FREEPORT MCMORAN COPPER & GOLD INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended March 31, 2003



Commission File Number: 1-9916



Freeport-McMoRan Copper & Gold Inc.



Incorporated in Delaware	74-2480931
	(IRS Employer Identification No.)


1615 Poydras Street, New Orleans, Louisiana 70112


Registrant's telephone number, including area code: (504) 582-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No __

On March 31, 2003, there were issued and outstanding 145,391,374 shares of its Class B Common Stock, par value $0.10 per share.

FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS


	Page
Part I. Financial Information

Financial Statements:

Condensed Balance Sheets	3

Statements of Operations	4

Statements of Cash Flows	5

Notes to Financial Statements	6

Remarks	10

Report of Independent Auditors	11

Management's Discussion and Analysis of Financial Condition
and Results of Operations	12

Quantitative and Qualitative Disclosures about Market Risks	25

Controls and Procedures	25

Part II. Other Information	25

Signature	2 6

Certifications	27

Exhibit Index	E-1

FREEPORT-McMoRan COPPER & GOLD INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

FREEPORT-McMoRan COPPER & GOLD INC.

CONDENSED BALANCE SHEETS (Unaudited)

	March 31,		December 31,
	2003		2002
	(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	762,699	$	7,836
Restricted investments and cash		60,808		49,809
Accounts receivable		211,340		190,509
Inventories		384,749		387,247
Prepaid expenses and other		9,777		2,579
Total current assets		1,429,373		637,980
Property, plant, equipment and development costs, net		3,292,133		3,320,561
Deferred mining costs		85,480		78,235
Restricted investments and cash		23,006		58,137
Investment in PT Smelting		47,393		44,619
Other assets		91,632		52,661
Total assets	$	4,969,017	$	4,192,193

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	233,041	$	262,310
Current portion of long-term debt and short-term borrowings		122,719		77,112
Rio Tinto share of joint venture cash flows		52,253		51,297
Accrued income taxes		47,522		81,319
Accrued interest payable		37,929		29,081
Unearned customer receipts		25,131		36,754
Total current liabilities		518,595		537,873
Long-term debt, less current portion:
Convertible senior notes		1,178,750		603,750
Senior notes		950,000		450,000
Infrastructure asset financings		289,452		310,674
Atlantic Copper debt		164,211		233,642
Equipment and other loans		82,977		84,212
FCX and PT Freeport Indonesia credit facilities		-		279,000
Total long-term debt, less current portion		2,665,390		1,961,278
Accrued postretirement benefits and other liabilities		141,122		140,016
Deferred income taxes		731,769		706,510
Minority interests		141,283		129,687
Redeemable preferred stock		450,003		450,003
Stockholders' equity		320,855		266,826
Total liabilities and stockholders' equity	$	4,969,017	$	4,192,193

The accompanying notes are an integral part of these financial statements.

FREEPORT-McMoRan COPPER & GOLD INC.

STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended March 31,
	2003			2002
	(In Thousands, Except Per Share Amounts)
Revenues	$	524,596		$	392,680
Cost of sales:
Production and delivery		247,470			234,917
Depreciation and amortization		67,788			53,054
Total cost of sales		315,258			287,971
Exploration expenses		1,504			754
General and administrative expenses		16,508			16,412
Total costs and expenses		333,270			305,137
Operating income		191,326			87,543
Equity in PT Smelting earnings (losses)		677			(822	)
Interest expense, net		(52,509	)		(44,282	)
Other income (expense), net		(1,619	)		36
Income before income taxes and minority interests		137,875			42,475
Provision for income taxes		(77,214	)		(28,814	)
Minority interests in net income of consolidated subsidiaries		(10,911	)		(5,554	)
Net income before cumulative effect of change s in accounting principle		49,750			8,107
Cumulative effect of change s in accounting principle, net of taxes		9,082			(3,049	)
Net income		58,832			5,058
Preferred dividends		(9,587	)		(9,212	)
Net income (loss) applicable to common stock	$	49,245		$	(4,154	)

Net income (loss) per share of common stock:
Basic:
Before cumulative effect		$.28			$(.01	)
Cumulative effect		.06			(.02	)
Net income (loss) per share of common stock		$.34			$(.03	)
Diluted:
Before cumulative effect		$.28			$(.01	)
Cumulative effect		.05			(.02	)
Net income (loss) per share of common stock		$.33			$(.03	)
Average common shares outstanding:
Basic		145,240			144,108
Diluted		189,484			144,108

The accompanying notes are an integral part of these financial statements.

FREEPORT-McMoRan COPPER & GOLD INC.

STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended March 31,
	2003			2002
	(In Thousands)
Cash flow from operating activities:
Net income	$	58,832		$	5,058
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		67,788			53,054
Cumulative effect of change s in accounting principle, net of taxes		(9,082	)		3,049
Deferred income taxes		17,892			12,702
Equity in PT Smelting losses (earnings)		(677	)		822
Minority interests' share of net income		10,911			5,554
Change in deferred mining costs		(7,245	)		(4,708	)
Amortization of deferred financing costs		4,031			2,989
Currency translation loss (gain)		2,521			(568	)
Recognition of profit on PT-Freeport Indonesia sales to PT Smelting		(2,097	)		(630	)
Provision for inventory obsolescence		1,500			1,500
Other		2,223			2,637
(Increases) decreases in working capital:
Accounts receivable		(18,101	)		(24,494	)
Inventories		(7,035	)		15,589
Prepaid expenses and other		(6,244	)		(2,275	)
Accounts payable and accrued liabilities		(32,913	)		(30,534	)
Rio Tinto share of joint venture cash flows		651			(9,332	)
Accrued income taxes		(33,797	)		(9,666	)
Increase in working capital		(97,439	)		(60,712	)
Net cash provided by operating activities		49,158			20,747

Cash flow from investing activities:
PT Freeport Indonesia capital expenditures		(28,948	)		(31,001	)
Atlantic Copper capital expenditures		(1,134	)		(833	)
Sale of restricted investments to fund interest costs		23,645			23,678
Sale of assets and other		1,931			(729	)
Net cash used in investing activities		(4,506	)		(8,885	)

Cash flow from financing activities:
Net proceeds from sale of senior notes		1,046,437			-
Proceeds from other debt		11,510			358,746
Repayments of debt		(336,933	)		(361,622	)
Cash dividends paid on preferred stock		(9,595	)		(9,081	)
Proceeds from exercised stock options		2,033			2,371
Financing costs		(3,241	)		(492	)
Net cash provided by (used in) financing activities		710,211			(10,078	)
Net increase in cash and cash equivalents		754,863			1,784
Cash and cash equivalents at beginning of year		7,836			7,587
Cash and cash equivalents at end of period	$	762,699		$	9,371

The accompanying notes are an integral part of these financial statements.

FREEPORT-McMoRan COPPER & GOLD INC.

NOTES TO FINANCIAL STATEMENTS

EARNINGS PER SHARE

Freeport-McMoRan Copper & Gold Inc.’s (FCX) basic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. The following is a reconciliation of net income and weighted average common shares outstanding for purposes of calculating diluted net income per share (in thousands, except per share amounts):

	Three months ended March 31,
	2003			2002
Net income before preferred dividends and cumulative effect of change s in accounting principle	$	49,750		$	8,107
Preferred dividends		(9,587	)		(9,212	)
Net income (loss) before cumulative effect		40,163			(1,105	)
Cumulative effect of change s in accounting principle		9 ,082			(3,049	)
Net income (loss) applicable to common stock		49,245			(4,154	)
Plus income impact of assumed conversion of 8 ¼% Convertible Senior Notes, after taxes		12,652			-
Diluted net income (loss) applicable to common stock	$	61,897		$	(4,154	)

Weighted average common shares outstanding		145,240			144,108
Add: Shares issuable upon conversion of 8 ¼% Convertible Senior Notes		42,220			-
Dilutive stock options		1,807			-
Restricted stock		217			-
Weighted average common shares outstanding for purposes of calculating diluted net income (loss) per share		189,484			144,108

Diluted net income (loss) per share of common stock:
Before cumulative effect	$	0.28		$	(0.01	)
Cumulative effect		0.05			(0.02	)
Net income (loss) per share of common stock	$	0.33		$	(0.03	)

Outstanding stock options with exercise prices greater than the average market price of the common stock during the period are excluded from the computation of diluted net income per share of common stock. In addition, certain of our convertible preferred stock and convertible senior notes are excluded for certain periods because including the conversion of these instruments would have increased reported diluted net income per share or decreased reported diluted net loss per share. A recap of the excluded amounts follows (in thousands, except exercise prices):

	Three months ended March 31,
	2003		2002
Weighted average outstanding options	7,706		10,090
Weighted average exercise price	$23.02		$22.20

Dividends on convertible preferred stock	$6,125		$6,125
Weighted average shares issuable upon conversion	11,690		11,690

Interest on 8 ¼% Convertible Senior Notes, net of taxes	-	^a	$12,729
Weighted average shares issuable upon conversion	-	^a	42,220

Interest on 7% Convertible Senior Notes, net of taxes	$5,806	^b	-	^b
Weighted average shares issuable upon conversion	10,14 0	^b	-	^b

Included in diluted calculation.

FCX’s 7% Convertible Senior Notes were issued on February 11, 2003, and are convertible into 18.6 million shares of common stock (see Note 4).

Stock options representing 1.4 million shares and unvested restricted stock representing 0.3 million shares in the first quarter of 2002, that otherwise would have been included in the first-quarter 2002 earnings per share calculation, were also excluded because of the net loss reported for the period.

Stock-Based Compensation Plans. As of March 31, 2003, FCX has three stock-based employee compensation plans and one stock-based director compensation plan, which are more fully described in Note 7 of FCX’s 2002 Annual Report on Form 10-K. FCX accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, which require compensation cost for stock-based employee compensation 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. The following table illustrates the effect on net income and earnings per share if FCX had applied the fair value recognition provisions of Statement of Financial Accounting Standards (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 (in thousands, except per share amounts):

	Three Months Ended March 31,
	2003			2002
Net income (loss) applicable to common stock, as reported	$	49,245		$	(4,154	)
Add: Stock-based employee compensation expense included in reported net income for stock option conversions and stock appreciation rights, net of taxes and minority interests		623			231
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of taxes and minority interests		(1,967	)		(2,048	)
Pro forma net income (loss) applicable to common stock	$	47,901		$	(5,971	)

Earnings (loss) per share:
Basic – as reported	$	0.34		$	(0.03	)
Basic – pro forma	$	0.33		$	(0.04	)

Diluted – as reported	$	0.33		$	(0.03	)
Diluted – pro forma	$	0.32		$	(0.04	)

For the pro forma computations, the values of option grants were calculated on the dates of grant using the Black-Scholes option-pricing model. The weighted average fair value for stock option grants was $10.04 per option in the first quarter of 2003 and $7.88 per option for the first quarter of 2002. The weighted average assumptions used include a risk-free interest rate of 3.7 percent in the first quarter of 2003 and 5.0 percent in 2002; expected volatility of 47 percent in the first quarter of 2003 and 2002; no annual dividends; and expected lives of 7 years. No other discounts or restrictions related to vesting or the likelihood of vesting of stock options were applied.

CUMULATIVE EFFECT OF CHANGE S IN ACCOUNTING PRINCIPLE

Effective January 1, 2003, FCX adopted 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 engaged other consultants to assist in estimating Atlantic Copper’s and PT Smelting’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. FCX estimated these aggregate undiscounted obligations to be approximately $120 million for PT Freeport Indonesia, $17 million for Atlantic Copper and $11 million for PT Smelting. 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 and PT Smelting’s obligations , for which an estimated inflation rate of 9 percent was applied . T he 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 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 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), $0.05 per share on a diluted basis, which was recognized as a cumulative effect adjustment for a change in accounting principle. As a result of adopting SFAS 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.

Prior to adoption of SFAS No. 143, estimated future reclamation 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 recoverable proven and probable copper reserves. Estimated future closure costs for Atlantic Copper’s and PT Smelting’s operations were not considered material and no accruals were made.

The effect of adopting SFAS No. 143 in the first quarter of 2003 was to increase net income by approximately $0.2 million, less than $0.01 per share. Presented below are FCX’s reported results and pro forma amounts that would have been reported in FCX’s S tatements of O perations had those S tatements been adjusted for the retroactive application of this change in accounting principle (in thousands, except per share amounts):