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). 56 |  FREEPORT-McMoRan COPPER & GOLD INC.