On February 11, 2003, FCX sold $575 million of 7% Convertible Senior Notes due 2011 for net proceeds of approximately $559 million.  Interest on the notes is payable semiannually on March 1 and September 1 of each year, beginning September 1, 2003.  The notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of FCX’s common stock at a conversion price of $30.87 per share, which is equal to a conversion rate of approximately 32.39 shares of common stock per $1,000 principal amount of notes.  The notes are unsecured.  

FCX used a portion of the net proceeds from the offerings to repay all its outstanding bank debt, which totaled $279.0 million at December 31, 2002.  In March 2003, FCX and PT Freeport Indonesia terminated their lending commitments and established an interim credit facility totaling $150 million with JP Morgan.  In October 2003, FCX and PT Freeport Indonesia entered into an amended $165 million revolving credit facility, which may be increased up to $350 million with additional lender commitments.  The facility matures in September 2006.  The credit facility allows common stock dividends, common stock purchases and investments as long as availability under the facility plus available cash exceeds $200 million or otherwise as long as certain other thresholds are exceeded.  The facility also sets limitations on liens and limitations on transactions with affiliates, and requires that certain financial ratios be maintained.  Security for obligations outstanding under the credit facility includes over 80 percent of PT Freeport Indonesia’s assets, 50.1 percent of the outstanding stock of PT Freeport Indonesia, the outstanding stock of PT Indocopper Investama owned by FCX, and a pledge of PT Freeport Indonesia’s rights under its Contract of Work.  PT Freeport Indonesia and FCX guarantee each others’ obligations under the credit facility.  No amounts are currently outstanding under the facility.  FCX and PT Freeport Indonesia recorded charges to other expenses totaling $5.6 million, $3.7 million to net income, in the third quarter of 2003 to accelerate amortization of deferred financing costs related to the prior credit facility.

In April 2003, FCX concluded tender offers for its 7.20% Senior Notes due 2026 and its 7.50% Senior Notes due 2006.  Of the total $450 million outstanding at March 31, 2003, notes with a face amount of $234.0 million were tendered for $239.0 million cash.  FCX recorded a charge to other expenses of $6.6 million ($4.8 million to net income) in the second quarter of 2003 associated with these early extinguishments of debt.  In July 2003, FCX purchased an additional $76.0 million face amount of its 7.20% Senior Notes for $77.2 million, and  recorded a charge to losses on extinguishment of debt of $1.3 million ($0.9 million to net income) in the third quarter of 2003.  At September 30, 2003, FCX had outstanding $73.5 million of its 7.20% Senior Notes and $66.5 million of its 7.50% Senior Notes.

In August 2003, FCX privately negotiated the early conversion of approximately 51 percent of its 8 ¼% Convertible Senior Notes, which resulted in a $311.1 million reduction in debt.  The holders converted their notes into 21.76 million shares of FCX common stock in accordance with the terms of the notes and received $23.0 million in cash from restricted cash held in escrow for payment of future interest on these notes.  FCX recorded charges totaling $24.7 million ($24.2 million to net income) related to the conversion of its 8 ¼% convertible senior notes.  At September 30, 2003, $292.6 million of the 8 ¼% Convertible Senior Notes remain outstanding and are callable beginning in August 2004.

5.   ACQUISITION OF PT PUNCAKJAYA POWER

In July 2003, FCX acquired the 85.7 percent ownership interest in PT Puncakjaya Power (PJP) owned by affiliates of Duke Energy Corporation for $78 million cash.  PJP is the owner of assets supplying power to PT Freeport Indonesia’s operations, including the 3x65 megawatt coal-fired power facilities, diesel generating capacity and other project assets.  PT Freeport Indonesia purchases power from PJP under infrastructure asset financing arrangements.  At September 30, 2003, PT Freeport Indonesia had infrastructure asset financing obligations to PJP totaling $304.3 million.  As a result of this transaction, FCX is now consolidating PJP and FCX’s consolidated balance sheet will no longer reflect PT Freeport Indonesia’s obligation to PJP, but instead will reflect the $247.2 million of PJP bank debt at September 30, 2003.

6.   INTEREST COST

Interest expense excludes capitalized interest of $0.7 million in the third quarter of 2003, $4.0 million in the third quarter of 2002, $2.1 million in the first nine months of 2003 and $10.6 million in the first nine months of 2002.

7.   COMPREHENSIVE INCOME

A summary of FCX’s comprehensive income is shown below (in thousands).

8.   RATIO OF EARNINGS TO FIXED CHARGES

The ratio of earnings to fixed charges for the first nine months of 2003 and 2002 was 4.3 to 1 and 2.9 to 1, respectively.  For this calculation, earnings consist of income from continuing operations before income taxes, minority interests and fixed charges.  Fixed charges include interest and that portion of rent deemed representative of interest.

9.   FINANCIAL ACCOUNTING STANDARDS BOARD INTERPRETATION NO. 46

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51,” which addresses consolidation of variable interest entities.  In October 2003, the FASB deferred the required implementation date of this interpretation to the fourth quarter of 2003 for variable interest entities acquired before February 1, 2003.  FCX is analyzing this interpretation to ascertain whether, and to what extent, it may apply to its consolidated financial statements.

10.   OTHER MATTERS

In May 2003, PT Freeport Indonesia received a U.S. federal grand jury subpoena for the production of documents in connection with an anti-trust investigation of the copper concentrate industry.  PT Freeport Indonesia has not been identified as a target and is cooperating fully with the investigation.

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Remarks

The information furnished herein should be read in conjunction with FCX's financial statements contained in its 2002 Annual Report on Form 10-K.  The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods. All such adjustments are, in the opinion of management, of a normal recurring nature.  

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To The Board of Directors and Stockholders of

Freeport-McMoRan Copper & Gold Inc.:

We have reviewed the accompanying condensed balance sheet of Freeport-McMoRan Copper & Gold Inc. (a Delaware Corporation) and subsidiaries as of September 30, 2003, the related statements of income for the three-month and nine-month periods ended September 30, 2003 and 2002, and the statements of cash flows for the nine months ended September 30, 2003 and 2002.  These financial statements are the responsibility of the Company’s management.  

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants.  A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements as of September 30, 2003 and 2002, and for the three-month and nine-month periods then ended for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Freeport-McMoRan Copper & Gold Inc. as of December 31, 2002, and the related consolidated statements of income, stockholder’s equity, and cash flows for the year then ended (not presented herein) and in our report dated January 16, 2003 (except for Note 15, as to which the date is March 6, 2003), we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

ERNST & YOUNG LLP

New Orleans, Louisiana

November 7, 2003

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

In management’s discussion and analysis, “we,” “us” and “our” refer to Freeport-McMoRan Copper & Gold Inc. (FCX) and its consolidated subsidiaries. References to “aggregate” amounts mean the total of our share and Rio Tinto plc’s share as our joint venture partner.  You should read this discussion in conjunction with our financial statements, the related discussion and analysis of financial condition and results of operations and our discussion of our “Business and Properties” in our Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission.  The results of operations reported and summarized below are not necessarily indicative of future operating results.

We operate through our majority-owned subsidiaries, PT Freeport Indonesia and PT Puncakjaya Power (PJP), and through PT Irja Eastern Minerals (Eastern Minerals) and Atlantic Copper, S.A. (Atlantic Copper), our wholly owned subsidiaries.  We acquired an 85.7 percent ownership interest in PJP in July 2003.  PJP supplies power to PT Freeport Indonesia’s operations (see Note 5).  PT Freeport Indonesia owns a 25 percent interest in PT Smelting, an Indonesian company which operates a copper smelter and refinery in Gresik, Indonesia. In addition to the PT Freeport Indonesia and Eastern Minerals exploration activities, we conduct other mineral exploration activities in Papua, Indonesia, pursuant to joint venture and other arrangements. Our field exploration activities outside of our current mining operations area in Block A have been temporarily suspended (see “Exploration Activities”).  

CONSOLIDATED RESULTS

Summary comparative results for the third-quarter and nine-month periods follow (in millions, except per share amounts):

Consolidated revenues include PT Freeport Indonesia’s sale of copper concentrates, which also contain significant amounts of gold and silver, and the sale by Atlantic Copper of copper anodes, cathodes, wire and wire rod, and gold in anodes and slimes.  Our revenues and net income vary significantly with fluctuations in the market prices of copper and gold and other factors. The October 9, 2003, slippage in the Grasberg pit is expected to have a negative impact on fourth-quarter 2003 revenues and earnings, including a charge of approximately $10 million ($5.1 million to net income) for lost equipment  (see “Mining and Exploration – PT Freeport Indonesia Operating Results”).  Assuming PT Freeport Indonesia’s share of annual copper sales is 1.3 billion pounds, a $0.01 per pound change in the average price realized would have an approximate $13 million impact on annual revenues and an approximate $7 million impact on annual net income.  Assuming PT Freeport Indonesia’s share of annual gold sales is 2.45 million ounces, a $5 per ounce change in the average price realized would have an approximate $12 million impact on annual revenues and an approximate $6 million impact on annual net income.  

On limited occasions, in response to market conditions, we have entered into copper and gold price protection contracts for a portion of our expected future mine production to mitigate the risk of adverse price fluctuations.  We currently have no copper or gold price protection contracts relating to our mine production. We have outstanding gold-denominated and silver-denominated preferred stock with dividends and redemption amounts determined by commodity prices.  In August 2003, we redeemed 6.0 million shares of Gold-Denominated Preferred Stock for $210.5 million and partially redeemed our Silver-Denominated Preferred Stock for $10.8 million.  The mandatory redemptions resulted in a $245.1 million decrease in debt (because mandatorily redeemable preferred stock is now classified as debt, see Note 2) and a hedging gain in revenues of $23.8 million ($12.2 million to net income or $0.06 per share) in the third quarter of 2003 (see “Capital Resources and Liquidity”).

Consolidated revenues for the third quarter and first nine months of 2003 reflect higher copper and gold revenues at PT Freeport Indonesia and at Atlantic Copper, compared with the same periods in 2002. PT Freeport Indonesia’s revenues benefited during the third quarter of 2003 from higher copper and gold prices when compared to the 2002 quarter.  For the first nine months of 2003 compared with the first nine months of 2002, PT Freeport Indonesia’s revenues benefited from increases in sales volumes caused by the mining of higher grade ore and higher copper and gold prices.  Atlantic Copper’s revenues improved compared with the third quarter and first nine months of 2002 mainly because of higher gold sales volumes and prices.

Third-quarter 2003 consolidated revenues include net additions of $8.3 million ($4.3 million to net income or $0.02 per share) primarily for final pricing of concentrates sold in prior quarters, compared with a decrease of $10.3 million ($5.3 million to net income or $0.03 per share) to third-quarter 2002 revenues. Nine-month 2003 consolidated revenues included net additions of $11.0 million ($5.7 million to net income or $0.03 per share), compared with net additions of $5.4 million ($2.8 million to net income or $0.02 per share) in the first nine months of 2002, primarily for final pricing of concentrates sold in prior years.

Cost of sales for the 2003 quarter was higher compared with the 2002 period largely because of higher unit costs, and for the first nine months of 2003 was higher compared with the first nine months of 2002 primarily because of higher sales volumes and unit costs.  Exploration expenses increased to $1.7 million in the third quarter of 2003 and $5.0 million in the first nine months of 2003, from $0.9 million and $2.5 million, respectively, in the 2002 periods reflecting increased drilling in Block A during 2003.  General and administrative expenses were $16.4 million in the third quarters of 2003 and 2002 and increased to $53.6 million in the first nine months of 2003 from $49.2 million in the first nine months of 2002 (see “Other Financial Results”).  

Net interest expense increased to $48.1 million in the third quarter of 2003 from $41.4 million in the third quarter of 2002, and to $156.1 million in the first nine months of 2003 from $129.2 million in the first nine months of 2002 primarily because of two senior note issuances in the first quarter of 2003 (see Note 4 and “Capital Resources and Liquidity – Financing Activities”).  

Other expenses include the impact of translating Atlantic Copper’s net euro-denominated liabilities, primarily its retiree pension obligations.  Changes in the U.S.$/euro exchange rate require us to adjust the dollar value of net euro-denominated liabilities and record the adjustment in earnings.  The exchange rate was $1.05 per euro at December 31, 2002, $1.14 per euro at June 30, 2003, and $1.17 per euro at September 30, 2003.  Exchange rate effects on net income from euro-denominated liabilities were gains (losses) of $(1.5) million in the third quarter of 2003, $1.7 million in the third quarter of 2002, $(7.8) million in the first nine months of 2003 and $(7.1) million in the first nine months of 2002.  Other expenses for the third quarter of 2003 and the first nine months of 2003 also include a $5.6 million ($3.7 million to net income or $0.02 per share) charge associated with the amended FCX/PT Freeport Indonesia credit facility (see Note 4 and “Capital Resources and Liquidity – Financing Activities”).

The provision for income taxes represented 55 percent of consolidated income before income taxes and minority interests for the third quarter of 2003 compared with 50 percent for the third quarter of 2002, and 55 percent for first nine months of 2003 compared with 57 percent for the first nine months of 2002 (see “Other Financial Results”).  

Effective July 1, 2003, we adopted Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 requires us to classify mandatorily redeemable financial instruments as a liability.  On July 1, 2003, we reclassified our mandatorily redeemable preferred stock totaling $450.0 million as debt and reclassified the $26.6 million of original issuance costs from capital in excess of par value of common stock as other assets.  We also recorded a $24.7 million ($0.13 per share) cumulative effect adjustment for the amortization of the original issuance costs through July 1, 2003.  Under SFAS No. 150, we will classify future dividend payments on our mandatorily redeemable preferred stock as interest expense.  SFAS No. 150 does not allow restatement of prior period financial statements to reflect the changes in classification (see Note 2).  

Effective January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires recording liabilities related to the legal obligations associated with the retirement of tangible long-lived assets at fair values in the periods in which the obligations are incurred (typically when the assets are acquired, constructed or installed).  When the liabilities for asset retirement obligations are initially recorded, capital costs of the related assets are increased by equal corresponding amounts.  The fair values of the liabilities are determined by estimating the asset retirement obligations, including consideration of inflation and a present value discount rate.  The fair values of the liabilities are also increased for a market risk premium to reflect what a third party would be expected to require to assume the liabilities.  Over time, changes in the fair values of the liabilities from revised estimates of the amount or timing of cash flows required to settle the future liability will be recognized by increasing or decreasing the liability and the related long-lived assets.  Changes resulting from the passage of time are recognized as an increase in the liability and charged to expense. Capitalized asset retirement costs are depreciated over the related useful lives.

At January 1, 2003, we estimated the fair value of our asset retirement obligations to be $28.5 million.  We recorded the estimated fair value of these liabilities and increased assets and accumulated depreciation as of January 1, 2003.  Prior to the adoption of SFAS No. 143, estimated future reclamation and mine closure costs for our mining operations were accrued and charged to income over the estimated life of the mine using the unit-of-production method based on estimated recoverable proven and probable copper reserves.  The difference between our previously recorded estimated future reclamation and closure costs and the liabilities and net assets recorded under SFAS No. 143, after taxes and minority interest, resulted in a gain of approximately $9.1 million ($0.05 per share), which was recognized as a cumulative effect adjustment for a change in accounting principle.  As a result of adopting SFAS No. 143, we expect for the near term future depreciation and amortization expense to be lower and production costs to be higher with no significant impact on earnings (see Note 2).

RESULTS OF OPERATIONS

We have two operating segments: “mining and exploration” and “smelting and refining.”  The mining and exploration segment consists of our Indonesian activities including PT Freeport Indonesia’s copper and gold mining operations, PJP’s power generating operations after eliminations with PT Freeport Indonesia and FCX’s Indonesian exploration activities, including those of Eastern Minerals.  The smelting and refining segment includes Atlantic Copper’s operations in Spain and PT Freeport Indonesia’s 25 percent equity investment in PT Smelting. Summary comparative operating income (loss) by segment follows (in millions):

a.

We defer recognizing profits on PT Freeport Indonesia’s sales to Atlantic Copper and on 25 percent of PT Freeport Indonesia’s sales to PT Smelting until their sales of final products to third parties.  Changes in the amount of these deferred profits impacted operating income by $4.8 million in the third quarter of 2003, $(40.7) million in the third quarter of 2002, $(31.1) million in the first nine months of 2003 and $(37.9) million in the first nine months of 2002.  Our consolidated quarterly earnings fluctuate depending on the timing and prices of these sales.

MINING AND EXPLORATION

A summary of changes in PT Freeport Indonesia’s revenues between the periods follows (in millions):

PT Freeport Indonesia’s revenues for both the third quarter and first nine months of 2003 benefited from higher copper and gold prices.  Sales volumes for the third quarter of 2003 were lower primarily because of lower ore grades and recovery rates compared with the 2002 quarter.  Sales volumes for the first nine months of 2003 were higher primarily because of higher grade material mined in the first two quarters compared with the first nine months of 2002.  Copper sales volumes totaled 344.9 million pounds in the third quarter of 2003, 23 percent lower than the 446.0 million pounds in the third quarter of 2002.   Gold sales volumes totaled 763,500 ounces in the third quarter of 2003, 14 percent lower than the 884,600 ounces in the third quarter of 2002.  For the nine month periods, copper sales volumes totaled 1.132 billion pounds in 2003, 4 percent higher than the 1.093 billion pounds in 2002, and gold sales volumes totaled 2,196,600 ounces, 36 percent higher than the 1,614,900 ounces in 2002.  Third-quarter 2003 copper price realizations of $0.81 per pound were $0.14 higher than the third-quarter 2002 realizations, and the 2003 nine month realizations of $0.77 per pound were $0.07 higher than the realizations in the first nine months of 2002.  Gold price realizations of $387.75 per ounce in the third quarter of 2003 were nearly $74 higher than third-quarter 2002 realizations, and realizations in the first nine months of 2003 of $364.04 per ounce were nearly $57 higher than the prior year period. Gold realizations for the 2003 periods are after hedging gains from redemption of our Gold-Denominated Preferred Stock (see below).  

Treatment charges were lower in the third quarter of 2003 compared with the 2002 quarter because of lower sales volumes, but were about the same for the nine-month periods.  Royalties totaled $8.8 million in the third quarter of 2003, $9.0 million in the third quarter of 2002, $25.5 million in the first nine months of 2003 and $16.4 million in the first nine months of 2002.  The higher royalties for the first nine months of 2003 reflect higher metal prices and higher gold sales volumes.

Substantially all of PT Freeport Indonesia’s concentrate sales contracts provide final copper pricing in a specified future period based on prices quoted on the London Metal Exchange (LME).   PT Freeport Indonesia records revenues and invoices its customers based on LME prices at the time of shipment.  Under accounting rules, these terms create an “embedded derivative” in our concentrate sales contracts which must be adjusted to fair value through earnings each period until the date of final copper pricing.  PT Freeport Indonesia’s third-quarter 2003 revenues include net additions of $17.1 million for adjustments to the fair value of embedded derivatives in concentrate sales contracts, compared with net reductions of $24.0 million to third-quarter 2002 revenues.  PT Freeport Indonesia’s nine-month 2003 revenues included net additions of $19.7 million for adjustments to the fair value of embedded derivatives in concentrate sales contracts, compared with net reductions of $9.3 million in the first nine months of 2002.

At September 30, 2003, embedded derivatives on consolidated copper sales totaling 155.6 million pounds were recorded at an average price of $0.81 per pound. Most of these sales are expected to be finally priced during the fourth quarter of 2003.  A one-cent movement in the average price used for these embedded derivatives will have an approximate $0.8 million impact on 2003 consolidated net income.

On limited occasions PT Freeport Indonesia has entered into derivative contracts to manage certain risks resulting from fluctuations in commodity prices.  During 2002 and the first nine months of 2003, and as of September 30, 2003, PT Freeport Indonesia did not have any contracts in place for its copper and gold sales.  As conditions warrant, PT Freeport Indonesia may enter into new contracts for its future sales; however, it has no plans to do so in the foreseeable future. In August 2003, we redeemed our Gold-Denominated Preferred Stock for $210.5 million and partially redeemed our Silver-Denominated Preferred Stock for $10.8 million.  The mandatory redemptions resulted in a $245.1 million decrease in debt and a hedging gain in revenues of $23.8 million ($12.2 million to net income or $0.06 per share) in the third quarter of 2003 (see “Capital Resources and Liquidity-Financing Activities”).

PT Freeport Indonesia has commitments from various parties, including Atlantic Copper and PT Smelting, to purchase all of its estimated remaining 2003 production.  Net of Rio Tinto’s interest and  reflecting the impact of the material slippage in the Grasberg open pit that occurred on October 9, 2003 (see “PT Freeport Indonesia Operating Results”), PT Freeport Indonesia’s share of sales for the fourth quarter of 2003 is projected to approximate 200 million pounds of copper and 250,000 ounces of gold. PT Freeport Indonesia’s share of sales for 2003 is projected to approximate 1.33 billion pounds of copper and 2.45 million ounces of gold, reflecting the expectation in 2003 of slightly lower copper ore grades and higher gold ore grades compared with 2002 as well as the projected impact of the material slippage.

PT Freeport Indonesia Operating Results

a.

Amounts were $367.72 in the third quarter of 2003 and $353.92 in the first nine months of 2003 before hedging gains resulting from redemption of FCX’s Gold-Denominated Preferred Stock.

b.

Net of deferred mining costs totaling $15.7 million (4.6 cents per pound) in the third quarter of 2003, $11.3 million (2.5 cents per pound) in the third quarter of 2002, $37.4 million (3.3 cents per pound) in the first nine months of 2003 and $23.7 million (2.2 cents per pound) in the first nine months of 2002.  

Net cash production costs per pound of copper is a measure intended to provide investors with information about the cash generating capacity of our mining operations in Indonesia.  This measure is presented by other copper and gold mining companies, although our measures may not be comparable to similarly titled measures reported by other companies.

We calculate gross profit per pound of copper under a “by-product” method, while the copper, gold and silver contained within our concentrates are treated as co-products in our financial statements.  We use the by-product method in the presentation of gross profit per pound because (1) generally the majority of our revenues are copper revenues, (2) we produce and sell one product, concentrates, which contains all three metals and (3) it is not possible to specifically assign our costs to revenues from the copper, gold and silver we produce in concentrates.  In the co-product method presentation below, costs are allocated to the different products based on their relative revenue values.  Presentations under both methods are shown below along with a reconciliation to amounts reported in the consolidated financial statements.