## Management’s Discussion and Analysis 

Unit site production and delivery costs in 2004 averaged $0.77 per pound of copper, $0.29 per pound higher than the $0.48 reported in 2003. Unit production and delivery costs are net of deferred mining costs of $0.08 per pound ($77.8 million) for 2004 and $0.05 per pound ($64.4 million) for 2003. The increase in deferred mining costs included the effects of PT Freeport Indonesia’s accelerated overburden removal efforts during 2004. In the fourth quarter of 2004, PT Freeport Indonesia changed its life-of-mine overburden-to-ore ratio to 2.4 to 1 from 2.2 to 1, and in the fourth quarter of 2003 the ratio changed to 2.1 to 1 from 1.9 to 1, as discussed above. The fourth-quarter 2004 change increased 2004 costs by $5.5 million or 0.6 cents per pound. As of December 31, 2004, deferred mining costs totaled $220.4 million compared with $142.6 million at December 31, 2003. See “Critical Accounting Estimates” for a discussion of changes in the estimated life-of-mine overburden-to-ore ratio. 

Gold and silver credits were $0.62 per pound for 2004, compared with $0.70 for 2003. The decrease primarily reflects the reduced production and sales of gold during 2004, partly offset by the improved gold realizations. 

Unit treatment charges vary with the price of copper, and royalty rates vary with prices of copper and gold. In addition, treatment charges vary based on PT Freeport Indonesia’s customer mix. Royalties of $0.04 per pound were $0.02 per pound above the year-ago period primarily because of higher copper and gold prices. The copper royalty rate payable by PT Freeport Indonesia under its Contract of Work varies from 1.5 percent of copper net revenue at a copper price of $0.90 or less per pound to 3.5 percent at a copper price of $1.10 or more per pound. The Contract of Work royalty rate for gold and silver sales is 1.0 percent. In connection with our fourth concentrator mill expansion completed in 1998, PT Freeport Indonesia agreed to pay the Government of Indonesia additional royalties (royalties not required by the Contract of Work) to provide further support to the local governments and the people of the Indonesian province of Papua. The additional royalties are paid on metal from production from PT Freeport Indonesia’s milling facilities above 200,000 metric tons of ore per day. The additional royalty for copper equals the Contract of Work royalty rate, and for gold and silver equals twice the Contract of Work royalty rates. Therefore, PT Freeport Indonesia’s royalty rate on copper net revenues from production above 200,000 metric tons of ore per day is double the Contract of Work royalty rate, and the royalty rates on gold and silver sales from production above 200,000 metric tons of ore per day are triple the Contract of Work royalty rates. As a result of higher projected copper and gold sales volumes, we expect our 2005 royalty costs to increase compared with 2004 royalty costs of $43.5 million. If copper prices average $1.35 per pound and gold prices average $420 per ounce in 2005, 

we would expect royalty costs to total approximately $90 million ($0.06 per pound) for 2005. These estimates assume 2005 sales volumes of 1.5 billion pounds of copper and 2.9 million ounces of gold. 

Assuming 2005 average prices of $1.35 per pound for copper and $420 per ounce for gold, and copper and gold sales of 1.5 billion pounds and 2.9 million ounces for 2005, PT Freeport Indonesia estimates that its gold credits would essentially offset its cash production costs, resulting in net cash production costs of approximately zero cents per pound for the year 2005. Estimated unit cash costs reflect recent increases in energy costs, a stronger Australian dollar currency and other factors. Net unit cash production costs for 2005 would change by approximately $0.05 per pound for each $25 per ounce change in the average price of gold. Forecasted unit costs are calculated on the same basis as the historical unit costs, which are discussed above and recon- ciled in “Product Revenues and Production Costs.” 

As a result of the lower copper production and sales in 2004, PT Freeport Indonesia’s depreciation rate per pound of copper increased to $0.17 for 2004 compared with $0.15 for 2003. For 2005, PT Freeport Indonesia expects its depre- cation rate to decrease to approximately $0.14 per pound, primarily because of higher projected copper production and sales. Because certain assets are depreciated on a straight- line basis, the rate per pound will vary with the level of copper production and sales. 

## PT Freeport Indonesia Operating Results – 2003 Compared with 2002 

PT Freeport Indonesia’s revenues increased by $225.6 million in 2003 from 2002. Both copper and gold price realizations improved during 2003 with copper approximately 15 percent higher at $0.82 per pound and gold approximately 18 percent higher at $366.60 per ounce. Gold revenues include a $22.1 million ($8.99 per ounce) hedging gain from redemption of our Gold-Denominated Preferred Stock. Copper sales volumes declined 15 percent to 1.3 billion pounds in 2003 from 1.5 billion pounds in 2002 because of lower copper ore grades and reduced mill throughput resulting from the fourth-quarter slippage and debris flow events. Gold sales volumes increased 8 percent to 2.5 million ounces in 2003 from 2.3 million ounces in 2002 because of higher gold ore grades partly offset by lower mill throughput. Treatment charges were $46.6 million lower in 2003 compared with 2002 because of lower copper sales volumes and market treatment rates. Royalties were higher at $26.5 million for 2003 compared with $24.5 million for 2002 primarily reflecting higher metals prices. Mill throughput from production from PT Freeport Indonesia’s producing mines averaged 203,000 metric tons of ore per day in 2003 and 235,600 metric tons of ore per day in 2002. The lower mill throughput rate during 2003 primarily reflects the 

