Freeport posts robust profits at Grasberg

Vancouver — A year ago, Freeport-McMoRan Copper & Gold (FCX-N) was struggling to recover from a late-2003 slippage event that clipped production and profits from the Grasberg mine for most of the first half of last year.

Freeport has since restored safe access to higher-grade areas at the huge mine complex in Papua, Indonesia, and, as a result, second-quarter net earnings jumped to US$175.2 million, or US91 per share, from a net loss of US$53.3 million a year earlier.

The New Orleans-based company reported second-quarter sales of 313.7 million lbs. copper and 616,400 oz. gold, compared with just 205.1 million lbs. copper and 351,100 oz. gold a year earlier.

The company expects sales this year to total about 1.47 billion lbs. copper and 2.8 million oz. gold.

The Indonesian unit’s cash costs, including gold and silver credits, averaged US11 per lb. copper in the second quarter, compared with an average of US$0.40 per lb. a year earlier.

For the six-month period, unit net cash costs averaged US9 per lb. copper, down from US67 per lb. in the first half of 2004.

Unit cash costs at Freeport’s Indonesian unit are expected to decrease to US$0.05 per lb. for the full year of 2005, despite higher input costs (almost double, in some cases) for basic items such as energy.

Freeport posted net earnings of US$305.6 million for the first half of 2006, compared to a net loss of US$72.9 million a year earlier. Results for this year reflect higher gold and copper prices, as well as higher production levels, from a year ago. The lower 2004 earnings were attributed to lower-grade ore and reduced throughout at Grasberg and a US$40-million maintenance charge associated with Freeport’s wholly owned Spanish smelting unit.

Daily mill throughput at Grasberg rose to an average of 211,800 tonnes in the latest quarter from 164,200 tonnes a year earlier. About 20% of mill throughput came from the Deep Ore Zone (DOZ) underground mine. The company is expanding the DOZ block-caving operation to 50,000 tonnes per day by installing a second crusher and additional ventilation. The company expects to complete the expansion project in 2007.

Thanks to higher prices and profits, Freeport reduced its debt by about US$200 million to about US$1.78 billion so far this year. Over the same period, the company paid stock dividends of US$179.7 million, or about US$1 per share. The company’s board recently approved another supplemental dividend of US50 per share that will be paid at the end of September.

Freeport also bought back 2.4 million of its shares for US$80.2 million, for an average price of US$33.83 per share.

Freeport Chairman James Moffett expects earnings to remain strong as the company gains access to, and mines, additional high-grade ores at Grasberg. The company will use the proceeds to strengthen its financial position and provide returns to shareholders. Since the 1980s, Freeport has returned about US$3 billion to shareholders through dividends and share-repurchase programs.

Freeport is continuing to explore the Grasberg project, focused on testing potential extensions of the Mill Level zone and Deep MLZ deposits to the northwest, expansion of the Deep Grasberg resource, and depth extensions of the Dom deposit.

Management also reports that the ‘Common Infrastructure Project’ launched in 2004 is progressing well. It will provide access to large, undeveloped underground deposits in the district through a tunnel system about 400 metres deeper than the existing one. The infrastructure project will help extend the future of the Grasberg mine — now about halfway through its open-pit life — and will also reduce the costs of future underground exploration and production.

Freeport also plans to develop Big Gossan, a high-grade deposit situated near the existing milling complex at Grasberg. Rio Tinto (RTP-N) secured a 40% interest in this joint-venture project by helping to finance the expansion program.

Mine plans are based on a resource of 44 million tonnes grading 2.5% copper and 1.2 grams gold. Capital costs are estimated at about US$225 million (US$195 million net for Freeport) for a 7,000-tonne-per-day operation slated to begin production by 2010. Annual production would average about 135 million lbs. copper and 65,000 oz. gold, with 60% of this to the account of Freeport’s Indonesian unit.