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## Management’s Discussion and Analysis 

include a $12.0 million charge for workforce reductions, lower treatment charges and lower production levels, compared with 2003. The effect of the 51-day turnaround on Atlantic Copper’s results for 2004 was approximately $40 million, including an approximate $12 million impact from lower volumes. 

During 2004, Atlantic Copper undertook a cost reduction and operational enhancement plan designed to reduce unit costs, including a reduction in workforce, and enhance operational and administrative efficiencies. The workforce reductions are expected to result in annual cost savings of approximately $8 million. In addition, in December 2004, Atlantic Copper completed a sale of its wire rod and wire assets for $18.3 million cash, resulting in a $7.5 million gain. The sale will enable Atlantic Copper to simplify its business and management structure and reduce working capital require- ments. These actions, together with recently negotiated higher treatment charges for 2005, are expected to improve operating results for Atlantic Copper in 2005 significantly. 

In March 2004, we used a portion of the proceeds from the sale of our 6 7 /8% Senior Notes to repay $162.4 million of Atlantic Copper borrowings (see “Capital Resources and Liquidity – Financing Activities”). Atlantic Copper recorded a $3.7 million ($0.02 per share) accounting charge for losses on early extinguishment of debt. As of December 31, 2004, FCX’s net investment in Atlantic Copper totaled $97.4 million, FCX had $189.5 million of loans outstanding to Atlantic Copper and Atlantic Copper’s debt under financing arrange- ments that are nonrecourse to FCX totaled $12.3 million. 

We defer recognizing profits on PT Freeport Indonesia’s sales to Atlantic Copper and on 25 percent of PT Freeport Indonesia’s sales to PT Smelting until the final sales to third parties occur. Changes in these net deferrals resulted in a reduction to our operating income totaling $24.7 million ($12.7 million to net income or $0.07 per share) in 2004, compared with an addition totaling $13.8 million ($7.1 million to net income or $0.04 per share) in 2003. At December 31, 2004, our net deferred profits on PT Freeport Indonesia concentrate inventories at Atlantic Copper and PT Smelting to be recognized in future periods’ net income after taxes and minority interest sharing totaled $41.6 million. 

The amount of profit we defer varies with the timing of concentrate shipments and metal prices. In 2003, we recognized previously deferred profit because of reduced shipments to Atlantic Copper and PT Smelting caused by lower production from PT Freeport Indonesia’s open pit following the fourth-quarter slippage and debris flow events. PT Freeport Indonesia resumed normal milling rates in June 2004 after accelerating the removal of overburden and mining low-grade ore following the fourth-quarter 2003 events. As a result of the return to normal milling rates, 

concentrate shipments to Atlantic Copper and PT Smelting increased in the second half of 2004. These increased shipments and higher metal prices caused the net deferrals and reduction in 2004 operating results. Based on current copper and gold prices and shipping schedules, we expect that a deferral of profits on intercompany sales will result in a decrease to net income of $22 million in the first quarter of 2005 as PT Freeport Indonesia’s shipments to affiliated smelters continue to increase. The actual change in deferred intercompany profits may differ substantially because of changes in the timing of shipments to affiliated smelters and metal prices. 

## Atlantic Copper Operating Results – 2003 Compared with 2002 

Atlantic Copper’s cash margin of $22.4 million in 2003 was $21.0 million lower, compared with $43.4 million in 2002, primarily because of lower treatment charge rates and higher unit costs. Atlantic Copper’s cathode cash production costs per pound of copper, before currency hedging, averaged $0.16 in 2003 and $0.12 in 2002. The higher unit costs in 2003 primarily reflect a stronger euro in relation to the U.S. dollar, which added approximately $0.03 per pound to the 2003 costs when compared to the 2002 costs. Atlantic Copper’s average treatment rates were at historically low levels of $0.16 per pound for 2003 and $0.17 per pound for 2002. 

Atlantic Copper recorded an operating loss of $21.8 million in 2003, compared with operating income of $2.6 million in 2002. Atlantic Copper’s operating results also include a $9.6 million gain in 2003 and a $1.2 million charge in 2002 on currency hedging contracts maturing during the year. The effect of changes in the deferred profits on PT Freeport Indonesia’s sales to Atlantic Copper and on 25 percent of PT Freeport Indonesia’s sales to PT Smelting resulted in additions to our operating income totaling $13.8 million ($7.1 million to net income or $0.04 per share) in 2003 and reductions totaling $28.8 million ($14.8 million to net income or $0.10 per share) in 2002. 

## PT Smelting Operating Results 

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