## Notes To Consolidated Financial Statements 

“Asset Impairment” accounting policy. The Grasberg mine is currently FCX’s only producing open-pit mine. 

PT Freeport Indonesia’s geologists and engineers reassess the overburden to ore ratio and the remaining life of its open-pit mine at least annually, and any changes in estimates are reflected prospectively beginning in the quarter of change. All other variables being equal, increases in the life of mine overburden removed to ore mined ratio would result in more of the overburden removal costs being matched with current period production and therefore charged to expense rather than deferred. Decreases in the life of mine overburden removed to ore mined ratio would result in more of the overburden removal costs being deferred and matched with production in future periods. 

PT Freeport Indonesia’s estimated ratio of mine over- burden removed to ore mined over the life of the mine in its deferred mining costs calculation averaged 2.3 to 1 in 2004, 2.0 to 1 in 2003 and 1.8 to 1 in 2002. The ratio changed in the fourth quarter of each of the last three years and the impact of the changes on each year’s results was to decrease net income by $2.8 million ($0.02 per share) in 2004, $1.5 million ($0.01 per share) in 2003 and $1.1 million ($0.01 per share) in 2002. If the changes in the ratio in the fourth quarter of 2004 (2.4 to 1) had been applied at the beginning of the year, the deferral of mining costs for 2004 would have been an estimated $11.0 million lower and net income would have been $5.6 million ($0.03 per share) lower. For 2005, the estimated average ratio of overburden to ore over the life of the mine in PT Freeport Indonesia’s deferred mining calculation is expected to be 2.4 to 1. 

The increases in the ratio over the last several years primarily relate to changes in the cutoff grade at the Grasberg open pit caused by a reassessment of the optimal milling rate at the mill facilities, including a greater proportional contribution to total ore processed from the underground Deep Ore Zone mine. 

Reclamation and Closure Costs.  Effective January 1, 2003, FCX adopted Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” which requires recording the fair value of an asset retirement obligation associated with tangible long-lived assets in the period incurred. Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which there is a legal obligation to settle under existing or enacted law, statute, written or oral contract or by legal construction. 

In 2002, FCX engaged an independent environmental consulting and auditing firm to assist in estimating PT Freeport Indonesia’s asset retirement obligations, and FCX worked with other consultants in estimating Atlantic Copper’s asset retirement obligations. FCX estimated these obligations using an expected cash flow approach, in which multiple 

cash flow scenarios were used to reflect a range of possible outcomes. As of January 1, 2003, FCX estimated these aggregate obligations to be approximately $120 million for PT Freeport Indonesia and $17 million for Atlantic Copper. To calculate the fair value of these obligations, FCX applied an estimated long-term inflation rate of 2.5 percent, except for Indonesian rupiah-denominated labor costs with respect to PT Freeport Indonesia’s obligations, for which an estimated inflation rate of 9.0 percent was applied. The projected cash flows were discounted at FCX’s estimated credit-adjusted, risk-free interest rates which ranged from 9.4 percent to 12.6 percent for the corresponding time periods over which these costs would be incurred. After discounting the projected cash flows, a market risk premium of 10 percent was applied to the total to reflect what a third party might require to assume these asset retirement obligations. The market risk premium was based on market-based estimates of rates that a third party would have to pay to insure its exposure to possible future increases in the value of these obligations. 

At January 1, 2003, FCX estimated the fair value of its total asset retirement obligations to be $28.5 million. FCX recorded the fair value of these obligations and the related additional assets as of January 1, 2003. The net difference between FCX’s previously recorded reclamation and closure cost liability and the amounts estimated under SFAS No. 143, after taxes and minority interest, resulted in a gain of $9.1 million (after reduction by $8.5 million for taxes and minority interest sharing), $0.06 per share on a diluted basis, which was recognized as a cumulative effect adjust- ment for a change in accounting principle. As a result of adopting SFAS No. 143, FCX expects future depreciation and amortization expense to be lower and production costs to be higher, with no significant net impact on net income during the near term. Excluding the cumulative effect adjustment, the net effect of adopting SFAS No. 143 was to increase net income by approximately $1 million, $0.01 per share, in 2003. 

Prior to adoption of SFAS No. 143, estimated future recla- mation and mine closure costs for PT Freeport Indonesia’s current mining operations in Indonesia were accrued and charged to income over the estimated life of the mine by the unit-of-production method based on estimated recover- able proven and probable copper reserves. Estimated future closure costs for Atlantic Copper’s operations were not considered material and no accruals were made. See Note 10 for further discussion about FCX’s asset retirement obliga- tions as of December 31, 2004 and 2003. 

Income Taxes. FCX accounts for income taxes pursuant to SFAS No. 109, “Accounting for Income Taxes.” Deferred income taxes are provided to reflect the future tax conse- quences of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements (see Note 8). 

