Freeport hits lowered profit target (October 16, 2001)

Vancouver – Amidst the bombing of Afghanistan and calls for a “holy war” against America, it must be a little unsettling for a U.S.-based mining company to have its main operation is the world’s largest Muslim country. However, Freeport-McMoRan Copper & Gold (FCX-N) states that its mighty Grasberg copper-gold mine in Indonesia is operating “exceptionally well” despite world political tensions and low copper prices.

The New Orleans-based company managed to hit its lowered profit forecast of US$4.2 million, or US3 per share in the latest quarter, compared to a loss of US$9.2 million, or US6 per share in the corresponding period of 2000.

Revenues for the three-month period tallied US$441.2 million, down from US$473.8 million recorded in the third quarter of 2000. Driving the profit gain were record gold recoveries and mill throughput at Grasberg, resulting in a 62% jump in sales to 673,800 oz, from 422,700 oz posted in the third quarter of 2000. The miner realized a slightly higher gold price for the quarter, coming in at US$277.08 per oz.

“Today’s world political situation has not affected our operations,” says the company’s CEO James Moffett, noting that the Grasberg milling complex set new records for ore throughput and gold recoveries, averaging over 244,000 metric tons per day for the quarter with gold recoveries of almost 90%.

Offsetting a good gold showing, copper sales fell 10% to 350.6 million lb., as the price of copper dropped 25% to US65 per lb. during the third quarter ended Sept. 30.

Situated in Indonesia’s easternmost province of Irian Jaya, Grasberg continues to rank as the lowest-cost copper producer in the world. Net cash production costs came in at US5 per lb., a significant improvement over the already envied US33 per lb. recorded in 2000.

Operating cash flow hit an impressive US$184 million in the latest quarter, allowing the company to repay some US$95 million of debt. In the first nine months of the year, Freeport recorded a profit of US$78.6 million, or 54 per share compared to a loss of US$18.6 million or 12 per share in the corresponding period of 2000. As of Sept. 30, the miner had reduced debt by US$272 million.

“We look forward to continuing our strong operating performance which has enabled us to achieve industry-leading cost performance and to generate significant positive cash flows despite near-record-low copper prices,” says Moffett.

The quarterly profit picture was also affected by a US3-per-share non-cash charge due to the strengthening of the euro impacting the long-term pension liability of the company’s wholly-owned Spanish smelting unit, Atlantic Copper.

Lower copper grades and recoveries at Grasberg are projected to hit its production figures in the fourth quarter. Gold sales are expected to come in at 440,000 oz. and copper sales at 330 million lbs.

For the year, a total of 1.4 billion lbs. copper and 2.6 million oz. gold are slated to be sold from the gigantic operation.

Freeport also improved relations with the indigenous community during the latest quarter by establishing a trust for the benefit of the original tribal people around the mine site. Through its local mining affiliate PT Freeport Indonesia (PT-FI), the company will start the trust with US$2.5 million and then add US$500,000 to it every year. The agreement was first outlined in 1996, and fulfills the commitment by Freeport to recognize traditional land rights in the mining area.

“This agreement and the memorandum of understanding are the result of several years of dialogue between PT-FI and the local community, as we continue to work together in a spirit of mutual respect and understanding,” says Moffet.

The fund benefits tribal groups in villages closest to the mining operations including the Amungme villages of Waa-Banti, Tsinga and Arwanop, the Kamoro villages of Nayaro, Nawaripi and Tipuka.

“We used to be on the outside, but now we stand together,” says the chairman of one of the local groups, Thom Beanal. “We have a stake in this mining operation and we will work hard so that we can share in its success.”

This marks the latest agreement between Freeport and the local communities. The company already spends US$20 million in yearly development through the Freeport Fund for Irian Jaya Development and existing land-use recognition programs.