## PT Smelting Operating Results – 2004 Compared with 2003 

PT Freeport Indonesia accounts for its 25 percent interest in PT Smelting using the equity method and provides PT Smelting with substantially all of its concentrate requirements (see Note 9 of “Notes to Consolidated Financial Statements”). During the second quarter of 2004, PT Smelting completed a 31-day maintenance turnaround and resumed normal operations. Major maintenance turnarounds of this duration typically occur approximately every four years for PT Smelting, with significantly shorter-term maintenance turn- arounds in the interim. PT Smelting also completed a refinery expansion during the maintenance turnaround, increasing its production capacity to approximately 250,000 metric tons of copper metal per year. PT Smelting treated 758,100 metric tons of concentrate in 2004 and 824,800 metric tons in 2003. 

PT Smelting reported production of 464.0 million pounds of cathodes and sales of 462.9 million pounds of cathodes in 2004, compared with production of 492.4 million pounds and sales of 493.5 million pounds in 2003. PT Smelting’s unit cathode cash production costs averaged $0.12 per pound in 2004 and $0.10 per pound in 2003. The 2004 unit costs reflect the impact of lower volumes in 2004 resulting from the scheduled maintenance turnaround. 

## PT Smelting Operating Results – 2003 Compared with 2002 

PT Smelting treated 824,800 metric tons of concentrate in 2003, 15 percent more than the 719,600 metric tons treated in 2002. PT Smelting’s copper cathode cash production costs per pound totaled $0.10 in 2003, compared with $0.14 in 2002, reflecting the impact of the 28-day maintenance turnaround in May 2002. 

## CAPITAL RESOURCES AND LIQUIDITY 

Our operating cash flows vary with prices realized for copper and gold sales, our production levels, production costs, cash payments for income taxes and interest, working capital changes and other factors. Based on the current strong prices for copper and gold and our current mine plans, we expect to generate cash flows significantly above our planned capital expenditures, scheduled debt maturities and other cash requirements in 2005 and for the foreseeable future. We may use available cash to reduce debt in advance of scheduled maturities, pay additional dividends (see discus- sion of supplemental dividends below) or purchase shares of our common stock under our share purchase program, depending on our financial results, cash requirements, future prospects and other factors. 

## Operating Activities 

Our operating cash flows totaled $341.4 million in 2004, including $85.9 million received as a settlement from insurance coverage related to the fourth-quarter 2003 slippage and debris flow events (see discussion above) and $130.7 million in working capital requirements, compared with $572.1 million in 2003. The decrease in 2004 from the prior year reflects the extended maintenance turnaround at Atlantic Copper and increased working capital requirements. For 2004, significant uses of cash from operating activities included increases in deferred mining costs, accounts receivable and inventories. For 2003, significant uses included increases in deferred mining costs and inventories, and payment of income taxes, partly offset by an increase in our accounts payable and accrued liabilities. We have $195 million available under our revolving credit facility and no amounts have been borrowed under this facility. At December 31, 2004, we had $551.5 million of cash and cash equivalents. 

Operating cash flows totaled $572.1 million in 2003, compared with $512.7 million in 2002. Working capital, excluding cash, increased by $18.1 million in 2002 primarily because of increases in accounts receivable and inventories, partly offset by an increase in accrued income taxes payable. Operating activities are expected to generate positive cash flows for the foreseeable future based on anticipated operating results and metal prices. Using current sales estimates and assuming metals prices of $1.35 per pound of copper and $420 per ounce of gold, we expect our consoli- dated operating cash flows to exceed $1.1 billion in 2005. Each $0.10 per pound change in copper prices would affect 2005 cash flows by approximately $75 million, including the effects of price changes on royalty costs and treatment charges, and each $25 per ounce change in gold prices would affect 2005 cash flows by approximately $36 million. 

## Investing Activities 

Our total 2004 capital expenditures were $141.0 million compared to $139.2 million in 2003. The largest individual capital expenditures for 2004 primarily related to long- term development projects, including development of the DOZ mine, totaling approximately $37 million. Our 2003 capital expenditures included the expansion of the DOZ mine (approximately $22 million) and work on the Grasberg overburden handling system (approximately $21 million). Capital expenditures in 2002, which totaled $188.0 million, included costs at the Grasberg open-pit operations totaling approximately $59 million for replacement capital such as new trucks, shovels, and major development costs totaling approximately $69 million for the overburden handling system and the DOZ mine. 

