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## Management’s Discussion and Analysis 

existing reserves. PT Freeport Indonesia receives 100 percent of the cash flow from specified annual amounts of copper, gold and silver through 2021, calculated by reference to its proven and probable reserves as of December 31, 1994, and 60 percent of all remaining cash flow. As noted above, the specified annual amounts of copper, gold and silver attributable 100 percent to PT Freeport Indonesia are adjusted upon the occur- rence of certain events. As a result of the Grasberg slippage and debris flow events, the 2004 specified amounts attribut- able 100 percent to PT Freeport Indonesia were reduced by 178 million pounds for copper and 280,000 ounces for gold. Pursuant to an agreement with Rio Tinto, these reductions are expected to be offset by increases in the specified amounts attribut- able 100 percent to PT Freeport Indonesia totaling 111 million pounds for copper and 175,000 ounces for gold in 2005, and 67 million pounds for copper and 105,000 ounces for gold in 2021. 

Under our joint venture arrangements, Rio Tinto has a 40 percent interest in PT Freeport Indonesia’s Contract of Work and in Eastern Minerals’ Contract of Work. Rio Tinto also has the option to participate in 40 percent of any of our other future exploration projects in Papua. Rio Tinto has elected to participate in 40 percent of our interest and cost in the PT Nabire Bakti exploration joint venture covering approximately 0.5 million acres contiguous to Block B and one of Eastern Minerals’ blocks. 

## Outlook 

In 2004, our sales volumes of copper and gold totaled 1.0 billion pounds of copper and 1.44 million ounces of gold. Our 2004 copper and gold sales volumes were lower than those reported for the last several years because of recovery efforts from the fourth-quarter 2003 slippage and debris flow events at the Grasberg open pit. 

Following the October 9, 2003, slippage event and the December 12, 2003, debris flow in a section of the Grasberg open pit, PT Freeport Indonesia accelerated the removal of overburden and mined low grade ore prior to restoring safe access to higher-grade ore areas and resuming normal milling rates in June 2004. Average ore grades improved in the second half of 2004 and are expected to be signifi- cantly higher for 2005, compared with 2004. Annual sales are expected to approximate 1.5 billion pounds of copper and 2.9 million ounces of gold in 2005, increases of 50 percent for copper and 100 percent for gold compared with 2004. Assuming average copper prices of $1.35 per pound and average gold prices of $420 per ounce, consolidated operating cash flows in 2005 are expected to exceed $1.1 billion. The impact on our annual cash flow for each $0.10 per pound change in copper prices would approximate $75 million, including the effects of price changes on royalty costs and treatment charges, and for each $25 per ounce change in gold prices would approximate $36 million. 

Average annual sales volumes over the next five years (2005 to 2009) are expected to approximate 1.36 billion pounds of copper and 2.2 million ounces of gold. Based on these estimates of average annual sales volumes over the next five years and copper prices of approximately $1.35 per pound and gold prices of approximately $420 per ounce, the impact on our annual cash flow for each $0.10 per pound change in copper prices would approximate $70 million, including the effects of price changes on royalty costs and treatment charges, and for each $25 per ounce change in gold prices would approximate $28 million. 

## Copper and Gold Markets 

<img src='content_image/31855.jpg'>

* Excludes Shanghai stocks, producer, consumer and merchant stocks. 

The graph above presents London Metal Exchange (LME) copper prices and reported stocks of copper at the LME and New York Commodity Exchange (COMEX) through February 28, 2005. Copper markets have reflected strong demand from China, which has become the world’s largest consumer of copper, stronger U.S. industrial demand for copper and limited incremental supplies from mine production. Global demand for copper exceeded global production during 2003 and 2004, resulting in a significant decline in available inventories, with LME and COMEX inventories declining to levels of less than 100,000 metric tons, less than 10 percent of the available stocks at the beginning of 2003. Copper prices rose sharply beginning in mid-2003 and continued to increase in 2004, with prices ranging from $1.06 per pound to a multi-year high of $1.49 per pound in 2004. Copper prices have remained strong in early 2005 and the LME spot price closed at $1.54 per pound on February 28, 2005. As a result of low inventory levels, expectations of continued strong demand and limited supplies, the outlook for copper markets in 2005 is positive. Market analysts expect copper demand to exceed supply in the first half of 2005, with a possibility of a balance between refined copper supply and demand in the second half of the year. Future copper prices will be determined by demand from China, economic performance in the U.S. and other industrialized countries, the timing of the development of new supplies of copper, production levels of mines and copper smelters and other factors. We consider the underlying supply and demand conditions in the global copper markets to be positive for our company. 

