SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2001 Commission File Number: 1-9916 Freeport-McMoRan Copper & Gold Inc. Incorporated in Delaware 74-2480931 (IRS Employer Identification No.) 1615 Poydras Street, New Orleans, Louisiana 70112 Registrant's telephone number, including area code: (504) 582-4000 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 __ On June 30, 2001, there were issued and outstanding 55,459,026 shares of the registrant's Class A Common Stock, par value $0.10 per share, and 88,514,099 shares of its Class B Common Stock, par value $0.10 per share. FREEPORT-McMoRan COPPER & GOLD INC. TABLE OF CONTENTS Page Part I. Financial Information Financial Statements: Condensed Balance Sheets 3 Statements of Operations 4 Statements of Cash Flows 5 Notes to Financial Statements 6 Remarks 10 Report of Independent Public Accountants 11 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Part II. Other Information 24 Signature 24 Exhibit Index E-1
2 FREEPORT-McMoRan COPPER & GOLD INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. <TABLE> <CAPTION> FREEPORT-McMoRan COPPER & GOLD INC. CONDENSED BALANCE SHEETS (Unaudited) June 30, December 31, 2001 2000 ---------- ---------- (In Thousands) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 14,946 $ 7,968 Accounts receivable 174,070 149,085 Inventories 383,984 400,607 Prepaid expenses and other 4,550 11,462 ---------- ---------- Total current assets 577,550 569,122 Property, plant and equipment, net 3,215,909 3,248,710 Investment in PT Smelting 53,334 56,154 Other assets 81,186 76,755 ---------- ---------- Total assets $3,927,979 $3,950,741 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 307,749 $ 313,208 Current portion of long-term debt and short-term borrowings 113,359 202,294 Unearned customer receipts 72,649 28,688 Rio Tinto share of joint venture cash flows 39,079 78,706 Accrued income taxes 33,729 11,016 ---------- ---------- Total current liabilities 566,565 633,912 Long-term debt, less current portion: FCX and PT Freeport Indonesia credit facilities 754,000 760,000 Senior notes 450,000 450,000 Infrastructure asset financings 400,723 457,673 Atlantic Copper debt 225,355 246,727 Equipment and other loans 69,534 73,331 Accrued postretirement benefits and other liabilities 120,274 112,831 Deferred income taxes 641,477 599,536 Minority interests 131,536 103,795 Redeemable preferred stock 475,005 475,005 Stockholders' equity 93,510 37,931 ---------- ---------- Total liabilities and stockholders' equity $3,927,979 $3,950,741 ========== ========== </TABLE> The accompanying notes are an integral part of these financial statements.
3 <TABLE> <CAPTION> FREEPORT-McMoRan COPPER & GOLD INC. STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (In Thousands, Except Per Share Amounts) <S> <C> <C> <C> <C> Revenues $538,259 $397,348 $985,346 $864,940 Cost of sales: Production and delivery 266,744 253,284 461,194 519,348 Depreciation and amortization 78,319 54,328 146,448 117,687 -------- -------- -------- -------- Total cost of sales 345,063 307,612 607,642 637,035 Exploration expenses 2,420 1,841 4,471 3,809 Equity in PT Smelting losses 352 5,878 2,820 3,637 General and administrative expenses 16,142 16,518 30,551 37,267 -------- -------- -------- -------- Total costs and expenses 363,977 331,849 645,484 681,748 -------- -------- -------- -------- Operating income 174,282 65,499 339,862 183,192 Interest expense, net (41,393) (49,813) (89,830) (99,748) Other income (expense), net (57) (1,802) 3,120 (584) -------- -------- -------- -------- Income before income taxes and minority interests 132,832 13,884 253,152 82,860 Provision for income taxes (72,408) (18,252) (133,023) (58,725) Minority interests in net income of consolidated subsidiaries (15,007) (4,808) (27,608) (14,580) -------- -------- -------- -------- Net income (loss) 45,417 (9,176) 92,521 9,555 Preferred dividends (9,125) (9,437) (18,190) (18,927) -------- -------- -------- -------- Net income (loss) applicable to common stock $ 36,292 $(18,613) $ 74,331 $ (9,372) ======== ======== ======== ======== Net income (loss) per share of common stock: Basic $0.25 $(.12) $0.52 $(.06) ===== ===== ===== ===== Diluted $0.25 $(.12) $0.51 $(.06) ===== ===== ===== ===== Average common shares outstanding: Basic 143,954 158,379 143,930 159,851 ======= ======= ======= ======= Diluted 145,232 158,379 144,977 159,851 ======= ======= ======= ======= </TABLE> The accompanying notes are an integral part of these financial statements.
4 <TABLE> <CAPTION> FREEPORT-McMoRan COPPER & GOLD INC. STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ------------------------- 2001 2000 -------- -------- (In Thousands) <S> <C> <C> Cash flow from operating activities: Net income $ 92,521 $ 9,555 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 146,448 117,687 Deferred income taxes 42,086 13,575 Equity in PT Smelting losses 2,820 3,637 Minority interests' share of net income 27,608 14,580 Other, including deferred mining costs (14,760) 14,795 (Increases) decreases in working capital: Accounts receivable (28,255) 59,542 Inventories 15,371 (16,295) Prepaid expenses and other 6,861 (878) Accounts payable and accrued liabilities 12,214 80,522 Rio Tinto share of joint venture cash flows (35,796) (12,264) Accrued income taxes 23,706 (56,222) -------- -------- (Increase) decrease in working capital (5,899) 54,405 -------- -------- Net cash provided by operating activities 290,824 228,234 -------- -------- Cash flow from investing activities: PT Freeport Indonesia capital expenditures (73,339) (87,376) Atlantic Copper capital expenditures (7,329) (3,871) Investment in PT Smelting - (5,717) Other 4,572 (6,442) -------- -------- Net cash used in investing activities (76,096) (103,406) -------- -------- Cash flow from financing activities: Proceeds from debt 103,758 368,538 Repayments of debt (280,150) (310,483) Purchases of FCX common shares (3,436) (122,358) Cash dividends paid: Preferred stock (18,265) (18,980) Minority interests (4,181) (30,808) Other (5,476) (11,574) -------- -------- Net cash used in financing activities (207,750) (125,665) -------- -------- Net increase (decrease) in cash and cash equivalents 6,978 (837) Cash and cash equivalents at beginning of year 7,968 6,698 -------- -------- Cash and cash equivalents at end of period $ 14,946 $ 5,861 ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements.
5 FREEPORT-McMoRan COPPER & GOLD INC. NOTES TO FINANCIAL STATEMENTS 1. AMENDED BANK CREDIT FACILITIES Freeport-McMoRan Copper & Gold Inc. (FCX) has commitments from all of the members in its bank group to amend its existing bank credit facilities to extend the maturities to December 2005 and to provide financing for any obligations FCX may have under its guarantee of PT Nusamba Mineral Industri's bank credit agreement. The amendment of the bank credit facilities is conditioned on FCX's sale of $300 million of convertible notes, the negotiation and execution of definitive agreements and satisfaction of other conditions. 2. EARNINGS PER SHARE FCX's basic net income (loss) per share of common stock was calculated by dividing net income (loss) applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share of common stock was calculated by dividing net income (loss) applicable to common stock by the weighted-average number of common shares outstanding during the period plus the net effect of dilutive stock options and restricted stock. Dilutive stock options represented 1.0 million shares in the second quarter of 2001 and 0.7 million shares in the 2001 six-month period. Stock options representing less than 0.1 million shares in the second quarter of 2000 and 0.7 million shares in the 2000 six-month period that otherwise would have been considered dilutive were excluded from the diluted net income (loss) per share calculation because of the net losses for those periods. Dilutive restricted stock totaled 0.3 million shares in the second quarter of 2001 and in the 2001 six-month period. Options excluded from the computation of diluted net income (loss) per share of common stock because their exercise prices were greater than the average market price of the common stock during the respective periods totaled options for 11.3 million shares (average exercise price of $21.56 per share) in each of the 2001 periods and 11.8 million shares (average price of $21.47 per share) in each of the 2000 periods. Convertible preferred stock outstanding was not included in the computation of diluted net income (loss) per share of common stock because doing so would have increased diluted net income per share of common stock or decreased diluted net loss per share of common stock. The preferred stock was convertible into 11.7 million shares of common stock, and the related accrued dividends totaled $6.1 million in the second quarters of 2001 and 2000, and $12.2 million in the 2001 and 2000 six-month periods. 3. DERIVATIVE CONTRACTS At times FCX and its subsidiaries have entered into derivative 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. Effective January 1, 2001, FCX adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133, as subsequently amended, 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. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation. Upon adoption of SFAS 133 on January 1, 2001, FCX recorded immaterial cumulative gain adjustments totaling $0.8 million to other income ($0.8 million to net income) to adjust the recorded values of PT Freeport Indonesia's and Atlantic Copper's (FCX's subsidiaries) foreign currency forward contracts to fair value and $0.8 million to revenues ($0.4 million to net income) to adjust the embedded derivatives in PT Freeport Indonesia's provisionally priced copper sales to fair value, as calculated under SFAS 133. In addition, FCX recorded a cumulative effect net loss adjustment to other comprehensive income totaling $1.0 million for the fair value of Atlantic Copper's interest rate swaps on January 1, 2001. FCX has entered into derivative contracts in limited instances to achieve specific objectives. Currently, the objectives principally relate to managing risks associated with foreign currency, commodity prices and interest rate risks with Atlantic Copper's smelting operations, where certain derivative contracts are required under financing agreements. In addition, in response to volatility in the Indonesian rupiah and Australian dollar currencies, FCX has sought to manage certain foreign currency risks with PT Freeport Indonesia's mining operations. In the past, FCX entered into derivative contracts related to its exposure to copper and gold prices, but activities in this regard since 1997 have been limited to establishing fixed prices for open copper sales under PT Freeport Indonesia's concentrate sales contracts. FCX does not enter into derivative contracts for speculative purposes. A summary of FCX's outstanding derivative instruments at June 30, 2001 and a discussion of FCX's risk management strategies for those designated as hedges follow.
6 Commodity Price Protection Contracts From time to time, PT Freeport Indonesia has entered into forward and option contracts to hedge the market risk associated with fluctuations in the prices of commodities it sells. The primary objective of these contracts has been to set a minimum price and the secondary objective is to retain market upside, if available at a reasonable cost. As of June 30, 2001, FCX had no price protection contracts relating to its mine production. FCX has outstanding gold- and silver-denominated redeemable preferred stock with dividends and redemption amounts determined by commodity prices. FCX elected to continue its historical accounting for its redeemable preferred stock indexed to commodities under the provisions of SFAS 133 which allow such instruments issued before January 1, 1998 to be excluded from those instruments required to be adjusted for changes in their fair values. Therefore, FCX's redeemable preferred stock is carried on its books at its original issue value less redemptions, and totaled $475.0 million at June 30, 2001. Certain of PT Freeport Indonesia's concentrate sales contracts allow for final pricing in future periods. Under SFAS 133, these pricing terms cause a portion of the contracts to be considered embedded derivatives which must be recorded at fair value. Prior to January 1, 2001, PT Freeport Indonesia adjusted the revenues from these provisionally priced sales based on then-current spot prices on or near each reporting date. Effective January 1, 2001, PT Freeport Indonesia began adjusting the revenues from these provisionally priced sales to reflect fair value based on forward prices for the final pricing periods on or near each reporting date. The impact of this change was to increase revenues by $0.8 million ($0.4 million to net income) on January 1, 2001. Changes in the fair value of these embedded derivatives are recorded in current period revenues. At June 30, 2001, Atlantic Copper had forward copper contracts designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match. Although these contracts provide a hedge against changes in copper prices, they do not qualify for hedge accounting under SFAS 133 because Atlantic Copper bases its hedging contracts on its net sales/purchases position and contracts to hedge a net position do not qualify for hedge accounting under SFAS 133. Atlantic Copper recorded gains (losses) to production costs totaling $1.1 million in the second quarter of 2001, $(0.4) million in the second quarter of 2000, $4.2 million in the first six months of 2001 and $(0.9) million in the first six months of 2000 related to its forward copper sales contracts. Atlantic Copper held forward copper sales contracts for 13.1 million pounds and the fair value of these contracts was a $0.5 million gain, which is recorded in accounts payable at June 30, 2001. Foreign Currency Exchange Contracts PT Freeport Indonesia and Atlantic Copper enter into foreign currency forward contracts to hedge the market risks of their forecasted costs denominated in a currency other than the U.S. dollar, their functional currency. The primary objective of these contracts is either to lock-in an exchange rate or to minimize the impact of adverse exchange rate changes. As of June 30, 2001, PT Freeport Indonesia had foreign currency forward contracts to hedge 48.0 million of its aggregate projected Australian dollar payments from July 2001 through December 2001, or approximately 50 percent of its aggregate projected remaining 2001 Australian dollar payments at an average exchange rate of $0.58 to one Australian dollar. PT Freeport Indonesia also had foreign currency forward contracts to hedge 698.7 billion of its aggregate projected Indonesian rupiah payments from July 2001 through December 2002, or approximately 50 percent of its projected remaining 2001 and 2002 rupiah payments at an average exchange rate of 12,296 rupiahs to one U.S. dollar. Atlantic Copper had foreign currency forward contracts to hedge 152.2 million of its projected euro payments from July 2001 through December 2003, or approximately 50 percent of its projected remaining 2001 peseta/euro payments and approximately 67 percent of its projected 2002 and 2003 euro payments at an average exchange rate of $1.02 per euro. The fair value of PT Freeport Indonesia's and Atlantic Copper's foreign currency contracts at June 30, 2001 totaled a loss of $27.8 million, of which $14.0 million was recorded in accrued liabilities and $13.8 million was recorded in other long-term liabilities. PT Freeport Indonesia and Atlantic Copper have designated their foreign currency forward contracts as cash flow hedges. FCX recorded losses to other comprehensive income for changes in the unrealized fair value of its foreign currency forward contracts totaling $6.1 million in the second quarter of 2001 and $19.8 million in the first six months of 2001. During the second quarter of 2001, PT Freeport Indonesia reclassed losses totaling $1.2 million ($0.6 million to net income) and Atlantic Copper reclassed losses totaling $1.0 million ($1.0 million to net income) from accumulated other comprehensive income to production costs for matured foreign currency forward contracts. For the first six months of 2001, PT Freeport Indonesia reclassed losses totaling $1.7 million ($0.8 million to net income) and Atlantic Copper reclassed losses totaling $1.3 million ($1.3 million to net income) from accumulated other comprehensive income to production costs for matured contracts. No hedge ineffectiveness was recorded for the outstanding
7 contracts at June 30, 2001. Prior to 2001, PT Freeport Indonesia and Atlantic Copper recorded changes in the market value of their foreign currency forward contracts to production costs as incurred. Net gains (losses) charged to production cost for changes in market value of foreign currency forward contracts totaled $0.1 million for the second quarter of 2000 and $(5.9) million for the first six months of 2000. Interest Rate Contracts Atlantic Copper entered into interest rate swap contracts to manage exposure to interest rate changes on a portion of its variable-rate debt. The primary objective of these contracts is to lock-in an interest rate considered to be favorable. As of June 30, 2001, Atlantic Copper had interest rate swap contracts at an average interest rate of 6.7 percent on $66.7 million of financing, reducing quarterly through September 2003. Atlantic Copper has designated its interest rate swap contracts as cash flow hedges and no ineffectiveness is expected from these hedges. Atlantic Copper recognized additional interest costs of $0.1 million in the second quarter of 2001, and benefits of $0.1 million in the second quarter of 2000, $0.1 million in the first six months of 2001 and less than $0.1 million in the first six months of 2000 related to its interest rate swap contracts. FCX's other comprehensive income for the first six months of 2001 included a $1.0 million cumulative effect loss to record the fair value of Atlantic Copper's interest rate swap contracts on January 1, 2001 and losses for changes in the unrealized fair value of its swaps totaled $0.2 million for the second quarter of 2001 and $1.3 million for the first six months of 2001. Atlantic Copper receives no tax benefit for these losses. The fair value of these interest rate swap contracts totaled a loss of $2.3 million, $1.7 million of which is recorded in accrued liabilities and $0.6 million is recorded in other long-term liabilities at June 30, 2001. 4. COMPREHENSIVE INCOME The 2000 periods did not include any items of other comprehensive income. FCX's comprehensive income for the 2001 periods is summarized below (in thousands). <TABLE> <CAPTION> Three Six Months Months Ended Ended June 30 June 30 ------- ------- <S> <C> <C> Net income applicable to common stock $36,292 $74,331 Other comprehensive income (loss): Cumulative effect of change in accounting, no tax effect - (982) Change in unrealized derivatives' fair value (net of tax benefit of $0.1 million and taxes of $1.6 million, respectively) (6,314) (21,138) Reclass to earnings (net of tax benefits of $0.4 million and $0.6 million, respectively) 1,766 2,097 ------- ------- Total comprehensive income $31,744 $54,308 ======= ======= </TABLE> 5. INTEREST COST Interest expense excludes capitalized interest of $2.1 million in the second quarter of 2001, $1.5 million in the second quarter of 2000, $4.1 million in the first six months of 2001 and $2.9 million in the first six months of 2000. 6. BUSINESS SEGMENTS FCX has two operating segments: "mining and exploration" and "smelting and refining." The mining and exploration segment includes the copper and gold mining operations of PT Freeport Indonesia in Indonesia and FCX's Indonesian exploration activities. The smelting and refining segment includes Atlantic Copper's operations in Spain and PT Freeport Indonesia's equity investment in PT Smelting in Gresik, Indonesia. The segment data presented below were prepared on the same basis as the consolidated FCX financial statements.
8 <TABLE> <CAPTION> Mining Smelting and and Eliminations FCX Exploration Refining and Other Total ---------- -------- --------- ---------- (In Thousands) <S> <C> <C> <C> <C> Three months ended June 30, 2001: Revenues $ 421,062a $194,399 $ (77,202)b $ 538,259 Production and delivery 143,539 198,866 (75,661)b 266,744 Depreciation and amortization 70,153 6,846 1,320 78,319 Exploration expenses 2,311 - 109 2,420 Equity in PT Smelting losses - 352c - 352 General and administrative expenses 12,043 2,153 1,946 16,142 ---------- -------- --------- ---------- Operating income (loss) $ 193,016 $(13,818) $ (4,916) $ 174,282 ========== ======== ========= ========== Interest expense, net $ 24,085 $ 7,073 $ 10,235 $ 41,393 ========== ======== ========= ========== Provision for income taxes $ 62,224 $ 385 $ 9,799 $ 72,408 ========== ======== ========= ========== Capital expenditures $ 37,075 $ 3,864 $ 392 $ 41,331 ========== ======== ========= ========== Total assets $3,264,190d $671,185e $ (7,396) $3,927,979 ========== ======== ========= ========== Three months ended June 30, 2000: Revenues $ 259,885a $201,795 $ (64,332)b $ 397,348 Production and delivery 134,748 192,898 (74,362)b 253,284 Depreciation and amortization 46,123 7,088 1,117 54,328 Exploration expenses 1,487 - 354 1,841 Equity in PT Smelting losses - 5,878c - 5,878 General and administrative expenses 13,081 1,857 1,580 16,518 ---------- -------- --------- ---------- Operating income (loss) $ 64,446 $ (5,926) $ 6,979 $ 65,499 ========== ======== ========= ========== Interest expense, net $ 31,869 $ 6,094 $ 11,850 $ 49,813 ========== ======== ========= ========== Provision for income taxes $ 11,634 $ 264 $ 6,354 $ 18,252 ========== ======== ========= ========== Capital expenditures $ 30,737 $ 2,407 $ 235 $ 33,379 ========== ======== ========= ========== Total assets $3,284,735d $639,771e $ 60,146 $3,984,652 ========== ======== ========= ========== Six months ended June 30, 2001: Revenues $ 781,108a $353,525 $(149,287)b $ 985,346 Production and delivery 258,641 349,851 (147,298)b 461,194 Depreciation and amortization 130,172 13,635 2,641 146,448 Exploration expenses 4,286 - 185 4,471 Equity in PT Smelting losses - 2,820c - 2,820 General and administrative expenses 22,818 4,172 3,561 30,551 ---------- -------- --------- ---------- Operating income (loss) $ 365,191 $(16,953) $ (8,376) $ 339,862 ========== ======== ========= ========== Interest expense, net $ 54,599 $ 14,219 $ 21,012 $ 89,830 ========== ======== ========= ========== Provision for income taxes $ 114,529 $ (46) $ 18,540 $ 133,023 ========== ======== ========= ========== Capital expenditures $ 72,641 $ 7,329 $ 698 $ 80,668 ========== ======== ========= ========== </TABLE>
9 <TABLE> <CAPTION> Mining Smelting and and Eliminations FCX Exploration Refining and Other Total ---------- -------- --------- ---------- (In Thousands) <S> <C> <C> <C> <C> Six months ended June 30, 2000: Revenues $ 567,380a $426,682 $(129,122)b $ 864,940 Production and delivery 278,488 410,240 (169,380)b 519,348 Depreciation and amortization 101,185 14,268 2,234 117,687 Exploration expenses 3,057 - 752 3,809 Equity in PT Smelting losses - 3,637c - 3,637 General and administrative expenses 30,017 4,174 3,076 37,267 ---------- -------- --------- ---------- Operating income (loss) $ 154,633 $ (5,637) $ 34,196 $ 183,192 ========== ======== ========= ========== Interest expense, net $ 65,559 $ 12,848 $ 21,341 $ 99,748 ========== ======== ========= ========== Provision for income taxes $ 34,756 $ 1,728 $ 22,241 $ 58,725 ========== ======== ========= ========== Capital expenditures $ 87,009 $ 9,588 $ 367 $ 96,964 ========== ======== ========= ========== </TABLE> a. Includes PT Freeport Indonesia sales to PT Smelting totaling $111.9 million in the second quarter of 2001, $58.9 million in the second quarter of 2000, $202.5 million in the six-month period ended June 30, 2001 and $129.4 million in the six-month period ended June 30, 2000. b. Represents elimination of intersegment sales from PT Freeport Indonesia to Atlantic Copper and the change in deferred profits on intersegment sales remaining in Atlantic Copper's inventories. c. Includes effect of changes in deferred intercompany profits on 25 percent of PT Freeport Indonesia's sales to PT Smelting that remain in PT Smelting's inventory at period end, totaling $(1.0) million in the second quarter of 2001, $(0.7) million in the second quarter of 2000, $0.1 million in the six-month period ended June 30, 2001 and $(4.7) million in the six-month period ended June 30, 2000. d. Includes PT Freeport Indonesia's trade receivables with PT Smelting totaling $26.7 million at June 30, 2001 and $8.9 million at June 30, 2000. e. Includes PT Freeport Indonesia's equity investment in PT Smelting totaling $53.3 million at June 30, 2001 and $68.2 million at June 30, 2000. 7. RATIO OF EARNINGS TO FIXED CHARGES The ratio of earnings to fixed charges for the first six months of 2001 and 2000 was 3.7 to 1 and 1.8 to 1, 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 interest. ---------------------- Remarks The information furnished herein should be read in conjunction with FCX's financial statements contained in its 2000 Annual Report on Form 10-K. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods. All such adjustments are, in the opinion of management, of a normal recurring nature.
10 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders of Freeport-McMoRan Copper & Gold Inc.: We have reviewed the accompanying condensed balance sheet of Freeport-McMoRan Copper & Gold Inc. (a Delaware corporation) as of June 30, 2001, the related statements of operations for the three and six-month periods ended June 30, 2001 and 2000, and the statements of cash flows for the six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the balance sheet of Freeport-McMoRan Copper & Gold Inc. as of December 31, 2000, and the related statements of income, stockholders' equity and cash flows for the year then ended (not presented herein), and, in our report dated January 18, 2001, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2000, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP New Orleans, Louisiana July 18, 2001
11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW We operate through our majority-owned subsidiaries, PT Freeport Indonesia and PT Irja Eastern Minerals (Eastern Minerals), and through Atlantic Copper, S.A. (Atlantic Copper), our wholly owned subsidiary. PT Freeport Indonesia also has a 25 percent interest in PT Smelting, an Indonesian company that operates a copper smelter and refinery in Gresik, Indonesia. In addition to the PT Freeport Indonesia and Eastern Minerals exploration activities, we conduct other mineral exploration activities in Irian Jaya (Papua), Indonesia pursuant to joint venture and other arrangements. The results of operations reported and summarized below are not necessarily indicative of future operating results. Summary comparative results for the second-quarter and six- month periods follow (in millions, except per share amounts): <TABLE> <CAPTION> Second Quarter Six Months ---------------- ---------------- 2001 2000 2001 2000 ------ ------ ------ ------ <S> <C> <C> <C> <C> Revenues $538.3 $397.3 $985.3 $864.9 Operating income 174.3 65.5 339.9 183.2 Net income (loss) applicable to common stock 36.3 (18.6) 74.3 (9.4) Diluted net income (loss) per share of common stock .25 (.12) .51 (.06) </TABLE> Our consolidated revenues include PT Freeport Indonesia's sale of copper concentrates, which also contain significant amounts of gold, and the sale by Atlantic Copper of copper anodes, cathodes, wire and wire rod. Our 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, we have entered into copper and gold price protection contracts for some portion of our expected future mine production to mitigate the risk of adverse price fluctuations. We currently have no copper or gold price protection contracts relating to our mine production. We have outstanding gold- and silver-denominated preferred stock with dividends and redemption amounts determined by commodity prices. Based on PT Freeport Indonesia's projected share of 2001 copper sales (1.4 billion pounds), a $0.01 per pound change in the average price realized would have an approximate $14 million impact on our revenues and an approximate $7 million impact on our net income. A $5 per ounce change in the average price realized on PT Freeport Indonesia's share of projected 2001 gold sales (2.5 million ounces) would have an approximate $12.5 million impact on our revenues and an approximate $6 million impact on our net income. Our 2001 consolidated revenues improved significantly when compared with the 2000 periods primarily because of higher copper and gold sales volumes at PT Freeport Indonesia. Second-quarter 2001 revenues include benefits of $0.7 million ($0.4 million to net income or less than $0.01 per share) and second-quarter 2000 revenues benefited by $6.2 million ($3.0 million to net loss or $0.02 per share) from adjustments to prior period "open" concentrate sales. Six-month 2001 revenues include reductions of $2.7 million ($1.3 million to net income or $0.01 per share) for adjustments to December 31, 2000 open concentrate sales, while six-month 2000 revenues were increased by $10.5 million ($5.1 million to net loss or $0.03 per share) for adjustments to December 31, 1999 open concentrate sales. Consolidated cost of sales for the 2001 second quarter was higher when compared with the 2000 quarter largely because of higher PT Freeport Indonesia sales volumes partly offset by lower unit costs. The decline in consolidated cost of sales during the first six months of 2001 compared with the first six months of 2000 primarily reflects the significant decline in Atlantic Copper sales volumes during the first quarter of 2001 as they prepared for a major maintenance turnaround in April 2001. From time to time we enter into foreign currency contracts to hedge our projected operating costs denominated in foreign currencies. On January 1, 2001, accounting standards for these types of hedging contracts changed (see Note 3). Prior to January 1, 2001, our foreign currency forward contracts did not qualify for hedge accounting and all changes in the market values of these contracts were included in earnings as they occurred. As a result, our reported earnings prior to January 1, 2001 included the effects of changes in market value of all our outstanding foreign currency forward contracts, which were significant at times. The 2000 periods included gains totaling $0.1 million for the second quarter and losses totaling $5.9 million for the six-month period for changes in market value of foreign currency forward contracts, most of which would have been charged to other comprehensive income under the new accounting rules we adopted on January 1, 2001.
12 The lower losses we recorded during 2001 for our equity interest in PT Smelting primarily reflects improvements in PT Smelting's operating results during 2001, compared to 2000 when operations were ramping up to full production capacity. General and administrative expenses during the second quarter of 2001 were slightly lower than the second quarter of 2000 and during the first six months of 2001 they were $6.7 million lower than during the 2000 period. In the first quarter of 2000 we recorded net charges of $5.3 million related to contribution commitments, personnel severance costs and stock appreciation rights. Our effective tax rate for the first six months of 2001 was 53 percent compared with an effective rate of 71 percent in the first six months of 2000. The lower effective rate for the first six months of 2001 primarily reflects the impact of higher income at PT Freeport Indonesia. The higher level of minority interests in net income of consolidated subsidiaries in the 2001 periods is the result of improved earnings at PT Freeport Indonesia. RESULTS OF OPERATIONS We have two operating segments: "mining and exploration" and "smelting and refining." The mining and exploration segment includes PT Freeport Indonesia's copper and gold mining operations in Indonesia and FCX's Indonesian exploration activities. The smelting and refining segment includes Atlantic Copper's operations in Spain and PT Freeport Indonesia's 25 percent equity investment in PT Smelting. Summary comparative operating income (loss) by segment for the second-quarter and six-month periods follows (in millions): <TABLE> <CAPTION> Second Quarter Six Months ---------------- ---------------- 2001 2000 2001 2000 ------ ----- ------ ------ <S> <C> <C> <C> <C> Mining and exploration $193.0 $64.4 $365.2 $154.6 Smelting and refining (13.8) (5.9) (17.0) (5.6) Intercompany eliminations and other (4.9) 7.0 (8.3) 34.2 ------ ----- ------ ------ FCX operating income a $174.3 $65.5 $339.9 $183.2 ====== ===== ====== ====== </TABLE> a. Profits on PT Freeport Indonesia's sales to Atlantic Copper and on 25 percent of PT Freeport Indonesia's sales to PT Smelting are deferred until the final sale to third parties has occurred. Changes in the amount of these deferred profits benefited operating income by $0.7 million in the second quarter of 2001, $11.2 million in the second quarter of 2000, $0.6 million in the six-month 2001 period and $46.5 million in the six-month 2000 period. Our consolidated quarterly earnings fluctuate depending on the timing and prices of these sales. MINING AND EXPLORATION A summary of increases (decreases) in PT Freeport Indonesia revenues between the periods follows (in millions): <TABLE> <CAPTION> Second Six Quarter Months ------ ------ <S> <C> <C> PT Freeport Indonesia revenues - 2000 periods $259.9 $567.4 Increases (decreases): Sales volumes: Copper 105.7 128.1 Gold 134.9 193.9 Price realizations: Copper (26.9) (41.2) Gold (9.9) (27.1) Adjustments, primarily for copper pricing on prior period open sales (14.1) (4.0) Treatment charges, royalties and other (28.5) (36.0) ------ ------ PT Freeport Indonesia revenues - 2001 periods $421.1 $781.1 ====== ====== </TABLE> PT Freeport Indonesia's 2001 revenues for both second- quarter and six-month periods benefited from significant increases in sales volumes compared to the 2000 periods. When compared to the 2000 periods, copper sales volumes improved by 52 percent in the 2001 second quarter and 29 percent in the 2001 six- month period, while gold sales volumes improved by 146 percent in the 2001 second quarter to a quarterly record 813,600 ounces and by 88 percent in the 2001 six-month period. The higher sale volumes were partly offset by decreases in copper and gold price realizations. Treatment charges and royalties in total were higher in 2001 primarily because of higher sales volumes.
13 PT Freeport Indonesia has commitments from various parties, including Atlantic Copper and PT Smelting, to purchase virtually all of its estimated 2001 production at market prices. Net of Rio Tinto plc's joint venture interest, PT Freeport Indonesia's share of sales for the third quarter of 2001 is projected to approximate 340 million pounds of copper and 590,000 ounces of gold. PT Freeport Indonesia's share of sales for 2001 is projected to approximate 1.4 billion pounds of copper and 2.5 million ounces of gold, an increase from 2000 of approximately 600,000 ounces. Projected 2001 gold sales reflect the expectation of higher average gold ore grades compared to 2000. PT Freeport Indonesia'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 forward prices. At June 30, 2001, we had consolidated copper sales totaling 212.2 million pounds recorded at an average price of $0.70 per pound remaining to be finally priced. Approximately 80 percent of these open pounds are expected to be finally priced during the third quarter of 2001 with the remaining pounds to be priced during the fourth quarter of 2001. A one-cent movement in the average price used for these open pounds would have an approximate $1 million impact on our 2001 net income. At times PT Freeport Indonesia has entered into derivative contracts to manage certain risks resulting from fluctuations in commodity prices. During the first half of 2001 and as of June 30, 2001, PT Freeport Indonesia had no price protection programs in place for its copper and gold sales other than our gold- denominated preferred stock. As conditions warrant, PT Freeport Indonesia may enter into new contracts for its future sales. During the second quarter of 2000 PT Freeport Indonesia entered into forward copper sales contracts to fix the price at $0.81 per pound on approximately 60 percent of its March 31, 2000 open concentrate sales. During the first quarter of 2000 PT Freeport Indonesia entered into forward copper sales contracts to fix the price at $0.85 per pound on approximately 50 percent of its December 31, 1999 open concentrate sales. We recorded $0.8 million of additional revenues in the second quarter of 2000 and $6.9 million of additional revenues in the first quarter of 2000 from these forward sales. PT Freeport Indonesia Operating Results <TABLE> <CAPTION> Second Quarter Six Months ---------------- ------------------- 2001 2000 2001 2000 ------- ------- --------- ------- <S> <C> <C> <C> <C> PT Freeport Indonesia, Net of Rio Tinto's Interest Copper Production (000s of recoverable pounds) 359,100 287,300 736,200 595,800 Sales (000s of recoverable pounds) 389,800 256,200 723,200 562,100 Average realized price $.72 $.79 $.74 $.79 Gold Production (000s of recoverable pounds) 751,500 358,800 1,482,400 806,100 Sales (000s of recoverable pounds) 813,600 330,500 1,458,300 774,700 Average realized price $267.04 $279.26 $265.11 $283.70 Gross profit per pound of copper (cents): Average realized price 72.2 79.1 73.8 79.5 ------- ------- --------- ------- Production costs: Site production and delivery 36.6a 51.1b 35.8a 49.1b Gold and silver credits (57.1) (37.1) (54.6) (40.5) Treatment charges 18.3 18.1 18.2 18.0 Royalty on metals 2.0 1.3 2.0 1.3 ------- ------- --------- ------- Cash production costs (0.2) 33.4 1.4 27.9 Depreciation and amortization 18.0 18.0 18.0 18.0 ------- ------- --------- ------- Total production costs 17.8 51.4 19.4 45.9 ------- ------- --------- ------- Adjustments, primarily for copper pricing on prior period sales (1.0) 4.6 (0.2) 0.3 ------- ------- --------- ------- Gross profit per pound of copper 53.4 32.3 54.2 33.9 ======= ======= ========= ======= </TABLE>
14 <TABLE> <CAPTION> Second Quarter Six Months ------------------ ------------------- 2001 2000 2001 2000 --------- ------- --------- ------- <S> <C> <C> <C> <C> PT Freeport Indonesia, 100% Operating Statistics Ore milled (metric tons per day) 240,000 218,500 234,800 225,000 Copper grade (percent) 1.04 .94 1.08 .94 Gold grade (grams per metric ton) 1.57 .86 1.62 .93 Recovery rate (percent) Copper 86.6 86.4 87.9 86.1 Gold 89.3 84.1 88.6 84.5 Copper (000s of recoverable pounds) Production 412,400 336,500 847,300 697,200 Sales 447,700 300,100 832,600 658,200 Gold (000s of recoverable ounces) Production 982,500 442,900 1,928,500 999,900 Sales 1,061,800 407,600 1,894,800 958,600 </TABLE> a. Net of deferred mining costs totaling $9.7 million (2.5 cents per pound) in the second quarter of 2001 and $18.0 million (2.5 cents per pound) in the first six months of 2001. During the fourth quarter of 2000, PT Freeport Indonesia changed its estimated average ratio of waste rock to ore over the life of the mine in its deferred mining calculation to 1.6 to 1 from 2.4 to 1. For additional information, see Note 1 to the consolidated financial statements in our annual report for the year ended December 31, 2000. b. Includes recaptured mining costs totaling $6.0 million (2.3 cents per pound) in the second quarter of 2000 and $13.3 million (2.4 cents per pound) in the first six months of 2000. PT Freeport Indonesia's 2001 production benefited from higher mill throughput rates, ore grades and recovery rates when compared with the prior-year periods. Mill throughput averaged a record 240,000 metric tons of ore per day during the second quarter of 2001. Second-quarter 2001 copper grades were 11 percent higher than the prior-year quarter and gold grades were 83 percent higher. Six-month 2001 copper grades were 15 percent higher than the prior-year period and gold grades were 74 percent higher. Recovery rates remained strong reflecting high-recovery ore processed during the last three quarters and recovery initiatives achieved at the mill. As previously reported, lower gold grades in the Grasberg pit during the first three quarters of 2000 reflected an expected mining of lower grade ore in accordance with the mine plan during that period and the gold grades in the first half of 2001 reflect a continuation of the improved grades that began to be mined during the fourth quarter of 2000. Ore grades for the second half of 2001 are expected to decline to an average of approximately 0.96 percent for copper and 1.20 grams per metric ton for gold. In May 2000, PT Freeport Indonesia, in consultation with the Government of Indonesia, voluntarily agreed to temporarily limit Grasberg open-pit production because of an incident at its Wanagon overburden stockpile. In January 2001, PT Freeport Indonesia resumed normal mining operations at Grasberg after receiving governmental approval. Mill throughput rates will vary based on the characteristics of the ore being processed as we manage our operations to optimize metal production. Unit site production and delivery costs in the second quarter of 2001 averaged $0.37 per pound of copper, $0.14 per pound lower than the $0.51 reported in the second quarter of 2000, primarily because of higher sales volumes, the previously reported change in the estimated ratio of waste rock to ore over the life of the mine, weaker foreign currencies (the Indonesian rupiah and Australian dollar) and implementation of operating initiatives introduced in 2000 designed to improve processes and reduce costs. Gold credits of $0.57 per pound in the 2001 quarter were higher when compared with the 2000 quarter level of $0.37 per pound because of higher gold ore grades and sales. Unit site production and delivery costs and gold credits in the first six months of 2001, compared with the 2000 period, benefited for the same reasons as second-quarter 2001 unit costs. Royalties were higher in the 2001 periods because of higher sales volumes and totaled $8.0 million in the second quarter of 2001, $3.3 million in the second quarter of 2000, $14.3 million in the first six months of 2001 and $7.2 million in the first six months of 2000. PT-FI has a labor agreement covering its hourly paid Indonesian employees, the key provisions of which are renegotiated biannually. PT-FI's labor agreement was scheduled to expire on September 30,
15 2001. In June 2001, PT-FI and its workers agreed to terms for a new labor agreement that expires September 30, 2003. PT-FI's relations with the workers' union have generally been positive. We conduct the majority of our operations in Indonesia and Spain. Our functional currency is the U.S. dollar. All of our revenues are denominated in U.S. dollars; however, certain costs and asset and liability accounts are denominated in Indonesian rupiahs, Australian dollars or Spanish pesetas/euros. Generally, our 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 1997, the Indonesian rupiah/U.S. dollar exchange rate has been volatile. One U.S. dollar was equivalent to 11,430 rupiahs at June 30, 2001 and 9,215 rupiahs at December 31, 2000. PT Freeport Indonesia recorded losses totaling $0.2 million during the second quarter of 2001, $0.4 million during the second quarter of 2000, $0.6 million during the first six months of 2001 and $0.7 million during the first six months of 2000 related to its rupiah-denominated net assets. The weakened rupiah currency has resulted in lower reported costs by PT Freeport Indonesia, primarily lower labor costs. At estimated annual aggregate rupiah payments of 800 billion and a June 30, 2001 exchange rate of 11,430 rupiahs to one U.S. dollar, a one-thousand-rupiah increase in the exchange rate would result in an approximate $6 million decrease in annual operating costs and a one-thousand- rupiah decrease in the exchange rate would result in an approximate $7 million increase in annual operating costs, before any hedging effects. In April 2000, PT Freeport Indonesia entered into foreign currency forward contracts to hedge a portion of its aggregate anticipated Australian dollar payments for the remainder of 2000 and for 2001. As of June 30, 2001, these contracts hedge 48.0 million of Australian dollar payments from July 2001 through December 2001, or approximately 50 percent of aggregate projected remaining 2001 Australian dollar payments at an average exchange rate of $0.58 to one Australian dollar. The exchange rate was $0.51 to one Australian dollar at June 30, 2001. Each $0.01 change in the U.S. dollar/Australian dollar exchange rate impacts the market value of these contracts by approximately $0.5 million. In July 2000, PT Freeport Indonesia entered into foreign currency forward contracts to hedge a portion of its aggregate projected April through July 2001 Indonesian rupiah payments. In June 2001, PT Freeport Indonesia entered into additional foreign currency forward contracts to hedge a portion of its aggregate projected August 2001 through December 2002 rupiah payments. As of June 30, 2001, the rupiah contracts hedge 698.7 billion of rupiah payments from July 2001 through December 2002, or approximately 50 percent of projected remaining 2001 rupiah payments and 2002 rupiah payments at an average exchange rate of 12,296 rupiahs to one U.S. dollar. Each 1,000-rupiah change in the Indonesian rupiah/U.S. dollar exchange rate impacts the market value of these contracts by approximately $5 million, before any hedging effects. PT Freeport Indonesia recorded net realized losses to production costs related to matured Australian dollar and Indonesian rupiah contracts totaling $1.2 million in the second quarter of 2001 and $1.7 million in the first six months of 2001, compared to a gain of $1.9 million in the second quarter and first six months of 2000 for all outstanding currency hedging contracts in the 2000 periods. Under new accounting standards that became effective January 1, 2001 gains or losses on qualifying hedging contracts are recognized in earnings as the contracts are settled, with changes in the fair value of outstanding contracts reflected in Other Comprehensive Income, a component of stockholders' equity, until realized (Note 3). We recorded a net gain of $0.7 million to Other Comprehensive Income in the second quarter of 2001 and a net loss of $1.3 million in the first six months of 2001 for PT Freeport Indonesia's outstanding currency hedging contracts at June 30, 2001. Exploration Activities Our exploration efforts continue to focus on the GBT Atas or "GBTA" project (previously referred to as Guru Ridge), the underground Ertsberg Stockwork Zone and Grasberg Underground. Exploration drilling and a preliminary study of the GBTA resource during the first quarter of 2001 concluded that open-pit mining appears promising and PT Freeport Indonesia continues to study the feasibility of this surface mineralization target for possible near-term development. Drilling rigs were operating from the surface and from underground locations to explore and delineate the grades and geometry of the resource. Reserve extension drilling continues at the Ertsberg Stockwork Zone adjacent to our Deep Ore Zone mine where underground production began in 2000 and the Grasberg Underground to define the outward extent of mineralization adjacent to and below the current block cave reserve. Field exploration activities outside of our current mining operations area have been temporarily suspended pending the resolution of security and regulatory issues involving a possible conflict between
16 our mining and exploration rights under ourContract of Work and the requirements of certain recently enacted Indonesian forestry laws. SMELTING AND REFINING Impact of Smelter Treatment and Refining Charges Our investment in smelters serves an important role in our concentrate marketing strategy. Approximately one-half of PT Freeport Indonesia's concentrate production is sold to its affiliated smelters, Atlantic Copper and PT Smelting, and the remainder is sold to other customers. Through downstream integration, we are able to achieve operating hedges for changes in treatment charges for smelting and refining PT Freeport Indonesia's copper concentrates. While low smelter treatment and refining charges adversely affect the operating results of our smelter operations, they benefit the operating results of our mining operations of PT Freeport Indonesia. Taking into account taxes and minority ownership interests, an equivalent change in rates would essentially offset in our consolidated operating results. <TABLE> <CAPTION> Atlantic Copper Operating Results Second Quarter Six Months ------------------- ------------------ 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Cash margin before currency hedging (in millions) $(2.6) $10.6 $6.0 $24.6 Operating loss (in millions) $(13.5) $ - $(14.1) $(2.0) Concentrate treated (metric tons) 195,300 238,500 400,800 483,200 Anode production (000s of pounds) 134,300 167,800 278,300 346,100 Cathode, wire rod and wire sales (000s of pounds) 129,100 147,100 264,700 284,200 Gold sales in anodes and slimes (ounces) 181,000 173,200 289,200 384,400 </TABLE> Atlantic Copper's cash margin, revenues less production costs, before currency hedging was $13.2 million lower in the 2001 quarter compared with the 2000 quarter and $18.6 million lower in the first six months of 2001 compared with the first six months of 2000 primarily because of a scheduled 27-day major maintenance turnaround in April 2001. The major maintenance turnaround was completed on schedule at a total cost of approximately $15 million (approximately $9 million of direct costs and $6 million related to lower sales volumes). Atlantic Copper's cathode cash production costs per pound of copper, before currency hedging, averaged $0.18 in the second quarter of 2001 and $0.16 in the first six months of 2001 compared with $0.12 in both the second quarter of 2000 and the first six months of 2000. The increase in unit costs reflects the effects of lower production volumes and the costs resulting from the turnaround. The next scheduled major maintenance turnaround is not anticipated for another three years. Atlantic Copper's treatment rates averaged $0.18 per pound in the 2001 periods, slightly better than the $0.17 per pound average in the 2000 periods, but still at historically low levels. Atlantic Copper recorded operating losses of $13.5 million for the second quarter of 2001, including approximately $9 million for direct costs related to the major maintenance turnaround, compared with breakeven results in the 2000 period. Atlantic Copper's operating results include a $1.0 million loss in the second quarter of 2001 and a $1.3 million loss in the first six months of 2001 on currency hedging contracts maturing during the periods compared to a $1.8 million charge in the second quarter of 2000 and a $7.8 million charge in the first six months of 2000 for all outstanding currency hedging contracts in the 2000 periods. Under new accounting standards discussed previously and in Note 3, Atlantic Copper recorded charges to Other Comprehensive Income totaling $5.3 million in the second quarter of 2001 and $16.4 million in the first six months of 2001 for its outstanding currency hedging contracts at June 30, 2001, reflecting an approximate 10 percent decline in the Spanish peseta/euro exchange rate since December 31, 2000. Atlantic Copper had peseta/euro-denominated net monetary liabilities at June 30, 2001 totaling $49.8 million recorded at an exchange rate of 196.2 pesetas to one U.S. dollar or $0.85 per euro. The December 31, 2000 exchange rate was 178.8 pesetas to one U.S. dollar or $0.93 per euro. Adjustments to Atlantic Copper's peseta/euro-denominated net liabilities to reflect changes in the exchange rate are recorded in other income and totaled gains (losses) of $1.2 million in the second quarter of 2001, $(0.3) million in the second quarter of 2000, $4.3 million in the first six months of 2001 and $2.1 million in the first six months of 2000.
17 At estimated annual peseta/euro payments of 15 billion pesetas/90 million euros and a June 30, 2001 exchange rate of 196.2 pesetas to one U.S. dollar or $0.85 per euro, a 10- peseta/$0.06 increase or decrease in the exchange rate would result in an approximate $4 million change in annual costs, before any hedging effects. As part of refinancing its debt in June 2000, Atlantic Copper was required to significantly expand its program to hedge anticipated peseta/euro-denominated operating costs. At June 30, 2001, Atlantic Copper had contracts to purchase 25.3 billion pesetas/152.2 million euros from July 2001 through December 2003 at an average exchange rate of 163.8 pesetas per one U.S. dollar or $1.02 per euro. These contracts currently hedge approximately 50 percent of Atlantic Copper's projected remaining 2001 peseta/euro disbursements and approximately 67 percent of Atlantic Copper's projected 2002 and 2003 euro disbursements. Each $0.01 change in the US$/euro exchange rate impacts the market value of these contracts by approximately $1.5 million. <TABLE> <CAPTION> PT Smelting Operating Results Second Quarter Six Months -------------- -------------- 2001 2000 2001 2000 ------ ----- ------ ------ (In millions) <S> <C> <C> <C> <C> PT Freeport Indonesia share of net losses $ 1.4 $ 6.6 $ 2.7 $ 8.3 PT Freeport Indonesia profits deferred (recognized) (1.0) (0.7) 0.1 (4.7) ------ ----- ------ ------ Equity in PT Smelting losses $ 0.4 $ 5.9 $ 2.8 $ 3.6 ====== ===== ====== ====== PT Freeport Indonesia sales to PT Smelting $111.9 $58.9 $202.5 $129.4 ====== ===== ====== ====== </TABLE> PT Freeport Indonesia accounts for its 25 percent interest in PT Smelting under the equity method and has provided PT Smelting with all of its concentrate requirements. PT Smelting operated at 109 percent of its full design capacity of 200,000 metric tons of copper per year during the second quarter of 2001 and at 107 percent of its full design capacity during the first six months of 2001. Concentrate treated during the second quarter of 2001 totaled 179,700 metric tons, an 80 percent increase compared to the amounts treated in the year-ago quarter when operations were ramping up to full capacity. PT Smelting shut down the smelter, as planned, at the end of March 2000 for the tie-in of a new third anode furnace as well as for planned maintenance. The smelter restarted at the end of April 2000. Second-quarter 2001 anode production increased by 95 percent and cathode production increased by nearly 100 percent when compared to the year-ago period, resulting in a 90 percent increase in PT Smelting's cathode sales in the 2001 quarter over the 2000 quarter. Anode production was 69 percent higher and cathode production was 78 percent higher in the first six months of 2001 compared with the first six months of 2000. The higher production levels in 2001 benefited PT Smelting's cathode cash production costs per pound of copper, which decreased to $0.12 in the 2001 quarter and first six months of 2001, compared with $0.23 in the 2000 quarter and $0.17 in the first six months of 2000. Our revenues include PT Freeport Indonesia's sales to PT Smelting, but we defer recognizing profits on 25 percent of PT Freeport Indonesia sales to PT Smelting that are still in PT Smelting's inventory at the end of the period. The effect of changes in these deferred profits was the recognition of profits totaling $1.0 million in the second quarter of 2001, $0.7 million in the second quarter of 2000 and $4.7 million in the first six months of 2000, and the deferral of profits totaling $0.1 million in the first six months of 2001. OTHER FINANCIAL RESULTS The FCX/Rio Tinto joint ventures incurred exploration costs of $3.6 million in the 2001 second quarter, $2.7 million in the 2000 second quarter, $7.1 million in the 2001 six-month period and $5.5 million in the 2000 six-month period. All costs in the joint venture areas are now being shared 60 percent by us and 40 percent by Rio Tinto. Second-quarter 2001 general and administrative expenses of $16.1 million were slightly lower than the $16.5 million reported in the 2000 quarter, and six-month 2001 general and administrative expenses were $6.7 million lower compared to the 2000 period primarily because of a $6.0 million charge in 2000 for contribution commitments to support small business development programs within Irian Jaya (Papua) that was paid over a two-year period. The six-month 2000 period also included a $0.8 million charge for personnel severance costs, offset by a $1.5 million reversal of previously recorded charges relating to stock appreciation rights because of a decrease in our common stock price.
18 Our total interest costs (before capitalization) were $43.5 million in the 2001 quarter, $51.4 million in the 2000 quarter, $93.9 million in the first six months of 2001 and $102.6 million in the first six months of 2000. The decrease in interest costs reflects lower debt levels and interest rates. We capitalized $2.1 million of interest costs in the second quarter of 2001, $1.5 million in the second quarter of 2000, $4.1 million in the first six months of 2001 and $2.9 million in the first six months of 2000. Our effective tax rate was 53 percent for the first six months of 2001 and 71 percent for the first six months of 2000. PT Freeport Indonesia's Contract of Work provides a 35 percent corporate income tax rate and a withholding tax rate of 10 percent (based on the tax treaty between Indonesia and the United States) on dividends and interest paid to us by PT Freeport Indonesia. No income taxes are recorded at Atlantic Copper, which is subject to taxation in Spain, because it has not generated significant taxable income in recent years and has substantial tax loss carryforwards for which no financial statement benefit has been provided. Additionally, we only receive a small U.S. tax benefit on costs incurred by our parent company because it has no U.S.-sourced income. As a result, our effective tax rate varies with the level of earnings at PT Freeport Indonesia, Atlantic Copper and the parent company. The lower effective tax rate for the first six months of 2001 primarily reflects the impact of higher income at PT Freeport Indonesia. NEW ACOUNTING STANDARD AND ENVIRONMENTAL MATTERS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," which requires recording the fair value of a liability for an asset retirement obligation in the period incurred. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application permitted. Upon adoption of the standard, we are required to use a cumulative-effect approach to recognize transition amounts for any existing asset retirement obligation liabilities, asset retirement costs and accumulated depreciation. We have not determined the transition amounts. The costs of complying with environmental laws is a fundamental cost of our business. We incurred environmental capital expenditures and other environmental costs totaling $106.1 million in 2000, $73.3 million in 1999 and $111.5 million in 1998, including levee maintenance and mine reclamation. In 2001, we expect to incur approximately $47 million of environmental capital expenditures, including $18.0 million of capital expenditures in connection with our construction of a treatment facility in the Lower Wanagon Basin to remove dissolved copper from the acid rock drainage resulting from both mining and overburden, and $46 million of other environmental costs. These environmental capital expenditures are part of our $190.0 million overall 2001 capital expenditure budget discussed below. CAPITAL RESOURCES AND LIQUIDITY Net cash provided by operating activities was $290.8 million for the first six months of 2001, compared with $228.2 million for the 2000 period. Net cash used in investing activities totaled $76.1 million in the 2001 period, compared with $103.4 million in the 2000 period, primarily for PT Freeport Indonesia capital expenditures. Net cash used in financing activities totaled $207.8 million in 2001 compared with $125.7 million in 2000. Operating Activities Higher net income was only partly offset by working capital changes in the first six months of 2001, resulting in a $62.6 million increase in operating cash flow to $290.8 million, from the year-ago period. The $5.9 million net increase in working capital for the first six months of 2001 primarily reflects an increase in accounts receivable and joint venture payments to Rio Tinto partly offset by an increase in income taxes payable. The net $54.4 million decrease in working capital for the first six months of 2000 primarily reflects the collection of accounts receivable and an increase in accounts payable and accrued liabilities, partly offset by an increase in inventories and the payment of income taxes. Investing Activities Our six-month 2001 capital expenditures were lower compared to the 2000 period primarily because we paid for previously purchased mine equipment in the first half of 2000. Our capital expenditures for 2001 are expected to total approximately $190 million, including $40 million for continued development of the Deep Ore Zone underground ore body, which started production in 2000 and is expected to reach full production of 25,000 metric tons of ore per day by 2003. Capital expenditure funding is expected to be provided by operating cash flows.
19 Financing Activities We used available operating cash flows to repay $176.4 million of debt in the first six months of 2001. During the first six months of 2000 we had net borrowings of $58.1 million and purchased $122.4 million of our common stock. Repayments to Rio Tinto totaled $60.6 million in the first six months of 2000 from PT Freeport Indonesia's share of incremental cash flow attributable to the fourth concentrator mill expansion. After less than two and one-half years, PT Freeport Indonesia fully repaid the $450 million loan from Rio Tinto, which funded PT Freeport Indonesia's share of the fourth concentrator mill expansion. We guarantee a $253.4 million loan to PT Nusamba Mineral Industri (Nusamba), as discussed in our Form 10-K for the year ended December 31, 2000, which matures in March 2002. Based on current market conditions, we may be required to perform under the guarantee. See "Refinancing Transactions" below. We also agreed to lend Nusamba any amounts necessary to cover shortfalls between the interest payments on the loan and dividends received by Nusamba on the PT Indocopper Investama stock. At June 30, 2001, we had loaned $61.8 million to Nusamba for this purpose. The amount of any future shortfalls will depend primarily on the level of PT Freeport Indonesia's dividends to PT Indocopper Investama. The total of the guaranteed loan and the amounts we have subsequently loaned to Nusamba exceeded the original purchase price ($315 million) of Nusamba's acquisition of its interest in PT Indocopper Investama in June 2001. Any amounts in excess of the $315 million original purchase price we loan to Nusamba are charged to other expense. In June 2000, our Board of Directors authorized a 20-million- share increase in our open market share purchase program, bringing the total shares approved for purchase under this program to 80 million. During the first six months of 2001, we purchased 0.2 million of our shares (all during the first quarter) for $1.6 million, $8.35 per share. During the first six months of 2000, we acquired 10.6 million of our shares for $129.2 million (an average of $12.15 per share). From inception of these programs in July 1995 through July 18, 2001, we have purchased a total of 70.7 million shares for $1.24 billion (an average of $17.53 per share) and approximately 9.3 million shares remain available under the program. The timing of future purchases is dependent upon many factors, including the price of common shares, our business and financial position, and general economic and market conditions. See "Amended Credit Facilities" discussion below for limitations on future repurchases. Refinancing Transactions We have commitments from all of the members of our bank group to amend our existing credit facilities to extend the maturities and to provide a mechanism for financing any obligations we may have under our guarantee of the commercial bank loan to PT Nusamba Mineral Industri. The amendment to our bank credit facilities is conditioned on the sale of $300 million of convertible notes, the negotiation and execution of definitive agreements and satisfaction of other conditions. The sale of the convertible notes and entering into the amended credit facilities are collectively referred to as the "refinancing transactions." We believe that the refinancing transactions, together with our cash flows from operations, will enable us to fund our ongoing capital expenditures and meet our debt maturities over the next several years. In addition to the refinancing transactions, we are also considering means of refinancing or restructuring our gold- denominated preferred stock to extend its current 2003 mandatory redemption date. * Existing Credit Facilities and Maturities Our existing bank credit facilities provide total availability of $1.0 billion, subject to a borrowing base that is redetermined annually. The facilities mature in December 2002. The outstanding balance at June 30, 2001 was $754.0 million, with $214.0 million available to PT Freeport Indonesia and $32.0 million available to FCX. The $253.4 million bank loan to PT Nusamba Mineral Industri that we guarantee matures in March 2002. It is uncertain whether Nusamba will pay its debt at maturity. If we are required to perform under our guarantee of Nusamba's debt, the amended credit facilities will provide a mechanism to finance our guarantee obligation. Other significant maturities through 2006 include the expected repayment of the senior notes of $250.0 million in 2003 and $200.0 million in 2006, and the redemption of preferred stock totaling approximately $172.3 million in 2003 and $126.4 million in 2006, based on gold and silver prices as of June 29, 2001.
20 Our scheduled debt and redeemable preferred stock maturities, including the Nusamba guarantee, total approximately $1.2 billion in 2002 and $499.3 million in 2003 based on June 29, 2001 gold and silver prices, which determine the preferred stock redemption amounts. * Amended Credit Facilities We have commitments from all members of our current bank group to amend our credit facilities based on the following terms. These terms are subject to the sale of $300 million of convertible notes, negotiation and execution of definitive agreements and satisfaction of other conditions. Commitments and Availability. The aggregate commitments under the amended credit facilities will be $760.0 million, all of which will be available to PT Freeport Indonesia and $340.0 million of which will be available to FCX. If we sell more than $300.0 million principal amount of convertible notes, the additional net proceeds will be used to repay our outstanding borrowings under the facilities and the commitments will be reduced by the excess amount. The aggregate commitments under the amended credit facilities will be $954.0 million if we are called on to perform under the Nusamba guarantee when the Nusamba loan matures in 2002. Nusamba indirectly owns 4.7 percent of PT Freeport Indonesia through its approximate 51 percent ownership of PT Indocopper Investama. To secure its commercial bank loan, Nusamba pledged its ownership in PT Indocopper Investama. If Nusamba does not pay the loan when due and we are required to perform under the guarantee, we would fund the $253.4 million obligation under the amended credit facilities and would seek to recover the PT Indocopper Investama stock as provided by the Nusamba financing documents, which are governed by Indonesian law. Maturities and Term Loan Conversion. Amounts that we borrow under the amended facilities will mature on December 31, 2005. Amounts will be available on a revolving basis until December 2003, at which time all borrowed amounts will become term loans, except for a $150.0 million revolver for working capital purposes. We will be able to use the amounts available under the amended facilities to pay interest and principal requirements on our other debt when due. We will be required to use all available cash flow after debt service and capital expenditures to reduce amounts outstanding under the amended facilities. There are no minimum principal payments under the amended facilities until 2004 at which time the loan will be subject to scheduled amortization in an aggregate principal amount of $130.0 million per year in each of 2004 and 2005. The cumulative amounts of any commitment reductions prior to December 31, 2003 will be credited toward the amortization payments. Mandatory Repayments and Reductions in Commitments. All of the proceeds from the sale of convertible notes will be used to pay outstanding borrowings under our credit facilities. After we have raised $250.0 million of additional financing in excess of the $300.0 million of gross proceeds from the sale of convertible notes, 25 percent of the proceeds from debt issuances and 50 percent of the proceeds from equity issuances would be available to us for general corporate purposes. All other proceeds from financings and all available cash of FCX and PT Freeport Indonesia will be used to pay outstanding borrowings under the amended credit facilities and the commitments under the facilities will be reduced by those amounts, except as necessary to maintain availability to repay the 7.20% senior notes and to preserve the $150.0 million revolving facility that will continue to be available through December 31, 2005. Interest Rates and Fees. Interest rates on all loans under the facilities, including any amounts used to fund our obligations under the Nusamba guarantee, will initially be LIBOR (currently 3.8 percent) plus 4.0 percent with annual increases of 0.125 percent on each anniversary of the closing of the amended facilities. Interest rates will be reduced to a level yet to be determined upon the achievement of minimum public debt ratings. We will also pay an amendment fee of up to 1.25 percent on available borrowings. Beginning in November 2003, if we have not raised $250.0 million of additional financing in excess of the $300.0 million of gross proceeds from the sale of convertible notes, and we use proceeds under the facilities to repay our 7.20% senior notes, then we will pay interest on those borrowings (up to a maximum of $250.0 million) of LIBOR plus 5.0 percent with annual increases of 0.125 percent. We will also pay an additional fee of 0.75 percent on amounts used under the facilities to repay our 7.20% senior notes (up to a maximum of $250.0 million), which we expect to repay in November 2003.
21 7.20% Senior Notes. Amounts available under the amended credit facilities may be used to repay our 7.20% senior notes in November 2003 to the extent necessary. In accordance with a schedule to be determined, we will maintain progressively greater amounts of unused availability under the amended credit facilities so that we will have available $250.0 million in November 2003 to repay the 7.20% senior notes. Gold-Denominated Preferred Stock Due in 2003. Prior to the mandatory redemption date in August 2003, we intend to refinance or restructure our obligation to redeem our gold-denominated preferred stock. Under the amended credit facilities, we have limitations on the amount of preferred stock we may redeem and, if by August 2003 we have not extended the maturity of a specified amount of the gold-denominated preferred stock beyond 2005, we will not thereafter be permitted to redeem or pay dividends on any of our preferred stock. Other Covenants. The covenants under the amended credit facilities are expected to include (a) a minimum consolidated debt service coverage ratio to be determined, but no greater than 1.5:1.0 and (b) a maximum ratio of consolidated debt to EBITDA equal to 3.5:1.0. The covenants will also include prohibitions on common stock dividends and common stock repurchases, limitations on capital expenditures to specified budgets, limitations on investments, limitations on liens, limitations on transactions with affiliates, and a requirement to implement minimum hedging protection for copper prices under certain circumstances. Security and Guarantees. The obligations of FCX and PT Freeport Indonesia under the amended credit facilities will be secured by a first security lien on most of PT Freeport Indonesia's assets and by our pledge of (1) 50.1 percent of the outstanding capital stock of PT Freeport Indonesia, (2) the approximate 49 percent of the outstanding capital stock of PT Indocopper Investama owned by us and (3) the approximate 51 percent of the outstanding capital stock of PT Indocopper Investama securing the original Nusamba loan, if acquired by us. PT Freeport Indonesia's obligations will also continue to be secured by its pledge of its rights under the Contract of Work. In addition, PT Freeport Indonesia will guarantee FCX's obligations under the amended credit facilities. Revised Debt and Redeemable Preferred Stock Maturities. Assuming the sale of $300 million of convertible notes and the amendments to the bank credit facilities as currently contemplated, following is a summary of our debt and redeemable preferred stock maturities, including the Nusamba loan maturity, based on loan balances as of June 30, 2001, and gold and silver prices (which determine the preferred stock redemption amounts) as of June 29, 2001 (in millions): <TABLE> <CAPTION> There- 2001 2002 2003 2004 2005 2006 after ----- ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> Bank credit facilities a $ - $ - $ - $130.0 $409.0 $ - $ - Infrastructure financings and equipment loans 32.6 110.7 56.9 62.3 47.4 47.7 187.1 7.20% Senior Notes due 2026 b - - 250.0 - - - - 7.50% Senior Notes due 2006 c - - - - - 200.0 - Convertible Notes - - - - - 300.0 - Atlantic Copper facilities and other 6.0 65.0 20.1 10.1 24.1 24.1 114.9 ----- ------ ------ ------ ------ ------ ------ Total debt maturities 38.6 175.7 327.0 202.4 480.5 571.8 302.0 Nusamba loan guarantee d - - - - 253.4 - - Redeemable preferred stock e 10.3 10.3 172.3 10.3 10.3 126.4 - ----- ------ ------ ------ ------ ------ ------ Total maturities $48.9 $186.0 $499.3 $212.7 $744.2 $698.2 $302.0 ===== ====== ====== ====== ====== ====== ====== </TABLE> a. The amount due in 2004 represents the minimum repayment requirement under the amended credit facilities and the amount due in 2005 represents the loan balances as of June 30, 2001 less the 2004 minimum repayment requirement and the estimated net proceeds from the sale of convertible notes. b. Although due in 2026, the holders of the 7.20% senior notes may, and are expected to, elect early repayment in November 2003. c. Due November 15, 2006. d. If we are required to perform under this guarantee, we intend to fund the $253.4 million obligation under our amended credit facilities; as reflected, $130.0 million under the bank credit facilities will mature in 2004 and the balance will mature in 2005.
22 e. Represents $10.3 million each year for our silver- denominated preferred stock, $162.0 million in August 2003 for our gold-denominated preferred stock, and $116.1 million in February 2006 for our series II gold-denominated preferred stock. Increased Cost of Debt. As of June 30, 2001, our weighted average cost of debt was 7.7 percent. Had we completed the refinancing transactions on June 30, 2001, our average borrowing cost would have increased by approximately 1.2 percent. In connection with the amended bank credit facilities, we expect to incur premiums, fees and expenses that will result in a cash outlay of approximately $19.4 million. This cash outlay has been reflected in the expected approximately 1.2 percent increase in our average borrowing cost. DEVELOPMENTS IN INDONESIA Indonesia's economic recovery remains vulnerable to ongoing political and social tensions. There have been repeated challenges to the political leadership of President Abdurrahman Wahid since his election on October 20, 1999. In May 2001, Indonesia's highest political institution, the People's Consultative Assembly (MPR), scheduled a special session to hear an accountability speech from President Wahid. If his speech were to be rejected, the MPR would have the power to withdraw the president's mandate and force him to resign. President Wahid had publicly stated that he would not resign. Early on the morning of July 23, 2001, President Wahid declared a state of emergency in Indonesia and called for new MPR elections to be held in 2002. However, the MPR, the military and the national police refused to recognize the decree following a Supreme Court ruling that the presidential decree had no legal basis. Later on July 23, 2001, the MPR voted to immediately remove President Wahid, and elected Vice President Megawati Sukarnoputri as the new president. The international community, including the United States, has expressed support for the newly elected President. While President Wahid had previously warned of violence by his supporters, no significant incidents of violence have been reported thus far. No incidents of violence were reported in PT Freeport Indonesia's area of operations, where the local community leaders continue to support peaceful solutions to the complex issue of regional autonomy. Indonesia's economy continues to struggle with a growing budget deficit, a weak currency, rising local interest rates and inflation, and a decline in exports. The political situation has prevented the government from implementing fiscal policy, prompting Standard & Poor's to downgrade Indonesia's credit rating during the quarter. The government continues to work closely with the International Monetary Fund to reach a new agreement allowing the release of a $400 million loan disbursement. Another factor impacting the country's economic recovery is that its debt-restructuring agency has not generated sufficient asset sale proceeds to meet government budget targets. The rupiah continues to reflect the uncertain political and social situation and the country's weak economic position. At June 30, 2001, the rupiah exchange rate was 11,430 rupiahs to 1 U.S. dollar and is 24 percent weaker than the rate at December 31, 2000. Inflation is on the rise and local interest rates currently exceed 16 percent. CAUTIONARY STATEMENT Our discussion and analysis contains forward-looking statements in which we discuss factors we believe may affect our performance in the future. Forward-looking statements are all statements other than historical facts, such as those regarding anticipated sales volumes, ore grades, commodity prices, capital expenditures, the expected amendment to our bank credit facilities, political, economic and social conditions in our areas of operations, treatment charge rates and exploration efforts and results. We caution you that these statements are not guarantees of future performance, and our actual results may differ materially from those projected, anticipated or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements 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 our Form 10-K for the year ended December 31, 2000.
23 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 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 alleged environmental, human rights and social/cultural violations in Indonesia and seeks unspecified monetary damages and other equitable relief. In addition, the plaintiff alleged that she was a third-party beneficiary under the 1967 and the 1991 Contracts of Work, and claimed that she had not received fair compensation for her land rights. On March 21, 2000 the trial court dismissed the entire case with prejudice, granting FCX's exception of no cause of action. On March 24, 2000, the plaintiff filed a petition of appeal to the Louisiana Fourth Circuit. 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 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) The exhibits to this report are listed in the Exhibit Index beginning on Page E-1 hereof. (b) During the quarter for which this report is filed, the registrant did not file any Current Reports on Form 8-K. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FREEPORT-McMoRan COPPER & GOLD INC. By: \s\ C. Donald Whitmire, Jr. --------------------------------- C. Donald Whitmire, Jr. Vice President and Controller-Financial Reporting (authorized signatory and Principal Accounting Officer) Date: July 30, 2001
24 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. Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K of FCX for the fiscal year ended December 31, 1998 (the 1998 FCX Form 10-K). 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 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Exhibit Number Description ------ ----------- 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 Freeport Indonesia Credit Agreement) among PT Freeport Indonesia, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT Freeport Indonesia 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 Freeport Indonesia Credit Agreement among PT Freeport Indonesia, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT Freeport Indonesia 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 Freeport Indonesia Credit Agreement among PT Freeport Indonesia, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT Freeport Indonesia 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 Freeport Indonesia Credit Agreement among PT Freeport Indonesia, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT Freeport Indonesia 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 Freeport Indonesia Credit Agreement among PT Freeport Indonesia, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT Freeport Indonesia 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.
E-2 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Exhibit Number Description ------ ----------- 4.19 Amendment dated as of July 15, 1996 to the CDF among PT Freeport Indonesia, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT Freeport Indonesia 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. 4.20 Amendment dated as of October 9, 1996 to the CDF among PT Freeport Indonesia, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT Freeport Indonesia 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 Freeport Indonesia, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT Freeport Indonesia 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 Freeport Indonesia, FCX, the several financial institutions that are parties thereto, First Trust of New York, National Association, as PT Freeport Indonesia 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. 4.25 Certificate of Designations of Series A Participating Cumulative Preferred stock of FCX. Incorporated by reference to Exhibit 4.25 to the Quarterly Report on Form 10-Q of FCX for the quarter ended March 31, 2000 (the FCX 2000 First Quarter Form 10-Q). 4.26 Rights Agreement dated as of May 3, 2000 between FCX and Chasemellon Shareholder Services, L.L.C., as Rights Agent. Incorporated by reference to Exhibit 4.26 to the FCX 2000 First Quarter Form 10-Q. 10.1 Contract of Work dated December 30, 1991 between the Government of the Republic of Indonesia and PT Freeport Indonesia. Incorporated by reference to Exhibit 10.20 to the FCX 1991 Form 10-K. 10.2 Contract of Work dated August 15, 1994 between the Government of the Republic of Indonesia and PT Irja Eastern Minerals Corporation. Incorporated by reference to Exhibit 10.2 to the FCX 1995 Form 10-K.
E-3 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Exhibit Number Description ------ ----------- 10.3 Agreement dated as of October 11, 1996 to Amend and Restate Trust Agreement among PT Freeport Indonesia, 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 Concentrate Purchase and Sales Agreement dated effective December 11, 1996 between PT Freeport Indonesia and PT Smelting. Incorporated by reference to Exhibit 10.34 to the Annual Report of FCX on Form 10-K for the year ended December 31, 1999 (the FCX 1999 Form 10-K). 10.5 Participation Agreement dated as of October 11, 1996 between PT Freeport Indonesia 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 Freeport Indonesia. 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 Freeport Indonesia and P.T. Puncakjaya Power. Incorporated by reference to Exhibit 10.9 to the FCX 1997 Form 10-K. 10.10 Option, Mandatory Purchase and Right of First Refusal Agreement dated as of December 19, 1997 among PT Freeport Indonesia, 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 10.37) 10.11 Annual Incentive Plan of FCX as amended effective February 2, 1999. Incorporated by reference to Exhibit 10.11 to the 1998 FCX Form 10-K. 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. Incorporated by reference to Exhibit 10.13 to the 1998 FCX Form 10-K. 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.
E-4 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Exhibit Number Description ------ ----------- 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 FCX 1999 Stock Incentive Plan. Incorporated by reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q of FCX for the quarter ended June 30, 1999. 10.19 FCX 1999 Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.19 to the Annual Report of FCX on Form 10-K for the year ended December 31, 1999 (the FCX 1999 Form 10-K). 10.20 FCX Stock Appreciation Rights Plan dated May 2, 2000. 10.21 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. 10.22 FM Services Company Performance Incentive Awards Program as amended effective February 2, 1999. Incorporated by reference to Exhibit 10.19 to the 1998 FCX Form 10-K. 10.23 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. 10.24 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. 10.25 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. 10.26 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. 10.27 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. 10.28 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. 10.29 Supplemental Agreement between FMS and B.M. Rankin Jr. dated December 7, 1998. Incorporated by reference to Exhibit 10.26 to the 1998 FCX Form 10-K. 10.30 Supplemental Agreement between FMS and B. M. Rankin, Jr. dated February 5, 2001. Incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K of FCX for the fiscal year ended December 31, 2000. 10.31 Letter Agreement effective as of January 7, 1997 between Senator J. Bennett Johnston, Jr. and FMS. Incorporated by reference to Exhibit 10.25 of the FCX 1996 Form 10-K.
E-5 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Exhibit Number Description ------ ----------- 10.32 Supplemental Letter Agreement dated April 13, 2000 between J. Bennett Johnston, Jr. and FMS. Incorporated by reference to Exhibit 10.30 to the FCX 2000 First Quarter Form 10-Q. 10.33 Letter Agreement dated November 1, 1999 between FMS and Gabrielle K. McDonald. Incorporated by reference to Exhibit 10.33 of the FCX 1999 Form 10-K. 10.34 Supplemental Letter Agreement dated May 17, 2000 between FMS and Gabrielle K. McDonald. Incorporated by reference to Exhibit 10.35 of the FCX 2000 Second Quarter Form 10-Q. 10.35 Executive Employment Agreement dated April 30, 2001 between FCX and James R. Moffett. 10.36 Executive Employment Agreement dated April 30, 2001 between FCX and Richard C. Adkerson. 10.37 Change of Control Agreement dated April 30, 2001 between FCX and James R. Moffett. 10.38 Change of Control Agreement dated April 30, 2001 between FCX and Richard C. Adkerson. 15.1 Letter dated July 18, 2001 from Arthur Andersen LLP regarding unaudited interim financial statements.
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