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## Management’s Discussion and Analysis 

dollars or euros. Generally, our costs are positively affected when the U.S. dollar strengthens in relation to those foreign currencies and adversely affected when the U.S. dollar weakens in relation to those foreign currencies. 

One U.S. dollar was equivalent to 9,270 rupiah at December 31, 2004, 8,437 rupiah at December 31, 2003, and 8,940 rupiah at December 31, 2002. PT Freeport Indonesia recorded losses to production costs totaling $0.7 million in 2004, $3.0 million in 2003 and $3.5 million in 2002 related to its rupiah- denominated net monetary assets and liabilities. At December 31, 2004, net liabilities totaled $7.7 million at an exchange rate of 9,270 rupiah to one U.S. dollar. 

Operationally, changes in the U.S. dollar to rupiah exchange rate primarily impact PT Freeport Indonesia’s labor costs, which are mostly rupiah denominated. At estimated annual aggregate rupiah payments of 1.4 trillion and an exchange rate of 9,270 rupiah to one U.S. dollar, the exchange rate as of December 31, 2004, a one-thousand-rupiah increase in the exchange rate would result in an approximate $15 million decrease in aggregate annual operating costs. A one- thousand-rupiah decrease in the exchange rate would result in an approximate $18 million increase in aggregate annual operating costs. 

PT Freeport Indonesia purchases certain materials, supplies and services denominated in Australian dollars. The exchange rate was $0.78 to one Australian dollar at December 31, 2004, $0.75 to one Australian dollar at December 31, 2003, and $0.56 to one Australian dollar at December 31, 2002. At estimated annual aggregate Australian dollar payments of 225 million and an exchange rate of $0.78 to one Australian dollar, the exchange rate as of December 31, 2004, a $0.01 increase or decrease in the exchange rate would result in an approximate $2 million change in aggregate annual operating costs. 

At times, PT Freeport Indonesia has entered into foreign currency forward contracts to hedge a portion of its aggregate anticipated Indonesian rupiah and Australian dollar payments. As of December 31, 2004, PT Freeport Indonesia 

had foreign currency contracts to hedge 450.0 billion in rupiah payments from April 2005 through December 2005, or approximately 32 percent of aggregate projected rupiah payments for 2005, at an average exchange rate of 10,059 rupiah to one U.S. dollar. PT Freeport Indonesia accounts for these contracts as cash flow hedges. We recorded net gains to production costs totaling $11.0 million in 2002 for PT Freeport Indonesia’s previous foreign currency contracts. 

The majority of Atlantic Copper’s revenues are denominated in U.S. dollars; however, operating costs other than concen- trate purchases and certain asset and liability accounts are denominated in euros. Atlantic Copper’s estimated annual euro payments total approximately 100 million euros. At a December 31, 2004, exchange rate of $1.36 per euro, a $0.05 increase or decrease in the exchange rate would result in an approximate $5 million change in annual costs. 

In connection with refinancing its debt in June 2000, Atlantic Copper’s lenders required it to hedge its anticipated euro-denominated operating costs. This hedging require- ment was removed when Atlantic Copper refinanced the facility in March 2004. Atlantic Copper had no outstanding currency hedging contracts at December 31, 2004. Atlantic Copper’s operating results reflect gains (losses) on currency hedging contracts totaling $9.6 million in 2003 and $(1.2) million in 2002. 

Atlantic Copper had euro-denominated net monetary liabilities at December 31, 2004, totaling $74.0 million. The exchange rate was $1.36 per euro at December 31, 2004, $1.26 per euro at December 31, 2003, and $1.05 per euro at December 31, 2002. Adjustments to Atlantic Copper’s euro- denominated net monetary liabilities to reflect changes in the exchange rate are recorded in other income (expense) and totaled $(1.6) million in 2004, $(13.6) million in 2003 and $(11.9) million in 2002. 

## Interest Rate Risk 

The table below presents average interest rates for our scheduled maturities of principal for outstanding debt and fair value at December 31, 2004 (dollars in millions). 

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## NEW ACCOUNTING STANDARDS 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized as current-period charges and requires 

the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. We must adopt SFAS No. 151 no later than January 1, 2006. We have not yet determined when we will adopt SFAS No. 151; however, we currently do not expect adoption to have a material impact on our accounting for inventory costs. 

