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 September 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 September 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 11 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) September 30, December 31, 2001 2000 ---------- ---------- (In Thousands) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 32,874 $ 7,968 Restricted investments 49,809 - Accounts receivable 118,573 149,085 Inventories 375,883 400,607 Prepaid expenses and other 3,928 11,462 ---------- ---------- Total current assets 581,067 569,122 Property, plant and equipment, net 3,206,402 3,248,710 Restricted investments 90,750 - Investment in PT Smelting 55,209 56,154 Other assets 102,256 76,755 ---------- ---------- Total assets $4,035,684 $3,950,741 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 334,330 $ 313,208 Current portion of long-term debt and short-term borrowings 112,990 202,294 Unearned customer receipts 65,660 28,688 Rio Tinto share of joint venture cash flows 55,908 78,706 Accrued income taxes 31,071 11,016 ---------- ---------- Total current liabilities 599,959 633,912 Long-term debt, less current portion: FCX and PT Freeport Indonesia credit facilities 214,000 760,000 Convertible senior notes 603,750 - Senior notes 450,000 450,000 Infrastructure asset financings 389,101 457,673 Atlantic Copper debt 233,128 246,727 Equipment and other loans 66,833 73,331 Accrued postretirement benefits and other liabilities 118,160 112,831 Deferred income taxes 651,028 599,536 Minority interests 138,186 103,795 Redeemable preferred stock 462,504 475,005 Stockholders' equity 109,035 37,931 ---------- ---------- Total liabilities and stockholders' equity $4,035,684 $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 Nine Months Ended September 30, September 30, ------------------- ----------------------- 2001 2000 2001 2000 -------- -------- ---------- ---------- (In Thousands, Except Per Share Amounts) <S> <C> <C> <C> <C> Revenues $441,238 $473,837 $1,426,584 $1,338,777 Cost of sales: Production and delivery 245,168 278,886 706,362 798,234 Depreciation and amortization 71,000 77,825 217,448 195,512 -------- -------- ---------- ---------- Total cost of sales 316,168 356,711 923,810 993,746 Exploration expenses 1,989 2,915 6,460 6,724 Equity in PT Smelting (earnings) losses (1,875) 5,383 945 9,020 General and administrative expenses 14,962 18,729 45,513 55,996 -------- -------- ---------- ---------- Total costs and expenses 331,244 383,738 976,728 1,065,486 -------- -------- ---------- ---------- Operating income 109,994 90,099 449,856 273,291 Interest expense, net (40,115) (53,539) (129,945) (153,287) Other income (expense),net (7,915) 5,598 (4,795) 5,014 -------- -------- ---------- ---------- Income before income taxes and minority interests 61,964 42,158 315,116 125,018 Provision for income taxes(40,285) (34,752) (173,308) (93,477) Minority interests in net income of consolidated subsidiaries (8,247) (7,252) (35,855) (21,832) -------- -------- ---------- ---------- Net income 13,432 154 105,953 9,709 Preferred dividends (9,184) (9,346) (27,374) (28,273) -------- -------- ---------- ---------- Net income (loss) applicable to common stock $ 4,248 $ (9,192) $ 78,579 $ (18,564) ======== ======== ========== ========== Net income (loss) per share of common stock: Basic $.03 $(.06) $.55 $(.12) ==== ===== ==== ===== Diluted $.03 $(.06) $.54 $(.12) ==== ===== ==== ===== Average common shares outstanding: Basic 143,973 150,088 143,944 156,597 ======= ======= ======= ======= Diluted 144,658 150,088 144,907 156,597 ======= ======= ======= ======= </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) Nine Months Ended September 30, ----------------------- 2001 2000 -------- -------- (In Thousands) <S> <C> <C> Cash flow from operating activities: Net income $105,953 $ 9,709 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 217,448 195,512 Deferred income taxes 51,171 18,707 Equity in PT Smelting losses 945 9,020 Minority interests' share of net income 35,855 21,832 Other, including change in deferred mining costs (19,284) 27,511 (Increases) decreases in working capital: Accounts receivable 30,347 5,090 Inventories 20,243 (30,571) Prepaid expenses and other 7,495 8,077 Accounts payable and accrued liabilities 22,884 93,019 Rio Tinto share of joint venture cash flows (15,797) (11,147) Accrued income taxes 17,857 (41,838) -------- -------- Decrease in working capital 83,029 22,630 -------- -------- Net cash provided by operating activities 475,117 304,921 -------- -------- Cash flow from investing activities: Purchase of restricted investments (139,762) - PT Freeport Indonesia capital expenditures (109,400) (117,950) Atlantic Copper capital expenditures (9,382) (8,377) Investment in PT Smelting - (5,717) Other 4,572 13 -------- -------- Net cash used in investing activities (253,972) (132,031) -------- -------- Cash flow from financing activities: Net proceeds from sale of convertible senior notes 582,619 - Proceeds from other debt 77,523 399,601 Repayments of debt (802,115) (331,674) Purchases of FCX common shares (3,436) (158,731) Partial redemption of preferred (10,386) (11,893) stock Cash dividends paid: Preferred stock (27,419) (28,464) Minority interests (6,786) (31,757) Other (6,239) (10,692) -------- -------- Net cash used in financing activities (196,239) (173,610) -------- -------- Net increase (decrease) in cash and cash equivalents 24,906 (720) Cash and cash equivalents at beginning of year 7,968 6,698 -------- -------- Cash and cash equivalents at end of period $ 32,874 $ 5,978 ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements.
5 FREEPORT-McMoRan COPPER & GOLD INC. NOTES TO FINANCIAL STATEMENTS 1. CONVERTIBLE SENIOR NOTES In August 2001, Freeport-McMoRan Copper & Gold Inc. (FCX) sold $603.8 million of 8 1/4% Convertible Senior Notes due 2006 for net proceeds of $582.6 million. Interest on the notes is payable semi- annually on January 31 and July 31 of each year. FCX may redeem some or all of the notes at any time after July 31, 2004 at specified redemption prices. A portion of the net proceeds was used to purchase $139.8 million of U.S. government securities, which secure and will be used to pay for the first six scheduled interest payments on the notes. The notes are otherwise unsecured. The remaining net proceeds were used to repay outstanding amounts under the FCX/PT Freeport Indonesia bank credit facilities. The notes are convertible, at the option of the holder, at any time on or prior to maturity into, at the option of the holder, shares of class A or class B common stock of FCX at a conversion price of $14.30 per share, which is equal to a conversion rate of approximately 69.9301 shares of class A or class B common stock per $1,000 principal amount of notes. The conversion rate is subject to adjustments. 2. SUBSEQUENT EVENT - AMENDED BANK CREDIT FACILITIES In October 2001, FCX and PT Freeport Indonesia amended their bank credit facilities to extend the maturities to December 2005. Aggregate commitments under the credit facilities total $734.0 million, including $253.4 million if FCX is required to perform in March 2002 under its guarantee of a loan of PT Nusamba Mineral Industri, leaving $480.6 million currently available. If FCX were to be required to perform under this guarantee, it would acquire rights and seek to recover the PT Indocopper Investama stock owned by Nusamba as provided by the financing documents, which are governed by Indonesian law. Borrowings under the credit facilities as of October 16, 2001, totaled $251.0 million for PT Freeport Indonesia and none for FCX. Amounts borrowed are 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. The initial interest rate on all borrowings is LIBOR plus 4.0 percent with annual increases of 0.125 percent. The credit facilities require that all available cash flow after debt service and capital expenditures be used to reduce outstanding amounts under the credit facilities, subject to limited exceptions. Amounts available under the credit facilities may be used to repay $250.0 million for FCX's 7.20% Senior Notes in November 2003 to the extent necessary. However, the credit facilities impose limitations on the amount of preferred stock FCX may redeem. If by August 2003 FCX has not extended the maturity of a specified amount of FCX's Gold-Denominated Preferred Stock beyond 2005, FCX will not thereafter be permitted to redeem or pay dividends on any of its preferred stock. FCX intends to undertake a refinancing or restructuring of its obligation to redeem the Gold-Denominated Preferred Stock before the mandatory redemption date in August 2003. The credit facilities prohibit common stock dividends and common stock purchases; limit capital expenditures, investments, liens and transactions with affiliates and require that certain financial ratios be maintained. Security for obligations outstanding under the credit facilities includes most of PT Freeport Indonesia's assets, 50.1 percent of the outstanding stock of PT Freeport Indonesia, 49 percent of the outstanding stock of PT Indocopper Investama owned by FCX, and a pledge of PT Freeport Indonesia's rights under its Contract of Work. PT Freeport Indonesia also guarantees FCX's obligations under the credit facilities. 3. 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 0.4 million shares in the third quarter of 2001 and 0.7 million shares in the 2001 nine-month period. Stock options representing less than 0.1 million shares in the third quarter of 2000 and 0.5 million shares in the 2000 nine-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 third quarter of 2001 and in the 2001 nine-month period.
6 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 12.1 million shares (average exercise price of $20.71 per share) in the third quarter of 2001, 14.7 million shares (average price of $19.17 per share) in the third quarter of 2000, 11.1 million shares (average price of $21.60 per share) in the 2001 nine-month period and 11.7 million shares (average price of $21.51 per share) in the 2000 nine-month period. FCX's convertible preferred stock and its recently issued 8 1/4% Convertible Senior Notes were 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 third quarters of 2001 and 2000, and $18.4 million in the 2001 and 2000 nine-month periods. The senior notes were convertible into an average of 25.2 million shares in the third quarter of 2001 and an average of 8.5 million shares in the first nine months of 2001. Interest expense totaled $7.5 million for the 2001 periods. 4. 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 price 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 PT Freeport Indonesia's 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 September 30, 2001 and a discussion of FCX's risk management strategies for those designated as hedges follow. 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 September 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 recorded at its original issue value less redemptions, and totaled $462.5 million at September 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. Changes in the fair value of these embedded derivatives are recorded in current period revenues.
7 At September 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 held forward copper purchase contracts for 13.1 million pounds with a fair value of $(0.1) million recorded in accounts payable at September 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 September 30, 2001, PT Freeport Indonesia had foreign currency forward contracts to hedge 24.0 million of its aggregate projected Australian dollar payments from October 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 599.4 billion of its aggregate projected Indonesian rupiah payments from October 2001 through December 2002, or approximately 50 percent of its projected remaining 2001 and 2002 rupiah payments, at an average exchange rate of 12,501 rupiahs to one U.S. dollar. Atlantic Copper had foreign currency forward contracts to hedge 139.2 million of its projected euro payments from October 2001 through December 2003, or approximately 44 percent of its projected remaining 2001 peseta/euro payments and approximately 63 percent of its projected 2002 and 2003 euro payments, at an average exchange rate of $1.01 per euro. The net fair value of PT Freeport Indonesia's and Atlantic Copper's foreign currency contracts at September 30, 2001 totaled $(8.9) million, of which $7.2 million was recorded in accounts receivable, $(8.1) million was recorded in accrued liabilities and $(8.0) 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. There was no hedge ineffectiveness for the outstanding contracts at September 30, 2001. 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 September 30, 2001, Atlantic Copper had interest rate swap contracts at an average interest rate of 6.1 percent on $62.8 million of financing, reducing quarterly through December 2003. Atlantic Copper has designated its interest rate swap contracts as cash flow hedges and no ineffectiveness is expected from these hedges. The fair value of these interest rate swap contracts totaled $(3.7) million, $(2.6) million of which is recorded in accrued liabilities and $(1.1) million is recorded in other long-term liabilities at September 30, 2001. FCX and its subsidiaries adopted SFAS 133 on January 1, 2001; therefore, amounts reported for 2001 and 2000 are based on different accounting methods. Prior to 2001, changes in the market value of foreign currency exchange contracts were included in current earnings. Beginning in 2001, changes in the fair value of unrealized derivative contracts, including foreign currency exchange contracts that qualify as hedges, are not reported in current earnings, but are included in other comprehensive income (see Note 5). A recap of gains (loss) charged to earnings for derivative contracts, embedded derivatives and redeemable preferred stock redemptions follows (in millions): <TABLE> <CAPTION> Three Months Ended Nine Months September 30, Ended September 30, ------------------ ------------------- 2001 2000 2001 2000 ----- ----- ----- ----- <S> <C> <C> <C> <C> FCX: Silver-Denominated preferred stock $ 2.1 $ 0.6 $ 2.1 $ 0.6 PT Freeport Indonesia: Foreign currency exchange contracts 0.4 (7.6) (1.3) (5.8) Forward copper contracts - (6.0) - 1.7 Concentrate sales contracts (16.1) (a) (39.0) (a) Atlantic Copper: Foreign currency exchange contracts (0.9) (19.1) (2.2) (26.9) Forward copper contracts (0.6) (0.3) 3.7 (1.2) Interest rate contracts (0.5) 0.4 (0.4) 0.5 </TABLE> (a) Embedded derivatives in PT Freeport Indonesia's concentrate sales contracts did not require separate accounting before 2001.
8 5. 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 Months Nine Months Ended Ended September 30 September 30 ------------ ------------ <S> <C> <C> Net income applicable to common stock $ 4,248 $78,579 Other comprehensive income (loss): Cumulative effect of change in accounting for derivatives, no tax effect - (982) Change in unrealized derivatives' fair value (net of taxes of $3.4 million and $1.7 million, respectively) 10,055 (11,083) Reclass to earnings (net of tax benefit of $0.2 million and taxes of $0.5 million, respectively) 1,148 3,245 ------- ------- Total comprehensive income $15,451 $69,759 ======= ======= </TABLE> 6. INTEREST COST Interest expense excludes capitalized interest of $2.5 million in the third quarter of 2001, $2.0 million in the third quarter of 2000, $6.6 million in the first nine months of 2001 and $4.8 million in the first nine months of 2000. 7. 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. <TABLE> <CAPTION> Smelting Mining and and Eliminations FCX Exploration Refining and Other Total ---------- -------- --------- ---------- (In Thousands) <S> <C> <C> <C> <C> Three months ended September 30, 2001: Revenues $ 343,300a $200,007 $(102,069)b $ 441,238 Production and delivery 145,719 190,763 (91,314)b 245,168 Depreciation and amortization 63,107 6,818 1,075 71,000 Exploration expenses 1,936 - 53 1,989 Equity in PT Smelting earnings - (1,875)c - (1,875) General and administrative expenses 11,217 2,092 1,653 14,962 ---------- -------- --------- ---------- Operating income (loss) $ 121,321 $ 2,209 $ (13,536) $ 109,994 ========== ======== ========= ========== Interest expense, net $ 20,137 $ 6,102 $ 13,876 $ 40,115 ========== ======== ========= ========== Provision for income taxes$ 37,272 $ 1,034 $ 1,979 $ 40,285 ========== ======== ========= ========== Capital expenditures $ 35,384 $ 2,053 $ 677 $ 38,114 ========== ======== ========= ========== Total assets $3,228,401d $667,461e $ 139,822 $4,035,684 ========== ======== ========= ========== </TABLE>
9 <TABLE> <CAPTION> Smelting Mining and and Eliminations FCX Exploration Refining and Other Total ---------- -------- --------- ---------- (In Thousands) <S> <C> <C> <C> <C> Three months ended September 30, 2000: Revenues $ 385,933a $181,312 $ (93,408)b $ 473,837 Production and delivery 176,002 186,851 (83,967)b 278,886 Depreciation and amortization 69,881 6,795 1,149 77,825 Exploration expenses 2,388 - 527 2,915 Equity in PT Smelting losses - 5,383c - 5,383 General and administrative expenses 14,751 2,346 1,632 18,729 ---------- -------- --------- ---------- Operating income (loss) $ 122,911 $(20,063) $ (12,749) $ 90,099 ========== ======== ========= ========== Interest expense, net $ 35,061 $ 6,263 $ 12,215 $ 53,539 ========== ======== ========= ========== Provision (benefit) for income taxeS $ 34,107 $ (649) $ 1,294 $ 34,752 ========== ======== ========= ========== Capital expenditures $ 30,281 $ 4,506 $ 293 $ 35,080 ========== ======== ========= ========== Total assets $3,284,279d $674,532 e $ 22,362 $3,981,173 ========== ======== ========= ========== Nine months ended September 30, 2001: Revenues $1,124,408a $553,532 $(251,356)b $1,426,584 Production and delivery 404,360 540,614 (238,612)b 706,362 Depreciation and amortization 193,279 20,453 3,716 217,448 Exploration expenses 6,222 - 238 6,460 Equity in PT Smelting losses - 945c - 945 General and administrative expenses 34,035 6,264 5,214 45,513 ---------- -------- --------- ---------- Operating income (loss) $ 486,512 $(14,744) $ (21,912) $ 449,856 ========== ======== ========= ========== Interest expense, net $ 74,736 $ 20,321 $ 34,888 $ 129,945 ========== ======== ========= ========== Provision for income taxes $ 151,801 $ 988 $ 20,519 $ 173,308 ========== ======== ========= ========== Capital expenditures $ 108,025 $ 9,382 $ 1,375 $ 118,782 ========== ======== ========= ========== Nine months ended September 30, 2000: Revenues $ 953,313a $607,994 $(222,530)b $1,338,777 Production and delivery 454,490 597,091 (253,347)b 798,234 Depreciation and amortization 171,066 21,063 3,383 195,512 Exploration expenses 5,445 - 1,279 6,724 Equity in PT Smelting losses - 9,020c - 9,020 General and administrative expenses 44,768 6,520 4,708 55,996 ---------- -------- --------- ---------- Operating income (loss) $ 277,544 $(25,700) $ 21,447 $ 273,291 ========== ======== ========= ========== Interest expense, net $ 100,620 $ 19,111 $ 33,556 $ 153,287 ========== ======== ========= ========== Provision for income taxes $ 68,863 $ 1,079 $ 23,535 $ 93,477 ========== ======== ========= ========== Capital expenditures $ 117,290 $ 14,094 $ 660 $ 132,044 ========== ======== ========= ========== </TABLE> a. Includes PT Freeport Indonesia sales to PT Smelting totaling $88.2 million in the third quarter of 2001, $101.2 million in the third quarter of 2000, $290.7 million in the nine-month period ended September 30, 2001 and $230.6 million in the nine-month period ended September 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 $2.8 million in the third quarter of 2001, $(1.8) million in the third quarter of 2000, $2.7 million in the nine-month period ended September 30, 2001 and $2.9 million in the nine-month period ended September 30, 2000. d. Includes PT Freeport Indonesia's trade receivables with PT Smelting totaling $23.2 million at September 30, 2001 and $24.7 million at September 30, 2000. e. Includes PT Freeport Indonesia's equity investment in PT Smelting totaling $55.2 million at September 30, 2001 and $62.8 million at September 30, 2000.
10 8. RATIO OF EARNINGS TO FIXED CHARGES The ratio of earnings to fixed charges for the first nine months of 2001 and 2000 was 3.3 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. 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 September 30, 2001, the related statements of operations for the three and nine-month periods ended September 30, 2001 and 2000, and the statements of cash flows for the nine-month periods ended September 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 October 16, 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 consolidated results for the third- quarter and nine-month periods ended September 30 follow (in millions, except per share amounts): <TABLE> <CAPTION> Third Quarter Nine Months ------------------ ------------------- 2001 2000 2001 2000 ------ ------ -------- -------- <S> <C> <C> <C> <C> Revenues $441.2 $473.8 $1,426.6 $1,338.8 Operating income 110.0 90.1 449.9 273.3 Net income (loss) applicable to common stock 4.2 (9.2) 78.6 (18.6) Diluted net income (loss) per share of common stock .03 (.06) .54 (.12) </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, and gold in anodes and slimes. 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 (2.6 million ounces) would have an approximate $13 million impact on our revenues and an approximate $6 million impact on our net income. Our third-quarter 2001 revenues were lower than the 2000 period mostly because of lower copper sales volumes and averaged realized prices, partly offset by higher gold sales volumes. Our nine-month 2001 consolidated revenues improved when compared with the 2000 period primarily because of higher copper and gold sales volumes, partly offset by lower average realized prices. A portion of PT Freeport Indonesia's copper sales are provisionally priced at the time of shipment and finally priced in subsequent periods based on prices in effect in those periods. Third- quarter 2001 revenues include reductions of $13.2 million ($6.4 million to net income or $0.04 per share) and third-quarter 2000 revenues benefited by $5.1 million ($2.5 million to net loss or $0.02 per share) from adjustments to prior period concentrate sales, mostly for copper pricing. Nine-month 2001 revenues include reductions of $2.8 million ($1.4 million to net income or $0.01 per share) for adjustments to year 2000 concentrate sales, while nine-month 2000 revenues benefited by $10.5 million ($5.1 million to net loss or $0.03 per share) for adjustments to year 1999 concentrate sales, mostly for copper pricing. 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 4). 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 losses charged to cost of sales totaling $26.7 million for the third quarter and $32.7 million for the nine-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. Excluding the 2000 charges relating to marking-to-market our foreign currency contracts, consolidated costs of sales in the third quarter of 2001 were slightly lower than the 2000 quarter primarily because of lower PT Freeport Indonesia copper sales.
12 Lower cost of sales for the nine-month 2001 period compared with the 2000 period primarily reflects lower sales volumes at Atlantic Copper because of a major maintenance turnaround completed in April 2001. The improved results we recorded during 2001 for our equity interest in PT Smelting primarily reflect the recognition of deferred profits on PT Freeport Indonesia sales to PT Smelting and improvements in PT Smelting's operating results during 2001. General and administrative expenses during the third quarter of 2001 were lower than during the third quarter of 2000 when we recorded charges totaling $2.3 million for personnel severance costs. During the first nine months of 2001 general and administrative expenses were $10.5 million lower than during the 2000 period. In the first nine months of 2000 we recorded net charges of $7.6 million related to contribution commitments, personnel severance costs and stock appreciation rights. Our lower effective tax rate for the first nine 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 also 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 third-quarter and nine-month periods follows (in millions): <TABLE> <CAPTION> Third Quarter Nine Months ------------------ ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ <S> <C> <C> <C> <C> Mining and exploration $121.3 $122.9 $486.5 $277.5 Smelting and refining 2.2 (20.1) (14.7) (25.7) Intercompany eliminations and other (13.5) (12.7) (21.9) 21.5 ------ ------ ------ ------ FCX operating income a $110.0 $ 90.1 $449.9 $273.3 ====== ====== ====== ====== </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 impacted operating income by $(7.0) million in the third quarter of 2001, $(10.7) million in the third quarter of 2000, $(6.4) million in the nine-month 2001 period and $35.9 million in the nine-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> Third Nine Quarter Months ------ -------- <S> <C> <C> PT Freeport Indonesia revenues - 2000 periods $385.9 $ 953.3 Increases (decreases): Sales volumes: Copper (32.5) 102.4 Gold 72.8 266.2 Price realizations: Copper (73.3) (140.7) Gold 0.6 (26.4) Adjustments, primarily for copper pricing on prior period open sales (19.5) (3.8) Treatment charges, royalties and other 9.3 (26.6) ------ -------- PT Freeport Indonesia revenues - 2001 periods $343.3 $1,124.4 ====== ======== </TABLE> PT Freeport Indonesia's 2001 revenues for both the third- quarter and nine-month periods benefited from significant increases in gold sales volumes compared to the 2000 periods. When compared to the 2000 periods, copper sales volumes declined by 10 percent in the 2001 third quarter but were 13 percent higher in the 2001 nine-month period, while gold sales volumes improved by 62 percent in the 2001 third quarter and by 79 percent in the 2001 nine-month period. Copper prices have declined
13 throughout 2001 resulting in a $0.21 per pound or 24 percent decline in the third-quarter 2001 average realized price and a $0.13 per pound or 16 percent decline in the nine-month 2001 average realized price compared with the year-ago periods. Treatment charges in total were higher in the first nine months of 2001 primarily because of higher concentrate sales volumes and royalties were higher in 2001 primarily because of significantly higher gold sales volumes. PT Freeport Indonesia estimates its share of fourth-quarter 2001 sales to approximate 330 million pounds of copper and 440,000 ounces of gold, reflecting expected lower ore grades. Because of the immense size of the Grasberg ore body, there are periods such as the upcoming quarter when the sequencing of mining results in production from ore that is economical, but lower than average in grade. Net of Rio Tinto plc's joint venture interest, PT Freeport Indonesia's share of sales for 2001 is projected to approximate 1.4 billion pounds of copper and nearly 2.6 million ounces of gold, an increase from 2000 of over 650,000 ounces reflecting higher average gold ore grades and recoveries. 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 September 30, 2001, we had consolidated copper sales totaling 175.4 million pounds recorded at an average price of $0.64 per pound remaining to be finally priced. Nearly all of these open pounds are expected to be finally priced during the fourth quarter of 2001. A one-cent movement in the average price used for these open pounds would have an approximate $0.9 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 nine months of 2001 and as of September 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. At the beginning of each of the first three quarters of 2000, PT Freeport Indonesia entered into forward copper sales contracts to fix the price on its open concentrate sales. We recorded reductions in revenues totaling $6.0 million in the third quarter of 2000 and net additional revenues of $1.7 million in the first nine months of 2000 from these forward sales contracts. PT Freeport Indonesia Operating Results <TABLE> <CAPTION> Third Quarter Nine Months ------------------- --------------------- 2001 2000 2001 2000 ------- ------- --------- --------- <S> <C> <C> <C> <C> PT Freeport Indonesia, Net of Rio Tinto's Interest Copper Production (000s of 341,000 362,500 1,077,200 958,300 recoverable pounds) Sales (000s of 350,600 388,300 1,073,800 950,400 recoverable pounds) Average realized price $.65 $.86 $.70 $.83 Gold Production (recoverable 673,800 385,400 2,156,200 1,191,500 ounces) Sales (recoverable 686,300 422,700 2,144,600 1,197,400 ounces) Average realized price $277.08 $276.23 $268.70 $281.02 Gross profit per pound of copper (cents): Average realized price 65.4 86.3 69.9 83.0 ------- ------- --------- --------- Production costs: Site production and delivery 40.7 a 43.7 b 37.4 a 46.9b Gold and silver credits (55.1) (31.3) (54.8) (36.7) Treatment charges 18.0 18.8 18.1 18.3 Royalty on metals 1.7 1.3 1.9 1.3 ------- ------- --------- --------- Cash production costs 5.3 32.5 2.6 29.8 Depreciation and amortization 18.0 18.0 18.0 18.0 ------- ------- --------- --------- Total production costs 23.3 50.5 20.6 47.8 ------- ------- --------- --------- Adjustments, primarily for copper pricing on prior period sales (2.9) 1.9 - 0.2 ------- ------- --------- --------- Gross profit per pound of copper 39.2 37.7 49.3 35.4 ======= ======= ========= ========= </TABLE>
14 <TABLE> <CAPTION> Third Quarter Nine Months ------------------- --------------------- 2001 2000 2001 2000 ------- ------- --------- --------- <S> <C> <C> <C> <C> PT Freeport Indonesia, 100% Operating Statistics Ore milled (metric tons per day) 244,600 221,500 238,100 223,900 Copper grade (percent) 0.96 1.09 1.04 0.99 Gold grade (grams per metric ton) 1.36 0.89 1.53 0.92 Recovery rate (percent) Copper 85.3 88.8 87.1 87.1 Gold 89.9 82.1 89.0 83.7 Copper (000s of recoverable pounds) Production 389,900 415,400 1,237,200 1,112,600 Sales 401,000 445,700 1,233,600 1,103,900 Gold (recoverable ounces) Production 887,700 470,900 2,816,200 1,470,800 Sales 903,900 517,500 2,798,700 1,476,100 </TABLE> a. Net of deferred mining costs totaling $8.1 million (2.3 cents per pound) in the third quarter of 2001 and $26.2 million (2.4 cents per pound) in the first nine 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. Net of deferred mining costs totaling $3.3 million (0.9 cents per pound) in the third quarter of 2000 and includes recaptured mining costs totaling $9.9 million (1.0 cents per pound) in the first nine months of 2000. PT Freeport Indonesia's 2001 production benefited from higher mill throughput rates, ore grades and gold recovery rates when compared with the prior-year periods. Mill throughput averaged a record 244,600 metric tons of ore per day during the third quarter of 2001. Third-quarter 2001 copper grades declined 12 percent compared to the prior-year quarter and were 5 percent higher for the nine-month period, while gold grades were 53 percent higher in the third quarter of 2001 and 66 percent higher in the first nine months of 2001 compared with the prior-year periods. Recovery rates remained strong for gold and achieved a quarterly record of 89.9 percent in the third quarter of 2001 reflecting high-recovery ore processed during the last four quarters and results of various enhanced 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 nine months of 2001 reflect a continuation of the improved grades that began to be mined during the fourth quarter of 2000. Ore grades to be mined in the next several months, particularly for gold, are expected to be lower than the higher grade material mined since the fourth quarter of 2000. 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 third quarter of 2001 averaged $0.41 per pound of copper, $0.03 per pound lower than the $0.44 reported in the third quarter of 2000, primarily because of the previously reported change in the estimated ratio of waste rock to ore over the life of the mine and the effect of weaker foreign currencies, partially offset by lower volumes. Gold credits of $0.55 per pound in the 2001 quarter were higher when compared with the 2000 quarter level of $0.31 per pound primarily because of higher gold ore grades and sales. Unit site production and delivery costs and gold credits in the first nine months of 2001, compared with the 2000 period, benefited for the same reasons as third-quarter 2001 unit costs. Royalties were higher in the 2001 periods mostly because of higher gold sales volumes and totaled $5.8 million in the third quarter of 2001, $4.9 million in the third quarter of 2000, $20.1 million in the first nine months of 2001 and $12.0 million in the first nine months of 2000. Unit net cash production costs averaged less than $0.03 per pound in the first nine months of 2001 and for full-year 2001 are expected to average less than $0.10 per pound of copper.
15 In September 2001, we established a trust for the benefit of those tribal communities in villages closest to PT Freeport Indonesia's operations for voluntary special recognition of their traditional land rights in the Grasberg mining area, as part of an agreement first outlined with these tribes in 1996. Under the agreement, PT Freeport Indonesia will fund $0.5 million per year to the trust, as long as certain conditions are met, and has provided $2.5 million representing funding for mid-1996 through mid-2001. PT Freeport Indonesia recorded a $2.2 million charged to third-quarter 2001 production costs for its share of the initial commitment. PT Freeport Indonesia has a labor agreement covering its hourly paid Indonesian employees, the key provisions of which are renegotiated biannually. PT Freeport Indonesia's labor agreement was scheduled to expire on September 30, 2001. In June 2001, PT Freeport Indonesia and its workers agreed to terms for a new labor agreement that expires September 30, 2003. PT Freeport Indonesia'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 rupiah, 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 9,655 rupiahs at September 30, 2001, 11,430 rupiahs at June 30, 2001 and 9,215 rupiahs at December 31, 2000. PT Freeport Indonesia recorded gains (losses) to production costs totaling $(0.3) million during the third quarter of 2001, $0.2 million during the third quarter of 2000, $(1.0) million during the first nine months of 2001 and $(0.5) million during the first nine months of 2000 related to its rupiah-denominated net assets. A weakened rupiah currency results in lower reported costs by PT Freeport Indonesia, primarily lower labor costs. At estimated annual aggregate rupiah payments of 800 billion and a September 30, 2001 exchange rate of 9,655 rupiahs to one U.S. dollar, a one-thousand- rupiah increase in the exchange rate would result in an approximate $8 million decrease in annual operating costs and a one-thousand-rupiah decrease in the exchange rate would result in an approximate $10 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 September 30, 2001, these contracts hedge 24.0 million of Australian dollar payments from October 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 $0.49 to one Australian dollar at September 30, 2001. Each $0.01 change in the U.S. dollar/Australian dollar exchange rate impacts the September 30, 2001 market value of these contracts by approximately $0.2 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 September 30, 2001, the rupiah contracts hedge 599.4 billion of rupiah payments from October 2001 through December 2002, or approximately 50 percent of projected remaining 2001 rupiah payments and 2002 rupiah payments at an average exchange rate of 12,501 rupiahs to one U.S. dollar. Each 1,000-rupiah change in the Indonesian rupiah/U.S. dollar exchange rate impacts the September 30, 2001 market value of these contracts by approximately $5 million. PT Freeport Indonesia recorded net realized gains (losses) to production costs related to matured Australian dollar and Indonesian rupiah contracts totaling $0.4 million in the third quarter of 2001 and $(1.3) million in the first nine months of 2001, compared to losses of $7.6 million in the third quarter of 2000 and $(5.8) million in the first nine 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 (see Notes 4 and 5). We recorded net gains of $4.2 million to Other Comprehensive Income in the third quarter of 2001 and $2.9 million in the first nine months of 2001 for PT Freeport Indonesia's outstanding currency hedging contracts at September 30, 2001.
16 Exploration Activities Our reserve extension drilling program has been completed at the Ertsberg Stockwork Zone (ESZ), adjacent to the Deep Ore Zone (DOZ) mine. The results indicate an expansion of the footprint of the lower ESZ mining block and additional filling in of ore between the DOZ mine reserve and the ESZ reserve. We are currently evaluating the potential for exploiting the two deposits as one, by an outward extension of the DOZ mine infrastructure. Exploration drilling also continues at the Grasberg Underground. This drilling at the perimeter of the Grasberg intrusion is directed at closing the gap between the Grasberg block cave mine reserve and the Kucing Liar mine reserve. The exploration drilling program at GBT-A (also previously referred to as Guru Ridge) has been completed. With current copper and gold metals prices, we will not pursue current development of this surface deposit, but will continue to study and evaluate the prospect and mining opportunities for other smaller near-surface ore bodies, including the Dom ore body. 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 our mining and exploration rights under our Contract 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. Atlantic Copper Operating Results <TABLE> <CAPTION> Third Quarter Nine Months ------------------ ------------------ 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Cash margin (in millions) $10.0 $13.7 $14.7 $38.3 Operating income(loss)(in millions) $0.3 $(14.7) $(13.8) $(16.7) Concentrate treated (metric tons) 240,100 245,200 640,900 728,400 Anode production (000s of pounds) 169,600 164,300 447,900 510,400 Cathode, wire rod and wire sales (000s of pounds) 138,000 143,200 402,700 427,400 Gold sales in anodes and slimes (ounces) 274,900 119,000 564,100 503,400 </TABLE> Atlantic Copper's cash margin, revenues less production costs, was $3.7 million lower in the 2001 quarter compared with the 2000 quarter primarily because of lower sales volumes and higher unit costs for refined copper cathodes. Cash margins were $23.6 million lower in the first nine months of 2001 compared with the first nine 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 $0.12 in the third quarter of 2001 and $0.10 in the third quarter of 2000. The higher unit costs in the 2001 quarter primarily reflect a stronger peseta currency. For the first nine months of 2001 cathode cash production costs were $0.15 per pound of copper, compared with $0.11 in the first nine months of 2000. The increase in unit costs in the nine-month period primarily 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 (including price participation) averaged $0.17 per pound in the reported 2001 and 2000 periods, which is at historically low levels. Atlantic Copper recorded operating income of $0.3 million in the third quarter of 2001, compared with losses of $14.7 million in the 2000 period. Atlantic Copper's operating results include a $0.9 million loss in the third quarter of 2001 and a $2.2 million loss in the first nine months of 2001 on currency hedging contracts maturing during the periods compared to a $19.1 million charge in the third quarter of 2000 and a $26.9 million charge in the first nine months of 2000 for all outstanding currency hedging contracts in the
17 2000 periods. Under new accounting standards discussed previously and in Note 4, Atlantic Copper recorded gains to Other Comprehensive Income totaling $8.4 million in the third quarter of 2001 and charges totaling $8.0 million in the first nine months of 2001 for its outstanding currency hedging contracts at September 30, 2001. Atlantic Copper had peseta/euro-denominated net monetary liabilities at September 30, 2001 totaling $68.2 million recorded at an exchange rate of 182.2 pesetas to one U.S. dollar or $0.91 per euro. The December 31, 2000 exchange rate was 178.8 pesetas to one U.S. dollar or $0.93 per euro and the June 30, 2001 exchange rate was 196.2 pesetas to one U.S. dollar or $0.85 per euro. Adjustments to Atlantic Copper's peseta/euro-denominated net liabilities to reflect changes in the exchange rate are recorded in other income (expense) and totaled gains (losses) of $(4.4) million in the third quarter of 2001, $5.9 million in the third quarter of 2000, $(0.1) million in the first nine months of 2001 and $8.0 million in the first nine months of 2000. At estimated annual peseta/euro payments of 15 billion pesetas/90 million euros and a September 30, 2001 exchange rate of 182.2 pesetas to one U.S. dollar or $0.91 per euro, a 10- peseta/$0.06 increase or decrease in the exchange rate would result in an approximate $4.5 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 September 30, 2001, Atlantic Copper had contracts to purchase 23.2 billion pesetas/139.2 million euros from October 2001 through December 2003 at an average exchange rate of 164.6 pesetas per one U.S. dollar or $1.01 per euro. These contracts currently hedge approximately 44 percent of Atlantic Copper's projected remaining 2001 peseta/euro disbursements and approximately 63 percent of Atlantic Copper's projected 2002 and 2003 euro disbursements. Each $0.01 change in the US$/euro exchange rate impacts the September 30, 2001 market value of these contracts by approximately $1.4 million. PT Smelting Operating Results <TABLE> <CAPTION> Third Quarter Nine Months --------------- --------------- 2001 2000 2001 2000 ----- ------ ------ ------ (In millions) <S> <C> <C> <C> <C> PT Freeport Indonesia share of net losses $ 0.9 $ 3.6 $ 3.6 $ 11.9 PT Freeport Indonesia profits deferred (recognized) (2.8) 1.8 (2.7) (2.9) ----- ------ ------ ------ Equity in PT Smelting (earnings) losses $(1.9) $ 5.4 $ 0.9 $ 9.0 ===== ====== ====== ====== PT Freeport Indonesia sales to PT Smelting $88.2 $101.2 $290.7 $230.6 ===== ====== ====== ====== </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 111 percent of its full design capacity of 200,000 metric tons of copper per year during the third quarter of 2001 and at 108 percent of its full design capacity during the first nine months of 2001. Concentrate treated during the third quarter of 2001 totaled 178,800 metric tons, 4 percent below the year-ago quarter. Third-quarter 2001 cathode production increased by 14 percent when compared to the year-ago period, resulting in a 20 percent increase in PT Smelting's cathode sales in the 2001 quarter over the 2000 quarter. 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. Anode production was 38 percent higher and cathode production was 49 percent higher in the first nine months of 2001 compared with the first nine months of 2000. PT Smelting's cathode cash production costs per pound of copper totaled $0.12 in the 2001 quarter and first nine months of 2001, compared with $0.09 in the 2000 quarter and $0.13 in the first nine months of 2000. Unit costs were higher in the 2001 quarter compared with the prior-year period because of higher maintenance costs. 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 deferral (recognition) of profits totaling $(2.8) million in the third quarter of 2001, $1.8 million in the third quarter of 2000, $(2.7) million in the first nine months of 2001 and $(2.9) million in the first nine months of 2000.
18 OTHER FINANCIAL RESULTS The FCX/Rio Tinto joint ventures incurred exploration costs of $3.7 million in the 2001 third quarter, $4.2 million in the 2000 third quarter, $10.8 million in the 2001 nine-month period and $9.7 million in the 2000 nine-month period. All costs in the joint venture areas are now being shared 60 percent by us and 40 percent by Rio Tinto. Third-quarter 2001 general and administrative expenses of $15.0 million were $3.7 million lower than the $18.7 million reported in the 2000 quarter primarily because of a $2.3 million charge in the 2000 period for personnel severance costs. Nine- month 2001 general and administrative expenses were $10.5 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 were paid over a two-year period and $3.1 million of charges for personnel severance costs. Partially offsetting these charges was a $1.5 million reversal of previously recorded charges relating to stock appreciation rights because of a decrease in our common stock price. Our total interest costs (before capitalization) were $42.6 million in the 2001 quarter, $55.5 million in the 2000 quarter, $136.5 million in the first nine months of 2001 and $158.1 million in the first nine months of 2000. The decrease in interest costs reflects lower debt levels and interest rates. We capitalized $2.5 million of interest costs in the third quarter of 2001, $2.0 million in the third quarter of 2000, $6.6 million in the first nine months of 2001 and $4.8 million in the first nine months of 2000. Our effective tax rate was 55 percent for the first nine months of 2001 and 75 percent for the first nine 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 nine 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 through earnings to recognize transition amounts for any existing asset retirement obligation liabilities, asset retirement costs and accumulated depreciation. We have begun work on identifying and quantifying our asset retirement obligations in accordance with the new standard, but currently do not expect to adopt the new rules before January 1, 2003. The cost 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 at the mill level to remove and recover copper from acid rock drainage resulting from mining and overburden storage operations, and $46 million of other environmental costs. These environmental capital expenditures are part of our overall 2001 capital expenditure budget. CAPITAL RESOURCES AND LIQUIDITY Net cash provided by operating activities was $475.1 million for the first nine months of 2001, compared with $304.9 million for the 2000 period. Net cash used in investing activities totaled $254.0 million in the 2001 period, compared with $132.0 million in the 2000 period. Net cash used in financing activities totaled $196.2 million in 2001 compared with $173.6 million in 2000. Operating Activities Higher net income and working capital changes in the first nine months of 2001 resulted in a $170.2 million increase in operating cash flow to $475.1 million, compared with $304.9 million reported in the year-ago period. The $83.0 million net decrease in working capital for the first nine months of 2001
19 primarily reflects decreases in accounts receivable and inventories. The net $22.6 million decrease in working capital for the first nine months of 2000 primarily reflects an increase in accounts payable and accrued liabilities, partly offset by an increase in inventories and the payment of income taxes. Investing Activities As part of our refinancing transactions discussed below, we sold $603.8 million of 8 1/4% Convertible Senior Notes due January 2006. The terms of these notes required that we use $139.8 million of the proceeds to purchase a portfolio of U.S. government securities, which secure and will be used to pay for the first six scheduled interest payments on the notes. The notes are otherwise unsecured. Our nine-month 2001 capital expenditures were slightly 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 $170 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 in mid-2002. Capital expenditure funding is expected to be provided by operating cash flows. Financing Activities In August 2001, we sold $603.8 million of 8 1/4% Convertible Senior Notes due 2006 (Convertible Notes) for net proceeds of $582.6 million. A portion of the net proceeds were used to purchase U.S. government securities for $139.8 million as security for the first six semi-annual interest payments on the Convertible Notes (see Investing Activities above) and the remaining net proceeds were used to repay outstanding amounts under our bank credit facilities. During the first nine months of 2000 we had net borrowings of $67.9 million and paid $158.7 million for purchases of our common stock. Our annual mandatory partial redemptions of our Silver-Denominated Preferred Stock totaled $10.4 million in August 2001 and $11.9 million in August 2000. Five annual redemption payments remain and will vary with the price of silver. Cash dividends to minority interests owners declined from $31.8 million in the first nine months of 2000 to $6.8 million in the first nine months of 2001 because of lower PT Freeport Indonesia dividends. As discussed in our Form 10-K for the year ended December 31, 2000, we guarantee a $253.4 million loan to PT Nusamba Mineral Industri (Nusamba), which matures in March 2002. Based on current market conditions, we may be required to perform under the guarantee. See "Amended Bank Credit Facilities" 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 September 30, 2001, we had loaned $65.3 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 have exceeded the original purchase price ($315 million) of Nusamba's acquisition of its interest in PT Indocopper Investama. Any amounts in excess of the $315 million original purchase price we loan to Nusamba are charged to other expense, including $3.6 million in the third quarter of 2001 and $3.7 million in the first nine months of 2001. 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 nine 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 nine months of 2000, we acquired 15.0 million of our shares for $167.5 million (an average of $11.13 per share). Our cash flows statement reflects only $158.7 million paid for stock purchases in the first nine months of 2000 because we paid $8.8 million in October 2000. From inception of these programs in July 1995 through October 16, 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. Our amended bank credit facilities also include prohibitions on common stock repurchases. See "Amended Bank Credit Facilities" discussion. Amended Bank Credit Facilities In October 2001, we amended our bank 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. We believe that the credit facilities, 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.
20 * Commitments and Availability. Aggregate commitments under the credit facilities total $734.0 million, including $253.4 million if FCX is required to perform in March 2002 under its guarantee of a loan of Nusamba, leaving $480.6 million currently available. Of the $480.6 million currently available, borrowings on October 22, 2001 were $266.0 million. 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 through a term loan under the amended credit facilities and would acquire rights and 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 credit facilities will mature on December 31, 2005. On December 31, 2003 all revolving loans will become term loans, except for a $150.0 million revolver for working capital purposes. We are able to use the amounts available under the credit facilities to pay interest and principal requirements on our other debt when due. We are required to use all available cash flow after debt service and capital expenditures to reduce amounts outstanding under the credit facilities, subject to limited exceptions. * Mandatory Repayments and Reductions in Commitments. If we raise proceeds from future offerings, 25 percent of the proceeds from debt issuances and 50 percent of the proceeds from equity issuances will be available to us for general corporate purposes so long as commitments are reduced with the balance of such financing proceeds. All other proceeds from financings and all available cash of FCX and PT Freeport Indonesia will be used to pay outstanding borrowings under the credit facilities and the commitments under the facilities will be reduced by those amounts, except as necessary to maintain availability to repay $250.0 million for 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. Interest rates on all loans under the credit facilities, including any amounts used to fund our obligations under the Nusamba guarantee, are LIBOR plus 4.0 percent with annual increases of 0.125 percent, subject to potential reductions if our credit ratings improve. * 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 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 80 percent 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 credit facilities include (a) a minimum consolidated debt service coverage ratio of 1.25:1.0 through December 2002, and thereafter 1.5:1.0 and (b) a maximum ratio of consolidated debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) equal to 4.25:1.0 through September 30, 2002, and thereafter 3.5:1.0. The covenants also include prohibitions on common stock dividends and common stock repurchases, prohibitions on changes in control of FCX or PT Freeport Indonesia, 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. Our obligations under the credit facilities are 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 also continue to be secured by its pledge of its rights under the Contract of Work. In addition, PT Freeport Indonesia guarantees FCX's obligations under the credit facilities.
21 * Revised Debt and Redeemable Preferred Stock Maturities. Below is a summary of our debt and redeemable preferred stock maturities, including the Nusamba loan maturity, based on loan balances as of September 30, 2001, and gold and silver prices (which determine the preferred stock redemption amounts) as of September 28, 2001 (in millions): <TABLE> <CAPTION> 2001 2002 2003 2004 2005 2006 Thereafter ----- ------ ------ ----- ------ -------- ------ <S> <C> <C> <C> <C> <C> <C> <C> Bank credit facilities a $ - $ - $ - $ - $214.0 $ - $ - Infrastructure financings and equipment loans 16.4 112.5 56.9 62.3 45.6 47.7 187.1 7.20% Senior Notes due 2026 b - - 250.0 - - - - 7.50% Senior Notes due 2006 c - - - - - 200.0 - Convertible Notes - - - - - 603.8 - Atlantic Copper facilities and other 3.0 75.6 20.1 10.1 24.1 24.1 116.5 ----- ------ ------ ----- ------ -------- ------ Total debt maturities 19.4 188.1 327.0 72.4 283.7 875.6 303.6 Nusamba loan guarantee d - - - - 253.4 - - Redeemable preferred stock e - 10.9 185.4 10.9 10.9 136.0 - ----- ------ ------ ----- ------ -------- ------ Total maturities $19.4 $199.0 $512.4 $83.3 $548.0 $1,011.6 $303.6 ===== ====== ====== ===== ====== ======== ====== </TABLE> a. Reflects December 2005 maturity based on credit facilities closed on October 19, 2001. 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 in March 2002, we intend to fund the $253.4 million obligation under our credit facilities. e. Represents $10.9 million each year for our Silver- Denominated Preferred Stock, $174.5 million in August 2003 for our Gold-Denominated Preferred Stock, and $125.1 million in February 2006 for our Gold-Denominated Preferred Stock, Series II. DEVELOPMENTS IN INDONESIA Indonesia's economic recovery remains vulnerable to ongoing political and social tensions. In July 2001, Indonesia's highest political institution, the People's Consultative Assembly, elected then Vice President Megawati Sukarnoputri as the new President. The international community, including the United States, has expressed support for the newly elected President. In late September 2001, President Sukarnoputri visited the United States for nine days and met with U.S. President George W. Bush and other U.S. Government officials. President Sukarnoputri announced Indonesia's strong support for the U.S. war against terrorism and won U.S. support for Indonesia's territorial integrity and for renewed ties with Indonesia's military. The U.S. also announced a new assistance package for Indonesia, including funds for judicial reform, police training, refugee aid, trade and finance initiatives as well as the granting of duty-free status to additional Indonesian exports. Her comments in public and in private with U.S. business and financial groups provided strong reassurance that the Indonesian government would honor all of its contracts and commitments and take steps to restore order and certainty. Since the September 11 attacks on the World Trade Center in New York, the Sukarnoputri government has been criticized by certain political and religious sects for its support of the U.S. Indonesia is the world's most populous Muslim country and there have been anti-American protests in Jakarta, the capital city of Indonesia. Most observers agree that the demonstrations do not reflect a change for Indonesia's overwhelmingly moderate Muslims, but rather are being orchestrated by a small group of radical Muslims. In Irian Jaya (Papua), where Christianity is the predominant religion of the local population, there have been sporadic attacks by separatists and sporadic conflicts between separatists and the Indonesian military. Our mining operations have continued to operate normally. No incidents of violence have occurred 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.
22 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, production costs, capital expenditures, cash flows, 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. Oral arguments were held in August 2001. 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 filed three Current Reports on Form 8-K dated July 30, 2001, August 2, 2001 and September 24, 2001 reporting information under Item 5. 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: November 1, 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 Amended and Restated Credit Agreement dated as of October 19, 2001 among FCX, PT Freeport Indonesia, the several financial institutions that are parties thereto, U.S. Bank Trust National Association, as PT Freeport Indonesia Trustee, J.P. Morgan Securities Inc., as arranger, and The Chase Manhattan Bank as administrative agent, security agent, JAA security agent and documentary agent. 4.14 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. 4.15 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. 4.16 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). 4.17 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. 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).
E-2 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Exhibit Number Description ------- ----------- 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 10.38) 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. 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.
E-3 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Exhibit Number Description ------- ----------- 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. Incorporated by reference to Exhibit 10.20 to the Quarterly Report on Form 10-Q of FCX for the quarter ended June 30, 2001. 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. 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.
E-4 Freeport-McMoRan Copper & Gold Inc. EXHIBIT INDEX Exhibit Number Description ------- ----------- 10.35 Executive Employment Agreement dated April 30, 2001 between FCX and James R. Moffett. Incorporated by reference to Exhibit 10.35 to the Quarterly Report on Form 10-Q of FCX for the quarter ended June 30, 2001 (the FCX 2001 Second Quarter Form 10-Q). 10.36 Executive Employment Agreement dated April 30, 2001 between FCX and Richard C. Adkerson. Incorporated by reference to Exhibit 10.36 of the FCX 2001 Second Quarter Form 10-Q. 10.37 Change of Control Agreement dated April 30, 2001 between FCX and James R. Moffett. Incorporated by reference to Exhibit 10.37 of the FCX 2001 Second Quarter Form 10-Q. 10.38 Change of Control Agreement dated April 30, 2001 between FCX and Richard C. Adkerson. Incorporated by reference to Exhibit 10.38 of the FCX 2001 Second Quarter Form 10-Q. 15.1 Letter dated October 16, 2001 from Arthur Andersen LLP regarding unaudited interim financial statements.
E-5