## Management’s Discussion and Analysis 

efforts resulted in additions to our proven and probable reserves as of December 31, 2004 (see “Exploration and Reserves”). All approved exploration costs in the joint venture areas with Rio Tinto are generally shared 60 percent by us and 40 percent by Rio Tinto. The FCX/Rio Tinto joint ventures’ 2005 exploration budgets total approximately $21 million ($15 million for our share). 

Consolidated general and administrative expenses increased to $89.9 million in 2004 from $80.3 million in 2003. General and administrative expenses for 2004 include a $2.2 million charge for Atlantic Copper’s workforce reduction plan (see “Smelting and Refining Operations”). The cost of our outstanding stock appreciation rights varies with the price of our common stock price, resulting in increases in general and administrative expenses totaling $0.5 million in 2004 and $7.3 million in 2003. Our parent company charges PT Freeport Indonesia for the in-the-money value of exercised employee stock options. These charges are eliminated in consolidation; however, PT Freeport Indonesia shares these charges with Rio Tinto and Rio Tinto’s reimbursements reduce our consolidated general and administrative expenses. General and administra- tive expenses are net of Rio Tinto’s share of joint venture reimbursements for employee stock option exercises, which reduced general and administrative expenses by $7.0 million in 2004 and $11.3 million in 2003. In addition, in accordance with our joint venture agreement, Rio Tinto’s percentage share of general and administrative expenses in 2004 was lower because of lower metal sales volumes. Estimated general and administrative expenses for 2005 are expected to approximate the 2004 level before consideration of the new accounting rules for share-based payments discussed in “New Accounting Standards.” 

General and administrative expenses increased by $12.0 million to $80.3 million in 2003 from $68.3 million in 2002. The increase relates to charges for costs associated with stock appreciation rights caused by an increase in our stock price, higher compensation and other costs. As a percentage of revenues, general and administrative expenses were 3.8 percent in 2004 and 3.6 percent in 2003 and 2002. 

PT Freeport Indonesia maintains property damage and business interruption insurance related to its operations. In December 2004, we entered into an insurance settlement agreement and settled all claims that arose from the fourth- quarter 2003 slippage and debris flow events in the Grasberg open-pit mine. Our insurers agreed to pay us an aggregate of $125.0 million, inclusive of interest and the $20.0 million paid to us in the third quarter of 2004, in connection with our claims. After considering our joint venture partner’s interest in the proceeds, PT Freeport Indonesia’s share of proceeds totaled $95.0 million. As a result of the settlement, 

we recorded in our Consolidated Statements of Income an $87.0 million gain on insurance settlement for the business interruption recovery and an $8.0 million gain to production costs for the property loss recovery for a net gain of $48.8 million ($0.26 per share), after taxes and minority interest sharing, in 2004. 

Total consolidated interest cost (before capitalization) was $151.0 million in 2004, $200.0 million in 2003 and $183.4 million in 2002. Interest costs decreased in 2004 primarily because we reduced average debt levels, including early conversions in 2003 and 2004 of all of the $603.8 million of our 8 1 /4% Convertible Senior Notes into 42.2 million shares of common stock (see Note 5 of “Notes to Consolidated Financial Statements” and “Capital Resources and Liquidity – Financing Activities”). Interest cost increased in 2003 compared to 2002, primarily because of higher average interest rates for our senior notes issued in early 2003 and higher average annual debt levels. Our interest cost for 2005 is expected to be about the same as 2004 unless we elect to prepay certain long-term debt. Capitalized interest totaled $2.9 million in 2004, $3.0 million in 2003 and $12.2 million in 2002. The reduction in capitalized interest in 2003 compared to 2002 reflects the completion of initial development activities at the Deep Ore Zone underground mine in early 2003. 

Losses on early extinguishment and conversion of debt in 2004 ($14.0 million) and 2003 ($34.6 million) primarily resulted from the early conversions of our 8 1 /4% Convertible Senior Notes. Gains on sales of assets totaled $28.8 million in 2004 as a result of two transactions. In November 2004, a joint venture in which we own a 50 percent interest completed the sale to a real estate developer of a parcel of land in Arizona where the joint venture previously was engaged in a copper mining research project. Our share of the net proceeds from the sale resulted in a gain of $21.3 million ($20.4 million to net income or $0.11 per share). In December 2004, Atlantic Copper completed a sale of its wire rod and wire assets for $18.3 million cash and recorded a gain of $7.5 million ($7.5 million to net income or $0.04 per share). 

Other income (expense) includes the impact of translating into U.S. dollars Atlantic Copper’s net euro-denominated liabilities, primarily its retiree pension obligations. Changes in the U.S. dollar/euro exchange rate require us to adjust the dollar value of our net euro-denominated liabilities and record the adjustment in earnings. Exchange rate effects on our net income from euro-denominated liabilities were losses of $1.6 million in 2004, $13.6 million in 2003 and $11.9 million in 2002. The losses reflect a stronger euro in relation to the U.S. dollar (see “Disclosures About Market Risks”). 

Other expenses in 2003 also include a $5.6 million ($3.7 million 

