Management’s Discussion and Analysis year, the ultimate configuration of the pit and the level  of ore contributed by our underground mines. All other  variables being equal, increases in the life of mine over- burden 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. “Accounting for Asset Retirement Obligations” (see Note 1  of “Notes to Consolidated Financial Statements”). SFAS No.  143 requires that we record the fair value of our estimated  asset retirement obligations in the period incurred, with the  cumulative effect of adopting SFAS No. 143 as of January 1,  2003, for all existing asset retirement obligations, asset  retirement costs and related accumulated depreciation  required to be reflected in earnings as a separate line  item. The accounting estimates related to reclamation and  closure costs are critical accounting estimates because (1) we  will not incur most of these costs for a number of years,  requiring us to make estimates over a long period; (2)  reclamation and closure laws and regulations could change  in the future or circumstances affecting our operations  could change, either of which could result in significant  changes to our current plans; (3) calculating the fair value  of our asset retirement obligations in accordance with SFAS  No. 143 requires management to assign probabilities to  projected cash flows, to make long-term assumptions about  inflation rates, to determine our credit-adjusted, risk- free interest rates and to determine market risk premiums  that are appropriate for our operations; and (4) given  the magnitude of our estimated reclamation and closure  costs, changes in any or all of these estimates could have  a material impact on net income. In the fourth quarter of 2004, PT Freeport Indonesia  changed its life-of-mine overburden-to-ore ratio to 2.4 to  1 based on a recently completed annual assessment. PT  Freeport Indonesia’s estimated life-of-mine overburden- to-ore ratio averaged 2.3 to 1 in 2004, 2.0 to 1 in 2003  and 1.8 to 1 in 2002. PT Freeport Indonesia’s geologists  and engineers reassess the overburden-to-ore ratio and  the remaining life of the Grasberg open-pit mine at least  annually, and we reflect any changes in our estimates  prospectively beginning in the quarter of change. We  expect the estimated life-of-mine overburden-to-ore ratio  to average 2.4 to 1 for 2005. The increases in the ratio  over the last several years primarily relate to changes in  the cutoff grade at the open pit caused by a reassessment  of the optimal milling rate at our mill facilities including  a greater proportional contribution to our total ore  processed from our underground Deep Ore Zone mine. If the life-of-mine overburden-to-ore ratio was 2.4 to  1, as in the fourth quarter of 2004, instead of the 2.2 to  1 ratio used through September 30, 2004, we estimate our  deferral of mining costs for 2004 would have been $11.0  million lower and net income would have been $5.6 million  ($0.03 per share) lower.  In 2002, we engaged an independent environmental  consulting and auditing firm to assist in estimating PT  Freeport Indonesia’s aggregate asset retirement obliga- tions, and worked with other consultants in estimating  Atlantic Copper’s asset retirement obligations. We  estimated these obligations using an expected cash flow  approach, in which multiple cash flow scenarios were used  to reflect a range of possible outcomes. We 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 obliga- tions, we 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 obliga- tions, for which an estimated inflation rate of 9.0 percent  was applied. The projected cash flows were discounted  at our 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. The inflation rates and discount rates we used  to calculate the fair value of PT Freeport Indonesia’s asset  retirement obligation are critical factors in the calcula- tion of future value and discounted present value costs. An  increase of one percent in the inflation rates used results  in an approximate 17 percent increase in the discounted  Effective January 1, 2003, we adopted Statement  of Financial Accounting Standards (SFAS) No. 143,  • Reclamation and Closure Costs –  Our mining opera- tions involve activities that have a significant effect on  the surrounding area. Our reclamation and closure costs  primarily involve treatment of acidic water (also known  as acid rock drainage) created by overburden, reclama- tion and revegetation of a large area in the lowlands of  Papua where mill tailings are deposited, reclamation of  overburden stockpiles and decommissioning of operating  assets. Through December 31, 2002, we had accrued $29.2  million for estimated closure and reclamation costs on a  unit-of-production basis over our total estimated proven  and probable recoverable copper reserves. For a discus- sion of the assumptions that we make to estimate proven  and probable recoverable reserves, see “Depreciation and  Amortization” above. 24 |  FREEPORT-McMoRan COPPER & GOLD INC.