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## Management’s Discussion and Analysis 

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The positive market environment and investor sentiment toward gold continued during 2004 with gold prices ranging from $374 to $456 per ounce, supported by a weak U.S. dollar reflecting large U.S. deficits, ongoing geopolitical strife and terrorism concerns, growing investment demand for gold and actions by gold producers to reduce hedge positions. Gold prices averaged $410 per ounce in 2004. Recent movements in gold prices have closely followed movements in the U.S. dollar against other currencies and most analysts anticipate that a weak U.S. dollar will continue to support gold prices. 

The London gold price closed at approximately $435 per ounce on February 28, 2005. 

As shown in the graphs above, world metal prices for copper have fluctuated during the period from 1992 through February 2005 from a low of approximately $0.60 per pound in 2001 to a high of approximately $1.54 per pound on February 28, 2005, and world gold prices have fluctuated during the period from 1998 through February 2005 from a low of approximately $250 per ounce in 1999 to a high of approximately $456 per ounce in 2004. Copper and gold prices are affected by numerous factors beyond our control as described further in our Form 10-K for the year ended December 31, 2004. 

## CRITICAL ACCOUNTING ESTIMATES 

Management’s discussion and analysis of our financial condition and results of operations are based on our consoli- dated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experi- ence and on assumptions that we consider reasonable under the circumstances; however, reported results could differ from those based on the current estimates under different assumptions or conditions. The areas requiring the use of management’s estimates are discussed in Note 1 of “Notes to Consolidated Financial Statements” under the subheading “Use of Estimates.” Management has reviewed the following 

discussion of its development and selection of critical accounting estimates with the Audit Committee of our Board of Directors. 

• Depreciation and Amortization –  As discussed in Note 

1 of “Notes to Consolidated Financial Statements,” we depreciate our mining and milling assets using the unit-of- production method based on our estimates of our proven and probable recoverable copper reserves. We have other assets that we depreciate on a straight-line basis over their estimated useful lives. Our estimates of proven and probable recoverable copper reserves and of the useful lives of our straight-line assets impact our depreciation and amortization expense. These estimates affect both our “mining and exploration” and “smelting and refining” segments. 

Effective January 1, 2002, we changed our method of computing depreciation for PT Freeport Indonesia’s mining and milling life-of-mine assets. See Note 1 of “Notes to Consolidated Financial Statements” for a discussion of this change. The cumulative effect of this change through December 31, 2001, as reflected in our 2002 results, reduced net income by $3.0 million ($0.02 per share), net of taxes and minority interest sharing. 

The accounting estimates related to depreciation and amortization are critical accounting estimates because (1) the determination of copper reserves involves uncer- tainties with respect to the ultimate geology of our reserves and the assumptions used in determining the economic feasibility of mining those reserves, including estimated copper and gold prices and costs of conducting future mining activities, and (2) changes in estimated proven and probable recoverable copper reserves and useful asset lives can have a material impact on net income. We perform annual assessments of our existing assets, including a review of asset costs and depreciable lives, in connection with the review of mine operating and develop- ment plans. When we determine that assigned asset lives do not reflect the expected remaining period of benefit, we make prospective changes to those depreciable lives. 

There are a number of uncertainties inherent in estimating quantities of reserves, including many factors beyond our control. Ore reserves estimates are based upon engineering evaluations of samplings of drill holes and other openings. Our estimates of proven and probable recoverable reserves are prepared by our employees and reviewed and verified by independent experts in mining, geology and reserve determination. As of December 31, 2004, aggregate proven and probable recoverable copper reserves totaled 56.2 billion pounds and PT Freeport Indonesia’s estimated share totaled 40.5 billion pounds. 

