Slippage causes deaths at Grasberg

Vancouver — A slippage accident at the Grasberg copper-gold mine in Indonesia has caused the deaths of eight workers.

In the second fatal accident at the mine in three years, two workers were killed, five were injured, and six are missing and presumed dead following a landslide in a small section of the massive open pit.

The slippage is different from the one that occurred in 2000, when overburden was washed by unusually heavy rains into Lake Wanagon, sending a wave of rocks, sludge and water cascading into the valley below. Four construction workers died in the accident, prompting Indonesian officials to press Freeport to cut production.

The latest incident saw 2.5 million tonnes of rock and debris fall from the high wall into the huge open pit, burying trucks and mining equipment along with the workers.

“It was more like a mudslide than a rock avalanche,” says Richard Adkerson, president of Freeport-McMoRan Copper & Gold (FCX-N), which owns the mine. “Material high up in the pit became fluid with water saturation, and the design systems did not contain it.”

In the aftermath, Freeport has revised its fourth-quarter sales estimates to 200 million lbs. copper and 250,000 oz. gold, a reduction of close to 10%. A small portion of the operation will be closed for at least two weeks, while clean-up activities try to restore access to the affected areas of the pit.

The causes of the accident are being investigated, though Chairman James Moffet insists: “Our rate of production had nothing to do with this. The pit is monitored and we had not had a slide since 1988.”

The New Orleans-based company earned US$55.9 million (or US33 per share) in the third quarter, compared with US$61.5 million (US39 per share) in the corresponding period of 2002. Driving the shortfall was US$37.6 million (US19 per share) in one-time charges.

Revenue between the two periods rose to US$668.8 million from US$538.7 million, while sales totalled 345 million lbs. copper (25 million lbs. higher than projected) and 763,500 oz. gold (120,000 oz. higher). Unit cash production costs at Grasberg, net of gold and silver credits, hit an enviable net credit of US16 per lb.

The operation saw copper grades average 1.08%, compared with 1.31% in the third quarter of 2002, and copper recovery rates between the two periods fell to 90% from 90.8%. However, Freeport realized a 21% increase in copper prices to US81 from US67 per lb.

Gold production was lower than a year earlier, owing to lower grades and recoveries. The average grade was 1.79 grams per tonne, compared with 1.85 grams a year earlier, while gold recovery rates declined to 88.5% from 90.1%. Freeport realized a gold price of US$367.72 per oz., before hedging — a 17% improvement over the year-ago period.

Operating cash flow for the first nine months of 2003 amounted to US$504.8 million, and the year-end tally is expected to reach US$575 million.

Freeport intends to continue reducing its debt, and to more than double the annual dividend to US80 from US36 per common share.

At Sept. 30, Freeport had US$528.6 million in cash and a total debt load of US$2.29 billion.

The Grasberg deposit, which Freeport discovered in 1988, has the world’s largest gold reserves and the third-largest copper reserves. For all of 2003, the mine is expected to produce 1.33 billion lbs. copper, or 70 million lbs. lower than estimated. Gold production is now projected at 2.45 million oz., or 150,000 oz. less than forecast.

London-based Rio Tinto (RTP-N) has a 40% interest in future production from Grasberg’s reserves above those reported at the end of 1994. Rio Tinto also holds a 16.5% direct stake in Freeport, which in turn owns 91% of PT Freeport Indonesia, the company that runs Grasberg. The mine accounted for 20% of Rio’s net earnings before adjustments: some US$132 million in 2002.

“We have fifty million payable ounces of gold and forty billion pounds of copper in proven and probable reserves,” says Adkerson. “Our operation is now fully developed for the remaining ten years of the Grasberg pit.”