Grasberg’s success now pays dividends

Vancouver — A strong operating performance from the mighty Grasberg mine in Indonesia has prompted Freeport-McMoRan Copper & Gold (FCX-N) to pay shareholders a dividend for the first time since 1998.

The New Orleans-based company will begin paying a quarterly divident of US9 per share on May 1. The move follows a series of financings aimed at restructuring.

In January, Freeport completed a US$500 million financing comprising senior notes yielding 10.1% due in 2010. “The success of this offering is an important step in our continuing efforts to establish a capital structure reflective of the significant values of our assets,” says President Richard Adkerson.

Then in early February, the company announced plans to pay off all its bank debt by selling US$575 million worth of 7% 8-year convertible senior notes. The notes are convertible into stock at US$30.87 each, a 70% increase over the recent share price of US$18.16.

Says CEO James Moffett: “Our strong financial performance and outlook, combined with recent financing transactions, enable our company to return a portion of free cash flows to shareholders.”

The company earned US$64.1 million (or US41 per share) in the fourth quarter, compared with a loss of US$2.1 million (US1 per share) in the corresponding period of 2001. Revenue soared to US$571 million from US$412.3 million between the two periods. Driving the improvement was a lowering of cash production costs at the Grasberg operation, along with higher realized gold and copper prices.

“We set multiple operating records throughout the year,” says Moffett. “Our low-cost, high-volume operations allowed us to generate significant cash flows and reduce net debt in 2002 by nearly US$280 million.”

Situated in Papua province (formerly Irian Jaya), Grasberg turned out a record amount of copper during the quarter while remaining the world’s lowest-cost producer. Production costs amounted to US3 per lb., compared with US21 in the year-earlier quarter. For all of 2002, production costs were US8 per lb., compared with US7 in the previous year.

Freeport-McMoRan earned US$127.1 million (US87 per share) in 2002, compared with US$76.5 million (US53 per share) in 2001. Operating cash flow was US$208.5 million in the fourth quarter and US$512.7 million for the year, enabling the company to reduce its debt by US$147.9 million for the fourth quarter and by US$278.2 million for the year.

Freeport sold 427.1 million lbs. copper and 678,300 oz. gold during the quarter, compared with 325.3 million lbs. and 500,200 oz. a year earlier. For the year, it produced 1.52 billion lbs. copper and 2.3 million oz. gold, compared with 1.39 billion lbs. and 2.6 million oz. in 2001.

Benefiting the company were higher realized prices for both metals. The average price for copper in the quarter was US70 per lb., whereas gold averaged US$323 per oz. Comparable prices in the fourth quarter of 2001 were US65 per lb. and US$277 per oz.

Copper grades averaged 1.23% in the latest quarter, compared with 0.89% a year earlier; for all of 2002, they averaged 1.14%, compared with 1% in 2001.

In 2003, Freeport-McMoRan expects to sell 1.4 billion lbs. copper and 2.6 million oz. gold; first-quarter sales are projected to be 370 million lbs. and 580,000 oz.

London-based Rio Tinto (RTP-N) has a 40% interest in future production from Grasberg’s reserves above those reported at the end of 1994.

Proven and probable reserves total 2.6 billion tonnes grading 1.12% copper, plus 1.02 grams gold and 3.73 grams silver per tonne. Net of Rio Tinto’s share, Freeport Indonesia’s share of proven and probable reserves amount to 39.4 billion lbs. copper, 48.5 million oz. gold and 110.9 million oz. silver. Freeport-McMoRan holds a 90.6% equity interest in Freeport Indonesia.