New Accounting Standards.  In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized as current- period charges and requires the allocation of fixed produc- tion overheads to inventory based on the normal capacity of the production facilities. FCX must adopt SFAS No. 151 no later than January 1, 2006. FCX has not yet determined when it will adopt SFAS No. 151; however, FCX currently does not expect adoption to have a material impact on its accounting for inventory costs. 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123 (revised 2004) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. 

Through December 31, 2004, FCX accounted for grants of employee stock options under the recognition prin- ciples of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, which require compensation costs for stock-based employee compensa- tion plans to be recognized based on the difference on the date of grant, if any, between the quoted market price of the stock and the amount an employee must pay to acquire the stock. If FCX had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” which requires compensation cost for all stock-based employee compensation plans to be recognized based on the use of a fair value method, FCX’s net income would have been reduced by $5.2 million, $0.05 per diluted share, for 2004, $4.7 million, $0.05 per diluted share, for 2003 and $6.5 million, $0.07 per diluted share, for 2002 (see ”Stock-Based Compensation”). FCX must adopt SFAS No. 123 (revised 2004) no later than July 1, 2005; however, FCX can elect to adopt SFAS No. 123 (revised 2004) as early as January 1, 2005. FCX is still reviewing the provisions of SFAS No. 123 (revised 2004) and has not yet determined if it will adopt SFAS No. 123 (revised 2004) before July 1, 2005. Also, stock options were granted to employees in February 2005, including multi-year grants to senior executive officers. As a result, the annual charges for share-based payments will be higher than the pro forma annual amounts presented under “Stock-Based Compensation.” Based on currently outstanding employee stock options, including those granted in February 2005, if FCX adopts SFAS No. 123 (revised 2004) on July 1, 2005, FCX estimates the charge to earnings before taxes and minority interest sharing in the second half of 2005 would total approxi- mately $11 million, and the reduction in net income would be approximately $6.5 million, $0.04 per basic share using common shares outstanding at December 31, 2004. 

## Note 2.  Ownership in Subsidiaries and Joint Ventures With Rio Tinto 

Ownership in Subsidiaries.  FCX’s direct ownership in PT Freeport Indonesia totaled 81.3 percent at December 31, 2004 and 2003. PT Indocopper Investama, an Indonesian company, owns 9.4 percent of PT Freeport Indonesia and FCX owns 100 percent of PT Indocopper Investama. In July 2004, FCX received a request from the Indonesian Department of Energy and Mineral Resources that it offer to sell to Indonesian nationals shares in PT Indocopper Investama at fair market value. In response to this request and in view of the potential benefits of having additional Indonesian ownership in the project, FCX has agreed to consider a potential sale of an interest in PT Indocopper Investama at fair market value. Neither its Contract of Work with the Indonesian government nor Indonesian law requires FCX to divest any portion of its ownership in PT Freeport Indonesia or PT Indocopper Investama. At December 31, 2004, PT Freeport Indonesia’s net assets totaled $2.3 billion and its retained earnings totaled $2.1 billion. As of December 31, 2004, FCX has two outstanding loans to PT Freeport Indonesia totaling $192.4 million. 

Substantially all of PT Freeport Indonesia’s assets are located in Indonesia. Events in Indonesia during 2004 mainly centered on the national elections. The presidential election was conducted peacefully and after a runoff, Susilo Bambang Yudhoyono was declared the new president in October. Indonesia continues to face political, economic and social uncertainties, including separatist movements and civil and religious strife in a number of provinces. 

FCX owns 100 percent of the outstanding Atlantic Copper common stock. At December 31, 2004, FCX’s net investment in Atlantic Copper totaled $97.4 million, FCX had $189.5 million of loans outstanding to Atlantic Copper and Atlantic Copper’s debt under financing arrangements that are nonrecourse to FCX totaled $12.3 million. Atlantic Copper is not expected to pay dividends in the near future. Under the terms of its concentrate sales agreements with Atlantic Copper, PT Freeport Indonesia had outstanding trade receivables from Atlantic Copper totaling $146.0 million at December 31, 2004. FCX made cash contributions to Atlantic Copper totaling $202.0 million in 2004, $10.0 million in 2003 and $25.0 million in 2002. These transactions had no impact on FCX’s consoli- dated financial statements. 

FCX owns 100 percent of FM Services Company. FM Services Company provides certain administrative, financial and other services on a cost-reimbursement basis to FCX and provides similar services to two other public companies under manage- ment services agreements with fixed fee terms plus reim- bursements for special projects and out-of-pocket expenses. The costs billed to FCX and PT Freeport Indonesia, which include related overhead, totaled $34.6 million in 2004, $33.4 

