4. The officers of the corporation shall hold office until their successors are respectively chosen and qualified, except that any officer may at any time resign or be removed by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board. 5. Any officer may resign at any time by giving written notice of his resignation to the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board or the President. Any such resignation shall take effect upon receipt thereof by the Board, the Chairman of the Board, the Vice Chairman of the Board or the President, as the case may be, or at such later date as may be specified therein. Any such notice to the Board shall be addressed to it in care of the Secretary. ARTICLE X Chairman of the Board The Chairman of the Board shall be the Chief Executive Officer of the corporation and shall preside at meetings of the stockholders and of the Board of Directors. Subject to the supervision and direction of the Board of Directors, he shall be responsible for managing the affairs of the corporation. He shall have general supervision and direction of all of the other officers of the corporation and shall have powers and duties usually and customarily associated with the office of Chairman of the Board and the position of Chief Executive Officer. ARTICLE XI President The President shall be the Chief Operating Officer of the corporation, and he shall have the powers and duties usually and customarily associated with the Office of the President and the position of Chief Operating Officer. He shall have such other powers and duties as may be delegated to him by the Chairman of the Board. The President shall, in the absence of the Chairman of the Board, preside at meetings of the stockholders. ARTICLE XII Vice Chairman of the Board, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents The Vice Chairman of the Board, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents shall have such powers and duties as may be delegated to them by the Board of Directors or the Chairman of the Board. The Vice Chairman of the Board shall, in the absence of the Chairman of the Board, preside at meetings of the stockholders and of the Board of Directors. ARTICLE XIII General Counsel, Secretary and Assistant Secretaries 1. The General Counsel shall have the powers and duties usually and customarily associated with the position of General Counsel. He shall have such other powers and duties as may be delegated to him by the Board of Directors or the Chairman of the Board. 2. The Secretary shall attend all meetings of the Board of Directors and of the stockholders, and shall record the minutes of all proceedings in a book to be kept for that purpose. He shall perform like duties for the committees of the Board when required. 3. The Secretary shall give, or cause to be given, notice of meetings of the stockholders and of the Board of Directors and of committees of the Board. He shall keep in safe custody the seal of the corporation, and when authorized by the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, a Senior Vice President, a Vice President or the General Counsel, shall affix the same to any instrument requiring it, and when so affixed it shall be attested by his signature or by the signature of an Assistant Secretary. He shall have such other powers and duties as may be delegated to him by the Board of Directors or the Chairman of the Board. 4. The Assistant Secretaries shall, in case of the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary, and shall have such other powers and duties as may be delegated to them by the Board of Directors or the Chairman of the Board. ARTICLE XIV Treasurer and Assistant Treasurers 1. The Treasurer shall have the custody of the corporate funds and securities, and shall deposit or cause to be deposited under his direction all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors or pursuant to authority granted by it. He shall render to the Chairman of the Board and the Board of Directors, whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the corporation. He shall have such other powers and duties as may be delegated to him by the Board of Directors or the Chairman of the Board. 2. The Assistant Treasurers shall, in case of the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer, and shall have such other powers and duties as may be delegated to them by the Board of Directors or the Chairman of the Board. ARTICLE XV Controller and Assistant Controllers 1. The Controller shall maintain adequate records of all assets, liabilities and transactions of the corporation, and shall see that adequate audits thereof are currently and regularly made. He shall disburse the funds of the corporation in payment of the just obligations of the corporation, or as may be ordered by the Board of Directors, taking proper vouchers for such disbursements. He shall have such other powers and duties as may be delegated to him by the Board of Directors or the Chairman of the Board. 2. The Assistant Controllers shall, in case of the absence of the Controller, perform the duties and exercise the powers of the Controller, and shall have such other powers and duties as may be delegated to them by the Board of Directors or the Chairman of the Board. ARTICLE XVI Agents and Representatives The Chairman of the Board, the Vice Chairman of the Board, the President, any Executive Vice President, any Senior Vice President or any Vice President, the General Counsel, together with the Secretary or any Assistant Secretary, are authorized and empowered in the name of and as the act and deed of the corporation, to name and appoint general and special agents, representatives, and attorneys to represent the corporation in the United States or in any foreign country, and to prescribe, limit and define the powers and duties of such agents, representatives and attorneys, and to grant, substitute, revoke, or cancel, in whole or in part, any power of attorney or other authority conferred on any such agent, representative, or attorney. All powers of attorney or other instruments which may be executed pursuant to this provision shall be signed by the Chairman of the Board, the Vice Chairman of the Board, the President, any Executive Vice President, any Senior Vice President, or any Vice President, the General Counsel, and by the Secretary or an Assistant Secretary and the seal of the corporation shall be affixed thereto. No further authorization by the Board of Directors shall be necessary in connection with the foregoing, it being intended that this By-Law shall constitute full and complete authority by which the officers above mentioned may act for the purposes aforesaid. ARTICLE XVII Certificates of Stock The certificates for shares of stock of the corporation shall be numbered and shall be entered on the books of the corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, a Senior Vice President or a Vice President and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. The signature of any such officers may be facsimile if such certificate is countersigned by a transfer agent other than the corporation or its employee or by a registrar other than the corporation or its employee. In case any officer who has signed or whose facsimile signature has been placed on any such certificate shall have ceased to be such officer before such certificate is issued, then, unless the Board of Directors shall otherwise determine and cause notification thereof to be given to such transfer agent and registrar, such certificate may be issued by the corporation (and by its transfer agent) and registered by its registrar with the same effect as if he were such officer at the date of issue. ARTICLE XVIII Transfers of Stock 1. All transfers of shares of the stock of the corporation shall be made on the books of the corporation by the registered holders of such shares in person or by their attorneys lawfully constituted in writing, or by their legal representatives. 2. Certificates for shares of stock shall be surrendered and cancelled at the time of transfer. ARTICLE XIX Fixing Record Date In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which record date: (1) in the case of determination of stockholders entitled to vote on any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than 60 nor less than 10 days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than 10 days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (3) in the case of any other action, shall not be more than 60 days prior to such other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day preceding the day on which notice is given, or, if notice is waived, at the close of business on the day preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action of the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE XX Registered Stockholders The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware. ARTICLE XXI Checks All checks, drafts and other orders for the payment of money, and all promissory notes and other evidences of the corporation shall be signed by such officer or officers or such other person or persons as may be designated by the Board of Directors or pursuant to authority granted by it. ARTICLE XXII Fiscal Year The fiscal year shall begin the first day of January in each year. ARTICLE XXIII Notices and Waivers 1. Whenever by statute or by the Certificate of Incorporation or by these By-Laws it is provided that notice shall be given to any director or stockholder, such provision shall not be construed to require personal notice, but such notice may also be given in writing, by mail, by depositing the same in the United States mail, postage prepaid, directed to such stockholder or director at his address as it appears on the records of the corporation, or in default of such address, to such director or stockholder at the General Post Office in the City of Wilmington, Delaware, and such notice shall be deemed to be given at the time when the same shall be thus deposited. Notice of special meetings of the Board of Directors may also be given to any director by (i) telephone, (ii) telecopier, (iii) telex or (iv) telegraph or cable, and in the latter event the notice shall be deemed to be given at the time such notice, addressed to such director at the address hereinbefore provided, shall be transmitted or delivered to and accepted by an authorized telegraph or cable office. 2. Whenever by statute or by the Certificate of Incorporation or by these By-Laws a notice is required to be given, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of any stockholder or director at any meeting thereof shall constitute a waiver of notice of such meeting by such stockholder or director, as the case may be, except as otherwise provided by statute. ARTICLE XXIV Alteration of By-Laws These By-Laws may be altered, amended, changed or repealed by vote of the stockholders or at any meeting of the Board of Directors by the vote of a majority of the directors present or as otherwise provided by statute. ARTICLE XXV Indemnification of Corporate Personnel The corporation shall indemnify any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as provided in the Certificate of Incorporation. Expenses incurred by such a director, officer, employee or agent in defending a civil or criminal action, suit or proceeding shall be paid by the corporation as provided in the Certificate of Incorporation. The corporation shall have power to purchase and maintain insurance on behalf of any such persons against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the Certificate of Incorporation. The indemnification provisions of this Article XXV and the Certificate of Incorporation shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any applicable law, by-law, agreement, vote of stockholders or disinterested directors or otherwise. The provisions of this Article XXV and Article EIGHTH of the Certificate of Incorporation shall be deemed to be a contract between the corporation and each person who serves as such director, officer, employee or agent of the corporation in any such capacity at any time while this Article XXV and Article EIGHTH of the Certificate of Incorporation are in effect. No repeal or modification of the provisions of this Article XXV and Article EIGHTH of the Certificate of Incorporation nor, to the fullest extent permitted by law, any modification of law shall adversely affect any right or protection of a director, officer, employee or agent of the corporation then existing at the time of such repeal or modification. EX-10 3 Exhibit 10.11 ANNUAL INCENTIVE PLAN OF FREEPORT-McMoRan COPPER & GOLD INC. ARTICLE I PURPOSE OF PLAN SECTION 1.1. The purpose of the Annual Incentive Plan of Freeport-McMoRan Copper & Gold Inc. (the "Plan") is to provide incentives for senior executives whose performance in fulfilling the responsibilities of their positions can have a major impact on the profitability and future growth of Freeport-McMoRan Copper & Gold Inc. (the "Company") and its subsidiaries. ARTICLE II ADMINISTRATION OF THE PLAN SECTION 2.1. Subject to the authority and powers of the Board of Directors in relation to the Plan as hereinafter provided, the Plan shall be administered by a Committee designated by the Board of Directors consisting of two or more members of the Board each of whom is a "non- employee director" within the meaning of Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934. The Committee shall have full authority to interpret the Plan and from time to time to adopt such rules and regulations for carrying out the Plan as it may deem best; provided, however, that the Committee may not exercise any authority otherwise granted to it hereunder if such action would have the effect of increasing the amount of an Award to any Covered Officer. All determinations by the Committee shall be made by the affirmative vote of a majority of its members, but any determination reduced to writing and signed by a majority of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. All decisions by the Committee pursuant to the provisions of the Plan and all orders or resolutions of the Board of Directors pursuant thereto shall be final, conclusive and binding on all persons, including the Participants, the Company and its subsidiaries and their respective equity holders. ARTICLE III ELIGIBILITY FOR AND PAYMENT OF AWARDS SECTION 3.1. Subject to the provisions of the Plan, in each calendar year the Committee may select any of the following to receive Awards under the Plan with respect to such year and determine the amounts of such Awards: (a) any person providing services as an officer of the Company or a Subsidiary, whether or not employed by such entity, including any person who is also a director of the Company, (b) any salaried employee of the Company or a Subsidiary, including any director who is also an employee of the Company or a Subsidiary, (c) any officer or salaried employee of an entity with which the Company has contracted to receive executive, management or legal services who provides services to the Company or a Subsidiary through such arrangement and (d) any person who has agreed in writing to become a person described in clauses (a), (b) or (c) within not more than 30 days following the date of grant of such person's first Award under the Plan. SECTION 3.2. Subject to the provisions of the Plan, Awards with respect to any year shall be paid to each Participant at such time established by the Committee following the determination of the amounts of such Awards, which payment shall in no event be later than February 28 of the year following such Award Year. SECTION 3.3. Notwithstanding the provisions of Section 3.2, if, prior to the date established by the Committee for any Award Year, a Participant shall so elect, in accordance with procedures established by the Committee, all or any part of an Award to such Participant with respect to such Award Year shall be deferred and paid in one or more periodic installments, not in excess of ten, at such time or times before or after the date of such Participant's Termination of Employment, but not later than ten years after such date of Termination of Employment, as shall be specified in such election. If and only if any Award or portion thereof is so deferred for payment after December 31 of the year following such Award Year, such Award or portion thereof, as the case may be, shall, commencing with January 1 of the year following such Award Year, accrue interest at a rate equal to the prime commercial lending rate announced from time to time by The Chase Manhattan Bank, N.A. (compounded quarterly) or by another major national bank headquartered in New York, New York and designated by the Committee. If such Participant's Termination of Employment occurs for any reason other than death, retirement under the Company's retirement plan, or retirement with the consent of the Company outside the Company's retirement plan and if, on the date of such Termination of Employment, there remain unpaid any installments of Awards which have been deferred as provided in this Section 3.3, the Committee may, in its sole discretion, authorize payment to the Participant of the aggregate amount of such unpaid installments in a lump sum, notwithstanding such election. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or assistant officers of the Company its authority set forth in the immediately preceding sentence, subject to such terms and limitations as the Committee shall determine. SECTION 3.4. (a) Notwithstanding the provisions of Sections 3.1, 3.2, 3.3, 4.2(a), and 4.2(b) hereof, any Award to any Covered Officer shall be granted in accordance with the provisions of this Section 3.4. (b) All Awards to Covered Officers under the Plan will be made and administered by two or more members of the Committee who are also "outside directors" within the meaning of Section 162(m). (c) The Committee shall assign Participant Shares of the Plan Funding Amount to those Covered Officers whom the Committee designates as Participants for that Award Year (which Participant Shares in the aggregate may not exceed 100% of the Plan Funding Amount). The maximum annual Award that may be made to any Covered Officer for an Award Year is 60% of the Plan Funding Amount. (d) If the Plan Funding Amount with respect to an Award Year is to be adjusted to exclude the effect of material changes in accounting policies or practices, material acquisitions or dispositions of property or other unusual items on the Plan Funding Amount, the Committee must so provide at the time that the Participant Shares of the Plan Funding Amount for that Award Year are assigned or within the first 90 days of the Award Year, if permitted under Section 162(m). (e) Any provision of the Plan to the contrary notwithstanding, no Covered Officer shall be entitled to any payment of an Award with respect to a calendar year unless the members of the Committee referred to in Section 3.4(b) hereof shall have certified the Participant Share for each Covered Officer, the Plan Funding Amount for such year and that the condition of Section 4.1 hereof has been met for such year. ARTICLE IV GENERAL PROVISIONS SECTION 4.1. Any provision of the Plan to the contrary notwithstanding, no Award shall be made pursuant to Section 3.1 or 3.4 with respect to any calendar year if the average of the Return on Investment for such calendar year and each of the four preceding calendar years, after giving effect to the aggregate amount (if any) that was awarded or credited with respect to such prior years and the aggregate amount that would otherwise have been so awarded or credited with respect to such calendar year, would be less than 6%. SECTION 4.2. (a) In determining the aggregate amount awarded to Participants under the Plan for any calendar year, the Committee shall consider as a guideline that the aggregate amount of all Awards granted with respect to any calendar year should not exceed two and one-half percent of Net Cash Provided by Operating Activities for such year. (b) If Managed Net Income or Total Investment of Capital for any year shall have been affected by special factors (including material changes in accounting policies or practices, material acquisitions or dispositions of property, or other unusual items) which in the Committee's judgment should or should not be taken into account, in whole or in part, in the equitable administration of the Plan, the Committee may, for any purpose of the Plan, adjust Managed Net Income or Total Investment of Capital and make payments and reductions accordingly under the Plan; provided that, except as provided in Section 3.4(d) hereof, the Committee shall not take any such adjustment into account in calculating Awards to Covered Officers if the effect of such adjustment would be to increase the Plan Funding Amount. (c) Notwithstanding the provisions of subparagraphs (a) and (b) above, the amount available for the grant of Awards under the Plan to Covered Officers with respect to a calendar year shall be equal to the Plan Funding Amount for such year and, except as specified under Section 3.4(c), any adjustments made in accordance with or for the purposes of subparagraphs (a) or (b) that would have the effect of increasing the Plan Funding Amount shall be disregarded for purposes of calculating Awards to Covered Officers. The Committee may, in the exercise of its discretion, determine that the aggregate amount of all Awards granted to Covered Officers with respect to a calendar year shall be less than the Plan Funding Amount for such year, but the excess of such Plan Funding Amount over such aggregate amount of Awards granted to Covered Officers shall not be available for any Awards to Covered Officers with respect to future years. In addition, the Committee may, in the exercise of its discretion, reduce or eliminate the amount of an Award to a Covered Officer otherwise calculated in accordance with the provisions of Section 3.4 prior to payment thereof. Any reduction of an Award shall not accrue to the benefit of any other Covered Officer. SECTION 4.3. A Participant may designate in writing a beneficiary (including the trustee or trustees of a trust) who shall upon the death of such Participant be entitled to receive all amounts which would have been payable hereunder to such Participant. A Participant may rescind or change any such designation at any time. Except as provided in this Section 4.3, none of the amounts which may be payable under the Plan may be assigned or transferred otherwise than by will or by the laws of descent and distribution. SECTION 4.4. All payments made pursuant to the Plan shall be subject to withholding in respect of income and other taxes required by law to be withheld, in accordance with procedures to be established by the Committee. SECTION 4.5. The selection of an individual for participation in the Plan shall not give such Participant any right to be retained in the employ of the Company or any of its subsidiaries, and the right of the Company or any such subsidiary to dismiss or discharge any such Participant, or to terminate any arrangement pursuant to which any such Participant provides services to the Company, is specifically reserved. The benefits provided for Participants under the Plan shall be in addition to, and shall in no way preclude, other forms of compensation to or in respect of such Participants. SECTION 4.6. The Board of Directors and the Committee shall be entitled to rely on the advice of counsel and other experts, including the independent public accountants for the Company. No member of the Board of Directors or of the Committee or any officers of the Company or its subsidiaries shall be liable for any act or failure to act under the Plan, except in circumstances involving bad faith on the part of such member or officer. SECTION 4.7. Nothing contained in the Plan shall prevent the Company or any subsidiary or affiliate of the Company from adopting or continuing in effect other compensation arrangements, which arrangements may be either generally applicable or applicable only in specific cases. ARTICLE V AMENDMENT OR TERMINATION OF THE PLAN SECTION 5.1. The Board of Directors may at any time terminate, in whole or in part, or from time to time amend the Plan, provided that, except as otherwise provided in the Plan, no such amendment or termination shall adversely affect any Awards previously made to a Participant and deferred by such Participant pursuant to Section 3.3. In the event of such termination, in whole or in part, of the Plan, the Committee may in its sole discretion direct the payment to Participants of any Awards not theretofore paid out prior to the respective dates upon which payments would otherwise be made hereunder to such Participants, and in a lump sum or installments as the Committee shall prescribe with respect to each such Participant. The Board may at any time and from time to time delegate to the Committee any or all of its authority under this Section 5.1. ARTICLE VI DEFINITIONS SECTION 6.1. For the purposes of the Plan, the following terms shall have the meanings indicated: (a) Award: The grant of an award of cash by the Committee to a Participant pursuant to Section 3.1 or 3.4. (b) Award Year: Any calendar year or portion thereof with respect to which an Award may be granted. (c) Board of Directors: The Board of Directors of the Company. (d) Committee: The Committee designated pursuant to Section 2.1. Until otherwise determined by the Board of Directors, the Corporate Personnel Committee designated by such Board shall be the Committee under the Plan. (e) Covered Officer: At any date, (i) any individual who, with respect to the previous taxable year of the Company, was a "covered employee" of the Company within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, and the rules promulgated thereunder by the Internal Revenue Service of the Department of the Treasury, provided, however, the term "Covered Officer" shall not include any such individual who is designated by the Committee, in its discretion, at the time of any grant or at any subsequent time, as reasonably expected not to be such a "covered employee" with respect to the current taxable year of the Company and (ii) any individual who is designated by the Committee, in its discretion, at the time of any grant or at any subsequent time, as reasonably expected to be such a "covered employee" with respect to the current taxable year of the Company or with respect to the taxable year of the Company in which any Award will be paid to such individual. (f) Managed Net Income: With respect to any year, the sum of (i) the net income (or net loss) of the Company and its consolidated subsidiaries for such year as reviewed by the Company's independent auditors and released by the Company to the public; plus (or minus) (ii) the minority interests' share in the net income (or net loss) of the Company's consolidated subsidiaries for such year as reviewed by the Company's independent auditors and released by the Company to the public; plus (or minus) (iii) the effect of changes in accounting principles of the Company and its consolidated subsidiaries for such year plus (or minus) the minority interests' share in such changes in accounting principles as reviewed by the Company's independent auditors and released by the Company to the public. (g) Net Cash Provided by Operating Activities: With respect to any year, the net cash provided by operating activities of the Company and its consolidated subsidiaries for such year as reviewed by the Company's independent auditors and released by the Company to the public. (h) Net Interest Expense: With respect to any year, the net interest expense of the Company and its consolidated subsidiaries for such year as reviewed by the Company's independent auditors and released by the Company to the public. (i) Participant: An individual who has been selected by the Committee to receive an Award. (j) Participant Share: The percentage of the Plan Funding Amount assigned to a Covered Employee by the Committee. (k) Plan Funding Amount: With respect to any year, two and one-half percent of Net Cash Provided by Operating Activities for such year. (l) Return on Investment: With respect to any year, the result (expressed as a percentage) calculated according to the following formula: a + (b - c) ----------- d in which "a" equals Managed Net Income for such year, "b" equals Net Interest Expense for such year, "c" equals Tax on Net Interest Expense for such year, and "d" equals Total Investment of Capital for such year. (m) Section 162(m): Section 162(m) of the Internal Revenue Code of 1986, as amended, and rules promulgated by the Internal Revenue Service thereunder. (n) Subsidiary: (i) Any corporation or other entity in which the Company possesses directly or indirectly equity interests representing at least 50% of the total ordinary voting power or at least 50% of the total value of all classes of equity interests of such corporation or other entity and (ii) any other entity in which the Company has a direct or indirect economic interest that is designated as a Subsidiary by the Committee. (o) Tax on Net Interest Expense: With respect to any year, the tax on the net interest expense of the Company and its consolidated subsidiaries for such year calculated at the appropriate statutory income tax rate for such year as reviewed by the Company's independent auditors. (p) Termination of Employment: Solely for purposes of Section 3.3 hereof, the cessation of the rendering of services, whether or not as an employee, to any and all of the following entities: the Company, any subsidiary of the Company, Freeport-McMoRan Inc., any subsidiary of Freeport-McMoRan Inc., McMoRan Oil & Gas Co., any subsidiary of McMoRan Oil & Gas Co., and any law firm rendering services to any of the foregoing entities provided such law firm consists of at least two or more members or associates who are or were officers of the Company or any subsidiary of the Company. (q) Total Investment of Capital: With respect to any year, the sum of (i) the weighted average of the stockholders' equity in the Company and its consolidated subsidiaries for such year, (ii) the weighted average of the minority interests in the consolidated subsidiaries of the Company for such year, (iii) the weighted average of the redeemable preferred stock of the Company for such year and (iv) the weighted average of the long-term debt of the Company and its consolidated subsidiaries for such year, all as shown in the quarterly balance sheets of the Company and its consolidated subsidiaries for such year. EX-10 4 Exhibit 10.13 FREEPORT-McMoRan COPPER & GOLD INC. PERFORMANCE INCENTIVE AWARDS PROGRAM 1. Purpose. The purpose of the Performance Incentive Awards Program (the "Plan") of Freeport-McMoRan Copper & Gold Inc. (the "Company") is to provide greater incentives for certain key management, professional and technical employees whose performance in fulfilling the responsibilities of their positions can significantly affect the performance of the Company or its operating units. The Plan provides an opportunity to earn additional compensation in the form of cash incentive payments based on the employee's individual performance and on the results achieved by the Company and by the operating or staff unit for which the employee performs services. 2. Administration. The Plan shall be administered by the Chairman of the Board of the Company who shall have full authority to interpret the Plan and from time to time adopt rules and regulations for carrying out the Plan, subject to such directions as the Corporate Personnel Committee (the "Committee") of the Company's Board of Directors may give, either as guidelines or in particular cases. In connection with his administration of the Plan, the Chairman of the Board may seek the views and recommendations of the Company's Operating Committee. 3. Eligibility for Participation. Each year the Chairman of the Board shall select the key managerial, professional or technical employees of the Company or of any of its subsidiaries who shall be eligible for participation in the Plan during that year. The Chairman of the Board may in his discretion make such selection, in whole or in part, on the basis of minimum salary levels, or position-point levels. The selection of an employee for eligibility in a particular year shall not constitute entitlement either to an incentive payment under the Plan for that year or to selection for eligibility in any subsequent year. Selection of employees for eligibility in a particular year will ordinarily be made in January of that year, but selection of any employee or employees may be made at any subsequent time or times in such year. No officer or employee shall receive any incentive payment under the Plan for any year during which such officer or employee was a participant in the Freeport-McMoRan Copper & Gold Inc. Annual Incentive Plan. 4. Determination of Target Incentives. At the time each employee is selected for eligibility in the Plan for a particular year, the Chairman of the Board shall determine a target incentive or a target incentive range for the employee with respect to that year. Such incentive or range shall be indicative of the incentive payment which the employee might expect to receive on the basis of strong performance by such employee, by the Company and by such employee's operating or staff unit, having regard to such performance standards and objectives as may be established with respect to that year. 5. Cash Incentive Payments. After the end of each year the Chairman of the Board shall evaluate, or cause to be evaluated, the performance of each employee selected for eligibility under the Plan for that year, as well as the performance of the Company and the employee's operating or staff unit. Based on such evaluation, the Chairman of the Board shall determine whether a cash incentive payment shall be made to such employee for that year and, if so, the amount of such payment. The aggregate amount of all such incentive payments shall be submitted to the Committee for its approval. Subject to such approval, each such payment (less applicable withholding and other taxes) shall be made at such time established by the Chairman of the Board or the Committee after such approval, which shall in no event be later than February 28 of the year following the year for which the incentive payments are made. An individual who has been awarded an incentive payment for a particular year need not be employed by the Company or any of its subsidiaries at the time of payment thereof to be eligible to receive such payment. Notwithstanding any of the foregoing to the contrary, if an individual selected for eligibility under the Plan for a particular year should cease to be employed by the Company and its subsidiaries for any reason prior to the end of such year, the Chairman of the Board shall evaluate, or cause to be evaluated, the performance of such employee and the employee's operating or staff unit for the portion of such year prior to such cessation of employment. Based on such evaluation, the Chairman of the Board shall determine whether a cash incentive payment shall be made to such employee for that year and, if so, the amount of such payment. The aggregate amount of all such incentive payments shall be submitted to the Committee for its approval. Subject to such approval, each such payment (less applicable withholding and other taxes) shall be made at such time established by the Chairman of the Board or the Committee after such approval, which may be made at any time during the year for which such incentive payments are made but shall in no event be later than February 28 of the year following such year. 6. Optional Deferral of Payments. If, prior to the date established by the Chairman of the Board or the Committee for any year for which incentive payments are made, an employee selected for participation in the Plan shall so elect, in accordance with procedures established by the Chairman of the Board, all or any part of a cash incentive payment to such employee with respect to such year shall be deferred and paid in one or more periodic installments, not in excess of ten, at such time or times before or after the date of such employee's Termination of Employment (as hereinafter defined), but not later than ten years after such date of Termination of Employment, as shall be specified in such election. If and only if any cash incentive payment or portion thereof is so deferred for payment after December 31 of the year following the year for which the incentive payment is made, such cash incentive payment or portion thereof, as the case may be, shall, commencing with January 1 of the year following the year for which the incentive payment is made, be increased at a rate equal to the prime commercial lending rate announced from time to time by The Chase Manhattan Bank, N.A. (compounded quarterly) or at such other rate and in such manner as shall be determined from time to time by the Committee. If such employee's Termination of Employment occurs for any reason other than early or normal retirement under the retirement plan of this corporation or retirement with the consent of this corporation outside the retirement plan of this corporation and if, on the date of such Termination of Employment, there remain unpaid any installments of cash incentive payments which have been deferred as provided in this Section 6, the Committee or the Chairman of the Board may, in its or his discretion, direct the payment to such employee of the aggregate amount of such unpaid installments in a lump sum, notwithstanding such election. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or assistant officers of the Company its authority set forth in the immediately preceding sentence, subject to such terms and limitations as the Committee shall determine. Solely for purposes of this Section 6, the term "Termination of Employment" shall mean the cessation of the rendering of services, whether or not as an employee, to any and all of the following entities: the Company; any subsidiary of the Company; Freeport-McMoRan Inc.; any subsidiary of Freeport-McMoRan Inc.; McMoRan Oil & Gas Co.; any subsidiary of McMoRan Oil & Gas Co.; any corporation or other entity in which any two or more of the aforementioned entities collectively possess, directly or indirectly, equity interests representing at least 50% of the total ordinary voting power or at least 50% of the total value of all classes of equity interests of such corporation or other entity; and any law firm rendering services to any of the foregoing entities provided such law firm consists of at least two or more members or associates who are or were officers of the Company, any subsidiary of the Company, Freeport- McMoRan Inc., any subsidiary of Freeport-McMoRan Inc., McMoRan Oil & Gas Co., or any subsidiary of McMoRan Oil & Gas Co. 7. General Provisions. The selection of an employee for participation in the Plan shall not give such employee any right to be retained in the employ of the Company or any of its subsidiaries, and the right of the Company and of such subsidiary to dismiss or discharge any such employee is specifically reserved. The benefits provided for employees under the Plan shall be in addition to, and in no way preclude, other forms of compensation to or in respect of such employee. 8. Amendment or Termination. The Committee may from time to time amend or at any time terminate the Plan. EX-10 5 Exhibit 10.19 FM SERVICES COMPANY PERFORMANCE INCENTIVE AWARDS PROGRAM 1. Purpose. The purpose of the Performance Incentive Awards Program (the "Plan") of FM Services Company (the "Company") is to provide greater incentives for certain key management, professional and technical employees whose performance in fulfilling the responsibilities of their positions can significantly affect the performance of the Company. The Plan provides an opportunity to earn additional compensation in the form of cash incentive payments based on the employee's individual performance and on the results achieved by the Company and by the staff unit for which the employee performs services. 2. Administration. The Plan shall be administered by the Chairman of the Board of the Company who shall have full authority to interpret the Plan and from time to time adopt rules and regulations for carrying out the Plan, subject to such directions as the Company's Board of Directors may give, either as guidelines or in particular cases. 3. Eligibility for Participation. Each year the Chairman of the Board shall select the key managerial, professional or technical employees of the Company or of any of its subsidiaries who shall be eligible for participation in the Plan during that year. The Chairman of the Board may in his discretion make such selection, in whole or in part, on the basis of minimum salary levels, or position-point levels. The selection of an employee for eligibility in a particular year shall not constitute entitlement either to an incentive payment under the Plan for that year or to selection for eligibility in any subsequent year. Selection of employees for eligibility in a particular year will ordinarily be made in January of that year, but selection of any employee or employees may be made at any subsequent time or times in such year. 4. Determination of Target Incentives. At the time each employee is selected for eligibility in the Plan for a particular year, the Chairman of the Board shall determine a target incentive or a target incentive range for the employee with respect to that year. Such incentive or range shall be indicative of the incentive payment which the employee might expect to receive on the basis of strong performance by such employee, by the Company and by such employee's staff unit, having regard to such performance standards and objectives as may be established with respect to that year. 5. Cash Incentive Payments. After the end of each year the Chairman of the Board shall evaluate, or cause to be evaluated, the performance of each employee selected for eligibility under the Plan for that year, as well as the performance of the Company and the employee's staff unit. Based on such evaluation, the Chairman of the Board shall determine whether a cash incentive payment shall be made to such employee for that year and, if so, the amount of such payment. Each such payment (less applicable withholding and other taxes) shall be made at such time established by the Chairman of the Board, which shall in no event be later than February 28 of the year following the year for which the incentive payments are made. An individual who has been awarded an incentive payment for a particular year need not be employed by the Company or any of its subsidiaries at the time of payment thereof to be eligible to receive such payment. Notwithstanding any of the foregoing to the contrary, if an individual selected for eligibility under the Plan for a particular year should cease to be employed by the Company and its subsidiaries for any reason prior to the end of such year, the Chairman of the Board shall evaluate, or cause to be evaluated, the performance of such employee and the employee's staff unit for the portion of such year prior to such cessation of employment. Based on such evaluation, the Chairman of the Board shall determine whether a cash incentive payment shall be made to such employee for that year and, if so, the amount of such payment. Each such payment (less applicable withholding and other taxes) shall be made at such time established by the Chairman of the Board, which may be made at any time during the year for which such incentive payments are made but shall in no event be later than February 28 of the year following such year. 6. Optional Deferral of Payments. If, prior to the date established by the Chairman of the Board for any year for which incentive payments are made, an employee selected for participation in the Plan shall so elect, in accordance with procedures established by the Chairman of the Board, all or any part of a cash incentive payment to such employee with respect to such year shall be deferred and paid in one or more periodic installments, not in excess of ten, at such time or times before or after the date of such employee's Termination of Employment (as hereinafter defined), but not later than ten years after such date of Termination of Employment, as shall be specified in such election. If and only if any cash incentive payment or portion thereof is so deferred for payment after December 31 of the year following the year for which the incentive payment is made, such cash incentive payment or portion thereof, as the case may be, shall, commencing with January 1 of the year following the year for which the incentive payment is made, be increased at a rate equal to the prime commercial lending rate announced from time to time by The Chase Manhattan Bank, N.A. (compounded quarterly) or at such other rate and in such manner as shall be determined from time to time by the Chairman of the Board. If such employee's Termination of Employment occurs for any reason other than early or normal retirement under the retirement plan of this corporation or retirement with the consent of this corporation outside the retirement plan of this corporation and if, on the date of such Termination of Employment, there remain unpaid any installments of cash incentive payments which have been deferred as provided in this Section 6, the Chairman of the Board may, in his discretion, direct the payment to such employee of the aggregate amount of such unpaid installments in a lump sum, notwithstanding such election. Subject to the terms of the Plan and applicable law, the Chairman of the Board may delegate to one or more officers or assistant officers of the Company his authority set forth in the immediately preceding sentence, subject to such terms and limitations as the Chairman of the Board shall determine. Solely for purposes of this Section 6, the term "Termination of Employment" shall mean the cessation of the rendering of services, whether or not as an employee, to any and all of the following entities: the Company; any subsidiary of the Company; Freeport-McMoRan Inc.; any subsidiary of Freeport-McMoRan Inc.; Freeport-McMoRan Copper & Gold Inc.; any subsidiary of Freeport-McMoRan Copper & Gold Inc.; McMoRan Oil & Gas Co.; any subsidiary of McMoRan Oil & Gas Co.; and any corporation or other entity in which any two or more of the aforementioned entities collectively possess, directly or indirectly, equity interests representing at least 50% of the total ordinary voting power or at least 50% of the total value of all classes of equity interests of such corporation or other entity. 7. General Provisions. The selection of an employee for participation in the Plan shall not give such employee any right to be retained in the employ of the Company or any of its subsidiaries, and the right of the Company and of such subsidiary to dismiss or discharge any such employee is specifically reserved. The benefits provided for employees under the Plan shall be in addition to, and in no way preclude, other forms of compensation to or in respect of such employee. 8. Amendment or Termination. The Board of Directors of the Company may from time to time amend or at any time terminate the Plan. EX-10 6 Exhibit 10.26 December 7, 1998 Mr. B. M. Rankin, Jr. 4500 Roland Avenue Unit #804 Dallas, TX 75219 Supplemental Agreement Providing an Extentsion to Consulting Agreement of January 1, 1991 Dear Mr. Rankin: I am writing in reference to the consulting agreement of January 1, 1991, (the "Consulting Agreement") between you and Freeport-McMoRan Inc. and to the Supplemental Agreement between you and FM Serivces Company (the "Company") dated December 15, 1997. By way of this Supplemental Agreement, the Company would like to extend your Consulting Agreement through December 31, 2000, with an increase in your quarterly consulting fee, effective January 1, 1999, to $60,000. All other terms and conditions of the Consulting Agreement and Supplemental Agreement dated December 15, 1997, shall remain unchanged. Please confirm that the foregoing correctly sets forth our understanding with respect to this matter by signing both originals of this Supplemental Agreement and returning one to me. Very truly yours, /s/Michael J. Arnold Michael J. Arnold Agreed to and accepted this 18th Day of December, 1998 By:/s/ B.M. Rankin, Jr. --------------------- B.M. Rankin, Jr. EX-10 7 Exhibit 10.30 January 25, 1999 Mr. Rene L. Latioliss 2305 Barton Creek Boulevard Villa 42 Austin, Teexas 78735 Dear Rene: This will confirm the agreement between the undersigned, FM Services Company (the "Company"), and you with respect to the provision by you of certain consulting services to the Company and its subsidiaries and corporate affiliates (which includes client companies for which services are provided). 1. From January 1, 1999 through December 31, 1999 (the "Consulting Term"), you agree to serve as a consultant to the Company. In your capacity as a consultant, you will provide to the Company, subject to the instruction and direction of its executive officers, consulting advice related to the businesses, operations and prospects of the Company and its subsidiaries and corporate affiliates. You agree to devote such of your time, skill, labor and attention to the performance of any consulting services requested by the Company hereunder as may be necessary for you to render the prompt and effective performance thereof, provided that it is generally understood that you shall only be required to devote yourself to the performance of such duties to the extent contemplated by paragraph 2(vi) of this letter. 2. It is understood and agreed with respect to your undertaking to provide the consulting Services described herein, that: (i) you will perform such consulting services as an independent contractor to, and not as an agent (except in any capacity as an elected officer or director) or employee of the Company or any of its subsidiaries or affiliates, and that, as an independent contractor, you shall have the sole and exclusive right to control and direct details incident to any consulting services required to be provided hereby; (ii) this agreement shall not be deemed or construed to create a partnership, a joint venture, a Mr. Rene L. Latiolais January 25, 1999 Page 2 principal and agent relationship, or any other relationship between you and the Company that would create liability for the Company for your actions; (iii)nothing herein contained shall be construed as giving you any right to be elected or appointed an officer or director of the Company or any of its subsidiaries or corporate affiliates or to retain any such position during the Consulting Term or any extension thereof; (iv) except as otherwise authorized in writing by the Chairman of the Board of the Company or his specific designees, you will not (A) represent or hold yourself out to others that you are an employee or agent of the Company or any of its subsidiaries or corporate affiliates, or (B) have any authority to negotiate or execute any agreements, contracts and commitments on behalf of, or otherwise binding upon, the Company or such subsidiary or corporate affiliate other than such authority which derives from your occupying the position of an elected officer or director of the Company or any of its subsidiaries or corporate affiliates; (v) the executive officers of the Company or the subsidiary or corporate affiliate seeking your consulting services will, insofar as it is reasonably practicable, consider your convenience in the timing of their requests, and your failure or inability, by reason of temporary illness or other cause beyond your control or because of absence for reasonable periods, to respond to such requests during any such temporary period shall not be deemed to constitute a default on your part in the performance hereunder of such services; (vi) subject to the provisions of the foregoing clause (v), during the Consulting Term you will make yourself available for the performance of services hereunder for one-third of your time, it being understood that this shall constitute, on the average, seven (7) days per month during the Consulting Term. 3. As an independent contractor of the Company, you acknowledge and agree that, except as otherwise specifically provided herein, Mr. Rene L. Latiolais January 25, 1999 Page 3 (i) you will not be entitled to any insurance, pension, vacation or other benefits customarily afforded to employees of the Company; (ii) you will not be treated by the Company as an employee for purposes of any federal or state law regarding income tax withholding or for purposes of contributions required by any unemployment insurance or compensatory program; and (iii)you will be solely responsible for the payment of any taxes or assessments imposed on you on account of the payment of the consulting fee to, or performance of consulting services by you pursuant to this agreement. 4. During the term hereof, you agree that you will not, without the prior written consent of the Company, (i) render any services, whether or not for compensation, to other individuals, firms, corporations or entities in connection with any matters that may involve interests adverse to the Company or any of its subsidiaries or affiliates, or (ii) engage in any business or activity detrimental to the business or interests of the Company or any of its subsidiaries or affiliates. 5. You acknowledge and agree that any inventions or discoveries, whether or not patentable, which you may make (either alone or in conjunction with others) as a result of performing services hereunder shall be the sole and exclusive property of the Company. You agree to communicate to the Company or its representatives all facts known to you concerning such matters, and to execute any documents or instruments necessary to transfer to the Company any inventions or discoveries to which the Company may become entitled under this agreement and should the Company decide to become entitled under this agreement, and should the Company decide to patent any such invention or discovery, you will assist in the preparation of patent applications and execute and assign such patent applications, and execute such other documents, as may be necessary. 6. You acknowledge and agree to comply with the confidentiality and other provisions set forth in Appendix A to this Agreement, the terms of which are incorporated by reference into, and made a part of this Agreement. 7. In the event of a breach or threatened breach by you of Sections 5 or 6 of this agreement during or after the Mr. Rene L. Latiolais January 25, 1999 Page 4 term hereof, the Company shall be entitled to injunctive relief restraining you from violating such paragraphs. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedy at law or inequity it may have in the event of your breach or threatened breach of this agreement. 8. For the consulting service provided by you hereunder during the Consulting Term, the Company agrees: (i) to pay to you an annual consulting fee of $330,000, such fee to be payable monthly in arrears in $27,000.00 amounts. It is understood by you that the amounts payable to you pursuant to this Consultint Agreement shall be in full satisfaction of any compensation to which you would otherwise b entitled as a director of the Company or any of its subsidiaries or affiliates, with you hereby relinquishing any claim to such amounts; (ii) that additional compensation potential in the form of options in McMoRan Exploration Company stock will be considered by the senior executives of that company from time to time; (iii)that the use of corporate aircraft from time to time will be made available to you for business purposes subject to availability, urgency, cost considerations and overall efficiency of business travel; (iv) to reimburse you for, or advance to you, all reasonable out-of-pocket travel and other expenses incurred by you at the request of the Company in connection with your performance of services hereunder. Such expenses will be reimbursed or advanced promptly after your submission to the company of expense statements in such reasonable detail as the Company may require; (v) to make available to you secretarial assistance, the use of a portable phone and laptop computer, and a suitable office at the Company's headquarters, for which you will pay to the Company a monthly amount of $2,500, such amount to be paid no later than the last day of each month; (vi) to make available to you, at no additional charge, an annual physical, a parking space, Mr. Rene L. Latiolais January 25, 1999 Page 5 access to the executive dining room and fitness center, participation in the Company's financial tax return preparation and financial counseling program, and membership privileges at English Turn Country Club for business entertainment purposes. Any expenses incurred at these clubs that are not business related will be borne by you personally. 9. Nothing in this agreement shall affect in any way any of your previously accrued and vested pension or other rights or benefits under any of the plans or agreements of the Company or any of its subsidiaries of affiliates. 10. (i) The term of this agreement shall be the Consulting Term, subject to any earlier termination of your status as a consultant pursuant to the terms of subparagraph (ii) of this paragraph. This agreement shall be automatically continued for like Consulting Terms of one year unless and until canceled by either party upon thirty (30) days written notice prior to the end of any Consulting Term. Following the termination of this agreement, each party shall have the right to enforce all rights and obligations under the terms of this agreement. (ii) This agreement may be terminated, upon notice given in the manner provided in paragraph 12 hereof, prior to the expiration of the Consulting Term: (A)by the mutual written consent of the Company and you; (B)by the Company, upon your death, or your physical or mental incapacity; (C)by the Company in the event of your (1) willful failure to perform substantially the consulting services contemplated hereby, (2) breach of any of the other covenants of this agreement, or (3) engaging in gross misconduct detrimental to the Company; or (D)by the Company for any other reason. If this agreement is terminated by the Company prior to the expiration of the Consulting Term for any reason other than those set forth in subparagraphs 10 (ii)(A), (B) or (C) above, then the company shall pay in a lump sum in cash within 30 days of such termination, the aggregate amount of previously unpaid consulting fees that you would have earned had you served as a consultant through the expiration of the Consulting Term. Mr. Rene L. Latiolais January 25, 1999 Page 6 11. It is hereby understood and agreed that the Company shall indemnify you for serving at the request of the Company as an elected officer or director of any of its subsidiaries or affiliates to the fullest extent permitted by applicable law, and the determination as to whether you have met the standard required for indemnification shall be made in accordance with the articles and bylaws of the applicable entity and with applicable law. It is further understood and agreed that while serving in such capacity you will be covered by the Company's directors and officers insurance policy. 12. Any notice or other communication required hereunder shall be in writing, shall be deemed to have been given and received when delivered in person, or, if mailed, shall be deemed to have been given when deposited in the United States mail, first class, registered or certified, return receipt required, with proper postage prepaid, and shall be deemed to have been received on the third business day hereafter, and shall be addressed as follows: If to the Company, addressed to: Mr. Richard C. Adkerson Chairman of the Board FM Services Company 1615 Poydras Street New Orleans, Louisiana 70112 If to you: Mr. Rene L. Latiolais 2305 Barton Creek Blvd. Villa 42 Austin, Texas 78735 or such other address to which either party shall have notified the other in writing. 13. This agreement is personal to you and the Company and its subsidiaries and shall not be assignable to either party without the prior written consent of the other. This agreement shall be governed by and construed in accordance with the laws of the State of Louisiana. This agreement contains the entire understanding between the Company and you with respect to the subject matter hereof. Further, Consultant confirms that he has not relied upon any representations or statements by the Company as a basis for entering into this agreement that are not contained herein. This agreement may not be amended, modified or extended otherwise than by a written agreement executed by the parties thereto. Mr. Rene L. Latiolais January 25, 1999 Page 7 Please confirm that the foregoing correctly sets forth the agreement between the Company and you by signing and returning to the Company one of the enclosed copies of this letter. Very truly yours, /s/ Michael J. Arnold Michael J. Arnold President FM Services Company I hereby confirm that the foregoing correctly sets forth the agreement between FM Services Company and myself. /s/ Rene L. Latiolais _______________________________ Rene L. Latiolais January 28, 1999 _______________________________ Date EX-12 8 EXHIBIT 12.1 FREEPORT-McMoRan COPPER & GOLD INC. Computation of Ratio of Earnings to Fixed Charges:
Years Ended December 31, -------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (In Thousands) Income from continuing operations $153,848 $245,108 $226,249 $253,618 $130,241 Add: Provision for income taxes 170,566 231,315 247,168 234,044 123,412 Minority interests' share of net income 37,012 40,343 48,529 57,100 25,439 Interest expense 205,588 151,720 117,291 50,080 - Rental expense factor(a) 323 240 457 1,002 2,333 -------- -------- -------- -------- -------- Earnings available for fixed charges $567,337 $668,726 $639,694 $598,844 $281,425 ======== ======== ======== ======== ======== Interest expense $205,588 $151,720 $117,291 $ 50,080 $ - Capitalized interest 19,612 23,021 22,979 49,758 35,110 Rental expense factor(a) 323 240 457 1,002 2,333 -------- -------- -------- -------- -------- Fixed charges $225,523 $174,981 $140,727 $100,840 $ 37,443 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges(b) 2.5x 3.8x 4.5x 5.9x 7.5x ==== ==== ==== ==== ====
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends:
Years Ended December 31, -------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (In Thousands) Income from continuing operations $153,848 $245,108 $226,249 $253,618 $130,241 Add: Provision for income taxes 170,566 231,315 247,168 234,044 123,412 Minority interests' share of net income 37,012 40,343 48,529 57,100 25,439 Interest expense 205,588 151,720 117,291 50,080 - Rental expense factor(a) 323 240 457 1,002 2,333 -------- -------- -------- -------- -------- Earnings available for fixed charges $567,337 $668,726 $639,694 $595,844 $281,425 ======== ======== ======== ======== ======== Interest expense $205,588 $151,720 $117,291 $ 50,080 $ - Capitalized interest 19,612 23,021 22,979 49,758 35,110 Rental expense factor(a) 323 240 457 1,002 2,333 Preferred dividends 65,847 65,896 101,083 101,125 94,251 -------- -------- -------- -------- -------- Fixed charges $291,370 $240,877 $241,810 $201,965 $131,694 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges(b) 1.9x 2.8x 2.6x 3.0x 2.1x ==== ==== ==== ==== ====
a. Portion of rent deemed representative of an interest factor. b. For purposes of 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. EX-13 9 WORKING TOWARD SUSTAINABLE DEVELOPMENT 1998 ECONOMIC, SOCIAL & ENVIRONMENTAL REPORT Introduction. Sustainable development balances economic, social and environmental issues in a way that meets the needs of the present without compromising the ability of future generations to meet their own needs. Achieving sustainable development is perhaps a greater challenge for a mining company than for other industries and businesses, because, by its very nature, mining actually depletes a natural resource. However, we believe the social and economic benefits for the local people - including education (pictured below), training in entrepreneurial skills and the transfer of technology - enable local prosperity to continue even after mine closure through learned pursuits such as agriculture on reclaimed lands and new businesses based on using acquired skills rather than a mining economy. Mining occurs because its products are needed for one of the three elements of sustainable development: the economy. Copper and gold produced by Freeport-McMoRan Copper & Gold Inc. (FCX) through its principal operating unit, P.T. Freeport Indonesia Company [Picture] (PT-FI), and the copper refined at our copper smelting unit in Spain, Atlantic Copper, S.A. (Atlantic), are essential. They provide electrical power, protect drinking water with copper plumbing and are used for virtually every aspect of technology, transportation, communication, business and industry in the developed and the developing world. While these metals are among the most recyclable and recycled materials in use, recycling alone - which provides for some 38 percent of annual copper consumption - cannot meet world demand. In helping meet that demand, FCX has earned a reputation, through operating innovations and efficiencies, as a low-cost leader in the industry. It is our goal - - through minimizing negative and maximizing positive economic, social and environmental impacts - to also earn a reputation as an industry leader in working toward sustainable development. We believe we are well on our way, and we are committed to a continuous search for ways to improve in every aspect of our operations. Beginning with the first Contract of Work (COW) in 1967 and throughout its history of developing world-class ore deposits at the Grasberg complex in Irian Jaya, Indonesia, FCX has found technological solutions to seemingly insurmountable obstacles in this once-remote part of the world. Yet the goal of managing our impacts in this difficult environment and among a complex mosaic of unique peoples while working toward sustainable development may be among the biggest challenges we have faced. Nevertheless, we regard this effort to be our responsibility. The company's view of its duty, responsibilities and commitments in these areas are clearly stated in the Environmental Policy and Social and Human Rights Policy, both of which have been approved by the FCX Board of Directors. We have committed to constantly assess and report on our progress and we have done so with the Dames & Moore Environmental Audit and the LABAT-Anderson Social Audit. Both audits were carried out by independent, highly qualified experts whose principal findings and recommendations were publicized and implemented in 1996 and 1997. A second independent environmental audit will be done in the second half of 1999. We have also committed to consult with other stakeholders and consider their concerns; and to listen to our critics and implement their suggestions where appropriate. During the past three years, we provided significant additional information in our Annual Report to shareholders with new Environmental & Social Responsibility sections. FCX's Social and Human Rights Policy and Environmental Policy are available to interested parties on our Internet web site, "www.fcx.com," along with the results of the independent audits and up-to-date information on our environmental and social programs. In addition, our smelting and refining unit in Spain this year produced the Atlantic Copper Environmental Report, a comprehensive publication summarizing all of Atlantic's key environmental commitments, activities and performance for the past three years. This is also available on our web site. This expanded report, "Working Toward Sustainable Development," is another important step. Besides providing information on economic, social and environmental issues and events from 1998, this report creates benchmarks and provides significant new data that will be useful in tracking our progress as we work toward sustainable development throughout our operations. 6 P. T. FREEPORT INDONESIA COMPANY I. ECONOMIC IMPACTS There are many ways in which PT-FI's operations benefit the economies of Irian Jaya and Indonesia. These financial benefits (Figure 1) are derived through the payment of taxes, dividends and royalties; voluntary economic development programs, such as the Freeport Fund for Irian Jaya Development (FFIJD); domestic re-investment; infrastructure development; employment; and the purchase and use of local and national goods. In three of the last five years, PT-FI has been the largest taxpayer in the Republic of Indonesia. In addition, it pays royalties on all payable metals removed from the ground. Since the beginning of 1992, these direct benefits to Indonesia have totaled over $1.25 billion. Taxes and royalties have been paid to the central government in Jakarta and then spent or distributed according to government policy and priorities. Indonesia's central and regional governments are currently discussing changing the policy concerning the distribution of such revenues so that a greater portion would benefit the regional government and, in our case, development in Irian Jaya. PT-FI supports this change. In light of its substantially expanded production capabilities, PT-FI is discussing with the GOI the payment of voluntary additional royalties on metal from production above 200,000 MTPD in amounts for copper equal to the COW royalty and for gold and silver equal to twice the COW royalties. Therefore, including the payment of COW royalties, the total of the royalties paid on copper net revenues from production above 200,000 MTPD would be double the amount of the COW royalty; and the total of the royalties paid on gold and silver sales from production above 200,000 MTPD would be triple the amount of the COW royalties. The additional royalties would be effective January 1, 1999. Because in large part mineral royalties under GOI regulations are remitted to the provinces from which the minerals are extracted, PT-FI offered the voluntary additional royalties to provide additional support to the local governments and people of Irian Jaya. Since we began development activities 30 years ago, PT-FI has made significant investments in infrastructure both for the use of the company and for the public in southern Irian Jaya. This includes medical facilities, roads, an airport and heliports, schools, housing, community buildings and places of worship. PT-FI is also one of the largest private employers in Indonesia and by far the largest in Irian Jaya. At the end of 1998, PT-FI directly employed 6,350 people and another 6,250 workers were employed by companies that provide services locally and exclusively to PT-FI in Irian Jaya. Approximately 17 percent of the employees and other workers referred to above are Irianese. Finally, PT-FI uses as many locally and nationally produced goods as possible. Fig. 1 Financial benefits of PT-FI's operations to the people and Government of Indonesia Graph showing the following data:
1992 1993 1994 1995 1996 1997 1998 (Dollars in millions) Wages, Salaries & Benefits 20 26 38 90 82 98 44 Goods & Services Purchased 80 204 508 425 321 269 241 Domestic Re-Investments 368 486 707 445 438 572 286 Charitable Contributions 8 15 20 22 23 33 32 Dividends, Royalties & Taxes 107 93 117 297 272 237 139
Besides the $1.25 billion paid in direct benefits to the Government of Indonesia (GOI) under PT-FI's new COW from 1992-98, Indonesia has realized another $5.9 billion in indirect benefits in the form of wages and benefits paid to workers, purchases of goods and services, charitable contributions and reinvestments in operations. In all, 87 percent of PT-FI's total revenues have remained in and benefited Indonesia and its people during this period. II. SOCIAL CHANGE AND DEVELOPMENT Background. From the beginning of its operations in Irian Jaya, PT-FI has supported programs to benefit the Amungme and Kamoro tribal people who were the area's traditional inhabitants. When PT-FI began development in Irian Jaya after the signing of its 1967 COW, with a local population numbering only in the hundreds and a relatively small mine, the programs were simple and limited. Houses for local leaders and community infrastructure were built and free medical care was provided to the local people. With the discovery of the world-class Grasberg deposit in 1988 and the years of rapid operational expansion that followed, the needs of the local communities and PT-FI's efforts to respond to them with an array of social and economic programs both spiraled in complexity. PT-FI's resident workforce expanded, particularly during construction, and its attraction as a source of economic opportunity increased, drawing thousands of migrants from other indigenous Irianese tribes over the mountains and into the area. Significantly, the GOI, pursuing its policy of transmigration, also moved thousands of people into the area from other parts of Indonesia. The result was a difficult and at times volatile 7 mixture of Irianese indigenous peoples, who have their own history of interethnic hostility, with Indonesians from other islands who have completely different ethnic and cultural backgrounds. These diverse groups were all brought together in a population that rapidly grew to its present size of some 70,000 individuals, and continues to grow today. Even with PT-FI's assistance, the GOI and the local peoples' leadership organizations were not prepared to manage these changes effectively. Social and Cultural Commitment. PT-FI's history in Irian Jaya has largely involved technical solutions to physical challenges, which fostered what can best be described as a "can-do" approach to tasks, i.e., 1) identify a problem; 2) solve the problem; 3) move on to the next problem. During the 1990s, the company realized that the same approach would not work in seeking to resolve complex social issues. PT-FI is now committed to patiently and carefully building and maintaining positive relationships with the indigenous peoples living in the areas where the company operates and to the continuous improvement of those relationships. Part of this commitment is to provide opportunities for social and economic development for the local people, including special efforts to train and hire people indigenous to each operational area. Another part is to learn more about the local people, their histories and their changing circumstances in order to achieve a greater understanding necessary for building constructive relationships. But perhaps the most important aspect is the commitment to treat the local people with respect and to consult them on important operational issues that impact their communities. PT-FI has also sought to be sensitive to the need of Irian Jaya's unique peoples to preserve their cultures at the same time they are merging with modern development. For this reason, PT-FI has long supported the annual Asmat Art and Cultural Festival and in 1998 sponsored the first Kamoro Art and Cultural Festival, which was highly successful. Human Rights Commitment. Because of the activities of a small separatist group in Irian Jaya, the GOI has stationed armed forces there. There have been a number of clashes between the Indonesian military and the separatists and there have been allegations of human rights violations in connection with some of these incidents. These allegations have been investigated and the individuals in the military who were determined to be involved have been punished. FCX supports and upholds the human rights of all people and has publicly and strongly condemned all human rights violations in Irian Jaya. FCX has applauded the government's arrest, trial, conviction and incarceration of those responsible for human rights violations in Irian Jaya and also encourages and fully supports any legitimate investigation of remaining allegations of human rights violations. There have been numerous investigations of human rights violations in Irian [Picture] Jaya, and none found that any Discussions with local people PT-FI employee participated in provide a better understanding of any violation. Equally important is their culture and history and the company's commitment are necessary for building constructive relationships. through its social programs to proactively work to secure fundamental human rights for all citizens in its area of operations and, through improved communication and increased understanding, to seek in the long term to reduce underlying frictions that are the root cause of situations that lead to human rights violations. Freeport Fund for Irian Jaya Development (FFIJD). In April 1996, PT-FI agreed to commit at least one percent of its revenues for the next 10 years to support village-based, bottom-up health, education, economic and social development programs in its area of operations. This commitment replaced community development programs undertaken by the company that spent a similar amount of money each year. In 1998, PT-FI contributed $13.5 million to the FFIJD. However, the disbursement mechanism initially established to administer the funds was flawed, which resulted in inappropriate funding decisions and expenditures. This situation added to friction with indigenous groups, rather than reducing it as intended by the program. At the recommendation of the LABAT-Anderson auditors and local and church leaders, disbursements from the fund were suspended in August 1997, other than for previously approved and essential programs with ongoing funding commitments, such as malaria control and public health, job training and scholarships for Irianese. PT-FI then joined a dialogue with local and church leaders, 8 government representatives and members of interested non-governmental organizations on how best to restructure the fund to provide for village-based development managed locally from Timika. As 1998 drew toward a close, these discussions successfully culminated with the restructuring of the FFIJD. The new umbrella structure is called the Lembaga Pengembangan Masyarakat-Irian Jaya (LPM-IRJA), or the People's Development Foundation-Irian Jaya. The LPM-IRJA Board of Directors is made up of the head of the local government, currently a Kamoro, a leader of the Amungme people, a leader of the Kamoro people, leaders of the three local churches and a representative of PT-FI. The Board of Directors makes grants from the FFIJD and has oversight for implementation of local development programs through the Implementation Board, which is headed by an Amungme leader and is composed of representatives of all local indigenous groups. The LPM-IRJA Board of Directors has approved a 1999/2000 operational plan and has selected a number of yayasans, or foundations, to implement funded projects. The operational plan provides some type of assistance for all 71 villages in the Mimika district, with the greatest support going to the 29 villages defined by the Amungme and Kamoro as most critically impacted by PT-FI's operations. Another important project will be a new primary care hospital in Timika. Ground has been broken for the 75-bed facility. The team which accomplished the restructuring took care to socialize and communicate the results in all Mimika villages before the implementation of any new programs or projects. Land Rights. FCX and PT-FI acknowledge the special relationship between indigenous peoples and their traditional lands and, like mining companies worldwide, must seek fair compensation for the use of those lands. Under Indonesian law, natural resources are owned by the state for the benefit of all the Indonesian people. Mining companies are allowed to operate and mine these resources as contractors to the government, operating under a GOI-approved COW. However, Indonesian law also provides for giving "recognition" in the form of community benefits to indigenous people for the temporary use of their land. The 1974 "January Agreement" between PT-FI and the Amungme people was an agreement to provide "recognition" for the temporary use of land traditionally used by the Amungme, and is considered by PT-FI and the GOI to be a legally binding release of land under Indonesian law. As part of the 1974 agreement, PT-FI made significant improvements in the infrastructure of the local Amungme communities. In 1974, the impact of mining operations on the Kamoro people in the lowlands was minimal and no recognition was negotiated. By 1997, mine expansion and the construction of the Ajkwa Deposition Area (ADA) (please see Environmental Management section for details) had impacted the lowlands area and some stands of sago palm, as well as some access to traditional fishing areas. With the assistance of the Sejati Foundation, land recognition was negotiated with the Kamoro people living in several villages near the ADA. The recognition plan includes the involvement of the Kamoro themselves in the building of substantial infrastructure for the use of the communities, as well as reclamation and economic development. PT-FI is currently negotiating with Amungme and Kamoro leaders voluntary additional recognition as a reflection of the expanded scope and continuing success of the mining operations. These discussions are part of an ongoing process to resolve issues between the company and the local people. The negotiations are being coordinated by an international group of mediators agreed upon by both parties. Medical Care. PT-FI provides medical care for the local population through free primary medical care in PT-FI hospitals and clinics, preventive medicine and medical education programs. In 1998, non-employee local people made over 35,000 patient visits at PT-FI medical facilities, and 3,750 local people were admitted to health care facilities for an average stay of five days. Preventive medicine and primary medical care are also provided by PT-FI's Malaria Control and Public Health Program. Through intensive home visitation, testing of potential malaria parasite carriers and aggressive treatment, the incidence of malaria has been dramatically reduced. The number of malaria cases in 1998 was down by 52 percent from 1997, which [Picture] itself was 41 percent lower than the Free public health care is previous year. This nearly 70 percent provided in our COW area. decrease over a two-year period is a significant accomplishment given a 12 percent annual population growth. Health education programs have been expanded into elementary schools on the concept of the Integrated Village Health Post, or Posyandu. Homework includes recruitment of mothers and neighbors to attend Posyandu over the two-trimester training period. It is hoped that immunizations and prenatal care offered in these programs will further reduce infant and maternal morbidity and mortality. Testing and long-term treatment for tuberculosis are also undertaken by the Public Health Program. Tuberculosis cases continue to increase due to better case detection and more patients migrating to Timika for treatment in PT-FI's 9 clinic, some of them staying for six months to complete therapy. Rates are nearly 600 per 100,000 population, which is extraordinarily high. Education, Training and Employment. PT-FI takes pride in its record of providing generous wages and benefits and excellent working conditions for all employees. PT-FI's employees (staff and hourly) receive base salaries which are at or above the 75th percentile of comparable employees in the energy and mining sectors in Indonesia. All salaries are substantially above national and regional minimum salaries. In addition, all PT-FI employees working in Irian Jaya receive a remote location allowance (25 percent of base salary) and a cost of living allowance. During the period of financial uncertainty in 1997 and 1998, PT-FI employees received four separate payroll adjustments to help them deal with inflation in Indonesia. For employees whose families live at the company's operations area, PT-FI provides free schooling and medical care; PT-FI pays education and health care allowances for staff employees whose families do not live at the company jobsite. PT-FI's support of employee dependents extends to educational aid and scholarships for study both in Indonesia and abroad. Currently, more than 200 employee dependents receive special scholarships for higher education in Indonesia and overseas. In April 1996, PT-FI agreed to implement training and educational programs sufficient to quadruple the number of Irianese in its work force over the next 10 years and to greatly increase the number of Irianese in management and supervisory positions. At [Picture] the end of 1998, this Training and the transfer of recruitment program was technological skills are two of ahead of schedule. Over our most important sustainable 97 percent of PT-FI development activities. employees are Indonesians and approximately 17 percent of the Indonesian employees are indigenous to Irian Jaya. In April 1996, PT-FI had just over 600 Irianese employees; at the end of December 1998, there were more than 1,100 Irianese employees. To facilitate preparation of local people for employment, PT-FI established a Basic Skills Development Center. Since 1996, more than 280 local residents have received training there. Of those participants, 246 graduated from the program and 186 are already employed. The remaining 60 will be employed by the middle of 1999. The training session that began in January of this year is solely dedicated to training of underground miners. Sixty candidates entered that training class. Viable educational opportunities for Irianese children are perhaps most important for the local people in the long term. PT-FI has supported the government in this effort by opening the company's schools to Amungme children living in the Banti area and by educational aid and scholarship programs for Irianese students from the elementary school level through college. The Tuarek Educational Foundation, named for the recently deceased traditional leader of the Amungme tribe in PT-FI's area, uses funds from the FFIJD to provide school uniforms, tuition, room and board for students seeking to continue their education. PT-FI provided educational assistance to over 4,000 Irianese students in 1998. Utikini Relocation. Over the past decade, thousands of Western Dani, traditional enemies of the Amungme, moved into an area called Utikini below Tembagapura and above the Amungme villages of the Waa Valley - Waa, Banti and Opitawak. The population of Utikini peaked at 2,500, which meant that the Amungme were outnumbered in their own traditional land, a situation that led to tribal battles causing numerous injuries and nine deaths. To relieve tensions, the GOI and PT-FI, in consultation with indigenous leaders and non-governmental organization representatives, created and financed a plan in which the residents of Utikini were given an option. In a series of meetings with affected families, Utikini residents were offered the choice of moving to an area in the lowlands outside Timika or moving back to their home areas. In either case, the residents were given a new home and other benefits as compensation for dismantling their houses in Utikini. Those who moved to the lowlands were also given training and work opportunities, special medical care and educational facilities for their children. The area in which the Utikini settlement was located is undergoing a two-year reclamation project by professional agricultural workers and the local Amungme population. In addition, because it is at the confluence of several river systems, the lower part of the village of Banti has constant danger of flooding. PT-FI, working with the people of Banti, is in the process of moving the residents of the lower part of Banti to new houses built by PT-FI in upper Banti. Social Studies and Cultural Support. In 1997, PT-FI formed a relationship with anthropologists and demographers from the Australian National University and 10 Cenderawasih University in Jayapura to prepare a baseline study documenting the history and contemporary social, economic and cultural situation of the Amungme and Kamoro peoples in PT-FI's operations area. In August 1998, the team presented its first report, which included a number of recommenda-tions to improve communications and understanding between PT-FI and the local people and to strengthen the company's community affairs programs by providing additional financial, development and training resources and by providing for on-site management. Steps are being taken to implement these recommendations. The team also recommended further research, and PT-FI supports this recommendation. III. ENVIRONMENTAL MANAGEMENT Environmental Commitments. FCX and PT-FI are fully committed to minimizing the impact of their mining operations on the surrounding environment and to reclaiming and/or revegetating land that is disturbed by operations. As part of its comprehensive Environmental Policy, FCX is a signatory to the International Council on Metals and the Environment (ICME) Environmental Charter. Through this policy, FCX commits to giving its highest priority to sound environmental management and practices, to providing adequate resources to fulfill that responsibility and to continuous improvement of its environmental performance at every operational site. FCX also commits strongly to supporting scientific research to find the best applicable environmental technologies; to comprehensive monitoring to ensure that its practices are working; and to both internal and external environmental audits to measure performance. PT-FI made a series of specific commitments as part of its AMDAL, which is the Indonesian acronym for the environmental impact assessment process, all of which have been implemented or are being implemented. These commitments, which were approved by the GOI in 1997 and are related to PT-FI's operational expansion, are detailed in the AMDAL approval, issued as a Decree of the State Minister for Environment. They are also listed on the FCX web site. Management and Monitoring. Significant new environmental activities at PT-FI in 1998 centered around the implementation of comprehensive and expanded Environmental Management and Monitoring Plans approved by the GOI in December 1997 as part of the AMDAL. New plans have been developed and implemented [Picture] for the expansion of operations The state-of-the-art environmental and support activities. lab plays a key role in providing Existing plans have been data to PT-FI's environmental enhanced and revised to scientists. reflect changes in current operations. A specific management and monitoring plan now exists for all major aspects of the PT-FI operation and privatized infrastructure. Auditing. FCX's Environmental Policy requires the performance of annual internal environmental audits. The 1998 internal audit concluded that PT-FI's Irian Jaya operations are in material compliance with GOI laws and regulations. In addition, PT-FI has made a commitment to independent external environmental audits by qualified experts every three years, with the results to be made public. The first such audit was in 1996, when PT-FI was the first company in Indonesia to undergo a voluntary external environmental audit of its operations under a new program of the Indonesian government. An independent, internationally qualified environmental consulting firm conducted the audit. The results of that audit were made public and its 33 principal recommendations have been implemented. The second external triennial environmental audit is scheduled for 1999 and its results will also be made public. In addition, the independent consultants conducting this audit will make recommendations for various programs, monitoring data, or other measures to serve as benchmarks against which PT-FI can measure its future environmental progress. ISO 14001 Environmental Management Systems. ISO 14001 is a voluntary international standard that provides a systematic approach to continual improvement by companies in their environmental management systems (EMS). An EMS consists of organizational policies and 11 procedures enacted to ensure that all environmental issues are handled in a quality manner. The system works to minimize the operations impact on the environment and to ensure compliance with regulations. PT-FI is developing a comprehensive EMS, including protocols and program descriptions, for ISO 14001 certification of its Irian Jaya operations in the year 2000. The implementation of an ISO 14001 program is part of PT-FI's 300,000 MTPD expansion AMDAL commitment to the GOI. Tailings Management Plan. Monitoring and refinement of the Tailings Management Program continued in 1998. (Tailings are the finely ground natural rock left over from the processing of copper ore by physical grinding and flotation methods.) The construction of the Ajkwa Deposition Area (ADA), essentially the flood plain of the Ajkwa River encompassing some 13,000 hectares, has been completed and the ADA is operating as designed as an engineered, managed system for the deposition and control of tailings. Programs have been instituted to monitor the development and effectiveness of the ADA system. Tailings reclamation studies show that the ADA can be readily revegetated with native and agricultural plant species once mining is completed. As part of its AMDAL commitment to further study its operations and search for ways to improve, PT-FI is conducting an Ecological Risk Assessment (ERA) of the Tailings Management Program. The ERA will involve stakeholders, will be carried out by world-class experts and the results will be made public. Tailings have an alkaline pH when released from the mill and data show that the pH in the Ajkwa River system is alkaline, meaning the tailings are not producing an acidic condition. (The pH is a measure of acidity or its opposite, alkalinity. Neutral is 7.0, meaning any pH greater than that is alkaline.) The annual average pH in the Ajkwa River for 1994 to 1998 ranged from 7.5 to 8.1. Additionally, Figure 2 shows that the tailings do not have an acid forming potential. Fig. 2 Tests on tailings show a non-acid forming potential Graph showing the following data:
1994 1995 1996 1997 1998 (Average Annual Value) Potential kilograms of acid per metric ton of tailings (32.93) (30.06) (34.97) (24.22) (35.79)
PT-FI does not use cyanide in its operational processes; therefore, cyanide in the river water systems is not an issue. Comprehensive water quality sampling of the tailings management system shows that the water in the Ajkwa River and ADA meets U.S. Environmental Protection Agency (U.S. EPA) and World Health Organization (WHO) drinking water standards for metals, including copper (Figure 3a). In addition, when the data are compared to U.S. EPA Water Quality Criteria (1997), and other scientific information on copper impacts on aquatic organisms, the values for dissolved copper in the Ajkwa River system are within and/or below the range of these values. Fig. 3a Copper concentrations from comprehensive water quality sampling in the Ajkwa River meet drinking water standards and criteria Graph showing the following data:
1994 1995 1996 1997 1998 (Annual Average Concentration) U.S. EPA Drinking Water Standard for Copper 1.300 1.300 1.300 1.300 1.300 WHO Drinking Water Criteria for Copper 1.000 1.000 1.000 1.000 1.000 Dissolved copper in parts-per-million (ppm) .048 .043 .050 .018 .015
Fig. 3b Comparisons of mercury in edible flesh of fish and shrimp-annual averages Graph showing the following data:
1996 1997 1998 (Mercury in mg/kg (ppm) net weight) U.S. FDA criteria for mercury in edible flesh of fish 1.00 1.00 1.00 Rivers with tailings: Ajkwa .05 .05 .04 Minajerwi .04 .03 * Rivers without tailings: Kamora .08 .08 .09 Otokwa .08 .10 .10 *1998 data not available.
Mercury is also not used in PT-FI's mill processes but does occur in trace amounts in the Ajkwa River with tailings, as well as in similar river systems in the area without tailings. Water quality data for dissolved mercury in the Ajkwa River show amounts lower than detection limits using modern analytical techniques. Figure 3b shows that mercury is found in edible flesh of fish and shrimp only in small amounts, and well below U.S. Food and Drug Administration (U.S. FDA) criteria for human consumption. The data also show that mercury in both fish flesh and fish organs - such as the liver, which concentrates metals - are lower in the river system with tailings than in reference rivers in the area without tailings. Extensive biological sampling shows that comparable numbers of species and aquatic organisms were collected in the Ajkwa and Minajerwi estuaries downstream of the tailings ADA as 12 Fig. 4 Tailings estuaries (Ajkwa and Minajerwi rivers) have comparable numbers of aquatic species and organisms as reference estuaries without tailings (Kamora and Otokwa rivers) based on per unit catch by trawl-net sampling. Two graphs showing the following data:
Number of Number of species organisms (1996 to 1998 Quarterly Average) Rivers with tailings Ajkwa 21 989 Minajerwi 25 1,145 Rivers without tailings Kamora 29 875 Otokwa 24 497
were found in baseline or reference estuaries without tailings (Kamora and Otokwa) based on per unit catch by trawl-net sampling (Figure 4). Overburden Management Plan. Overburden is the rock which has to be moved aside in order to reach the ore in the mining process. Metals can occur in nature as minerals called sulphides. If they are mined, and rock or tailings containing sulphides are left exposed to the elements, the action of water, oxygen and natural bacteria can create sulphuric acid. This acidic water will dissolve metals contained in rock and, if not collected or treated, the contaminated water can be harmful to many aquatic organisms and plants. This condition is called Acid Rock Drainage (ARD). PT-FI continually monitors and manages ARD. PT-FI's current Overburden Management Plan, which was approved by the GOI, includes three types of control: minimization - cover of the overburden to minimize production of ARD; remediation - treatment of runoff from the overburden piles for neutralization of ARD with capture/recovery of copper; and/or prevention - blending potentially acid-forming overburden with acid-consuming materials. Monitoring of the overburden stockpiles, which at the end of 1998 encompassed an estimated 575 hectares of surface area, continues as part of the program to optimize placement of overburden to minimize the generation of ARD. It should also be noted that with the recent mine and mill expansion, cutoff grades for ores to be processed have been lowered so that material that otherwise would have been overburden will now be processed, reducing the total amount of overburden. However, there will be a net increase in tailings as a result of the lower cutoff grade. A Molecular Recognition Technology (MRT) pilot-test unit has been constructed and placed into operation to capture and recover copper from acidic drainage. Drainage from the mine area is captured and routed to the MRT unit, which utilizes molecular recognition and electro-winning to capture and recover copper. The "Wanagon Lake" water catchment basin is used as a capture point for West Grasberg overburden ARD to prevent its release to the environment. This ARD is directed to the catchment basin where it is neutralized with lime. The metal precipitates from the neutralization process are captured in the catchment basin. As the stockpiles advance, the Wanagon catchment basin will eventually be filled with overburden, but will still serve as a natural collection point for ARD from the overburden stockpiles. The ARD will be drained from the basin through underground drainage drifts and drill holes. It will then be directed to the mill area MRT plant for treatment and copper recovery. FCX is a member of the International Network for Acid Prevention (INAP), an organization of 16 of the world's mining and minerals companies, established to undertake research and development to control ARD from mine materials. INAP will bring together engineers and scientists from over 23 countries to undertake research and develop technologies to reduce the impact of ARD. The member companies of INAP, which represent around 40 percent of the world's mining activity, will share their knowledge and participate in joint research projects. Wanagon Lake Incident. On June 20, 1998, after a period of heavy rainfall, a sudden discharge of water occurred from the Wanagon Lake water catchment basin into the Wanagon River. Geotechnical experts have concluded that it was caused by a slough of rock from mine stockpiles, which in turn triggered several landslips along the steep river banks recently saturated by heavy rains after 18 months of record drought. The ensuing mudslide reached the downstream village of Banti. No people were hurt, but some pigs and gardens belonging to local residents were lost and PT-FI has compensated those affected. Floods and mudslides are common in this part of Irian Jaya and similar incidents have occurred recently having no connection to mining. However, steps have been taken to reduce the potential for sloughing and to lower the level of the Wanagon catchment basin. An alarm system was in place to warn of 13 sloughing from the top of the mine stockpiles, but the June 20 sloughing took place at the base of the stockpiles and was not detected. In response to this incident, additional alarm systems have been installed to warn of sloughing at the base of the stockpiles, as well as any basin overflow. The basin water level has also been lowered to reduce the likelihood of any outflow. Long Term Environmental Monitoring Plan. PT-FI continues to conduct the Long Term Environmental Monitoring Plan (LTEMP) to evaluate the potential impact of operations on water quality, biology, hydrology, sediments and air quality. This comprehensive program ensures that PT-FI has all of the necessary scientific information available for all environmental aspects of its operations in order to minimize, mitigate and properly manage environmental effects. Figure 5 shows the number of samples and analyses conducted in 1998 as part of this extensive program. Fig. 5 Comprehensive LTEMP program encompases a large number of samples and analyses every year; data shown are for 1998 Two graphs showing the following data:
Number Number of samples of analyses Type of Sample Aquatic Biology 474 1,896 Aquatic Tissue 611 3,932 Mine Water 120 1,743 Surface Water 1,095 8,676 Tailings 2,349 11,745
Waste Management and Recycling Plan. PT-FI has continued in 1998 to incorporate a comprehensive waste management program into its daily operations. The concepts of waste reduction, reuse and recycling have been implemented as a practical means to manage all wastes in an environmentally acceptable manner. Those materials that can be reused or recycled are separated from the waste stream at the point of origin. Steel is stockpiled at several strategic locations for reuse by construction and operations. Copper, aluminum and other recyclable metals are currently being held pending permission from the government for resale or trade. Combustible waste materials are segregated from the waste stream and sent to several air curtain incinerators to reduce the amount of wastes placed in the onsite landfills. Biodegradable wastes are collected and transported to an engineered landfill at Mile 38, which is lined and which also provides for the collection and treatment of water leaching from the waste. PT-FI also utilizes a state-of-the- art medical waste incinerator. Indicative of PT-FI's recycle/ reuse programs, Figure 6 shows the amount of waste oil reused annually as fuel compared to the amount of new oil consumed. Fig. 6 Waste oil reused as fuel vs. new oil consumption Graph showing the following data:
Waste Oil New Oil Reused as Fuel Consumption (Millions of liters per year) 1994 2.07 8.34 1995 3.99 7.36 1996 4.84 7.26 1997 5.91 8.51 1998 8.81 7.94
Reclamation and Revegetation. PT-FI's comprehensive reclamation testing and revegetation program continued in 1998. Revegetation and reclamation programs for the ADA have been in place for several years. Demonstration projects have been developed to show that numerous species of native plants, agricultural crops and fruit trees grow well on the tailings deposited in the ADA. PT-FI has also developed other successful revegetation and reclamation projects involving the development of lakes, wetlands, forests and agriculture in areas disturbed by construction. A large hydro-mulcher machine is a centerpiece of this aggressive revegetation program to quickly reclaim land disturbed by construction. Mining activities are ongoing and the placement of overburden in the West Grasberg and Carstensz valleys and the deposition of tailings in the ADA will continue for many more years. Because of this, the reclamation of the majority of the overburden and the tailings deposits will not be feasible until mining operations cease. PT-FI has established a fund to accumulate at least $100 million by the end of the mine life to help fund mine closure and reclamation. The fund will be used to restore properties and related facilities to meet the 14 requirements of Indonesian environmental and other regulations, as well as PT-FI's own commitments outlined earlier in this report. Figure 7 depicts the number of species tested on overburden and tailings. Numerous species of native and agricultural plants have been successfully grown on tailings in the lowlands. Several native species have also been successfully grown on overburden, and research continues in this challenging, high-altitude environment to find additional adaptive species. Fig. 7 Reclamation tests show success for many species on tailings; overburden testing to date reflects challenges of high-altitude reclamation Graph showing the following:
Species Species Tested Successful (Number of plant species) Tailings 79 74 Overburden 20 5
[Picture] Pineapple is one of the many plants successfully tested in tailings reclamation areas. 15 [Picture] Research continues to show encouraging results in challenging, high-altitude overburden reclamation testing. Training and Technology Transfer. An important element of PT-FI's sustainable development program is the training of employees and local people in environmental management issues, programs and procedures at the company's operations. Included in this training is technology transfer for modern pollution control equipment, environmental sampling and monitoring methodologies. Figure 8 shows the number of personnel involved and manhours spent in environmental training in 1997 and 1998. Fig. 8 Environmental training of PT-FI and contractor personnel Graph showing the following:
1997 1998 Personnel Trained 1,918 2,951 Man hours of Training 5,171 7,506
ATLANTIC COPPER, S.A. Environmental Programs Update. IS0 14001 is the world's first series of internationally accepted standards for environmental management. Implementing an ISO 14001 environmental management system provides the framework for a high level of environmental performance. In April 1998, Atlantic's environmental management system at its Huelva, Spain copper smelter was certified under 14001 by AENOR, the Spanish Certification Agency. Later in the year, the metal cable facility at Cordoba, Spain was also certified under ISO 14001. Atlantic is committed to conducting periodic environmental, safety and industrial health audits to ensure that its facilities and operations comply with applicable legal requirements, company policies and protocols, and generally accepted standards. The 1998 audit confirmed that Atlantic is in material compliance with all current applicable environmental and safety regulations, as well as all requirements established by the company. The audit recognized the improvements that have been made in these areas during the last few years and Atlantic has incorporated as part of its objectives additional management practice recommendations made by the auditors. In 1996 and 1997, Atlantic successfully completed the environmental improvement project started in 1994 in conjunction with expansion activities at its copper smelter in Huelva. New technology substantially reduced atmospheric emissions from its operations even with an approximate doubling of production capacity (Figure 9). In addition, dust emissions have decreased as a result of the installation of new facilities for handling ore concentrates and the addition of 16 new bag filters in the concentrate drying and furnace tapping areas. New gas scrubbers have significantly reduced acid mist and particulate emissions. Fig. 9 Sulphur dioxide (SO2) air emission rates from Atlantic's three acid plants Graph showing the following:
1994 1995 1996 1997 (SO2 emissions (mg/Nm3)) SO2 Plant Limit** 2,850 2,850 2,850 2,850 Atlantic Acid Plant #1 4,373 2,081 760 668 Atlantic Acid Plant #2 773 840 685 784 Atlantic Acid Plant #3 * * 551 531
*Acid plant #3 was built in 1996 **Maximum regulatory limit for SO2 emissions for post 1975-constructed acid plants (does not apply to acid plant #1, because it was constructed prior to 1975) 17 FREEPORT-McMoRan COPPER & GOLD INC. SELECTED FINANCIAL AND OPERATING DATA
Years Ended December 31: 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------- (Financial Data In Thousands, Except Per Share Amounts) FCX FINANCIAL DATA Revenues $1,757,132 $2,000,904 $1,905,036 $1,834,335 $1,212,284 Operating income 574,281a 664,215b 638,261c 596,432d 280,134e Net income applicable to common stock 118,317a 208,541b 174,680c 199,465d 78,403e Basic net income per common share .67a 1.06b .90c .98d .38e Diluted net income per common share .67a 1.06b .89c .98d .38e Dividends paid per common share .20 .90 .90 .675 .60 Basic average shares outstanding 175,353 196,392 194,910 203,536 205,755 Diluted average shares outstanding 175,354 197,653 196,682 204,406 205,755 At December 31: Property, plant and equipment, net 3,474,451 3,521,715 3,088,644 2,845,625 2,360,489 Total assets 4,192,634 4,152,209 3,865,534 3,581,746 3,040,197 Long-term debt, including current portion and short-term borrowings 2,456,793 2,388,982 1,562,916 1,167,232 549,710 Redeemable preferred stock 500,007 500,007 500,007 500,007 500,007 Stockholders' equity 103,416 278,892 675,379 881,674 994,975 PT-FI OPERATING DATA Ore milled (metric tons per day) 196,400 128,600 127,400 111,900 72,500 Average ore grade Copper (percent) 1.30 1.37 1.35 1.32 1.51 Gold (grams per metric ton) 1.49 1.51 1.52 1.39 1.31 Gold (ounce per metric ton) .048 .049 .049 .045 .042 Silver (grams per metric ton) 3.17 3.11 3.10 3.17 3.02 Silver (ounce per metric ton) .102 .100 .100 .102 .097 Recovery rates (percent) Copper 86.9 85.4 83.8 85.0 83.7 Gold 85.3 81.4 77.1 74.3 72.8 Silver 71.8 65.6 64.6 63.2 64.7 Copper Production (000s of recoverable pounds) 1,427,300f 1,166,500 1,118,800 978,000 710,300 Sales (000s of recoverable pounds) 1,419,500g 1,188,600 1,097,000 985,100 700,800 Average realized price $.73 $.94h 1.02h $1.22h $1.02h Gold Production (recoverable ounces)2,227,700f 1,798,300 1,695,200 1,310,400 784,000 Sales (recoverable ounces)2,190,300g 1,888,100 1,698,900 1,353,400 794,700 Average realized price $290.57 $346.14i $390.96i $383.73i $381.13 Silver Production (recoverable ounces)3,421,200f 2,568,700 2,360,600 2,303,000 1,305,400 Sales (recoverable ounces)3,412,300g 2,724,300 2,532,000 2,349,400 1,335,400 Average realized price $5.29 $4.68 $4.95 $4.99 $5.08 ATLANTIC COPPER OPERATING DATA Concentrate treated (metric tons) 973,900 929,700 804,500 434,400j 485,300 Anodes (000s of pounds) Production 642,400 639,800 547,900 296,000 347,500 Sales 96,900 133,500 77,300 44,600 38,300 Cathodes (000s of pounds) Production 544,800 505,600 462,900 258,200 312,100 Sales (including wire rod) 544,300 505,300 461,100 280,200 309,400 Gold sales in anodes and slimes (ounces) 678,700 532,900 421,300 118,200 166,300 Cathode cash production cost per pound $.13 $.12 $.15 $.18 $.17
NOTES a. Includes net charges totaling $9.1 million ($4.4 million to net income or $0.03 per share), $11.1 million charged to general and administrative expenses less a $2.0 million gain included in production and delivery costs, associated with the sale of corporate aircraft. b. Includes a $25.3 million gain ($12.3 million to net income or $0.06 per share) for the reversal of stock appreciation rights and related costs caused by the decline in FCX's common stock price in 1997. c. Includes charges totaling $17.4 million ($8.0 million to net income or $0.04 per share) consisting of $12.7 million for costs of stock appreciation rights caused by the increase in FCX's common stock price, $3.0 million for costs related to a civil disturbance and $1.7 million for an early retirement program. d. Includes charges totaling $49.6 million ($26.9 million to net income or $0.13 per share) consisting of $29.8 million for costs of stock appreciation rights caused by the increase in FCX's common stock price, $12.5 million for a materials and supplies inventory reserve adjustment in connection with the completion of an expansion program and $7.3 million for an early retirement program. e. Includes a $32.6 million insurance settlement gain ($17.4 million to net income or $0.08 per share). f. Amounts are PT-FI's share, net of Rio Tinto's interest, of aggregate production totaling 1,721.3 million pounds of copper, 2,839,700 ounces of gold and 4,040,600 ounces of silver. g. Amounts are PT-FI's share, net of Rio Tinto's interest, of aggregate sales totaling 1,706.7 million pounds of copper, 2,774,700 ounces of gold and 4,008,000 ounces of silver. h. Amounts were $0.90 in 1997, $0.97 in 1996, $1.28 in 1995 and $1.15 in 1994 before hedging adjustments. i. Amounts were $326.08 in 1997, $382.62 in 1996 and $380.85 in 1995 before hedging adjustments. j. Reflects shutdowns caused by a strike at an adjacent plant, expansion equipment tie-ins and normal maintenance turnarounds. 18 FREEPORT-McMoRan COPPER & GOLD INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW To enhance understanding of Freeport-McMoRan Copper & Gold Inc.'s (FCX) financial results, the components of Management's Discussion and Analysis are presented adjacent to the pertinent financial data. Accordingly, in addition to the discussion that begins on this page and continues through page 27, further analyses of consolidated results of operations can be found on page 29, cash flows and liquidity on page 31, and capital resources and financial condition on page 33, as well as the Working Toward Sustainable Development report on pages 6 through 17. The results of operations reported and summarized throughout are not necessarily indicative of future operating results and should be read in conjunction with the financial statements and related notes. FCX operates through its majority-owned subsidiaries, P.T. Freeport Indonesia Company (PT-FI) and P.T. IRJA Eastern Minerals Corporation (Eastern Mining), and through Atlantic Copper, S.A. (Atlantic), a wholly owned subsidiary. PT-FI's operations involve mineral exploration and development, mining and milling of ore containing copper, gold and silver in Irian Jaya, Indonesia and the worldwide marketing of concentrates containing those metals. PT-FI also has a 25 percent interest in P.T. Smelting Co. (PT-SC), an Indonesian company formed to construct and operate a copper smelter and refinery in Gresik, Indonesia. Eastern Mining conducts mineral exploration activities in Irian Jaya. Atlantic's operations involve the smelting and refining of copper concentrates in Spain and marketing refined copper products. In addition to the PT-FI and Eastern Mining exploration activities, FCX conducts other mineral exploration activities in Irian Jaya pursuant to joint venture and other arrangements. Rio Tinto Joint Ventures. In 1996, FCX and Rio Tinto plc (Rio Tinto) established exploration and expansion joint ventures. Pursuant to the exploration joint ventures, Rio Tinto has a 40 percent interest in future development projects under PT-FI's Contract of Work (COW) and Eastern Mining's COW. In addition, Rio Tinto has the option to elect to participate in 40 percent of any future FCX exploration projects. The FCX/Rio Tinto exploration joint ventures are continuing their exploration activities within the original 24,700-acre PT-FI Block A area, the adjacent 1.6 million-acre PT-FI Block B area, the 1.25 million-acre Eastern Mining area and in several blocks contiguous to PT-FI's Block B and Eastern Mining's Block I areas totaling approximately 1.0 million acres. As required by its COW, PT-FI relinquished its rights to 4.9 million acres in Block B, including 1.6 million acres in December 1998. Eastern Mining relinquished a 1.25 million-acre area and must relinquish an additional 0.6 million acres by August 2001. For a discussion of exploration cost sharing arrangements with Rio Tinto, see "Exploration Expenses" on page 29. FCX and Rio Tinto completed the "fourth concentrator mill expansion" of PT-FI's milling facilities in early 1998. Pursuant to the joint venture agreement, Rio Tinto has a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver through 2021. FCX and Rio Tinto began sharing incremental cash flow attributable to the expansion effective January 1, 1998. For a discussion of the joint venture arrangements, see Note 2 of "Notes to Financial Statements." The expanded milling facilities have allowed PT-FI to increase throughput beyond 200,000 metric tons of ore per day (MTPD) and improve profitability by optimizing the ore available from PT-FI's mines. Mill throughput averaged 210,600 MTPD during the fourth quarter of 1998. Reserves. During 1998, additions and revisions to the aggregate proved and probable reserves of the Grasberg and other Block A ore bodies totaled approximately 381 million metric tons of ore representing 6.0 billion recoverable pounds of copper, 4.3 million recoverable ounces of gold and 18.7 million recoverable ounces of silver. Net of Rio Tinto's share, PT-FI's share of proved and probable recoverable reserves was 40.0 billion pounds of copper, 51.6 million ounces of gold and 119.1 million ounces of silver as of December 31, 1998 (Note 14). Net of Rio Tinto's share, these additions and revisions to reserves replaced approximately 250 percent of PT-FI's 1998 copper production, 120 percent of gold production and 330 percent of silver production. Estimated recoverable reserves were assessed using a copper price of $0.90 per pound and a gold price of $325 per ounce. Using prices of $0.75 per pound of copper and $280 per ounce of gold would reduce estimated recoverable reserves by approximately 9 percent for copper, 7 percent for gold and 9 percent for silver. 19 RESULTS OF OPERATIONS FCX has two operating segments: "mining and exploration" and "smelting and refining." The mining and exploration segment includes PT-FI's copper and gold mining operations in Indonesia and FCX's Indonesian exploration activities. The smelting and refining segment includes Atlantic's operations in Spain and PT-FI's 25 percent equity investment in PT-SC. Summary operating income by segment follows (in millions):
Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------ Mining and exploration $566.7 $630.8 $648.0 Smelting and refining 35.4 30.6 6.4 Intercompany eliminations and other a (27.8) 2.8 (16.1) ------ ------ ------ Operating income $574.3 $664.2 $638.3 ====== ====== ======
a. PT-FI sales to Atlantic impacted operating income by $(15.8) million in 1998, $19.0 million in 1997 and $2.7 million in 1996. FCX's consolidated earnings fluctuate depending on the timing and prices of these sales. MINING AND EXPLORATION A summary of changes in PT-FI revenues (in millions) and gross profit per pound of copper follow:
1998 1997 - ---------------------------------------------------- Revenues - prior year $1,505.3 $1,485.8 Increases (decreases): Sales volumes: Copper 218.0 93.4 Gold 104.6 74.0 Price realizations: Copper (306.5) (88.8) Gold (121.7) (84.6) Adjustments to prior year open sales (28.3) 59.0 Treatment charges, royalties and other (20.3) (33.5) -------- -------- Revenues - current year $1,351.1 $1,505.3 ======== ========
Gross Profit Per Pound of Copper (cents).
Years Ended December 31, 1998 1997 1996 - --------------------------------------------------------- Average realized price 72.8 94.4a 101.9a ---- ---- ----- Production costs: Site production and delivery 32.2 50.6 52.4 Gold and silver credits (45.3) (55.5) (61.3) Treatment charges 23.5 24.4 22.9 Royalty on metals 1.3 2.6 2.8 ---- ---- ----- Cash production costs 11.7 22.1 16.8 Depreciation and amortization 17.0 15.0 13.0 ---- ---- ----- Total production costs 28.7 37.1 29.8 ---- ---- ----- Revenue adjustments b 1.9 3.7 (2.0) ---- ---- ----- Gross profit per pound of copper 46.0 61.0 70.1 ==== ==== =====
a. Amounts were $0.90 in 1997 and $0.97 in 1996 before hedging adjustments. b. Reflects adjustments for prior year concentrate sales and amortization of the price protection program cost in 1996 and 1997. 20 PT-FI Operating Results - 1998 Compared with 1997. PT-FI's 1998 revenues declined compared with 1997 revenues as record sales volumes were more than offset by significant declines in price realizations (see Selected Financial and Operating Data). Copper sales volumes rose 19 percent and gold sales volumes rose 16 percent primarily as a result of increased production from the fourth concentrator mill expansion and improved mill recoveries. Average copper realizations declined 22 percent from $0.94 per pound in 1997 to $0.73 per pound in 1998. PT-FI's 1997 revenues include net additions totaling $42.6 million recognized under PT-FI's copper price protection program. Average 1998 gold realizations declined 16 percent or nearly $56 per ounce compared to 1997. PT-FI's 1997 revenues include additions totaling $37.6 million recognized on gold forward sales contracts. Adjustments to prior year open sales totaled $26.6 million in 1998 compared with $54.9 million in 1997. Treatment charges were higher in the 1998 periods because of higher sales volumes, partially offset by price participation in PT-FI's smelter contracts, which provides for reduced treatment charges during periods of lower copper prices. Royalty costs were reduced because of lower metal prices. PT-FI's mill throughput averaged a record 196,400 MTPD during 1998, as a result of its fourth concentrator mill expansion that was completed in early 1998. Average copper and gold ore grades for 1998 were slightly lower than a year ago, but recovery rates improved compared with 1997. Unit site production and delivery costs averaged 32.2 cents per pound of copper for 1998, 36 percent below the 50.6 cents per pound reported in 1997, primarily because of lower labor costs reflecting the devaluation of the Indonesian rupiah, lower diesel fuel and power costs, economies of scale from the fourth concentrator mill expansion and cost reduction efforts. Gold credits were lower in 1998 when compared with 1997, primarily because of the lower gold realizations. Unit treatment charges were lower in 1998 primarily because of contractual price participation, whereby the charge varies with the price of copper. Treatment charge rates for a significant portion of PT-FI's 1999 projected sales were negotiated in the fourth quarter of 1998 based on then-current market conditions and are expected to decline for 1999. PT-FI's copper royalty rate varies from 1.5 percent, at a copper price of $0.90 or less, to 3.5 percent, at a copper price of $1.10 or more, of copper net revenue. The related rate for gold and silver sales is 1.0 percent. PT-FI's depreciation rate of 17.0 cents per pound for 1998 reflects an increase over the 1997 rate for a half-year of depreciation on the fourth concentrator mill expansion and other capital additions. The 1999 depreciation rate is expected to increase to 18.0 cents per pound to reflect a full year of depreciation on the fourth concentrator mill expansion assets and other capital additions. In light of its substantially expanded production capabilities, PT-FI is discussing with the GOI the payment of voluntary additional royalties on metal from production above 200,000 MTPD in amounts for copper equal to the COW royalty and for gold and silver equal to twice the COW royalties. Therefore, including the payment of COW royalties, the total of royalties paid on copper net revenues from production above 200,000 MTPD would be double the amount of the COW royalty; and the total of royalties paid on gold and silver sales from production above 200,000 MTPD would be triple the amount of the COW royalties. The additional royalties would be effective January 1, 1999. Because in large part mineral royalties under GOI regulations are remitted to the provinces from which the minerals are extracted, PT-FI offered the voluntary additional royalties to provide additional support to the local governments and people of Irian Jaya. PT-FI's mining and milling operations are located in steep mountainous terrain in a remote area of Indonesia. Although this area ordinarily receives significant annual rainfall, much dryer conditions existed in Southeast Asia during 1997 and the first half of 1998, which were generally attributed to the "El Nino" phenomenon. Subsequent heavy rainfall on the dryer than usual terrain caused localized flooding and mudslides at the town of Tembagapura near PT- FI's mine and mill facilities on July 30 and 31, 1998, which resulted in damages to certain equipment and facilities owned by PT-FI. Mining and milling operations, as well as PT-FI's administrative headquarters in Kuala Kencana, were unaffected, and there were no injuries or fatalities. PT-FI charged $6.3 million to 1998 production costs for this event. Future abnormal weather patterns in general, and heavy rainfall in particular, could cause additional flooding and mudslides, which could affect both PT-FI's operations and facilities as well as the surrounding area. The financial impact on PT-FI's operations and facilities from any such events should be limited because PT-FI has insurance coverage for such events with a deductible of $20 million per occurrence for physical damage and business interruption combined. On August 11, 1998, PT-FI's mining and milling operations at its Grasberg mine were suspended as a result of a wildcat work stoppage by a group of workers, a majority of whom were employees of contractors of PT-FI. On August 14, 1998, the workers voluntarily returned to work and PT-FI began resuming operations. The workers cited economic and other employment issues as the reasons for their work stoppage. The employees of certain contractors expressed a desire to become PT- FI employees, who generally have higher wages and more attractive benefits. PT-FI indicated that it would continue its practice of reviewing its package of wages and benefits to ensure that PT-FI remains competitive with other companies. The workers' union did not authorize the work stoppage. The actions of the workers were peaceful, there were no injuries or property damage and the suspension and resumption of operations were conducted in an orderly fashion. Shipments of concentrates were made from inventory and were not disrupted by the work stoppage. 21 PT-FI has a labor agreement covering its hourly-paid Indonesian employees, the key provisions of which are renegotiated biannually. The current labor agreement expires on September 30, 1999. PT-FI's relations with the workers' union have generally been positive. PT-FI Sales Outlook. PT-FI's copper concentrates are sold under dollar-denominated, primarily long-term sales agreements, mostly to companies in Asia and Europe. PT-FI has commitments from various parties, including Atlantic and PT-SC, to purchase virtually all of its estimated 1999 production at market prices. Net of Rio Tinto's interest, PT-FI's share of sales for 1999 is expected to approximate 1.4 billion pounds of copper and 2.1 million ounces of gold. Projected 1999 copper and gold sales reflect the expectation of producing at higher average mill throughput rates than in 1998 because of the fourth concentrator mill expansion, offset by expected lower average ore grades and recoveries compared to 1998. The lower projected ore grades for 1999 reflect the capability of the expanded mill facilities to process large volumes of lower grade ore material. PT-FI will continue to concentrate its efforts on optimizing metal production from its expanded operations during 1999. PT-FI has a long-term contract to provide approximately 60 percent of Atlantic's copper concentrate requirements at market prices. PT-FI is providing 100 percent of PT-SC's copper concentrate requirements at market prices; however, for the first 15 years of operations the treatment and refining charges will not fall below a specified minimum rate. After PT-SC's operations reach design capacity, FCX anticipates that PT-FI will sell at least 50 percent of its annual concentrate production to Atlantic and PT-SC. Exploration. FCX continues its exploration program in Irian Jaya, in the Block A and Block B areas of PT-FI's COW, the Eastern Mining COW, the PT-Iriana Mutiari Mining (PT-IMM) COW and in its new acreage acquired through its June 1998 exploration joint venture agreement discussed below. In Block A, which contains PT-FI's mining and milling operations, delineation drilling continues at Kucing Liar, Grasberg Underground and DOZ. Two rigs are now drilling in the Kucing Liar ore body. Recent drilling to the west indicates a possible thinning or fault offsets to the mineralization, but continuity of mineralization extends beyond the 1998 reserve additions and along favorable horizons toward the Grasberg deposit. Drilling at Grasberg Underground is ongoing with two drills working from the Amole drift to delineate the Grasberg deposit below the 1998 reserve additions. Copper-gold mineralization is decreasing below the level of the 1998 reserve additions, but additional drilling is required to fully define the ultimate geometry of the mineralized zone. Drilling at DOZ continues to return positive results, indicating the potential for additional reserve increases. FCX's exploration activities in the Block B area, Eastern Mining area and other areas continue and are focused on prospects that potentially could lead to the discovery of significant porphyry and/or skarn-type copper-gold deposits. Exploration of PT-IMM's COW area covering 1.2 million acres continues. FCX has the option through June 1999 to purchase for $7.0 million a 90 percent interest in the COW. Rio Tinto has elected not to participate in this COW. Interpretation of the reconnaissance sampling program results is under way to determine areas for follow-up geological mapping and drilling. Test pitting at the Siduarsi nickel prospect has been completed with assay results pending. In June 1998, FCX entered into an exploration joint venture agreement through which it can earn an indirect interest in a COW area covering a total of approximately 1.0 million acres in several blocks contiguous to PT-FI's Block B and Eastern Mining's Block I areas in Irian Jaya. Rio Tinto has elected to participate in 40 percent of FCX's interest and costs in this exploration joint venture. To earn up to a 54 percent interest, FCX and Rio Tinto must spend a total of up to $21 million on exploration and other activities in the joint venture areas ($3.0 million of which was incurred through December 31, 1998). Exploration drilling is ongoing with three rigs on several identified geological anomalies. PT-FI Operating Results - 1997 Compared with 1996. PT-FI's 1997 revenues were slightly higher than 1996 revenues as higher sales volumes were substantially offset by lower price realizations. Copper sales volumes rose 8 percent and gold sales volumes rose 11 percent primarily as a result of improvements in recovery rates. Average copper realizations declined 8 percent from $1.02 per pound in 1996 to $0.94 per pound in 1997. PT-FI's revenues include net additions totaling $42.6 million in 1997 and $38.2 million in 1996 recognized under PT-FI's copper price protection program. Average 1997 gold realizations declined 11 percent or nearly $45 per ounce compared to 1996. PT-FI's revenues also include $37.6 million in 1997 and $14.1 million in 1996 recognized on gold forward sales contracts. Adjustments to prior year open sales totaled $54.9 million in 1997 compared with $(4.1) million in 1996. Treatment charges increased in 1997 because of higher sales volumes and tighter smelter market conditions. Average cash production costs in 1997 of 22.1 cents per pound of copper were higher than the comparable 1996 average primarily because of lower gold credits. Lower gold realizations offset record gold sales and reduced unit gold credits by 9 percent. Site production and delivery costs per pound declined primarily because of lower labor costs offset by higher treatment charges that reflected tightened smelter capacity. 22 PT-FI's 1997 depreciation rate of 15.0 cents per pound of copper reflects an increase over the 1996 rate because of the first phase of the enhanced infrastructure program (EIP) and other 1997 capital additions. The EIP is designed to provide the infrastructure needed for PT-FI's growing operations and expected future growth, to enhance the living conditions of PT-FI's employees, and to develop and promote the growth of local and third party activities and enterprises in Irian Jaya. The first phase of the EIP was completed in 1996; therefore, the 1996 rate of 13.0 cents per pound did not include the EIP for a full year. SMELTING AND REFINING Atlantic Operating Results - 1998 Compared with 1997. Atlantic reported lower revenues ($754.0 million compared with $874.5 million in 1997) and cost of sales ($703.3 million compared with $831.2 million in 1997) primarily because of lower copper and gold prices. Higher operating income in 1998 ($40.3 million compared with $32.2 million in 1997) reflects higher volumes of concentrate treated (5 percent more) and higher cathode and wire rod sales volumes (8 percent more), partially offset by lower treatment and refining rates and higher unit costs compared with 1997. Atlantic completed a $13.0 million "debottlenecking" project in June 1997, which increased annual production capacity by 20,000 metric tons to 290,000 metric tons of copper metal. Treatment and refining rates of $0.25 per pound for 1998 were slightly lower compared with $0.26 per pound for 1997. Lower treatment charges, which negatively affect Atlantic, benefit PT-FI and vice versa. Cathode cash production costs of $0.13 per pound in 1998 were slightly higher than the $0.12 per pound reported in 1997 because of unscheduled repair work. PT-SC Operating Results - 1998 Compared with 1997. PT-FI accounts for its 25 percent interest in PT-SC under the equity method (Note 9). PT-SC completed construction of its copper smelter/refinery complex in Gresik, Indonesia during the third quarter of 1998 on schedule and on budget. The smelter furnace was ignited on October 12, 1998 with first production of copper cathode in December 1998. Production is expected to gradually increase to design capacity of 200,000 metric tons of copper metal per year over an approximate two-year period. PT- FI's share of PT-SC's net operating results and the elimination of intercompany profit on 25 percent of PT-FI sales to PT-SC, for which the final sale has not occurred, are recorded in operating income and totaled net charges of $4.9 million in 1998 and $1.5 million in 1997. Atlantic Operating Results - 1997 Compared with 1996. Atlantic reported higher revenues ($874.5 million compared to $778.1 million in 1996) and cost of sales ($831.2 million compared to $759.4 million in 1996) because of increases in production from its newly expanded facilities. Atlantic reached a production capacity of 270,000 metric tons of metal per year in June 1996. Atlantic also benefited from higher treatment and refining rates in 1997 ($0.26 per pound compared with $0.23 per pound in 1996). Cathode cash production costs ($0.12 per pound) in 1997 were 20 percent lower than in 1996 primarily because of favorable exchange rates and higher production in 1997. DISCLOSURES ABOUT MARKET RISKS Commodity Price Risk. FCX's revenues include PT-FI's sale of copper concentrates, which also contain significant amounts of gold, and the sale of copper cathodes and wire rod by Atlantic. FCX's revenues and net income vary significantly with fluctuations in the market prices of copper and gold and other factors. At various times, in response to market conditions, FCX has entered into copper and gold price protection contracts for some portion of its expected future mine production to mitigate the risk of adverse price fluctuations. FCX currently has no copper or gold price protection contracts relating to its mine production. Based on PT-FI's projected 1999 sales volumes, a $0.01-per-pound change in the average price realized on copper sales would have an approximate $14 million impact on revenues and an approximate $6 million impact on net income. A $10-per-ounce change in the average price realized on PT-FI annual gold sales would have an approximate $21 million impact on revenues and an approximate $10 million impact on net income. The significant decline in gold prices in early 1997 increased the value of certain forward gold sales contracts formerly owned by PT-FI covering 876,000 ounces of gold sales at an average price of $376.08 per ounce from February 1997 through August 1997. In February 1997, PT-FI closed these contracts and received $30.1 million cash. As a result, PT-FI reported gold revenues through August 1997 at a higher price than realized under its contract terms with customers, but PT-FI no longer has any forward gold sales positions. PT-FI recognized $37.6 million of gold revenues from forward sales contracts in 1997 and $14.1 million in 1996. PT-FI has suspended its program of selling gold forward on a six-month basis but, as conditions warrant, may reinstate the program in the future. Future gold sales will be priced under contractual terms at then-current market prices as long as the forward sales program is suspended. The significant decline in copper prices during 1996 increased the value of put option contracts that PT-FI purchased under a previous price protection program to provide a floor price of $0.90 per pound for essentially all copper sales through the second quarter of 23 1997 at an average cost of approximately $0.02 per pound. During the third quarter of 1996, PT-FI sold all of its put option contracts covering approximately 1.2 billion pounds of copper for $97.2 million cash. As a result, PT-FI reported copper revenues through June 30, 1997 at a higher price than realized under its copper concentrate sales contracts. PT-FI recognized net additional copper revenues of $35.6 million in 1997 from the sale of its put option contracts. In June 1997, PT-FI entered into forward sales contracts to fix prices on 56.5 million open pounds of copper sales at an average of $1.22 per pound. PT-FI recorded $7.0 million of additional revenues in 1997 from these forward sales. PT-FI no longer has any price protection on its future copper sales but, as conditions warrant, PT-FI may enter into new contracts for its future copper sales. PT-FI's concentrate sales agreements, with regard to copper, provide for provisional billings at the time of shipment with final pricing settlement generally based on the average London Metal Exchange (LME) price for a specified future month. Copper revenues on provisionally priced open pounds are adjusted monthly based on then- current prices. At December 31, 1998, FCX had consolidated copper sales totaling 191.5 million pounds recorded at an average price of $0.66 per pound remaining to be finally priced. Approximately 84 percent of these open pounds are expected to be finally priced during the first quarter of 1999 with the remaining pounds to be priced during the second quarter of 1999. A one-cent movement in the average price used for these open pounds will have an approximate $0.9 million impact on FCX's 1999 net income. FCX has redeemable preferred stock indexed to gold and silver prices that hedge future production and are carried at their original issue value. As redemption payments occur, differences between the carrying value and the redemption payment, which is based on commodity prices at the time of redemption, will be recorded as an adjustment to revenues (see Notes 1, 5 and 11 of Notes to Financial Statements). Future redemption payments in ounces and equivalent value in dollars, as well as dollar-equivalent dividend payments based on December 31, 1998 gold and silver prices, follow (dollars in millions):
Gold Silver - ---------------------------------------------------------------------------- Redemption Redemption Dividend Redemption Redemption Dividend Ounces Amount Amount Ounces Amount Amount - ---------------------------------------------------------------------------- 1999 - $ - $10.1 2,380,000 $11.9 $3.8 2000 - - 10.1 2,380,000 11.9 3.3 2001 - - 10.1 2,380,000 11.9 2.8 2002 - - 10.1 2,380,000 11.9 2.3 2003 600,000 172.5 8.5 2,380,000 11.9 1.8 Thereafter 430,000 123.6 9.1 7,140,000 35.7 2.6 At December 31, 1998: Fair value based on quoted market prices $142.0 $ 55.9 ====== ====== Carrying value $400.0 $100.0 ====== ======
Atlantic's purchases of copper concentrate are priced at approximately the same time as its sales of the refined copper, thereby protecting Atlantic from most copper price risk. Atlantic enters into futures contracts to hedge its price risk whenever its physical purchases and sales pricing periods do not match. At December 31, 1998, Atlantic's contracts to hedge its price risk were not significant. Atlantic has also extended copper pricing terms that allow certain of its customers to purchase specified quantities of copper at a future date and a fixed price through December 1999. Atlantic has entered into copper futures contracts to eliminate any price risk associated with these extended pricing terms. At December 31, 1998, Atlantic had contracts, with a fair value of $(1.6) million, to purchase 15.6 million pounds of copper at an average price of $0.76 per pound through December 1999. Foreign Currency Exchange Risk. FCX conducts the majority of its operations in Indonesia and Spain where its functional currency is the U.S. dollar. All of FCX's revenues are denominated in U.S. dollars; however, some costs and certain asset and liability accounts are denominated in Indonesian rupiah, Australian dollars or Spanish pesetas. Generally, FCX's results are positively affected when the U.S. dollar strengthens against these foreign currencies and adversely affected when the U.S. dollar weakens against these foreign currencies. Since early 1997, the Indonesian rupiah exchange rate has been extremely volatile, severely weakening initially and partly recovering later against the U.S. dollar and continuing to be unpredictable. PT- FI recorded gains (losses) to production costs totaling $0.9 million in 1998 and $(6.3) million in 1997 related to its rupiah- denominated net monetary assets, which totaled $25.6 million recorded at an exchange rate of 7,725 rupiah to one U.S. dollar at December 31, 1998. Operationally PT-FI has benefited from a weakened Indonesian rupiah currency, primarily through lower labor costs. During the first quarter of 1998, PT-FI began a currency hedging 24 program to reduce its exposure to changes in the Indonesian rupiah and Australian dollar by entering into foreign currency forward contracts to hedge a portion of its anticipated payments in these currencies. At December 31, 1998, these contracts hedged 120.0 billion of rupiah payments at an average exchange rate of 19,478 rupiah to one U.S. dollar through August 1999, approximately 40 percent of projected rupiah payments, and 79.2 million of Australian dollar payments at an average exchange rate of 1.59 Australian dollars to one U.S. dollar through September 1999, approximately 80 percent of projected Australian dollar payments. PT- FI recorded net gains to production costs totaling $4.3 million in 1998 related to these contracts under its current accounting for such contracts. Assuming estimated 1999 rupiah payments of 470 billion and a December 31, 1998 exchange rate of 7,725 rupiah to one U.S. dollar, a one-thousand-rupiah increase in the exchange rate could result in an approximate $7 million decrease in annual production costs, before any hedging effects. A one-thousand-rupiah decrease in the exchange rate could result in an approximate $9 million increase in annual production costs, before any hedging effects. A portion of Atlantic's operating costs and certain Atlantic asset and liability accounts are denominated in Spanish pesetas. Based on estimated 1999 peseta payments of 15 billion and a December 31, 1998 exchange rate of 142.7 pesetas to one U.S. dollar, a ten-peseta increase in the exchange rate could result in an approximate $7 million decrease in costs, before any hedging effects. A ten-peseta decrease in the exchange rate could result in an approximate $8 million increase in costs, before any hedging effects. Atlantic had peseta-denominated net monetary liabilities at December 31, 1998 totaling $79.1 million recorded at an exchange rate of 142.7 pesetas to one U.S. dollar. Adjustments to these net liabilities to reflect changes in the exchange rate are recorded as currency transaction gains (losses) in other income and totaled $(2.2) million in 1998, $16.6 million in 1997 and $10.3 million in 1996. Atlantic has a currency hedging program to reduce its exposure to changes in the U.S. dollar and Spanish peseta exchange rate that involves foreign currency forward contracts. At December 31, 1998, Atlantic had contracts, with a fair value of $2.0 million, to purchase 10.8 billion Spanish pesetas at an average exchange rate of 144.7 pesetas to one U.S. dollar through January 2000. These contracts currently hedge approximately 70 percent of Atlantic's projected net peseta cash outflows through January 2000. In addition to the currency transaction gains (losses) noted above, Atlantic recorded gains (losses) to other income related to its forward currency contracts under its current accounting policy, totaling $3.7 million in 1998, $(6.5) million in 1997 and $(1.0) million in 1996. On January 1, 1999, a new common currency (the Euro) was introduced to member states of the European Union, including Spain. A transition period will extend until January 1, 2002. Only a few of Atlantic's customers and none of its suppliers have notified Atlantic of their intent to use the Euro as the currency for commercial transactions beginning January 1, 1999. Atlantic has not yet decided when it will adopt the Euro as its currency for commercial transactions. Atlantic does not expect conversion to the Euro currency to have a material impact on revenues or expenses. A single European currency is expected to improve Atlantic's competitiveness with other European copper smelters and refiners by eliminating exchange rate differences. Atlantic's current management information systems are designed to accommodate multiple currencies and would not require major modifications to process transactions involving the Euro. Atlantic's peseta hedging contracts will be set at a fixed exchange rate to the Euro and would continue to achieve their objectives. See Notes 1 and 11 of Notes to Financial Statements for additional information. Interest Rate Risk. FCX has interest rate swap contracts to fix interest rates on a portion of its variable-rate debt. The costs associated with these contracts are amortized to interest expense over the terms of the agreements. The table below presents scheduled maturities of principal (or notional amount) for outstanding debt and interest rate swaps at December 31, 1998 and fair value at December 31, 1998 (dollars in millions):
1999 2000 2001 2002 2003 Thereafter Fair Value - ---------------------------------------------------------------------------- Long-term debt (Note 6): Fixed rate $7.0 $7.0 $148.0 $- $250.0 $200.0 $434.1 Average interest rate 8.1% 8.1% 9.4% -% 7.2% 7.5% 7.9% Variable rate $120.8 $116.7 $79.3 $782.3 $64.4 $681.3 $1,844.8 Average interest rate 7.7% 8.3% 9.5% 7.7% 9.4% 8.6% 8.2% Interest rate swaps (Note 11): Amount $32.1 $179.9 $74.4 $- $- $- $(1.7) Average interest rate 7.0% 5.4% 5.3% -% -% -% 5.6%
25 DEVELOPMENTS IN INDONESIA Unfavorable economic conditions continue to affect Southeast Asia, including Indonesia. Since early 1997, Indonesia's economy has contracted, inflation increased dramatically, and the Indonesian rupiah severely weakened initially and then partly recovered. Financial assistance to Indonesia is being provided by the International Monetary Fund, and various political, financial and regulatory changes are being implemented, including national parlimentary elections scheduled for June 1999. International copper and gold markets have been adversely affected by the developments in Southeast Asia. PT-FI's and Eastern Mining's operations, all of which are in Indonesia, are conducted through the PT-FI and Eastern Mining COWs. Both COWs have 30-year terms, provide for two 10-year extensions under certain conditions, and govern PT-FI's and Eastern Mining's rights and obligations relating to taxes, exchange controls, repatriation and other matters. Both COWs were concluded pursuant to the 1967 Foreign Capital Investment Law, which expresses Indonesia's foreign investment policy and provides basic guarantees of remittance rights and protection against nationalization, a framework for economic incentives and basic rules regarding other rights and obligations of foreign investors. Specifically, the COWs provide that the Government of Indonesia (GOI) will not nationalize or expropriate PT-FI's or Eastern Mining's mining operations. Any disputes regarding the provisions of the COWs are subject to international arbitration. FCX has had positive relations with the GOI since it commenced business activities in Indonesia in 1967 and contributes significantly to the economy of Irian Jaya and Indonesia. PT-FI is one of the largest taxpayers in Indonesia and is a significant employer in a remote and undeveloped area of the country. PT-FI intends to continue to maintain positive working relationships with the central, provincial and local branches of the GOI regarding its operations and development efforts. IMPACT OF YEAR 2000 COMPLIANCE The Year 2000 (Y2K) issue is the result of computerized systems being written to store and process the year portion of dates using two digits rather than four. Date-aware systems (i.e., any system or component that performs calculations, comparisons, sequencing or other operations involving dates) may fail or produce erroneous results on or before January 1, 2000 because the year 2000 will be interpreted as the year 1900. FCX's State of Readiness. FCX has been pursuing a strategy to ensure all its significant computer systems will be able to process dates from and after January 1, 2000, including leap years, without critical systems failure (Y2K Compliant or Y2K Compliance). Computerized systems are integral to the operations of FCX, particularly for plant and equipment process control at its mining, milling and smelting production facilities. Certain services are provided to FCX and its subsidiaries by FM Services Company (FMS), which is responsible for ensuring Y2K Compliance for the systems it manages. FMS has separately prepared a plan for its Y2K Compliance. Certain PT-FI infrastructure assets within PT-FI's area of operations are operated by third parties. Each respective third party is responsible for its own Y2K Compliance, although PT-FI is coordinating their activities and providing oversight. Progress of the Y2K plan is being monitored by FCX executive management and reported to the Audit Committee of the FCX Board of Directors. In addition, the independent accounting firm functioning as FCX's internal auditors is assisting management in monitoring the progress of the Y2K plan. FCX believes all critical components of the plan are on schedule for completion by the end of the second quarter of 1999. The majority of computerized date-sensitive hardware and software components used by FCX or FMS are covered by maintenance contracts with the vendors who originally implemented them. Almost all of these vendors have already been contacted regarding Y2K Compliance of their products. Where necessary, software modifications to ensure compliance will be provided by the appropriate vendors under their maintenance contracts. Information Technology (IT) Systems - The bulk of FCX computerized business systems processing is provided through commercial third party software licensed by FCX. Implementation of the Y2K Compliant version of its enterprise asset management and accounting software package was completed in the fourth quarter of 1998. Modification of other critical FCX business systems is scheduled for completion in the first half of 1999. FMS is responsible for making changes to the systems it manages, and modification work is scheduled for completion in the second quarter of 1999. 26 Non-IT Systems - FCX is heavily dependent upon computerized systems in its mining, milling and smelting production facilities. In addition, computerized systems are used extensively for exploration, reserve and production modeling functions. A detailed inventory and a preliminary risk analysis of potentially date-aware components were completed in the third quarter of 1998. To verify the accuracy and completeness of PT-FI's inventory, a third party engineering firm assisted in an on- site audit of the inventory process at its operation in Irian Jaya. During the fourth quarter, inventory compliance was assessed using vendor provided Y2K Compliance information. This work is substantially complete, with the exception of certain vendors who have not yet provided definitive compliance information regarding their products. During the first quarter of 1999, compliance testing will begin for critical systems and operations regardless of their compliance status. At the same time, remediation work will begin for noncompliant items. Compliance testing and remediation work for critical items is scheduled for completion in the second quarter of 1999. Third Party Risks - FCX computer systems are not widely integrated with the systems of its suppliers or customers. The primary potential Y2K risk attributable to third parties would be from a temporary disruption in certain materials and services provided by third parties. The mining operations of PT-FI, the largest FCX subsidiary, are located in Irian Jaya, a province of Indonesia. Because of its remote operating location, PT-FI has identified contingency needs for critical operating supplies and materials to help mitigate the impact of a disruption in its supply and logistics chain. In addition, every FCX supplier has been contacted regarding Y2K Compliance, and effective August 1998, Y2K Compliance requirements have been included in all FCX purchasing contracts. The Costs to Address FCX's Y2K Issues. Expenditures for the necessary Y2K-related modifications will largely be funded by routine software and hardware maintenance fees paid by FCX or FMS. Based on current information, FCX believes that the estimated incremental cost of Y2K Compliance not covered by routine software and hardware maintenance fees will total approximately $3 million, most of which is expected to be incurred in 1999. If the software modifications and conversions referred to above are not made, or are delayed, the Y2K issue could have a material impact on FCX operations. Additionally, cost estimates are based on management's best estimates, which are derived using numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. There also can be no assurance that the systems of other companies will be converted on a timely basis or that their failure to convert will not have a material adverse effect on FCX. The Risks of FCX's Y2K Issues. Based on its Y2K risk assessment work, FCX believes the most likely Y2K- related failures would probably be temporary disruption in certain materials and services provided by third parties, which would not be expected to have a material adverse effect on FCX's financial condition or results of operations. FCX believes that these third-party risks will be mitigated through its contingency plans for critical purchased commodities and close monitoring of compliance for other third parties that are important to its operations. FCX's Contingency Plans. Companies, including FCX, cannot make Y2K Compliance certifications because the ability of any organization's systems to operate reliably after midnight on December 31, 1999 is dependent upon factors that may be outside the control of, or unknown to, the organization. Although FCX believes the likelihood of any or all of the above risks occurring is low, specific contingency plans to address certain risk areas will be developed, if needed, beginning in the first quarter of 1999. While there can be no assurance that FCX will not be materially adversely affected by Y2K problems, it is committed to ensuring that it is fully Y2K ready and believes its plans adequately address the above-mentioned risks. CAUTIONARY STATEMENT Management's discussion and analysis contains forward-looking statements regarding market risks, mineral reserves, treatment charge rates, depreciation rates, copper and gold grades and sales volumes, exploration activities, capital expenditures, introduction of the Euro, the availability of financing, future environmental costs, the impact of weather conditions, Y2K Compliance, interest expense and relations with workers and the indigenous population of Irian Jaya. Important factors that may cause future results to differ from FCX's expectations include unanticipated declines in the average grades of ore mined, unanticipated milling and other processing problems, labor relations, weather conditions, the speculative nature of mineral exploration, fluctuations in interest rates and other adverse financial market conditions, and other factors described in more detail under the heading "Cautionary Statements" in FCX's Form 10-K for the year ended December 31, 1998. 27
FREEPORT-McMoRan COPPER & GOLD INC. STATEMENTS OF INCOME Years Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------- (In Thousands, Except Per Share Amounts) Revenues $1,757,132 $2,000,904 $1,905,036 Cost of sales: Production and delivery 804,631 1,008,604 951,863 Depreciation and amortization 277,407 213,855 173,978 ---------- ---------- ---------- Total cost of sales 1,082,038 1,222,459 1,125,841 ---------- ---------- ---------- Exploration expenses 13,033 17,629 - General and administrative expenses 87,780 96,601 140,934 ---------- ---------- ---------- Total costs and expenses 1,182,851 1,336,689 1,266,775 ---------- ---------- ---------- Operating income 574,281 664,215 638,261 Interest expense, net (205,588) (151,720) (117,291) Other income (expense), net (7,267) 4,271 976 ---------- ---------- ---------- Income before income taxes and minority interests 361,426 516,766 521,946 Provision for income taxes (170,566) (231,315) (247,168) Minority interests in net income of consolidated subsidiaries (37,012) (40,343) (48,529) ---------- ---------- ---------- Net income 153,848 245,108 226,249 Preferred dividends (35,531) (36,567) (51,569) ---------- ---------- ---------- Net income applicable to common stock $ 118,317 $ 208,541 $ 174,680 ========== ========== ========== Net income per share of common stock: Basic $.67 $1.06 $.90 ==== ===== ==== Diluted $.67 $1.06 $.89 ==== ===== ==== Average common shares outstanding: Basic 175,353 196,392 194,910 ======= ======= ======= Diluted 175,354 197,653 196,682 ======= ======= ======= Dividends paid per common share $.20 $.90 $.90 ==== ===== ====
The accompanying Notes to Financial Statements are an integral part of these financial statements. 28 FREEPORT-McMoRan COPPER & GOLD INC. MANAGEMENT'S DISCUSSION AND ANALYSIS CONSOLIDATED RESULTS OF OPERATIONS Revenues. Increased production from expansions resulted in higher sales volumes in each of the past three years. Lower copper and gold realizations in 1998 more than offset the higher sales volumes when compared with 1997, while the lower realizations in 1997 partially offset the impact of higher sales volumes when compared with 1996. Cost of Sales. Production and delivery costs decreased in 1998 when compared with 1997 because of a number of factors, including lower labor costs reflecting the devaluation of the Indonesian rupiah, lower diesel fuel and power costs and cost reduction efforts. Higher costs in 1997 compared with 1996 reflect increased production volumes; however, cost reduction efforts partially offset some of those increases. Increases in depreciation and amortization were caused by additional capital assets becoming subject to depreciation and by increased production as certain assets are depreciated on the unit-of- production method. Exploration Expenses. The FCX/Rio Tinto joint ventures incurred exploration costs of $29.4 million in 1998, $44.6 million in 1997 and $39.2 million in 1996 as they explore the COW areas. FCX's exploration expense in 1998 and 1997 primarily related to costs incurred in the Eastern Mining and PT-FI Block B areas. All 1996 exploration costs and PT-FI Block A exploration costs in 1997 and 1998 were reimbursed by Rio Tinto's $100 million exploration funding received in 1996 ($1.2 million remaining at December 31, 1998). Substantially all costs in the joint venture areas are now being shared 60 percent by FCX and 40 percent by Rio Tinto. The FCX/Rio Tinto joint ventures' 1999 exploration budgets total approximately $17 million. FCX also has budgeted approximately $1 million for exploration activities outside of the joint ventures. General and Administrative Expenses. General and administrative expenses declined 9 percent from 1997 to 1998 primarily because of initiatives to reduce costs and the effect of sharing these costs with Rio Tinto pursuant to joint venture agreements. The 1998 amount includes net charges totaling $11.1 million associated with the sale of corporate aircraft. General and administrative expenses declined 31 percent from 1996 to 1997 primarily because of the reversal of $25.3 million of costs of stock appreciation rights caused by the decline in FCX's common stock price during 1997. General and administrative expenses for 1996 included $12.7 million for costs of stock appreciation rights when FCX's stock price rose. As a percentage of revenues, general and administrative expenses were 5 percent in 1998, 5 percent in 1997 and 7 percent in 1996. Interest Expense, Net. FCX's total interest cost (before capitalization) rose to $225.2 million in 1998, compared to $174.7 million in 1997 and $140.3 million in 1996, because of an overall increase in debt levels associated with the expansions and the FCX share purchase programs. Capitalized interest, relating primarily to the fourth concentrator mill expansion totaled $19.6 million in 1998 and $23.0 million in 1997, while capitalized interest relating primarily to the first phase of the PT-FI EIP and Atlantic's expansion to 270,000 metric tons totaled $23.0 million in 1996. Total interest cost and net interest expense for 1999 are expected to be lower compared with 1998 because of lower debt levels. Reduced capitalized interest should partially offset the benefits of lower debt levels. Provision for Income Taxes. FCX's effective tax rate was 47 percent in 1998, 45 percent in 1997 and 47 percent in 1996 (Note 8). PT-FI's COW provides a 35 percent corporate income tax rate for PT-FI and a 10 percent withholding on dividends paid to FCX by PT-FI and on interest for debt incurred after the signing of the COW. The withholding rate declined from 15 percent to 10 percent beginning February 1997 because of an amendment to the United States/Indonesia tax treaty. No income taxes are recorded at Atlantic, which is subject to taxation in Spain, because it has not generated significant taxable income in recent years and has a substantial tax loss carryforward for which no financial statement benefit has been provided. PT-FI's 1994 and 1997 Indonesian income tax returns are currently under examination. In January 1998, PT-FI settled and paid assessments from the Indonesian tax authorities for the years 1989-1993 with no material adverse effect on FCX's financial condition or results of operations. Minority Interests and Preferred Dividends. Minority interests in net income of consolidated subsidiaries is primarily related to net income levels at PT-FI. Preferred dividends declined in 1997 primarily because in December 1996 FCX's Convertible Exchangeable Preferred Stock was converted to FCX common stock or redeemed for cash (Note 7). 29
FREEPORT-McMoRan COPPER & GOLD INC. STATEMENTS OF CASH FLOW Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------- (In Thousands) Cash flow from operating activities: Net income $153,848 $ 245,108 $226,249 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 277,407 213,855 173,978 Deferred income taxes 62,165 61,717 54,194 Deferral of unearned income - 30,102 97,173 Recognition of unearned income - (76,595) (51,066) Minority interests' share of net income 37,012 40,343 48,529 Deferred stock appreciation rights costs, mining costs and other 13,756 (53,131) (9,625) (Increase) decrease in working capital: Accounts receivable (103,976) 80,611 6,860 Inventories 6,323 51,957 (6,474) Prepaid expenses and other (455) 32 3,906 Accounts payable and accrued liabilities 16,713 (8,963) 42,155 Accrued income taxes 16,034 (71,484) 14,645 -------- ---------- -------- (Increase) decrease in working capital (65,361) 52,153 61,092 -------- ---------- -------- Net cash provided by operating activities 478,827 513,552 600,524 -------- ---------- -------- Cash flow from investing activities: Capital expenditures: PT-FI (280,952) (530,191) (401,538) Investment in PT-SC (2,709) (36,243) (38,845) Atlantic Copper (8,422) (18,478) (51,855) Other 4,977 (7,705) 3,535 -------- ---------- -------- Net cash used in investing activities(287,106) (592,617) (488,703) -------- ---------- -------- Cash flow from financing activities: Net borrowings from (repayments to) Rio Tinto (144,760) 371,040 75,360 Proceeds from other debt 549,230 1,097,770 241,640 Repayment of other debt (239,495) (723,398) (372,633) Purchase of FCX common shares (259,213 (438,388) (220,997) Cash dividends paid: Common stock (35,382) (178,341) (175,766) Preferred stock (39,157) (40,543) (52,437) Minority interests (9,069) (33,773) (44,045) Proceeds from sale of: 7.50% Senior notes - - 197,525 7.20% Senior notes - - 248,045 Other (16,957) (3,461) 1,722 -------- ---------- -------- Net cash provided by (used in) financing activities (194,803) 50,906 (101,586) -------- ---------- -------- Net increase (decrease) in cash and cash equivalents (3,082) (28,159) 10,235 Cash and cash equivalents at beginning of year 8,959 37,118 26,883 -------- ---------- -------- Cash and cash equivalents at end of year $ 5,877 $ 8,959 $ 37,118 ======== ========== ======== Interest paid $251,999 $155,658 $142,170 ======== ======== ======== Income taxes paid $ 91,567 $259,434 $178,328 ======== ======== ========
The accompanying Notes to Financial Statements, which include information in Notes 1 and 7 regarding noncash transactions, are an integral part of these financial statements. 30 FREEPORT-McMoRan COPPER & GOLD INC. MANAGEMENT'S DISCUSSION AND ANALYSIS CASH FLOWS AND LIQUIDITY FCX's primary sources of cash are operating cash flows and borrowings, while its primary cash outflows over the last three years have been capital expenditures, dividends and purchases of its common stock. FCX believes that its expected operating cash flows and available borrowings provide the necessary liquidity to fund its anticipated 1999 operating needs. Operating Activities. Operating cash flow declined 7 percent or $34.7 million in 1998 compared with 1997, mostly because of lower net income and an increase in working capital, and declined 14 percent or $87.0 million in 1997 compared with 1996 when FCX received exploration advances from Rio Tinto. FCX received $97.2 million of cash proceeds from the sale of copper put option contracts in 1996 and recognized $46.1 million in 1997 revenues and $51.1 million in 1996 revenues. Working capital, excluding cash, increased $65.4 million in 1998 primarily because of increases in accounts receivable, and decreased $52.2 million in 1997 primarily because decreases in accounts receivable and inventories offset decreases in taxes payable. The $61.1 million decrease in working capital during 1996 primarily relates to exploration advances from Rio Tinto and an increase in accrued income taxes payable because of higher taxable income. Investing Activities. PT-FI's capital expenditures have varied with the level of activity on its expansions and EIP. In early 1998 PT-FI completed construction of the fourth concentrator mill expansion, which was funded almost entirely with nonrecourse borrowings from Rio Tinto. FCX's capital expenditures for 1999 are expected to approximate $185 million, primarily to maintain current production levels. Funding is expected to be provided by operating cash flow and PT-FI's bank credit facilities ($342.0 million commitment available at December 31, 1998). PT-FI funded most of its share of costs to construct PT-SC's smelter/refinery in 1996 and 1997. Atlantic completed its $225 million expansion to 270,000 metric tons of copper metal per year in 1996 and its $13.0 million debottlenecking project in June 1997. Atlantic received grants from the Spanish government of $7.5 million in 1997, $29.5 million in 1996 and a total of $52.8 million through December 31, 1997. These grants are recorded as a reduction of capital expenditures and are contingent on Atlantic meeting specified conditions through December 2001. Financing Activities. Net repayments to Rio Tinto totaled $144.8 million in 1998 from PT-FI's share of incremental cash flow attributable to the fourth concentrator mill expansion. Nonrecourse borrowings from Rio Tinto for the expansion totaled $371.0 million in 1997 and $75.4 million in 1996. Net proceeds from other debt totaled $309.7 million in 1998 and $374.4 million in 1997. Net repayments of other debt totaled $131.0 million in 1996. In August 1998, FCX announced a new open market share purchase program for an additional 20 million shares bringing the total shares approved for purchase under the open market share purchase programs to 60 million. During 1998, FCX acquired 20.0 million of its shares for $259.4 million (an average of $12.97 per share) under its open market share purchase programs. From inception of these programs through December 31, 1998, FCX has purchased a total of 50.2 million shares for $1.03 billion (an average of $20.49 per share), with 9.8 million shares remaining available under the programs. The timing of any future purchases is dependent upon many factors, including the price of FCX's common stock, the company's business and financial position, and general economic and market conditions. During 1997, FCX acquired 18.3 million of its shares for $439.8 million (an average of $24.07 per share). During 1996, FCX acquired 7.6 million of its shares for $221.6 million (an average of $29.24 per share). In December 1997, the FCX Board of Directors authorized a reduction in FCX's regular quarterly cash dividend on its common stock to $0.05 per share or $0.20 per share annually, from the 1997 annual dividend of $0.90 per share. In 1996, FCX sold publicly its 7.50% and 7.20% Senior Notes for net proceeds of $445.6 million. FCX remains focused on effectively managing its operations in the current environment of low copper and gold prices. Through its cost reduction and production enhancement efforts commenced in early 1998, PT-FI has directed its efforts toward optimizing performance of its expanded milling facilities to achieve higher sales levels at the low cost levels. In addition to the favorable effects of foreign currency movements, PT-FI realized significantly lower operating costs, capital and exploration expenditures and general and administrative expenses in 1998. These savings are expected to continue in 1999. With these savings and the prospective elimination of the regular quarterly cash dividend announced in December 1998, FCX believes it will be able to reduce its 1998 year-end debt significantly during 1999 at year-end 1998 commodity price levels. As a result, FCX believes it will have the overall financial flexibility to continue to invest in operations and maintain its exploration program. Because of the economic and political issues affecting Indonesia and the low current prices for copper and gold, the availability of any capital which may be required for FCX and its subsidiaries is limited and the cost of new capital, if available, would be high. 31
FREEPORT-McMoRan COPPER & GOLD INC. BALANCE SHEETS December 31, 1998 1997 - ------------------------------------------------------------------- (In Thousands) ASSETS Current assets: Cash and cash equivalents $ 5,877 $ 8,959 Accounts receivable: Customers 180,978 89,599 Other 47,524 40,012 Inventories: Product 118,440 120,794 Materials and supplies 182,964 194,006 Prepaid expenses and other 10,111 9,719 ---------- ---------- Total current assets 545,894 463,089 Property, plant and equipment, net 3,474,451 3,521,715 Investment in PT-SC 80,822 83,061 Other assets 91,467 84,344 ---------- ---------- Total assets $4,192,634 $4,152,209 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 289,342 $ 261,866 Current portion of long-term debt and short-term borrowings 127,804 80,852 Unearned customer receipts 55,564 101,428 Accrued income taxes 45,777 31,519 ---------- ---------- Total current liabilities 518,487 475,665 Long-term debt, less current portion 2,073,669 1,843,770 Note payable to Rio Tinto 255,320 464,360 Accrued postretirement benefits and other liabilities 124,073 125,980 Deferred income taxes 471,178 403,047 Minority interests 146,484 60,488 Redeemable preferred stock 500,007 500,007 Stockholders' equity: Step-up convertible preferred stock 349,990 349,990 Class A common stock, par value $0.10, 97,071,944 shares issued and outstanding 9,707 9,707 Class B common stock, par value $0.10, 121,453,497 shares and 121,404,858 shares issued and outstanding, respectively 12,145 12,140 Capital in excess of par value of common stock 650,746 649,792 Retained earnings 190,614 107,679 Accumulated other comprehensive income 10,244 10,244 Common stock held in treasury - 54,217,541 shares and 34,221,720 shares, at cost, respectively (1,120,030) (860,660) ---------- ---------- Total stockholders' equity 103,416 278,892 ---------- ---------- Total liabilities and stockholders' equity $4,192,634 $4,152,209 ========== ==========
The accompanying Notes to Financial Statements are an integral part of these financial statements. 32 FREEPORT-McMoRan COPPER & GOLD INC. MANAGEMENT'S DISCUSSION AND ANALYSIS CAPITAL RESOURCES AND FINANCIAL CONDITION Assets. FCX's total assets increased by $40.4 million over 1997 primarily because of capital expenditures and an increase in accounts receivable from customers because of higher sales volumes, partially offset by depreciation on property, plant and equipment. In March 1997, P.T. Nusamba Mineral Industri (NMI), a subsidiary of P.T. Nusantara Ampera Bakti, acquired from a third party approximately 51 percent of the capital stock of P.T. Indocopper Investama Corporation (PT-II). FCX owns the remaining 49 percent of PT-II, which is a 9.4 percent owner of PT-FI. NMI financed $254.0 million of the $315.0 million purchase price with a variable-rate commercial loan maturing in March 2002. The purchase price was negotiated based primarily on FCX's market value using its publicly traded common stock price at the time of the transaction. FCX has agreed that if NMI defaults on the loan, FCX will purchase the PT-II stock or the lenders' interest in the commercial loan for the amount then due by NMI under the loan. FCX also agreed to lend to NMI any amounts to cover any shortfalls between the interest payments due on the commercial loan and the dividends received by NMI from PT-II. At December 31, 1998, $25.4 million was due in March 2002 from NMI because of interest payment shortfalls and is included in other assets. The amount of any future shortfalls will depend primarily on the level of PT-FI's dividends to PT-II. Infrastructure Asset Sales. In September 1998, PT-FI reacquired for $30 million an aggregate one-third interest in certain infrastructure asset joint ventures owned by P.T. ALatieF Nusakarya Corporation (ALatieF), an Indonesian investor. The joint ventures had purchased $270.0 million of infrastructure assets from PT-FI during the period from December 1993 to March 1997 and PT-FI had sold its one-third interest in the joint ventures in March 1997. PT-FI is now consolidating the joint ventures because the financing arrangements provide the joint venture partners with a guaranteed annual return on their investment, and PT-FI's results reflect lower interest expense and higher minority interest charges as a result (Note 6). In December 1997, PT-FI sold the new power plant facilities associated with the fourth concentrator mill expansion for $366.4 million to the joint venture that owns the assets which already provide electricity to PT-FI. The purchase price included $123.2 million for Rio Tinto's share of the new power plant facilities. Asset sales to the power joint venture totaled $581.4 million through 1997 including $458.2 million of PT-FI owned assets. PT-FI subsequently sold its 30 percent interest in the joint venture to the other partners and is purchasing power under infrastructure asset financing arrangements pursuant to a power sales agreement (Note 6). Liabilities and Stockholders' Equity. FCX's liabilities rose by $215.9 million over 1997, primarily reflecting an increase in total debt and minority interests. Increases in debt relate to the expansions and the FCX stock purchase programs. Minority interests were higher because PT-FI is now consolidating the AlatieF joint ventures discussed above. The current portion of long-term debt includes $46.3 million and accrued liabilities include $1.5 million of accrued interest payable to Rio Tinto from PT-FI's share of December 1998 incremental cash flow. Deferred income taxes increased $68.1 million because of timing differences related to tax and book depreciation of property, plant and equipment. Equity declined by $175.5 million from 1997 primarily because an $82.9 million increase in retained earnings was offset by $259.4 million of FCX common stock purchases. FCX believes that PT-FI's operations are being conducted pursuant to applicable permits and are in compliance in all material respects with applicable Indonesian environmental laws, rules and regulations. The ultimate amount of reclamation and closure costs to be incurred cannot currently be projected with precision. Ultimate reclamation and closure costs may require as much as $100 million but are not expected to exceed $150 million. These estimates are subject to revision over time as more complete studies are performed and more definitive plans are formulated. Some reclamation costs will be incurred throughout the remaining life of the mine, while most closure costs and the remaining reclamation costs will be incurred at the end of the mine's life, which is currently estimated to exceed 30 years. PT-FI had $9.2 million accrued on a unit-of-production basis at December 31, 1998 for mine closure and reclamation costs, included in other liabilities. In 1996, FCX began contributing to a cash fund ($0.9 million balance at December 31, 1998) designed to accumulate at least $100 million by the end of its Indonesian mine's life. Proceeds from this fund, including accrued interest, will be used to fund costs incurred for mine closure and reclamation. An increasing emphasis on environmental issues and future changes in regulations could require FCX to incur additional costs that would be charged against future operations. Estimates involving environmental matters are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology and inflation. See FCX's Working Toward Sustainable Development report beginning on page 6 for information about FCX's environmental programs. 33
FREEPORT-McMoRan COPPER & GOLD INC. STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------- (In Thousands) Convertible Exchangeable Preferred Stock: Balance at beginning of year $ - $ - $223,900 Conversions to Class A common stock - - (221,093) Redemptions - - (2,807) ---------- -------- -------- Balance at end of year - - - ---------- -------- -------- Step-Up Convertible Preferred Stock: Balance at beginning of year 349,990 349,990 350,000 Conversions to Class A common stock - - (10) ---------- -------- -------- Balance at end of year 349,990 349,990 349,990 ---------- -------- -------- Class A common stock: Balance at beginning of year 9,707 9,707 8,804 Conversions of preferred stock - - 903 ---------- -------- -------- Balance at end of year 9,707 9,707 9,707 ---------- -------- -------- Class B common stock: Balance at beginning of year 12,140 12,098 11,862 Exercised stock options 5 42 236 ---------- -------- -------- Balance at end of year 12,145 12,140 12,098 ---------- -------- -------- Capital in excess of par value of common stock: Balance at beginning of year 649,792 636,100 376,054 Conversions of preferred stock - - 220,073 Exercised stock options 954 13,692 39,973 ---------- -------- -------- Balance at end of year 650,746 649,792 636,100 ---------- -------- -------- Retained earnings: Balance at beginning of year 107,679 77,479 78,565 Net income 153,848 245,108 226,249 Cash dividends on common stock (35,382) (178,341) (175,766) Dividends on preferred stock (35,531) (36,567) (51,569) ---------- -------- -------- Balance at end of year 190,614 107,679 77,479 ---------- -------- -------- Accumulated other comprehensive income 10,244 10,244 10,244 ---------- -------- -------- Common stock held in treasury: Balance at beginning of year (860,660) (420,239) (177,755) Purchase of 19,995,821, 18,270,500 and 7,576,500 shares, respectively (259,370) (439,827) (221,565) Tender of 20,527 and 669,093 shares, respectively, to FCX to exercise stock options - (594) (20,919) ---------- -------- -------- Balance at end of year (1,120,030) (860,660) (420,239) ---------- -------- -------- Total stockholders' equity $ 103,416 $278,892 $675,379 ========== ======== ========
The accompanying Notes to Financial Statements are an integral part of these financial statements. 34 FREEPORT-McMoRan COPPER & GOLD INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The consolidated financial statements of Freeport-McMoRan Copper & Gold Inc. (FCX) include its majority-owned subsidiaries, P.T. Freeport Indonesia Company (PT-FI), including certain joint ventures involving PT-FI (Note 6), and P.T. IRJA Eastern Minerals Corporation (Eastern Mining), as well as its wholly owned subsidiary, Atlantic Copper, S.A. (Atlantic). FCX's unincorporated joint ventures with Rio Tinto plc (Rio Tinto) are reflected using the proportionate consolidation method in accordance with standard industry practice (Note 2). PT-FI's investment in P.T. Smelting Co. (PT-SC) is accounted for under the equity method (Note 9) with PT-FI's share of operating results recorded in operating income. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 1998 presentation. Use of Estimates. The preparation of FCX's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management estimates include the pricing of open concentrate sales, useful lives for depreciation and amortization, allowances for obsolete inventory, reclamation and environmental obligations, postretirement and other employee benefits, valuation allowances for deferred tax assets, future cash flow associated with assets and proved and probable reserves. Actual results could differ from those estimates. Cash and Cash Equivalents. Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents. Accounts Receivable. Accounts receivable from customers include $20.8 million from PT-SC at December 31, 1998. Other accounts receivable include refundable value-added taxes, net of the allowance for uncollectible amounts, totaling $24.9 million at December 31, 1998 and $18.9 million at December 31, 1997. The allowance for uncollectible amounts totaled $5.5 million at December 31, 1998 and $3.8 million at December 31, 1997. Inventories. Inventories are stated at the lower of cost or market. PT-FI uses the average cost method and Atlantic uses the first-in, first-out (FIFO) cost method. Property, Plant and Equipment. Property, plant and equipment are carried at cost. Mineral exploration costs are expensed as incurred, except in the year a property is deemed to contain a viable mineral deposit, in which case they are capitalized. Development costs, including interest incurred during the construction and development period, are capitalized. Expenditures for replacements and improvements are capitalized. Depreciation for mining and milling life-of-mine assets is determined using the unit-of-production method based on estimated recoverable copper reserves. Other assets are depreciated on a straight-line basis over estimated useful lives of 15 to 20 years for buildings and 3 to 25 years for machinery and equipment. Income Taxes. FCX accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Deferred income taxes are provided to reflect the future tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Reclamation and Mine Closure. Estimated reclamation and mine closure costs for PT-FI's current mining operations in Indonesia are accrued and charged to income over the estimated life of the mine by the unit- of-production method based on estimated recoverable copper reserves. Expenditures resulting from the remediation of conditions caused by past operations, which do not contribute to future revenue generation, are expensed. Financial Contracts. At times FCX has entered into financial contracts to manage certain risks resulting from fluctuations in commodity prices (primarily copper and gold), foreign currency exchange rates and interest rates by creating offsetting market exposures. Costs or premiums and gains or losses on contracts meeting deferral criteria, including closed contracts, are recognized with the hedged transaction. Gains or losses are recognized if the hedged transaction is no longer expected to occur or if deferral criteria are not met. FCX monitors its credit risk on an ongoing basis and considers this risk to be minimal because its contracts are with a diversified group of financially strong counterparties. At December 31, 1998, FCX had redeemable preferred stock indexed to commodities, open foreign currency forward contracts, open forward copper purchase contracts, and interest rate swap contracts (Note 11). Redeemable preferred stock indexed to commodities is treated as a hedge of future production and is carried at its original issue value. As redemption payments occur, differences between the carrying value and the payment will be recorded as an adjustment to revenues. 35 FCX hedges a portion of its anticipated Spanish peseta, Indonesian rupiah and Australian dollar cash outflows with foreign currency forward contracts. Changes in market value of foreign currency forward contracts which protect anticipated transactions are recognized in the period incurred. Atlantic enters into futures contracts to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match, and whenever Atlantic extends the pricing terms on its copper sales. Gains and losses on these contracts are recognized with the hedged transaction. FCX has interest rate swap contracts to limit the effect of increases in the interest rates on variable-rate debt. The costs associated with these contracts are amortized to interest expense over the terms of the agreements. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activity," which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. SFAS 133 is effective for fiscal years beginning after June 15, 1999 with earlier application permitted. FCX has not determined when it will adopt SFAS 133; however, adoption is not expected to have a material impact on its financial position. Concentrate Sales. Revenues from PT-FI's concentrate sales are recorded net of royalties, treatment costs and the impact of the price protection program (Note 11). PT-FI's concentrate sales agreements, including its sales to Atlantic and PT-SC, provide for provisional billings based on world metals prices when shipped, primarily using then-current prices on the London Metal Exchange (LME). Actual settlement on the copper portion is generally based on the average LME price for a specified future month (quotational period). Copper revenues on provisionally priced open pounds are adjusted monthly based on then-current prices. At December 31, 1998, FCX had consolidated provisionally priced copper sales totaling 191.5 million pounds recorded at an average price of $0.66 per pound. Approximately 84 percent of these open pounds are expected to be finally priced during the first quarter of 1999 with the remaining pounds to be priced during the second quarter of 1999. A one-cent movement in the average price used for these open pounds will have an approximate $0.9 million impact on FCX's 1999 net income. Gold sales are priced according to individual contract terms, generally the average London Bullion Market Association price for the month of shipment. PT-FI pays royalties under a Contract of Work (COW), with a 30- year term and two 10-year extensions permitted, entered into in December 1991 with the Government of Indonesia (GOI). PT-FI's copper royalty rate varies from 1.5 percent, at a copper price of $0.90 or less, to 3.5 percent, at a copper price of $1.10 or more, of copper net revenue. The related rate for gold and silver sales is 1.0 percent. The royalties totaled $18.7 million in 1998, $31.4 million in 1997 and $30.4 million in 1996. In light of its substantially expanded production capabilities, PT-FI is discussing with the GOI the payment of voluntary additional royalties on metal from production above 200,000 metric tons of ore per day (MTPD) in amounts for copper equal to the COW royalty and for gold and silver equal to twice the COW royalties. Therefore, including the payment of COW royalties, the total of royalties paid on copper net revenues from production above 200,000 MTPD would be double the amount of the COW royalty; and the total of royalties paid on gold and silver sales from production above 200,000 MTPD would be triple the amount of the COW royalties. The additional royalties would be effective January 1, 1999. Because in large part mineral royalties under GOI regulations are remitted to the provinces from which the minerals are extracted, PT-FI offered the voluntary additional royalties to provide additional support to the local governments and people of Irian Jaya. Foreign Currencies. Effective January 1, 1996, Atlantic changed its functional currency from the Spanish peseta to the U.S. dollar. This resulted from the significant changes in Atlantic's operations related to its expansion and the sale of its mining operations in Spain. Previously, Atlantic's assets and liabilities that were denominated in pesetas were translated to U.S. dollars using the exchange rate in effect at the balance sheet date, with translation adjustments recorded as a component of stockholders' equity. Transaction gains and losses associated with Atlantic's peseta- denominated and PT-FI's rupiah-denominated monetary assets and liabilities are included in net income. Excluding hedging amounts, net Atlantic transaction gains (losses) totaled $(2.2) million in 1998, $16.6 million in 1997 and $10.3 million in 1996. Atlantic's peseta-denominated net monetary liabilities totaled $79.1 million at December 31, 1998 based on an exchange rate of 142.7 pesetas to one U.S. dollar. PT-FI's rupiah-denominated net monetary assets totaled $25.6 million at December 31, 1998 based on an exchange rate of 7,725 rupiah to one U.S. dollar. Excluding hedging amounts, net PT-FI transaction gains (losses) related to these rupiah-denominated net monetary assets totaled $0.9 million in 1998, $(6.3) million in 1997 and were not material in 1996. 36 Comprehensive Income. In 1998, FCX adopted SFAS 130, "Reporting Comprehensive Income," which establishes new rules for the reporting and display of comprehensive income (net income plus other comprehensive income, or all other changes in net assets from nonowner sources) and its components. FCX has no items of other comprehensive income for the years presented in the financial statements. Accumulated other comprehensive income reported in the Statements of Stockholders' Equity consists solely of the cumulative foreign currency translation adjustment at Atlantic as of December 31, 1995, for which there is no tax effect. Earnings Per Share. 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. Diluted net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the year plus the net effect of dilutive stock options. Dilutive stock options represented one thousand shares in 1998, 1.3 million shares in 1997 and 1.8 million shares in 1996. Options excluded from the computation of diluted net income per share of common stock because their exercise prices were greater than the average market price of the common stock during the year totaled options for 10.5 million shares (average exercise price of $23 per share) in 1998, options for 2.3 million shares (average exercise price of $33 per share) in 1997 and options for 1.8 million shares (average exercise price of $35 per share) in 1996. The FCX Step-Up Convertible Preferred Stock outstanding was not included in the computation of diluted net income per share of common stock because including the conversion of these shares would have increased net income per share of common stock. The preferred stock was convertible into 11.7 million shares of common stock and accrued dividends totaled $21.0 million for each year presented. NOTE 2. OWNERSHIP IN SUBSIDIARIES AND JOINT VENTURES WITH RIO TINTO FCX's direct ownership in PT-FI totaled 81.3 percent at December 31, 1998 and 1997. FCX also owns 49 percent of P.T. Indocopper Investama Corporation (PT-II), a 9.4 percent owner of PT-FI, bringing FCX's total ownership in PT-FI to 85.9 percent at December 31, 1998 and 1997. At December 31, 1998, PT-FI's net assets totaled $678.9 million, including $475.3 million of retained earnings. FCX has various intercompany loans to PT-FI totaling $832.5 million at December 31, 1998. Substantially all of PT-FI's assets are located in Indonesia. Unfavorable economic conditions continue to affect Southeast Asia, including Indonesia. Since early 1997, Indonesia's economy has contracted, inflation increased dramatically and the Indonesian rupiah severely weakened initially and then partly recovered. The economic situation has also created political and social instability in Indonesia. PT-FI's COW provides that the GOI will not nationalize or expropriate PT-FI's mining operations. In March 1997, PT Nusamba Mineral Industri (NMI), a subsidiary of P.T. Nusantara Ampera Bakti, acquired from a third party approximately 51 percent of the capital stock of PT-II. NMI financed $254.0 million of the $315.0 million purchase price with a variable-rate commercial loan maturing in March 2002. The purchase price was negotiated based primarily on FCX's market value using its publicly traded common stock price at the time of the transaction. FCX has agreed that if NMI defaults on the loan, FCX will purchase the PT-II stock or the lenders' interest in the commercial loan for the amount then due by NMI under the loan. FCX also agreed to lend to NMI any amounts to cover any shortfalls between the interest payments due on the commercial loan and the dividends received by NMI from PT-II. At December 31, 1998, $25.4 million was due in March 2002 from NMI because of interest payment shortfalls and is included in other assets. The amount of any future shortfalls will depend primarily on the level of PT-FI's dividends to PT-II. FCX's direct ownership in Eastern Mining totaled 90 percent at December 31, 1998 and 1997. PT-II owns the remaining 10 percent of Eastern Mining, bringing FCX's total ownership in Eastern Mining to 94.9 percent at December 31, 1998 and 1997. FCX owns 100 percent of the outstanding Atlantic stock. At December 31, 1998, Atlantic's net assets totaled $52.3 million and FCX had outstanding advances to Atlantic totaling $25.2 million. Atlantic is not expected to pay dividends in the near future. Joint Ventures With Rio Tinto. Rio Tinto owns 23.9 million shares of FCX Class A common stock (approximately 15 percent of the December 31, 1998 outstanding common stock of FCX). In addition, FCX and Rio Tinto established exploration and expansion joint ventures. Pursuant to the exploration joint ventures, Rio Tinto has a 40 percent interest in future development projects under PT-FI's COW and Eastern Mining's COW, and may elect to participate in future exploration projects. Under the arrangements, Rio Tinto funded $100 million in 1996 ($1.2 million remaining at December 31, 1998) for approved exploration costs in the areas covered by the PT-FI and Eastern Mining COWs. Substantially all exploration costs in the joint venture areas are now being shared 60 percent by FCX and 40 percent by Rio Tinto. 37 FCX and Rio Tinto completed the "fourth concentrator mill expansion" of PT-FI's facilities in early 1998. Pursuant to the joint venture agreement, Rio Tinto has a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver through 2021. Rio Tinto provided a $450 million nonrecourse loan to PT-FI for PT-FI's share of the cost of the expansion. FCX and Rio Tinto began sharing incremental cash flow attributable to the expansion effective January 1, 1998 on the basis of 60 percent to PT-FI and 40 percent to Rio Tinto. PT-FI is paying its share of incremental cash flow to Rio Tinto until Rio Tinto receives an amount equal to the funds loaned to PT-FI plus interest based on Rio Tinto's cost of borrowing. Through December 31, 1998, PT-FI's share of incremental cash flow totaled $236.4 million, of which $188.6 million was paid to Rio Tinto in 1998 and $47.8 million was paid in 1999. The incremental production from the expansion, as well as production from PT-FI's existing operations, share proportionately in operating, nonexpansion capital and administrative costs. PT-FI will continue to receive 100 percent of the cash flow from specified annual amounts of copper, gold and silver through 2021 calculated by reference to its proved and probable reserves as of December 31, 1994 (Note 14). NOTE 3. INVENTORIES The components of product inventories follow (in thousands):
December 31, 1998 1997 - ----------------------------------------------------------- PT-FI: Concentrates - Average Cost $ 15,630 $ 16,118 Atlantic: Concentrates - FIFO 58,597 72,088 Work in process - FIFO 41,725 26,501 Finished goods - FIFO 2,488 6,087 -------- -------- Total product inventories $118,440 $120,794 ======== ========
The average cost method was used to determine the cost of essentially all materials and supplies inventory at December 31, 1998 and 1997. Materials and supplies inventory is net of obsolescence reserves totaling $24.6 million at December 31, 1998 and $29.5 million at December 31, 1997. NOTE 4. PROPERTY, PLANT AND EQUIPMENT, NET The components of net property, plant and equipment follow (in thousands):
December 31, 1998 1997 - -------------------------------------------------------------- Exploration, development and other $ 975,218 $ 929,844 Buildings and infrastructure 1,103,753 717,518 Machinery and equipment 1,566,674 1,281,903 Mobile equipment 444,474 355,802 Infrastructure assets 619,631 930,399 Construction in progress 104,076 397,272 ---------- ---------- Property, plant and equipment 4,813,826 4,612,738 Accumulated depreciation and amortization (1,339,375) (1,091,023) ---------- ---------- Property, plant and equipment, net $3,474,451 $3,521,715 ========== ==========
Exploration, development and other include $124.8 million of excess costs related to investments in consolidated subsidiaries which are being amortized over the lives of the related assets. Property, plant and equipment are net of grants from the Spanish government totaling $52.8 million. The grants are contingent on Atlantic meeting specified conditions through December 2001. NOTE 5. REDEEMABLE PREFERRED STOCK FCX has outstanding 6.0 million depositary shares representing 300,000 shares of its Gold-Denominated Preferred Stock totaling $232.6 million. Each depositary share has a cumulative quarterly cash dividend equal to the value of 0.000875 ounce of gold and will be redeemed in August 2003 for the cash value of 0.1 ounce of gold. 38 FCX has outstanding 4.3 million depositary shares representing 215,279 shares of its Gold-Denominated Preferred Stock, Series II totaling $167.4 million. Each depositary share has a cumulative quarterly cash dividend equal to the value of 0.0008125 ounce of gold and will be redeemed in February 2006 for the cash value of 0.1 ounce of gold. FCX has outstanding 4.8 million depositary shares representing 119,000 shares of its Silver-Denominated Preferred Stock totaling $100.0 million. Each depositary share has a cumulative quarterly cash dividend equal to the value of 0.04125 ounce of silver. Beginning in August 1999, FCX will redeem the underlying Silver-Denominated Preferred Stock in eight equal annual installments. NOTE 6. LONG-TERM DEBT
December 31, 1998 1997 - ------------------------------------------------------------------------- (In Thousands) Notes payable: FCX and PT-FI credit facilities, average rate 7.4% in 1998 and 6.4% in 1997 $ 658,000 $ 250,000 Rio Tinto loan, including accrued interest at December 31, 1997, average rate 5.6% in 1998 and 5.8% in 1997 (Note 2) 301,640 464,360 Atlantic facility, average rate 6.5% in 1998 and 7.2% in 1997 275,785 291,276 Equipment loan 42,000 49,000 ALatieF loan, average rate 6.6% in 1998 43,563 - Other, primarily Atlantic borrowings 43,438 78,273 9 /% Senior Notes due 2001 120,000 120,000 7.50% Senior Notes due 2006 200,000 200,000 7.20% Senior Notes due 2026 250,000 250,000 Infrastructure asset financings 522,367 686,073 ---------- ---------- 2,456,793 2,388,982 Less current portion and short-term borrowings 127,804 80,852 ---------- ---------- $2,328,989 $2,308,130 ========== ==========
Notes Payable. The FCX and PT-FI credit facilities provide total availability of $1.0 billion. PT-FI has a $550 million facility ($234.0 million of additional borrowings available at December 31, 1998) and FCX and PT-FI have a separate $450 million facility ($108.0 million of additional borrowings available at December 31, 1998). These credit facilities are also subject to a borrowing base, redetermined annually during the second quarter by the banks, which had $766.5 million available at December 31, 1998. These variable-rate revolving facilities are available until December 2002, contain provisions requiring minimum working capital requirements, specified cash flow to interest coverage and restrictions on other borrowings. PT-FI assigned its existing and future sales contracts and pledged its rights under the COW and most of its assets as security for its borrowings. Atlantic has a variable-rate project loan, nonrecourse to FCX, consisting of a term loan ($210.8 million) and a fully drawn working capital revolver ($65.0 million) as of December 31, 1998 (the Atlantic Facility). The term loan is being repaid in equal quarterly installments through June 2005. The working capital facility matures in June 2005. The Atlantic Facility requires certain hedging arrangements, restricts other borrowings and specifies certain minimum coverage ratios. Borrowings under the Atlantic Facility are secured by 100 percent of Atlantic's capital stock, the smelter and refinery assets, and certain receivables and inventory. In addition to the Atlantic Facility, Atlantic has a $40 million working capital revolver that is secured by certain shipments of copper concentrate, and has access to additional lines of credit, which are generally unsecured, with various financial institutions. FCX has an equipment loan secured by certain PT-FI assets. Interest accrues at 8.1 percent and principal payments total $7.0 million annually with a final payment of $21.0 million in December 2001. Senior Notes. In 1996, FCX sold publicly its 7.50% Senior Notes Due 2006 (the 2006 Notes) for net proceeds of $197.5 million and its 7.20% Senior Notes Due 2026 (the 2026 Notes) for net proceeds of $248.0 million. Interest is payable semiannually in May and November of each year. The holder of each 2026 Note may elect early repayment in November 2003. The Notes are redeemable at the option of FCX at the greater of (a) their principal amount or (b) the remaining scheduled payments of principal and interest discounted to the date of redemption on a semiannual basis at the applicable treasury rate plus 30 basis points, together with, in either case, accrued interest to the date of redemption. 39 Infrastructure Asset Financings. In March 1997, PT-FI completed the final $75.0 million sale of infrastructure assets to joint ventures then owned one-third by PT-FI and two-thirds by P.T. ALatieF Nusakarya Corporation (ALatieF), an Indonesian investor. The sales to the ALatieF joint ventures totaled $270.0 million during the period from December 1993 to March 1997. Funding for the purchases consisted of $90.0 million in equity contributions by the joint venture partners, a $60.0 million bank loan (the AlatieF loan) and the 9 /% Senior Notes due 2001. PT-FI subsequently sold its one-third interest in the joint ventures to ALatieF in March 1997. In September 1998, PT-FI reacquired for $30 million an aggregate one-third interest in the joint ventures and continues to lease the infrastructure assets under infrastructure asset financing arrangements. PT-FI guarantees the ALatieF loan associated with the purchases and is consolidating the joint ventures because the financing arrangements provide the joint venture partners with a guaranteed 15 percent after-tax minimum annual return on their investment. In December 1997, PT-FI sold the new power plant facilities associated with the fourth concentrator mill expansion for $366.4 million to the joint venture that owns the assets which already provide electricity to PT-FI. The purchase price included $123.2 million for Rio Tinto's share of the new power plant facilities. Asset sales to the power joint venture totaled $581.4 million through 1997 including $458.2 million of PT-FI owned assets. PT-FI subsequently sold its 30 percent interest in the joint venture to the other partners and is purchasing power under infrastructure asset financing arrangements. At December 31, 1998, the infrastructure asset financing obligations pursuant to the power sales agreement totaled $431.7 million. In 1995, PT-FI sold certain of its port, marine, logistics and construction equipment and facilities for $100.0 million to an unrelated joint venture and sold $48.0 million of its aviation assets to a joint venture, 25 percent owned by PT-FI. PT-FI guarantees certain of the bank loans totaling $69.9 million at December 31, 1998 associated with these sales. PT-FI is leasing these assets under infrastructure asset financing arrangements. At December 31, 1998, the obligations under these infrastructure asset financings totaled $88.7 million. Maturities and Capitalized Interest. Maturities of debt instruments and infrastructure asset financings based on the amounts and terms outstanding at December 31, 1998 totaled $127.8 million in 1999, $123.7 million in 2000, $227.3 million in 2001, $782.3 million in 2002, $314.4 million in 2003 and $881.3 million thereafter. Capitalized interest totaled $19.6 million in 1998, $23.0 million in 1997 and $23.0 million in 1996. NOTE 7. STOCKHOLDERS' EQUITY Common Stock. FCX has 473.6 million authorized shares of capital stock consisting of 423.6 million shares of common stock and 50.0 million shares of preferred stock. FCX has two classes of common stock which differ only as to their voting rights for the directors of FCX. Holders of Class B common stock elect 80 percent of the FCX directors while holders of Class A common stock and preferred stock elect 20 percent. Preferred Stock. FCX has outstanding 14.0 million depositary shares representing 700,000 shares of its Step-Up Convertible Preferred Stock. Each depositary share has a cumulative $1.75 annual cash dividend (payable quarterly) and a $25 liquidation preference, and is convertible at the option of the holder into 0.835 shares of FCX Class A common stock. Through August 1999, FCX may redeem these depositary shares for 0.835 shares of FCX Class A common stock per depositary share if the market price of FCX Class A common stock exceeds $37.43 per share for 20 trading days within any period of 30 consecutive trading days. Thereafter, FCX may redeem these depositary shares at $25 per share (payable in FCX Class A common stock, cash or a combination of both, at FCX's option) plus accrued and unpaid dividends. In 1996, FCX called for redemption its depositary shares representing Convertible Exchangeable Preferred Stock. Prior to the redemption date, holders of 8.8 million depositary shares converted their shares into 9.0 million FCX Class A common shares. FCX paid $2.9 million in January 1997 to redeem the remaining 0.1 million depositary shares. Stock Options. In 1995, FCX's shareholders adopted the Adjusted Stock Award Plan to provide for the issuance of certain stock awards to employees, officers and directors of Freeport-McMoRan Inc. (FTX), the former parent of FCX, in connection with FTX's distribution of FCX shares. Under this plan, FCX made a one time grant of awards to purchase up to 10.7 million Class B common shares, including stock appreciation rights (SARs), at prices equivalent to the original FTX price at date of grant as adjusted for the proportionate market value of FCX shares at the time of the distribution. All options granted under this plan expire 10 years from the original FTX date of grant. FCX's shareholders adopted the 1995 Stock Option Plan (the 1995 Plan) to provide for the issuance of stock options and other stock- based awards (including SARs) at no less than market value at the time of grant. During 1998, FCX converted 1.3 million SARs to stock options when FCX's stock price was below the SARs' exercise prices. Under the 1995 Plan, FCX can grant options to 40 eligible participants to purchase up to 10 million Class B common shares. Options granted under the 1995 Plan generally expire 10 years after the date of grant. FCX's shareholders also adopted the 1995 Stock Option Plan for Non- Employee Directors (the Director Plan) authorizing FCX to grant options to purchase up to 2 million shares. Options granted under the Director Plan are exercisable in 25 percent annual increments beginning one year from the date of grant and expire 10 years after the date of grant. For options granted under the Director Plan, FCX will pay cash to the option holder equal to an amount based on the maximum individual federal income tax rate in effect at the time of exercise. Options for 3.1 million shares under the 1995 Plan and 1.5 million shares under the Director Plan were available for new grants as of December 31, 1998. A summary of stock options outstanding, including 0.1 million SARs, follows:
1998 1997 1996 - --------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Number Option Number Option Number Option of Options Price of Options Price of Options Price - --------------------------------------------------------------------------- Balance at January 1 8,065,837 $23.84 7,990,083 $23.04 9,770,040 $18.59 Granted 3,691,200 17.77 856,900 29.18 1,909,200 34.71 Exercised (51,749) 14.74 (579,612) 18.47 (3,538,945) 17.07 Expired/Forfeited (274,706) 21.29 (201,534) 30.45 (150,212) 22.66 ---------- --------- --------- Balance at December 31 11,430,582 21.98 8,065,837 23.84 7,990,083 23.04 ========== ========= =========
In March 1998, two FCX executive officers were granted stock options under the 1995 Plan to purchase 2.6 million shares of FCX stock at $19.03 per share. The options may be exercised at any time through March 2006 and were granted in return for a five-year cap on their cash incentive compensation. Summary information of stock options outstanding at December 31, 1998, excluding SARs, follows:
Options Outstanding Options Exercisable - --------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Number Remaining Option Number Option Range of Exercise Prices of Options Life Price of Options Price - --------------------------------------------------------------------------- $14.63 to $21.27 8,710,853 5.2 years $18.73 7,687,358 $19.26 $22.63 to $32.81 1,226,244 7.7 years 29.56 472,069 29.39 $35.50 1,416,667 7.4 years 35.50 566,666 35.50 ---------- --------- 11,353,764 8,726,093 ========== =========
FCX has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and continues to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation plans. FCX recognized a $25.3 million gain in 1997 and charges totaling $12.7 million in 1996 for the cost of SARs and grants under the Director Plan, which have the same accounting treatment as SARs, caused by the fluctuations in FCX's common stock price. Had compensation cost for FCX's stock option grants, excluding SARs, been determined based on the value at the grant dates for awards under those plans pursuant to the requirements of SFAS 123, FCX's stock- based compensation costs would have increased by $34.3 million ($16.7 million to net income or $0.10 per share) in 1998, $6.3 million ($3.4 million to net income or $0.02 per share) in 1997 and $2.4 million ($1.3 million to net income or $0.01 per share) in 1996. For the pro forma computations, the values of the option grants were calculated on the dates of grant using the Black-Scholes option- pricing model. The weighted average fair value for stock option grants, including the 1.3 million SARs converted to stock options in 1998, was $6.75 per option in 1998, $10.24 per option in 1997 and $12.09 per option in 1996. The weighted average assumptions used include a risk-free interest rate of 5.8 percent in 1998, 6.9 percent in 1997 and 6.6 percent in 1996; expected volatility of 34 percent in 1998, 30 percent in 1997 and 26 percent in 1996; an annual dividend of $0.20 per share in 1998 and $0.90 per share in 1997 and 1996; and expected lives of 8 years in 1998 and 10 years in 1997 and 1996. The pro forma effects on net income for 1998, 1997 and 1996 are not representative of future years. No other discounts or restrictions related to vesting or the likelihood of vesting of stock options were applied. 41 NOTE 8. INCOME TAXES The components of FCX's deferred taxes follow (in thousands):
December 31, 1998 1997 - -------------------------------------------------------------- Deferred tax asset: Foreign tax credits $ 181,749 $ 137,784 U.S. alternative minimum tax credits 55,583 49,946 Atlantic net operating loss carryforwards 91,653 97,400 Deferred compensation 4,658 5,898 Intercompany profit elimination 14,850 8,141 Obsolescence reserve 4,282 8,095 Valuation allowance (328,985) (285,130) --------- --------- Total deferred tax asset 23,790 22,134 --------- --------- Deferred tax liability: Property, plant and equipment (463,312) (423,515) Undistributed earnings in PT-FI (22,832) (6,219) Other (8,824) 4,553 --------- --------- Total deferred tax liability (494,968) (425,181) --------- --------- Net deferred tax liability $(471,178) $(403,047) ========= =========
FCX has provided a valuation allowance equal to its tax credit carryforwards ($237.3 million at December 31, 1998 and $187.7 million at December 31, 1997) as these would only be used should FCX be required to pay regular U.S. tax, which is considered unlikely for the foreseeable future. Atlantic is subject to taxation in Spain and has not generated significant taxable income in recent years. FCX has provided a valuation allowance equal to the future tax benefits resulting from $261.9 million of Atlantic net operating losses at December 31, 1998 and $278.3 million of net operating losses at December 31, 1997 which expire through the year 2007. PT-FI's 1994 and 1997 Indonesian income tax returns are currently under examination. In January 1998, PT-FI settled and paid assessments from the Indonesian tax authorities for the years 1989- 1993 with no material adverse effect on the consolidated financial condition or results of operations of FCX. The provision for income taxes consists of the following (in thousands):
1998 1997 1996 - ------------------------------------------------------------------ Current income taxes: Indonesian $100,336 $159,713 $182,354 United States and other 8,065 9,885 10,620 -------- -------- -------- 108,401 169,598 192,974 Deferred Indonesian taxes 62,165 61,717 54,194 -------- -------- -------- $170,566 $231,315 $247,168 ======== ======== ========
42 Differences between income taxes computed at the contractual Indonesian tax rate and income taxes recorded follow (dollars in thousands):
1998 1997 1996 - --------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent - --------------------------------------------------------------------------- Income taxes computed at the contractual Indonesian tax rate $126,499 35% $180,868 35% $182,681 35% Indonesian withholding tax on: Earnings/dividends 21,490 6 21,886 4 37,097 7 Interest 3,765 1 6,818 1 7,590 1 Increase (decrease) attributable to: Intercompany interest expense (15,103) (4) (24,192) (5) (21,260) (4) Parent company costs 26,504 7 24,926 5 11,498 2 Indonesian presidential decree - - 9,643 2 - - U.S. alternative minimum tax 7,500 2 8,500 2 9,500 2 Atlantic net loss (income) (1,733) - (1,187) - 8,378 2 Other, net 1,644 - 4,053 1 11,684 2 -------- -- -------- -- -------- -- Provision for income taxes $170,566 47% $231,315 45% $247,168 47% ======== == ======== == ======== ==
NOTE 9. TRANSACTIONS WITH AFFILIATES AND EMPLOYEE BENEFITS Management Services Agreement. FM Services Company (FMS), owned 45 percent by FCX, provides certain administrative, financial and other services on a cost-reimbursement basis under a management services agreement. These costs, which include related overhead, totaled $40.3 million in 1998, $44.7 million in 1997 and $45.2 million in 1996. Management believes these costs do not differ materially from the costs that would have been incurred had the relevant personnel providing these services been employed directly by FCX. PT-SC. PT-SC, an Indonesian company, completed construction of its 200,000 metric tons of copper metal per year smelter/refinery in Gresik, Indonesia during the third quarter of 1998. PT-FI, Mitsubishi Materials Corporation (Mitsubishi Materials), Mitsubishi Corporation (Mitsubishi) and Nippon Mining & Metals Co., Ltd. (Nippon) own 25 percent, 60.5 percent, 9.5 percent and 5 percent, respectively, of the outstanding PT-SC stock. PT-FI is providing all of PT-SC's copper concentrate requirements at market rates; however, for the first 15 years of operations the treatment and refining charges will not fall below a specified minimum rate. PT-FI has also agreed to assign, if necessary, its earnings in PT-SC to support a 13 percent cumulative annual return to Mitsubishi Materials, Mitsubishi and Nippon for the first 20 years of commercial operations. Pension Plans and Other Benefits. FCX has a defined benefit pension plan to cover substantially all U.S. and certain overseas employees. In 1996, FCX changed the pension benefit formula to a cash balance formula from the prior benefit calculation based on years of service and final average pay. Under the amended plan, FCX credits each participant's account annually with at least 4 percent of the participant's qualifying compensation. Additionally, interest is credited annually to each participant's account balance. FCX funds its pension liability in accordance with Internal Revenue Service guidelines. Additionally, for those employees in the qualified defined benefit plan whose benefits are limited under federal income tax laws, FCX sponsors an unfunded, nonqualified plan. FCX also provides certain health care and life insurance benefits (Other Benefits) for retired employees. FCX has the right to modify or terminate these benefits. 43 PT-FI has a defined benefit plan denominated in Indonesian rupiah covering substantially all of its Indonesian national employees. PT-FI funds the plan in accordance with Indonesian pension guidelines. The pension obligation was valued at an exchange rate of 7,725 rupiah to one U.S. dollar on December 31, 1998 and 7,450 rupiah to one U.S. dollar on December 31, 1997. Information on the FCX and PT-FI plans follows (dollars in thousands):
Pension Benefits Other Benefits - ----------------------------------------------------------------------------- FCX Plan PT-FI Plan FCX 1998 1997 1998 1997 1998 1997 - ----------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $(13,652) $(12,292) $(7,208) $(17,975) $(1,043) $(1,135) Service cost (1,089) (1,410) (704) (1,827) (42) (62) Interest cost (926) (864) (728) (1,928) (50) (72) Plan amendments - - (729) - 301 251 Curtailment gain - - 781 - - - Special termination benefit - - (5,873) - - - Actuarial gains (losses)1,721 741 (287) (1,301) 63 (44) Foreign exchange gain - - 42 15,502 - - Benefits paid 324 173 6,641 321 8 19 -------- -------- ------- -------- ------- ------- Benefit obligation at end of year (13,622) (13,652) (8,065) (7,208) (763) (1,043) -------- -------- ------- -------- ------- ------- Change in plan assets: Fair value of plan assets at beginning of year 7,660 6,639 2,030 1,695 - - Actual return on plan assets 1,045 1,194 594 479 - - Employer contributions - - 6,720 3,984 8 19 Foreign exchange gain (loss) - - 289 (3,807) - - Benefits paid (324) (173) (6,641) (321) (8) (19) -------- -------- ------- -------- ------- ------- Fair value of plan assets at end of year 8,381 7,660 2,992 2,030 - - -------- -------- ------- -------- ------- ------- Funded status (5,241) (5,992) (5,073) (5,178) (763) (1,043) Unrecognized net actuarial (gain)loss (1,650) 328 - 306 (1,311) (1,342) Unrecognized transition (asset) liability (344) (402) 2,228 2,642 - - Unrecognized prior service cost (780) (927) 710 - (473) (224) -------- -------- ------- -------- ------- ------- Accrued benefit cost $ (8,015) $ (6,993) $(2,135) $ (2,230) $(2,547) $(2,609) ======== ======== ======= ======== ======= ======= Weighted-average assumptions (percent): Discount rate 6.75 7.25 a 11.00 6.75 7.25 Expected return on plan assets 9.00 9.50 a 12.00 - - Rate of compensation increase 4.25 5.00 a 9.00 - -
a. Given the economic uncertainty in Indonesia, PT-FI used annual discount rates and expected return on plan assets of 35 percent in 1999 and 30 percent in 2000. For 2001 and thereafter, PT-FI used an 11 percent discount rate and a 12 percent expected return on plan assets. The annual rates of compensation increase used were 20 percent in 1999 and 2000, and 9 percent thereafter. The initial health care cost trend rate used for the other benefits was 8.5 percent for 1996, decreasing 0.5 percent per year until reaching 5.0 percent. A one-percentage-point increase or decrease in assumed health care cost trend rates would not have a significant impact on total service or interest cost. 44 The components of net periodic benefit cost for FCX's plans follow (in thousands):
Pension Benefits Other Benefits 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------- Service cost $1,089 $1,410 $1,318 $ 42 $ 62 $ 70 Interest cost 926 864 1,019 50 72 87 Expected return on plan assets (652) (560) (512) - - - Amortization of prior service cost (147) (147) (28) (52) (26) - Amortization of net actuarial loss (gain) (135) (89) 376 (93) (94) (77) Amortization of transition asset (58) (58) (58) - - - ------ ------ ------ ---- ---- ---- Net periodic benefit cost $1,023 $1,420 $2,115 $(53) $ 14 $ 80 ====== ====== ====== ==== ==== ====
The components of net periodic benefit cost for PT-FI's plan follow (in thousands):
1998 1997 1996 - ------------------------------------------------------------ Service cost $ 704 $1,827 $1,732 Interest cost 728 1,928 1,787 Expected return on plan assets (285) (412) (139) Amortization of transition liability 217 857 884 Amortization of net actuarial losses 280 - - Curtailment gain (781) - - Special termination benefits 5,873 - - ------ ------ ------ Net periodic benefit cost $6,736 $4,200 $4,264 ====== ====== ======
During 1998, PT-FI offered special termination benefits to certain employees as part of a restructuring program following the completion of its latest expansion. The special termination benefits included separation and service allowances based on years of service, a lump sum pension payment and other cash incentives. PT-FI recognized a curtailment gain in accordance with SFAS 88 because the program significantly reduced the expected years of future service of employees. The PT-FI plan was also amended in 1998 to reflect changes in Indonesian laws eliminating the limits on pensionable pay. Atlantic has an unfunded contractual obligation denominated in Spanish pesetas to supplement amounts paid to retired employees. The accrued liability was based on corresponding exchange rates of 142.7 pesetas to one U.S. dollar and 150.7 pesetas to one U.S. dollar at December 31, 1998 and 1997, respectively. Pending Spanish legislation will require Atlantic to begin funding this obligation in December 2000. The discount rate used was 8 percent at December 31, 1998 and 1997. The interest cost for this obligation was $6.8 million in 1996. The actuarial valuation of this obligation was $96.4 million at December 31, 1998 and $87.9 million at December 31, 1997, based on discount rates of 5 percent and 6 percent, respectively. Other information on the Atlantic plan follows (in thousands):
1998 1997 - ------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $69,373 $80,372 Interest cost 6,658 6,809 Foreign exchange loss (gain) 3,429 (10,261) Benefits paid (7,160) (7,547) ------- ------- Benefit obligation at end of year $72,300 $69,373 ======= =======
FCX has a savings plan under Section 401(k) of the Internal Revenue Code that allows eligible employees to contribute up to 20 percent of their pre-tax compensation. FCX matches 100 percent of the first 5 percent of the employees' contribution with such matching amounts vesting after 5 years. The costs charged to operations for FCX's plan totaled $0.8 million in 1998, $0.8 million in 1997 and $0.7 million in 1996. FCX has other employee benefit plans, certain of which are related to FCX's performance, which costs are recognized currently in general and administrative expense. 45 NOTE 10. COMMITMENTS AND CONTINGENCIES Environmental, Reclamation and Mine Closure. FCX has an environmental policy committing it not only to compliance with federal, state and local environmental statutes and regulations, but also to continuous improvement of its environmental performance at every operational site. FCX believes that its operations are being conducted pursuant to applicable permits and are in compliance in all material respects with applicable environmental laws, rules and regulations. FCX incurs significant costs for environmental programs and projects. The ultimate amount of reclamation and closure costs to be incurred at PT-FI's operations cannot currently be projected with precision. Ultimate reclamation and closure costs may require as much as $100 million but are not expected to exceed $150 million. These estimates are subject to revision over time as more complete studies are performed and more definitive plans are formulated. Some reclamation costs will be incurred throughout the remaining life of the mine, while most closure costs and the remaining reclamation costs will be incurred at the end of the mine's life, which is currently estimated to exceed 30 years. PT-FI had $9.2 million accrued on a unit-of- production basis at December 31, 1998 for mine closure and reclamation costs, included in other liabilities. In 1996, PT-FI began contributing to a cash fund ($0.9 million balance at December 31, 1998) designed to accumulate at least $100 million by the end of its Indonesian mine's life. Proceeds from this fund, including accrued interest, will be used to fund costs incurred for mine closure and reclamation. An increasing emphasis on environmental issues and future changes in regulations could require FCX to incur additional costs that would be charged against future operations. Estimates involving environmental matters are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology and inflation. Social and Economic Development Programs. FCX has a social and human rights policy to ensure that its operations are conducted in a manner respecting basic human rights, the laws and regulations of the host country, and the culture of the people who are indigenous to the areas in which FCX operates. In 1996, PT-FI established the Freeport Fund for Irian Jaya Development (FFIJD), through which PT-FI has made available funding and expertise to support the economic and social development of the area. PT-FI has committed to provide one percent of its annual revenue for ten years beginning in mid-1996 for the development of the local people through the FFIJD. PT-FI charged $13.5 million in 1998, $15.1 million in 1997 and $9.0 million in 1996 to production costs for this commitment. Long-Term Contracts and Operating Leases. Atlantic has commitments with parties other than PT-FI to purchase concentrate totaling 386,000 metric tons in 1999, 371,000 metric tons in 2000, 373,000 metric tons in 2001, 340,000 metric tons in 2002, 220,000 metric tons in 2003 and a total of 120,000 metric tons thereafter, at market prices. FCX's minimum annual contractual charges under noncancelable long-term contracts and operating leases which extend to 2002 total $1.5 million in 1999, $1.4 million in 2000, $1.3 million in 2001 and $0.2 million in 2002. Total rental expense under long-term contracts and operating leases amounted to $1.9 million in 1998, $2.2 million in 1997 and $3.8 million in 1996. PT-FI has a labor agreement covering its hourly-paid Indonesian employees, the key provisions of which are renegotiated biannually. The current labor agreement expires on September 30, 1999. 46 NOTE 11. FINANCIAL INSTRUMENTS Summarized below are financial instruments whose carrying amounts are not equal to their fair value and foreign exchange contracts at December 31, 1998 and 1997. Fair values are based on quoted market prices and other available market information.
1998 1997 - ---------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ---------------------------------------------------------------------------- (In Thousands) Price protection program: Open contracts in liability position $ - $ (1,575)$ - $ (1,494) Debt: Long-term debt (Note 6) (2,456,793) (2,278,857) (2,388,982) (2,402,862) Interest rate swaps - (1,749) - (1,210) Foreign exchange contracts: $U.S./Indonesian rupiah 7,800 7,800 - - $U.S./Australian dollar (1,215) (1,215) - - $U.S./Spanish peseta 2,005 2,005 1,148 471 Redeemable preferred stock (Note 5) (500,007) (197,923) (500,007) (334,177)
Price Protection Program. From time to time, PT-FI enters into forward and option contracts to hedge the market risk associated with fluctuations in the prices of commodities it sells. As of and during the year ended December 31, 1998, PT-FI had no outstanding forward or option contracts. FCX's revenues include net additions totaling $42.6 million in 1997 and $38.2 million in 1996 related to PT-FI's copper price protection program. Revenues also include net additions totaling $37.6 million in 1997 and $14.1 million in 1996 from gold forward contracts. At December 31, 1998, Atlantic's contracts to hedge its price risk on concentrate inventory were not significant. Atlantic had purchased forward 15.6 million pounds of copper at an average price of $0.76 per pound to eliminate the price risk on trade receivables with terms that allow certain of its customers to purchase specified quantities of copper at a future date and at fixed prices. Debt. PT-FI and Atlantic entered into interest rate swaps to manage exposure to interest rate changes on a portion of their variable-rate debt. PT-FI pays 8.3 percent on $14.3 million of financing at December 31, 1998 through December 1999. Atlantic pays an average of 6.1 percent on $115.6 million of financing at December 31, 1998, reducing annually through June 2000. From July 2000 through December 2000, Atlantic will pay 4.7 percent on $82.1 million of financing and from January 2001 through March 2001, Atlantic will pay 5.3 percent on $74.4 million of financing. Interest on comparable floating rate debt averaged 5.7 percent in 1998, 5.7 percent in 1997 and 5.6 percent in 1996, resulting in additional interest costs of $1.1 million, $1.5 million and $2.2 million, respectively. Atlantic is a party to letters of credit totaling $8.6 million at December 31, 1998. Fair value of these letters of credit is not material at December 31, 1998. Foreign Exchange Contracts. During 1998, PT-FI implemented a currency hedging program to reduce its exposure to changes in the U.S. dollar/Indonesian rupiah and U.S. dollar/Australian dollar exchange rates. As of December 31, 1998, PT-FI has foreign exchange currency contracts through August 1999 totaling $6.2 million on 120.0 billion Indonesian rupiah (an average exchange rate of 19,478 rupiah to 1 U.S. dollar) and contracts through September 1999 totaling $49.8 million on 79.2 million Australian dollars (an average exchange rate of 1.59 Australian dollars to 1 U.S. dollar). Atlantic has a currency hedging program to reduce its exposure to changes in the U.S. dollar and Spanish peseta exchange rate. As of December 31, 1998, Atlantic has foreign exchange currency contracts through January 2000 totaling $74.9 million on 10.8 billion Spanish pesetas (an average exchange rate of 144.7 pesetas to 1 U.S. dollar). 47 NOTE 12. BUSINESS SEGMENTS FCX follows SFAS 131, "Disclosures About Segments of an Enterprise and Related Information" which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. FCX has two operating segments: "mining and exploration" and "smelting and refining." The mining and exploration segment includes PT-FI's copper and gold mining operations in Indonesia and FCX's Indonesian exploration activities. The smelting and refining segment includes Atlantic's operations in Spain and PT-FI's equity investment in PT-SC in Gresik, Indonesia. The segment data presented below were prepared on the same basis as the consolidated FCX financial statements.
Mining Smelting and and Eliminations FCX Exploration Refining and Other Total - ---------------------------------------------------------------------------- (In Thousands) 1998 Revenues $1,351,123a $753,957 $(347,948) $1,757,132 Production and delivery 461,244 676,518b (333,131) 804,631 Depreciation and amortization 241,312 31,711 4,384 277,407 Exploration expense 11,542 - 1,491 13,033 General and administrative expenses 70,361 10,337 7,082 87,780 ---------- -------- --------- ---------- Operating income $ 566,664 $ 35,391 $ (27,774) $ 574,281 ========== ======== ========= ========== Capital expenditures $ 280,026 $ 11,131 $ 926 $ 292,083 ========== ======== ========= ========== Total assets $3,487,527 $722,767b $ (17,660) $4,192,634 ========== ======== ========= ========== 1997 Revenues $1,505,295 $874,514 $(378,905) $2,000,904 Production and delivery 604,851 800,997b (397,244) 1,008,604 Depreciation and amortization 178,289 31,693 3,873 213,855 Exploration expense 14,758 - 2,871 17,629 General and administrative expenses 76,549 11,197 8,855 96,601 ---------- -------- --------- ---------- Operating income $ 630,848 $ 30,627 $ 2,740 $ 664,215 ========== ======== ========= ========== Capital expenditures $ 529,731 $ 54,721 $ 10,035 $ 594,487 ========== ======== ========= ========== Total assets $3,406,539 $742,184b $ 3,486 $4,152,209 ========== ======== ========= ========== 1996 Revenues $1,485,848 $778,120 $(358,932) $1,905,036 Production and delivery 575,781 731,651 (355,569) 951,863 Depreciation and amortization 142,605 27,783 3,590 173,978 General and administrative expenses 119,492 12,301 9,141 140,934 ---------- -------- --------- ---------- Operating income $ 647,970 $ 6,385 $ (16,094) $ 638,261 ========== ======== ========= ========== Capital expenditures $ 398,986 $ 90,086 $ 3,166 $ 492,238 ========== ======== ========= ========== Total assets $3,168,837 $775,336b $ (78,639) $3,865,534 ========== ======== ========= ==========
a. Includes $25.6 million of PT-FI sales to PT-SC. b. PT-FI recorded losses related to PT-SC totaling $4.9 million in 1998 and $1.5 million in 1997. Total assets include PT-FI's equity investment in PT-SC totaling $80.8 million at December 31, 1998, $83.1 million at December 31, 1997 and $46.8 million at December 31, 1996. FCX markets its products worldwide primarily pursuant to the terms of long-term contracts. As a percentage of consolidated revenues, revenues under long-term contracts totaled 91 percent in 1998, 92 percent in 1997 and 94 percent in 1996. Customers with over ten percent of revenues under long-term contracts in at least one of the past three years include Japanese companies with 12 percent in 1998, 16 percent in 1997 and 17 percent in 1996, and a Swiss firm with 8 percent in 1998, 8 percent in 1997 and 10 percent in 1996. PT-FI's contracts with the group of Japanese companies and the Swiss firm extend through 2000 and 2003, respectively. There are several other long-term agreements in place, each representing less than ten percent of FCX consolidated sales. Certain terms of these long-term contracts are negotiated annually. 48 FCX revenues attributable to various countries based on the location of the customer follow:
1998 1997 1996 --------------------------------------------------- (In Thousands) Japan $ 382,721 $ 470,373 $ 474,443 Spain 324,202 402,276 342,373 United States 250,922 131,042 116,770 Switzerland 269,355 297,821 353,776 Others 529,932 699,392 617,674 ---------- ---------- ---------- Total $1,757,132 $2,000,904 $1,905,036 ========== ========== ==========
NOTE 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Net Income Net Income Applicable Per Share Operating to Common -------------- Revenues Income Stock Basic Diluted - ------------------------------------------------------------------------ (In Thousands, Except Per Share Amounts) 1998 1st Quarter $ 396,132 $129,804 $ 26,592 $ .15 $ .15 2nd Quarter 433,858 134,938 25,802 .14 .14 3rd Quarter a 442,126 135,088 23,842 .14 .14 4th Quarter a 485,016 174,451 42,081 .26 .26 ---------- -------- -------- $1,757,132 $574,281 $118,317 .67 .67 ========== ======== ======== 1997 1st Quarter $ 523,780 $197,608 $ 62,451 $ .31 $ .31 2nd Quarter 566,950 213,701 69,852 .35 .35 3rd Quarter 489,522 136,417 36,577 .19 .19 4th Quarter b 420,652 116,489 39,661 .21 .21 ---------- -------- -------- $2,000,904 $664,215 $208,541 1.06 1.06 ========== ======== ========
a. Includes net charges to operating income totaling $4.5 million ($2.2 million to net income or $0.01 per share) in the third quarter and $4.6 million ($2.2 million to net income or $0.01 per share) in the fourth quarter associated with the sale of corporate aircraft. b. Includes a $25.3 million gain to operating income ($12.3 million to net income or $0.06 per share) for the reversal of SAR and related costs caused by the decline in FCX's common stock price. 49 NOTE 14. SUPPLEMENTARY MINERAL RESERVE INFORMATION (UNAUDITED) Total estimated proved and probable mineral reserves at the Grasberg and other Block A ore bodies in Indonesia follow:
Average Ore Grade Per Ton Recoverable Reserves - ---------------------------------------------------------------------------- Year- Ore Copper Gold Silver Copper Gold Silver End - ---------------------------------------------------------------------------- (Metric Tons) (%) (Grams)(Ounce)(Grams)(Ounce)(Billions (Millions of Lbs.) of Ozs.) 1994 1,125,640,000 1.30 1.42 .046 4.06 .131 28.0 39.6 80.8 1995 1,899,244,000 1.17 1.18 .038 3.78 .121 40.3 52.1 111.1 1996 2,008,285,000 1.19 1.18 .038 3.80 .122 43.2 55.3 118.7 1997 2,166,212,000 1.20 1.20 .039 3.95 .127 47.1 62.7 138.4 1998 2,475,478,000 1.13 1.05 .034 3.83 .123 51.3 64.2 153.1 By Deposit at December 31, 1998 Grasberg: Open pit 1,185,770,000 1.02 1.19 .038 2.99 .096 21.9 34.8 57.1 Under- ground 691,094,000 1.08 0.77 .025 3.15 .101 14.0 13.6 36.3 Kucing Liar 320,457,000 1.41 1.41 .045 5.30 .170 8.1 10.3 25.5 DOZ 181,195,000 1.15 0.83 .027 5.17 .166 4.0 3.9 15.9 Big Gossan 37,349,000 2.69 1.02 .033 16.42 .528 1.8 0.9 9.9 DOM 30,892,000 1.67 0.42 .014 9.63 .310 0.9 0.3 4.7 IOZ 28,721,000 1.06 0.45 .014 7.63 .245 0.6 0.4 3.7 ------------- ---- ---- ---- ----- ---- ---- ---- ----- Total 2,475,478,000 1.13 1.05 .034 3.83 .123 51.3 64.2 153.1
Estimated recoverable reserves were assessed using a copper price of $0.90 per pound and a gold price of $325 per ounce. Using prices of $0.75 per pound of copper and $280 per ounce of gold would reduce estimated recoverable reserves by approximately 9 percent for copper, 7 percent for gold and 9 percent for silver. In PT-FI's Block A, Rio Tinto provided a $450 million nonrecourse loan to PT-FI for PT-FI's share of cost of the fourth concentrator mill expansion (Note 2). Incremental cash flow attributable to the expansion is now being shared 60 percent PT-FI and 40 percent Rio Tinto. PT-FI has assigned its interest in such incremental cash flow to Rio Tinto until Rio Tinto has received an amount equal to the funds lent to PT-FI plus interest based on Rio Tinto's cost of borrowing. Incremental cash flow consists of amounts generated from production in excess of specified annual amounts based on the December 31, 1994 reserves and mine plan. The incremental production from the expansion, as well as production from PT-FI's existing operations, share proportionately in operating and administrative costs. FCX receives 100 percent of cash flow from its existing production facilities as specified by the contractual arrangements. PT-FI's estimated net share of recoverable reserves follows:
Year-End Copper Gold Silver ----------------------------------------------- (Billions (Millions (Millions Of Lbs.) Of Ozs.) Of Ozs.) 1994 28.0 39.6 80.8 1995 34.6 46.0 96.7 1996 35.9 47.4 100.4 1997 37.8 51.3 111.3 1998 40.0 51.6 119.1
50 REPORT OF MANAGEMENT Freeport-McMoRan Copper & Gold Inc. (the Company) is responsible for the preparation of the financial statements and all other information contained in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on management's informed judgments and estimates. The Company maintains a system of internal accounting controls designed to provide reasonable assurance at reasonable costs that assets are safeguarded against loss or unauthorized use, that transactions are executed in accordance with management's authorization and that transactions are recorded and summarized properly. The system is tested and evaluated on a regular basis by the Company's internal auditors, PricewaterhouseCoopers LLP. In accordance with generally accepted auditing standards, the Company's independent public accountants, Arthur Andersen LLP, have developed an overall understanding of our accounting and financial controls and have conducted other tests as they consider necessary to support their opinion on the financial statements. The Board of Directors, through its Audit Committee composed solely of non-employee directors, is responsible for overseeing the integrity and reliability of the Company's accounting and financial reporting practices and the effectiveness of its system of internal controls. Arthur Andersen LLP and PricewaterhouseCoopers LLP meet regularly with, and have access to, this committee, with and without management present, to discuss the results of their audit work. /s/James R. Moffett /s/Richard C. Adkerson /s/ Stephen M. Jones James R. Moffett Richard C. Adkerson Stephen M. Jones Chairman of the Board and President and Senior Vice President and Chief Executive Officer Chief Operating Officer Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF FREEPORT-McMoRan COPPER & GOLD INC.: We have audited the accompanying balance sheets of Freeport- McMoRan Copper & Gold Inc. (the Company), a Delaware Corporation, as of December 31, 1998 and 1997, and the related statements of income, cash flow and stockholders' equity for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997 and the results of its operations and its cash flow for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Arthur Andersen LLP New Orleans, Louisiana, January 19, 1999 51 FCX Class A Common Shares. Our Class A common shares trade on the New York Stock Exchange (NYSE) under the symbol "FCX.A." The FCX.A share price is reported daily in the financial press under "FMCGA" in most listing of NYSE securities. At year-end 1998, the number of holders of record of our Class A common share was 8,373. NYSE composite tape Class A common share price ranges during 1998 and 1997:
1998 1997 - -------------------------------------------------------------- High Low High Low - -------------------------------------------------------------- First Quarter $19.375 $12.938 $33.500 $25.375 Second Quarter 20.313 14.063 30.375 25.875 Third Quarter 15.875 10.938 28.750 25.750 Fourth Quarter 14.000 9.188 28.875 14.625
FCX Class B Common Shares. Our Class B common share began trading in July 1995 on the New York Stock Exchange (NYSE) under the symbol "FCX." The FCX share price is reported daily in the financial press under "FMCG" in most listings of NYSE securities. At year-end 1998, the number of holders of record of our Class B common shares was 13,206. NYSE composite tape Class B commons share price ranges during 1998 and 1997 were:
1998 1997 - --------------------------------------------------------------- High Low High Low - --------------------------------------------------------------- First Quarter $20.875 $13.063 $34.875 $27.500 Second Quarter 21.438 14.813 31.875 26.500 Third Quarter 16.625 11.250 30.750 27.188 Fourth Quarter 15.125 9.813 29.938 14.938
Common Share Dividends. FCX Class A and Class B common share cash dividends declared and paid for the quarterly periods of 1998 and 1997 were:
1998 - ------------------------------------------------------------------ Amount Per Share Record Date Payment Date - ------------------------------------------------------------------ First Quarter $.05 Apr. 15, 1998 May 1, 1998 Second Quarter .05 Jul. 15, 1998 Aug. 1, 1998 Third Quarter .05 Oct. 15, 1998 Nov. 1, 1998 Fourth Quarter * n/a n/a
*In December 1998, in response to low commodity market prices for copper and gold, FCX's Board of Directors authorized elimination of the regular quarterly cash dividend on common stocks as part of FCX's cash flow enhancement efforts.
1997 - ---------------------------------------------------------------- Amount Per Share Record Date Payment Date - ---------------------------------------------------------------- First Quarter $.225 Apr. 15, 1997 May 1, 1997 Second Quarter .225 Jul. 15, 1997 Aug. 1, 1997 Third Quarter .225 Oct. 15, 1997 Nov. 1, 1997 Fourth Quarter .05 Jan. 16, 1998 Feb. 1, 1998
EX-21 10 Exhibit 21.1 List of Subsidiaries of FREEPORT-McMoRan COPPER & GOLD INC. Name Under Which Entity Organized It Does Business - ---------------------------------- -------------- ------------------ P.T. Freeport Indonesia Company Indonesia and Same Delaware P.T. IRJA Eastern Minerals Indonesia Same Corporation Atlantic Copper, S.A. Spain Same FM Services Company Delaware Same EX-23 11 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports included herein or incorporated by reference in this Form 10-K, into Freeport-McMoRan Copper & Gold Inc.'s previously filed Registration Statements on Form S-3 (File Nos. 33-45787, 33-63376, 33-52503 and 333-02699) and on Form S-8 (File Nos. 33-63267, 33-63269 and 33-63271). /s/ Arthur Andersen LLP ----------------------- Arthur Andersen LLP New Orleans, Louisiana, March 19, 1999 EX-23 12 Exhibit 23.2 CONSENT OF INDEPENDENT MINING CONSULTANTS, INC. We hereby consent to the incorporation by reference of our reports included herein or incorporated by reference in this Form 10-K, into Freeport-McMoRan Copper & Gold Inc.'s previously filed Registration Statements on Form S-3 (File Nos. 33-45787, 33-63376, 33-52503 and 333-02699) and on Form S-8 (File Nos. 33-63267, 33-63269, and 33-63271). /s/ John M. Marek John M. Marek P.E. President Tucson, Arizona March 19, 1999 EX-24 13 Exhibit 24.1 FREEPORT-McMoRan COPPER & GOLD INC. SECRETARY'S CERTIFICATE I, Michael C. Kilanowski, Jr., Secretary of Freeport-McMoRan Copper & Gold Inc. (the "Corporation"), a Delaware corporation, do hereby certify that the following resolution was duly adopted by the Board of Directors of the Corporation at a meeting held on December 13, 1988, and that such resolution has not been amended, modified or rescinded and is in full force and effect: RESOLVED, that any report, registration statement or other form filed on behalf of this corporation pursuant to the Securities Exchange Act of 1934, or any amendment to such report, registration statement or other form, may be signed on behalf of any director or officer of this corporation pursuant to a power of attorney executed by such director or officer. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Company on this the 19th day of March, 1999. (Seal) /s/ Michael C. Kilanowski, Jr. Michael C. Kilanowski, Jr. Secretary EX-24 14 Exhibit 24.2 POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/ Richard C. Adkerson Richard C. Adkerson POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/ Robert W. Bruce III Robert W. Bruce III POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/Leon A. Davis Leon A. Davis POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/Jonathan C. A. Leslie Jonathan C.A. Leslie POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/B.M. Rankin, Jr. B.M. Rankin, Jr. POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998 and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or adviseable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/Robert A. Day Robert A. Day POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998 and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/J. Bennett Johnston J. Bennett Johnston POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998 and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/William B. Harrison, Jr. William B. Harrison, Jr. POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998 and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/Henry A. Kissinger Henry A. Kissinger POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998 and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/Bobby Lee Lackey Bobby Lee Lackey POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/Rene L. Latiolais Rene L. Latiolais POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/Gabrielle K. McDonald Gabrielle K. McDonald POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/George A. Mealey George A. Mealey POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/George Putnam George Putnam POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT and RICHARD C. ADKERSON, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/Stephen M. Jones Stephen M. Jones POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/James R. Moffett James R. Moffett POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/J. Taylor Wharton J. Taylor Wharton POWER OF ATTORNEY BE IT KNOWN: That the undersigned, in his capacity or capacities as an officer and/or a member of the Board of Directors of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint JAMES R. MOFFETT, RICHARD C. ADKERSON and STEPHEN M. JONES, and each of them acting individually, his true and lawful attorney-in-fact with power to act without the others and with full power of substitution, to execute, deliver and file, for and on behalf of him, in his name and in his capacity or capacities as aforesaid, an Annual Report of the Company on Form 10-K for the year ended December 31, 1998, and any amendment or amendments thereto and any other document in support thereof or supplemental thereto, and the undersigned hereby grants to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever that said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of this Power of Attorney. EXECUTED this 2nd day of February, 1999. /s/C. Donald Whitmire, Jr. C. Donald Whitmire, Jr. EX-27 15
5 This schedule contains summary financial information extracted from Freeport-McMoRan Copper & Gold Inc. financial statements at December 31, 1998 and for the 12 months then ended, and is qualified in its entirety by reference to such financial statements. 0000831259 FREEPORT-MCMORAN COPPER & GOLD INC. 1,000 YEAR DEC-31-1998 DEC-31-1998 5,877 0 180,978 0 301,404 545,894 4,813,826 1,339,375 4,192,634 518,487 2,328,989 500,007 349,990 21,852 (268,426) 4,192,634 1,757,132 1,757,132 1,082,038 1,082,038 13,033 0 205,588 361,426 170,566 153,848 0 0 0 153,848 .67 .67
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