## Notes To Consolidated Financial Statements 

estimated useful lives of 15 to 20 years for buildings and 3 to 25 years for machinery and equipment. 

Effective January 1, 2002, FCX changed its method of computing depreciation for PT Freeport Indonesia’s mining and milling life-of-mine assets. Prior to January 1, 2002, PT Freeport Indonesia depreciated mining and milling life-of- mine assets on a composite basis. Total historical capitalized costs and estimated future development costs relating to its developed and undeveloped reserves were depreciated using the unit-of-production method based on total developed and undeveloped proven and probable copper reserves. Estimated future costs, which are significant, to develop PT Freeport Indonesia’s undeveloped ore bodies are expected to be incurred over the next 20 to 25 years. 

After considering the inherent uncertainties and subjec- tivity relating to the long time frame over which these estimated costs would be incurred, management revised its depreciation methodology prospectively. Effective January 1, 2002, deprecia- tion for the mining and milling life-of-mine assets excludes consideration of future development costs. Under the new methodology, PT Freeport Indonesia depreciates the capital- ized costs of individual producing mines over the related proven and probable copper reserves. Infrastructure and other common costs continue to be depreciated over total proven and probable copper reserves. 

Asset Impairment.  FCX reviews and evaluates its long- lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured as the amount by which asset carrying value exceeds its fair value. Fair value is generally determined using valuation tech- niques such as estimated future cash flows. An impairment is considered to exist if total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows for PT Freeport Indonesia’s mining assets, which are considered one asset group, include estimates of recoverable pounds and ounces, metal prices (considering current and historical prices, price trends and related factors), production rates and costs, capital and reclamation costs as appropriate, all based on detailed life-of-mine engineering plans. Future cash flows for Atlantic Copper’s smelting assets include estimates of treatment and refining rates (considering current and histor- ical prices, price trends and related factors), production rates and costs, capital and reclamation costs as appropriate, all based on operating projections. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. No impairment losses were recorded during the periods presented. 

Deferred Mining Costs.  Mining costs are charged to operations as incurred. However, because of the configura- tion and location of the Grasberg open-pit ore body and the 

location and extent of the related surrounding overburden, the ratio of overburden to ore is much higher in the initial mining of the open pit than in later years. As a result, surface mining costs associated with overburden removal at PT Freeport Indonesia’s Grasberg open-pit mine that are estimated to relate to future production are initially deferred when the ratio of actual overburden removed to ore mined exceeds the estimated average ratio of overburden removed to ore mined over the life of the Grasberg open-pit mine. Those deferred costs are subsequently charged to operating costs when the ratio of actual overburden removed to ore mined falls below the estimated average ratio of overburden to ore over the life of the Grasberg open-pit mine. The reserve quantities used to develop the life of mine ratio are the proven and probable ore quantities for the Grasberg open pit disclosed in Note 13. 

The deferred mining cost method is used by some companies in the metals mining industry; however, industry practice varies. The Emerging Issues Task Force of the Financial Accounting Standards Board (FASB) currently is evaluating this issue. The deferred mining cost method matches the cost of production with the sale of the related metal from the open pit by assigning each metric ton of ore removed an equivalent amount of overburden tonnage thereby averaging the overburden removal costs over the life of the mine. The mining costs capitalized in inventory and the amounts charged to cost of goods sold do not represent the actual costs incurred to mine the ore in any given period. If PT Freeport Indonesia were to charge all mining costs to expense when incurred, including all overburden removal costs, as some mining companies do, there would be greater volatility in FCX’s period-to-period results of operations. 

The application of the deferred mining cost method has resulted in an asset on FCX’s balance sheets (“Deferred Mining Costs”), which based on current mine plans, is estimated to increase through about 2010. Subsequently, these costs are expected to be amortized as a charge to production and delivery costs until they are fully amortized at the end of the open pit’s life, which is estimated to be in approximately 2015. This is because PT Freeport Indonesia expects to mine higher than average amounts of overburden through 2010 and less than average thereafter. Deferred mining costs totaled $220.4 million at December 31, 2004, and $142.6 million at December 31, 2003. Additions to deferred mining costs are classified as increases in deferred mining costs in operating activities in the consolidated statements of cash flows and totaled $77.8 million in 2004, $64.4 million in 2003 and $30.6 million in 2002. PT Freeport Indonesia evaluates the recoverability of these deferred mining costs in conjunction with its evaluation of the recoverability of its mining assets as described in FCX’s 

