Mining Operations
We and our predecessors have conducted exploration and mining operations in
Block A since 1967 and have been the only operator of those operations. Following
are descriptions of ore mines in production, significant ore mines in development
and our ore bodies.
Mines in Production. We currently have two mines in operation: the Grasberg
open pit and the Deep Ore Zone. We began open-pit mining of the Grasberg ore
body in January 1990. The underground Grasberg reserves will be mined using
the block-cave method near the end of open-pit mining, which is expected to
continue until approximately 2015.
The Deep Ore Zone ore body lies vertically below the Intermediate Ore Zone.
We began production from the Deep Ore Zone ore body in 1989, but we suspended
production in 1991 in favor of production from the Grasberg deposit. Production
using the block-cave method at the Deep Ore Zone restarted in September 2000.
Production is at the 3,150-meter elevation level and totaled 14.8 million metric
tons of ore in 2003 and 7.9 million metric tons of ore in 2002. The Deep Ore
Zone performed above design capacity of 35,000 metric tons of ore per day and
studies are ongoing to evaluate additional low-cost expansion options to increase
production. Production from the Deep Ore Zone averaged 40,500 metric tons of
ore per day in 2003.
The Intermediate Ore Zone was an underground block-cave operation that began
production in the first half of 1994. Production totaled 2.5 million metric
tons of ore in 2003 and 7.1 million metric tons of ore in 2002. The Intermediate
Ore Zone was depleted during the third quarter of 2003. During its 10-year life,
the Intermediate Ore Zone operation produced almost 30 percent more copper and
gold than the initial reserve estimates.
Exploration
As a result of our joint venture arrangements, Rio Tinto generally pays for
40 percent of our joint venture exploration and exploratory drilling costs in
Papua.
In June 1998, we entered into a joint venture agreement to conduct exploration
activities in PT Nabire Bakti Mining's Contract of Work area, which currently
covers approximately 500,000 acres in several blocks contiguous to PT Freeport
Indonesia's Block B and one of Eastern Minerals' blocks in Papua. Rio Tinto
shares in 40 percent of our interest and costs in this exploration joint venture.
With the subsequent approval of the Indonesian government, in 2000 we temporarily
suspended our field exploration activities in Block B, which includes the Wabu
Ridge gold prospect, as well as in the other Contract of Work areas of Eastern
Minerals and PT Nabire Bakti Mining. The suspensions are due to safety and security
issues and uncertainty relating to a possible conflict between our mining and
exploration rights in certain forest areas covered by the Contracts of Work
and an Indonesian law enacted in 1999 prohibiting open-pit mining in forest
preservation areas. We cannot predict when we will be able to resume our exploration
activities in these areas. We expect to continue to seek renewals of these suspensions
for each of the suspended areas if required. All of the suspended areas are
outside of our current mining operations area.
Investment in Smelters
Our investment in smelters (Atlantic Copper and PT Smelting) serves an important
role in our concentrate marketing strategy. PT Freeport Indonesia generally
sells approximately one-half of its concentrate production to its affiliated
smelters, Atlantic Copper and PT Smelting, and the remainder to other customers.
Treatment charges for smelting and refining copper concentrates represent a
cost to PT Freeport Indonesia and income to Atlantic Copper and PT Smelting.
Through downstream integration, we are assured placement of a significant portion
of our concentrate production and operating hedges for treatment and refining
charges. While currently low smelting and refining charges have adversely affected
the operating results of Atlantic Copper, these low charges have benefited the
operating results to PT Freeport Indonesia's mining operations.