Management’s Discussion and Analysis Unit site production and delivery costs in 2004 averaged  $0.77 per pound of copper, $0.29 per pound higher than  the $0.48 reported in 2003. Unit production and delivery  costs are net of deferred mining costs of $0.08 per pound  ($77.8 million) for 2004 and $0.05 per pound ($64.4 million)  for 2003. The increase in deferred mining costs included the  effects of PT Freeport Indonesia’s accelerated overburden  removal efforts during 2004. In the fourth quarter of 2004, PT  Freeport Indonesia changed its life-of-mine overburden-to-ore  ratio to 2.4 to 1 from 2.2 to 1, and in the fourth quarter of  2003 the ratio changed to 2.1 to 1 from 1.9 to 1, as discussed  above. The fourth-quarter 2004 change increased 2004 costs  by $5.5 million or 0.6 cents per pound. As of December 31,  2004, deferred mining costs totaled $220.4 million compared  with $142.6 million at December 31, 2003. See “Critical  Accounting Estimates” for a discussion of changes in the  estimated life-of-mine overburden-to-ore ratio.  Gold and silver credits were $0.62 per pound for 2004,  compared with $0.70 for 2003. The decrease primarily  reflects the reduced production and sales of gold during  2004, partly offset by the improved gold realizations. Unit treatment charges vary with the price of copper,  and royalty rates vary with prices of copper and gold. In  addition, treatment charges vary based on PT Freeport  Indonesia’s customer mix. Royalties of $0.04 per pound were  $0.02 per pound above the year-ago period primarily because  of higher copper and gold prices. The copper royalty rate  payable by PT Freeport Indonesia under its Contract of Work  varies from 1.5 percent of copper net revenue at a copper  price of $0.90 or less per pound to 3.5 percent at a copper  price of $1.10 or more per pound. The Contract of Work royalty  rate for gold and silver sales is 1.0 percent. In connection  with our fourth concentrator mill expansion completed in  1998, PT Freeport Indonesia agreed to pay the Government  of Indonesia additional royalties (royalties not required by  the Contract of Work) to provide further support to the local  governments and the people of the Indonesian province  of Papua. The additional royalties are paid on metal from  production from PT Freeport Indonesia’s milling facilities  above 200,000 metric tons of ore per day. The additional  royalty for copper equals the Contract of Work royalty rate,  and for gold and silver equals twice the Contract of Work  royalty rates. Therefore, PT Freeport Indonesia’s royalty  rate on copper net revenues from production above 200,000  metric tons of ore per day is double the Contract of Work  royalty rate, and the royalty rates on gold and silver sales  from production above 200,000 metric tons of ore per day  are triple the Contract of Work royalty rates. As a result of  higher projected copper and gold sales volumes, we expect  our 2005 royalty costs to increase compared with 2004  royalty costs of $43.5 million. If copper prices average $1.35  per pound and gold prices average $420 per ounce in 2005,  we would expect royalty costs to total approximately $90  million ($0.06 per pound) for 2005. These estimates assume  2005 sales volumes of 1.5 billion pounds of copper and 2.9  million ounces of gold. Assuming 2005 average prices of $1.35 per pound for  copper and $420 per ounce for gold, and copper and gold  sales of 1.5 billion pounds and 2.9 million ounces for 2005,  PT Freeport Indonesia estimates that its gold credits would  essentially offset its cash production costs, resulting in net  cash production costs of approximately zero cents per  pound for the year 2005. Estimated unit cash costs reflect  recent increases in energy costs, a stronger Australian dollar currency and other factors. Net unit cash production costs  for 2005 would change by approximately $0.05 per pound  for each $25 per ounce change in the average price of gold.  Forecasted unit costs are calculated on the same basis as the  historical unit costs, which are discussed above and recon- ciled in “Product Revenues and Production Costs.” As a result of the lower copper production and sales in  2004, PT Freeport Indonesia’s depreciation rate per pound  of copper increased to $0.17 for 2004 compared with $0.15  for 2003. For 2005, PT Freeport Indonesia expects its depre- cation rate to decrease to approximately $0.14 per pound,  primarily because of higher projected copper production and  sales. Because certain assets are depreciated on a straight- line basis, the rate per pound will vary with the level of  copper production and sales. PT Freeport Indonesia’s revenues increased by $225.6 million  in 2003 from 2002. Both copper and gold price realizations  improved during 2003 with copper approximately 15 percent  higher at $0.82 per pound and gold approximately 18 percent  higher at $366.60 per ounce. Gold revenues include a $22.1  million ($8.99 per ounce) hedging gain from redemption of  our Gold-Denominated Preferred Stock. Copper sales volumes  declined 15 percent to 1.3 billion pounds in 2003 from 1.5  billion pounds in 2002 because of lower copper ore grades  and reduced mill throughput resulting from the fourth-quarter  slippage and debris flow events. Gold sales volumes increased  8 percent to 2.5 million ounces in 2003 from 2.3 million  ounces in 2002 because of higher gold ore grades partly  offset by lower mill throughput. Treatment charges were $46.6  million lower in 2003 compared with 2002 because of lower  copper sales volumes and market treatment rates. Royalties  were higher at $26.5 million for 2003 compared with $24.5  million for 2002 primarily reflecting higher metals prices. Mill throughput from production from PT Freeport Indonesia’s  producing mines averaged 203,000 metric tons of ore per day  in 2003 and 235,600 metric tons of ore per day in 2002. The  lower mill throughput rate during 2003 primarily reflects the  PT Freeport Indonesia Operating Results – 2003 Compared with 2002 30 |  FREEPORT-McMoRan COPPER & GOLD INC.