Management’s Discussion and Analysis existing reserves. PT Freeport Indonesia receives 100 percent  of the cash flow from specified annual amounts of copper, gold  and silver through 2021, calculated by reference to its proven  and probable reserves as of December 31, 1994, and 60 percent  of all remaining cash flow. As noted above, the specified  annual amounts of copper, gold and silver attributable 100  percent to PT Freeport Indonesia are adjusted upon the occur- rence of certain events. As a result of the Grasberg slippage  and debris flow events, the 2004 specified amounts attribut- able 100 percent to PT Freeport Indonesia were reduced by 178  million pounds for copper and 280,000 ounces for gold. Pursuant  to an agreement with Rio Tinto, these reductions are expected  to be offset by increases in the specified amounts attribut- able 100 percent to PT Freeport Indonesia totaling 111 million  pounds for copper and 175,000 ounces for gold in 2005, and 67  million pounds for copper and 105,000 ounces for gold in 2021. Under our joint venture arrangements, Rio Tinto has a 40  percent interest in PT Freeport Indonesia’s Contract of Work  and in Eastern Minerals’ Contract of Work. Rio Tinto also has  the option to participate in 40 percent of any of our other  future exploration projects in Papua. Rio Tinto has elected to  participate in 40 percent of our interest and cost in the PT  Nabire Bakti exploration joint venture covering approximately  0.5 million acres contiguous to Block B and one of Eastern  Minerals’ blocks. In 2004, our sales volumes of copper and gold totaled 1.0  billion pounds of copper and 1.44 million ounces of gold.  Our 2004 copper and gold sales volumes were lower than  those reported for the last several years because of recovery  efforts from the fourth-quarter 2003 slippage and debris  flow events at the Grasberg open pit.  Following the October 9, 2003, slippage event and the  December 12, 2003, debris flow in a section of the Grasberg  open pit, PT Freeport Indonesia accelerated the removal of overburden and mined low grade ore prior to restoring safe  access to higher-grade ore areas and resuming normal  milling rates in June 2004. Average ore grades improved  in the second half of 2004 and are expected to be signifi- cantly higher for 2005, compared with 2004. Annual sales  are expected to approximate 1.5 billion pounds of copper  and 2.9 million ounces of gold in 2005, increases of 50  percent for copper and 100 percent for gold compared with  2004. Assuming average copper prices of $1.35 per pound  and average gold prices of $420 per ounce, consolidated  operating cash flows in 2005 are expected to exceed $1.1  billion. The impact on our annual cash flow for each $0.10  per pound change in copper prices would approximate $75  million, including the effects of price changes on royalty  costs and treatment charges, and for each $25 per ounce  change in gold prices would approximate $36 million.  2004 ANNUAL REPORT  | 21 The graph above presents London Metal Exchange (LME)  copper prices and reported stocks of copper at the LME and  New York Commodity Exchange (COMEX) through February 28,  2005. Copper markets have reflected strong demand from  China, which has become the world’s largest consumer of  copper, stronger U.S. industrial demand for copper and  limited incremental supplies from mine production. Global  demand for copper exceeded global production during 2003  and 2004, resulting in a significant decline in available  inventories, with LME and COMEX inventories declining to  levels of less than 100,000 metric tons, less than 10 percent of  the available stocks at the beginning of 2003. Copper prices  rose sharply beginning in mid-2003 and continued to increase  in 2004, with prices ranging from $1.06 per pound to a  multi-year high of $1.49 per pound in 2004. Copper prices  have remained strong in early 2005 and the LME spot price  closed at $1.54 per pound on February 28, 2005. As a result  of low inventory levels, expectations of continued strong  demand and limited supplies, the outlook for copper markets  in 2005 is positive. Market analysts expect copper demand  to exceed supply in the first half of 2005, with a possibility  of a balance between refined copper supply and demand in  the second half of the year. Future copper prices will be  determined by demand from China, economic performance  in the U.S. and other industrialized countries, the timing of  the development of new supplies of copper, production levels  of mines and copper smelters and other factors. We consider  the underlying supply and demand conditions in the global  copper markets to be positive for our company. Average annual sales volumes over the next five years  (2005 to 2009) are expected to approximate 1.36 billion  pounds of copper and 2.2 million ounces of gold. Based on  these estimates of average annual sales volumes over the  next five years and copper prices of approximately $1.35 per  pound and gold prices of approximately $420 per ounce, the  impact on our annual cash flow for each $0.10 per pound  change in copper prices would approximate $70 million,  including the effects of price changes on royalty costs and  treatment charges, and for each $25 per ounce change in  gold prices would approximate $28 million. Copper and Gold Markets Outlook * Excludes Shanghai stocks, producer, consumer and merchant stocks. Historical LME Copper Price Historical LME Copper Prices  Through February 28, 2005 1,000 800 600 400 200 LME Copper Price 000s Metric Tons Cents Per Pound 1,200 1,400 LME & COMEX Exchange Stocks* Cents per pound 000s of metric tons 40 60 80 100 120 140 160 05 04 03 02 01 00 99 98 97 96 95 94 93 92