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## Management’s Discussion and Analysis 

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a. Funding plus accrued interest are projected to accumulate to $100.0 million by the end of our Indonesian mining activities. 

b. Minimum payments under operating leases have not been reduced by aggregate minimum sublease rentals of $1.1 million due under noncancelable subleases. 

## Environmental Matters 

We believe that we conduct our Indonesian operations pursuant to applicable permits and that we comply in all material respects with applicable Indonesian environmental laws, rules and regulations. We have had three independent environmental audits conducted by internationally recognized environmental consulting and auditing firms. Audits were completed in 1996 by Dames & Moore, in 1999 by Montgomery Watson, and in 2002 by SGS International Certification Services Indonesia, a member of the Société Générale de Surveillance group. The 2002 audit found that the overall approach to practical management of environmental issues at PT Freeport Indonesia is considered to be very sound. There were no audit findings requiring corrective action. 

In connection with obtaining our environmental approvals from the Indonesian government, we committed to performing a one-time environmental risk assessment on the impacts of our tailings management plan. We completed this extensive environmental risk assessment with more than 90 scientific studies conducted over four years and submitted it to the Indonesian government in December 2002. We developed the risk assessment study with input from an independent review panel, which included representatives from the Indonesian government, academia and non-govern- mental organizations. The risks that we identified during this process were in line with our impact projections of the tailings management program contained in our environmental approval documents. 

We will determine our ultimate reclamation and closure activities based on applicable laws and regulations and our assessment of appropriate remedial activities in the circumstances after consultation with governmental authori- ties, affected local residents and other affected parties. As of December 31, 2004, we estimated aggregate reclamation and closure obligations to be approximately $149 million for PT Freeport Indonesia and $18 million for Atlantic Copper. Estimates of the ultimate reclamation and closure costs we will incur in the future involve complex issues requiring integrated assessments over a period of many years and are subject to revision over time, and actual costs may vary 

from our estimates. Some reclamation costs will be incurred during mining activities, while most closure costs and the remaining reclamation costs will be incurred at the end of the Grasberg open-pit mining operations and at the end of all mining activities, which are currently estimated to continue for more than 35 years. 

In 1996, we began contributing to a cash fund ($6.0 million balance at December 31, 2004) designed to accu- mulate at least $100 million by the end of our Indonesian mining activities. We plan to use this fund, including accrued interest, to pay mine closure and reclamation costs. Any costs in excess of the $100 million fund would be funded by operational cash flow or other sources. Future changes in regulations could require us to incur additional costs which would be charged against future operations. Estimates involving environmental matters are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology and inflation. 

The cost of complying with environmental laws is a funda- mental cost of our business. We incurred aggregate environ- mental capital expenditures and other environmental costs totaling $65.1 million in 2004, $72.1 million in 2003 and $62.6 million in 2002, including tailings management levee maintenance and mine reclamation. In 2005, we expect to incur approximately $21 million of aggregate environmental capital expenditures and $39 million of other environmental costs. These environmental expenditures are part of our overall 2005 operating budget. 

## DISCLOSURES ABOUT MARKET RISKS 

## Commodity Price Risk 

Our consolidated revenues include PT Freeport Indonesia’s sale of copper concentrates, which also contain significant quantities of gold and silver, and Atlantic Copper’s sale of copper anodes, cathodes, wire rod, wire and precious metals in slimes. Atlantic Copper sold its wire rod and wire assets in December 2004. Our consolidated revenues and net income vary significantly with fluctuations in the market prices 

