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## Management’s Discussion and Analysis 

of copper and gold and other factors. A change of $0.10 in the average price per pound of copper would have an approximate $150 million impact on our 2005 consolidated revenues and an approximate $75 million impact on our 2005 consolidated net income, assuming approximately 1.5 billion pounds of 2005 PT Freeport Indonesia copper sales. A change of $25 in the average price per ounce of gold would have an approximate $72 million impact on our 2005 consolidated revenues and an approximate $36 million impact on our 2005 consolidated net income, assuming approximately 2.9 million ounces of 2005 PT Freeport Indonesia gold sales. 

At times, in response to market conditions, we have in the past and may in the future enter into copper and gold price protection contracts for some portion of our expected future mine production to mitigate the risk of adverse price fluctuations. We currently have no commodity price protec- tion contracts relating to our mine production other than our gold-denominated and silver-denominated preferred stock discussed below. 

PT Freeport Indonesia’s concentrate sales agreements, with regard to copper, provide for provisional billings at the time of shipment with final pricing settlement generally based on the average LME price for a specified future period. Under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” PT Freeport Indonesia’s sales based on a provisional sales price contain an embedded derivative, which we bifurcate from the sale of the concentrates at the current spot LME price. The embedded derivative, which does not qualify for hedge accounting, is marked-to-market through earnings each period until the date of final copper pricing (see Note 1 of “Notes to Consolidated Financial Statements”). At December 31, 2004, we had consolidated embedded derivatives on copper sales totaling 292.2 million 

pounds recorded at an average price of $1.45 per pound. We expect final prices on these sales over the next few months. We estimate that a two-cent movement in the average price used for these embedded derivatives will have an approxi- mate $3 million impact on our 2005 consolidated net income. 

We have outstanding two issues of redeemable preferred stock, which have cash dividend and redemption requirements indexed to gold and silver prices. We account for these securities as a hedge of future production and reflect them as debt on our balance sheets at their original issue value less redemptions. As redemption payments occur, differ- ences between the carrying value and the redemption payment, which is based on commodity prices at the time of redemption, are recorded as an adjustment to revenues (see Notes 1, 5 and 11 of “Notes to Consolidated Financial Statements”). During 2003, we redeemed all our gold-denomi- nated preferred stock due in August 2003 and made an annual partial redemption of our silver-denominated stock. We paid $221.3 million to redeem these securities, which had a book balance of $245.1 million. We recorded the $23.8 million gain as revenues. In August 2004, we funded the sixth of eight scheduled annual redemption payments on our Silver- Denominated Preferred Stock for $13.9 million. The mandatory redemption resulted in a $12.5 million decrease in debt and a hedging loss to revenues of $1.4 million ($0.7 million to net income or less than $0.01 per share) in 2004. Future redemp- tion payments denominated in ounces and equivalent value in dollars, as well as dollar-equivalent dividend payments, based on the December 31, 2004, London A.M. gold fixing price for one ounce of gold ($438.00) and the London silver fixing price for one ounce of silver ($6.82) in the London bullion market (which determine the preferred stock redemption and dividend amounts), follow (dollars in millions): 

<img src='content_image/130898.jpg'>

The fair values of the redeemable preferred stock, based on December 31, 2004, quoted market prices of $43.65 per depositary share for our gold-denominated preferred stock due in 2006 and $7.40 per depositary share for our silver- denominated preferred stock, were $187.9 million for the preferred stock indexed to gold prices and $35.2 million for the preferred stock indexed to silver prices. 

Atlantic Copper prices its purchases of copper concentrate at approximately the same time as it sells the refined copper, thereby protecting Atlantic Copper from most copper price risk. Atlantic Copper enters into futures contracts to hedge 

its price risk whenever its physical purchases and sales pricing periods do not match. At December 31, 2004, Atlantic Copper had contracts, with a fair value of $(0.9) million, to sell 12.7 million pounds of copper at an average price of $1.40 per pound through March 2005. 

## Foreign Currency Exchange Risk 

Our operations are in Indonesia and Spain, where our func- tional currency is the U.S. dollar. All of our revenues and a significant portion of our costs are denominated in U.S. dollars; however, some costs and certain asset and liability accounts are denominated in Indonesian rupiah, Australian 

