FCX 1Q07 Form 10-Q
|
|
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
|
FORM
10-Q
|
|
(Mark
One)
|
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended March 31, 2007
|
OR
|
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from
|
|
To
|
Commission
File Number: 1-9916
|
|
|
|
Freeport-McMoRan
Copper & Gold Inc.
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
74-2480931
|
(State
or other jurisdiction of
|
(IRS
Employer Identification No.)
|
incorporation
or organization)
|
|
|
|
One
North Central Avenue
|
|
Phoenix,
AZ
|
85004-4414
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
(602)
366-8100
|
(Registrant's
telephone number, including area code)
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. R
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one): Large accelerated filer R Accelerated
filer
o Non-accelerated
filer oÿ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ÿoYes
R
No
On
April
30, 2007, there were issued and outstanding 381,139,775 shares of the
registrant’s Common Stock, par value $0.10 per share.
TABLE OF CONTENTS
FREEPORT-McMoRan
COPPER & GOLD INC.
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Page
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3
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3
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4
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5
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6
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7
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29
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30
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71
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71
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72
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72
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76
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88
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88
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89
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90
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E-1
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TABLE OF CONTENTS
FREEPORT-McMoRan
COPPER & GOLD INC.
FREEPORT-McMoRan
COPPER & GOLD INC.
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
Millions)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,126.5
|
|
|
$
|
907.5
|
|
Accounts
receivable
|
|
|
2,254.4
|
|
|
|
485.8
|
|
Inventories
|
|
|
2,590.9
|
|
|
|
724.2
|
|
Mill
and leach stockpiles
|
|
|
340.4
|
|
|
|
-
|
|
Prepaid
expenses, restricted cash and other
|
|
|
241.7
|
|
|
|
33.5
|
|
Total
current assets
|
|
|
8,553.9
|
|
|
|
2,151.0
|
|
Property,
plant, equipment and development costs, net
|
|
|
23,730.1
|
|
|
|
3,098.5
|
|
Other
assets
|
|
|
716.1
|
|
|
|
140.3
|
|
Trust
assets
|
|
|
623.2
|
|
|
|
-
|
|
Long-term
mill and leach stockpiles
|
|
|
431.7
|
|
|
|
-
|
|
Goodwill
|
|
|
7,379.0
|
|
|
|
-
|
|
Total
assets
|
|
$
|
41,434.0
|
|
|
$
|
5,389.8
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
2,641.5
|
|
|
$
|
789.0
|
|
Accrued
income taxes
|
|
|
785.1
|
|
|
|
164.4
|
|
Current
portion of long-term debt and short-term borrowings
|
|
|
199.2
|
|
|
|
19.1
|
|
Total
current liabilities
|
|
|
3,625.8
|
|
|
|
972.5
|
|
Long-term
debt, less current portion:
|
|
|
|
|
|
|
|
|
Senior
notes
|
|
|
7,230.0
|
|
|
|
620.0
|
|
Term
loan
|
|
|
4,382.0
|
|
|
|
-
|
|
Project
financing, equipment loans and other
|
|
|
224.9
|
|
|
|
41.0
|
|
Total
long-term debt, less current portion
|
|
|
11,836.9
|
|
|
|
661.0
|
|
Accrued
postretirement benefits and other liabilities
|
|
|
1,206.1
|
|
|
|
297.9
|
|
Deferred
income taxes
|
|
|
6,992.8
|
|
|
|
800.3
|
|
Total
liabilities
|
|
|
23,661.6
|
|
|
|
2,731.7
|
|
Minority
interests
|
|
|
1,473.7
|
|
|
|
213.0
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
5½%
Convertible perpetual preferred stock
|
|
|
1,100.0
|
|
|
|
1,100.0
|
|
6¾%
Mandatory convertible preferred stock
|
|
|
2,875.0
|
|
|
|
-
|
|
Common
stock
|
|
|
49.5
|
|
|
|
31.0
|
|
Capital
in excess of par value
|
|
|
13,266.5
|
|
|
|
2,668.1
|
|
Retained
earnings
|
|
|
1,833.5
|
|
|
|
1,414.8
|
|
Accumulated
other comprehensive loss
|
|
|
(3.0
|
)
|
|
|
(19.9
|
)
|
Common
stock held in treasury
|
|
|
(2,822.8
|
)
|
|
|
(2,748.9
|
)
|
Total
stockholders’ equity
|
|
|
16,298.7
|
|
|
|
2,445.1
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
41,434.0
|
|
|
$
|
5,389.8
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
TABLE OF CONTENTS
FREEPORT-McMoRan
COPPER & GOLD INC.
|
Three
Months Ended March 31,
|
|
|
2007
|
|
2006
|
|
|
(In
Millions, Except Per Share Amounts)
|
|
Revenues
|
$
|
2,302.9
|
|
$
|
1,086.1
|
|
Cost
of sales:
|
|
|
|
|
|
|
Production
and delivery
|
|
952.1
|
|
|
477.9
|
|
Depreciation,
depletion and amortization
|
|
116.3
|
|
|
43.3
|
|
Total
cost of sales
|
|
1,068.4
|
|
|
521.2
|
|
Exploration
and research expenses
|
|
6.5
|
|
|
2.6
|
|
Selling,
general and administrative expenses
|
|
48.9
|
|
|
30.6
|
|
Total
costs and expenses
|
|
1,123.8
|
|
|
554.4
|
|
Operating
income
|
|
1,179.1
|
|
|
531.7
|
|
Interest
expense, net
|
|
(51.9
|
)
|
|
(22.7
|
)
|
Losses
on early extinguishment and conversion of debt, net
|
|
(87.8
|
)
|
|
(2.0
|
)
|
Other
income, net
|
|
23.6
|
|
|
5.0
|
|
Equity
in affiliated companies’ net earnings
|
|
4.5
|
|
|
3.6
|
|
Income
before income taxes and minority interests
|
|
1,067.5
|
|
|
515.6
|
|
Provision
for income taxes
|
|
(460.2
|
)
|
|
(221.7
|
)
|
Minority
interests in net income of consolidated subsidiaries
|
|
(114.4
|
)
|
|
(27.1
|
)
|
Net
income
|
|
492.9
|
|
|
266.8
|
|
Preferred
dividends
|
|
(16.7
|
)
|
|
(15.1
|
)
|
Net
income applicable to common stock
|
$
|
476.2
|
|
$
|
251.7
|
|
|
|
|
|
|
|
|
Net
income per share of common stock:
|
|
|
|
|
|
|
Basic
|
|
$2.20
|
|
|
$1.34
|
|
Diluted
|
|
$2.02
|
|
|
$1.23
|
|
|
|
|
|
|
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
216.8
|
|
|
187.9
|
|
Diluted
|
|
244.0
|
|
|
221.5
|
|
|
|
|
|
|
|
|
Dividends
paid per share of common stock
|
|
$0.3125
|
|
|
$0.8125
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
FREEPORT-McMoRan
COPPER & GOLD INC.
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
Millions)
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
492.9
|
|
|
$
|
266.8
|
|
Adjustments
to reconcile net income to net cash provided by (used in)
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Unrealized
losses on copper collars and copper put options
|
|
|
38.1
|
|
|
|
-
|
|
Depreciation,
depletion and amortization
|
|
|
116.3
|
|
|
|
43.3
|
|
Minority
interests' in net income of consolidated subsidiaries
|
|
|
114.4
|
|
|
|
27.1
|
|
Noncash
compensation and benefits
|
|
|
25.5
|
|
|
|
17.0
|
|
Losses
on early extinguishment and conversion of debt, net
|
|
|
87.8
|
|
|
|
2.0
|
|
Deferred
income taxes
|
|
|
(46.0
|
)
|
|
|
41.9
|
|
Elimination
(recognition) of profit on PT Freeport Indonesia sales
|
|
|
|
|
|
|
|
|
to
PT Smelting
|
|
|
35.7
|
|
|
|
(20.8
|
)
|
Other
|
|
|
6.4
|
|
|
|
-
|
|
(Increases)
decreases in working capital, excluding amounts
|
|
|
|
|
|
|
|
|
acquired
from Phelps Dodge:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(398.0
|
)
|
|
|
65.2
|
|
Inventories
|
|
|
80.7
|
|
|
|
(40.3
|
)
|
Prepaid
expenses, restricted cash and other
|
|
|
0.8
|
|
|
|
(7.3
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(30.0
|
)
|
|
|
(250.4
|
)
|
Accrued
income taxes
|
|
|
144.3
|
|
|
|
(268.3
|
)
|
Increase
in working capital
|
|
|
(202.2
|
)
|
|
|
(501.1
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
668.9
|
|
|
|
(123.8
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of Phelps Dodge, net of cash acquired
|
|
|
(13,888.1
|
)
|
|
|
-
|
|
PT
Freeport Indonesia capital expenditures
|
|
|
(74.0
|
)
|
|
|
(48.6
|
)
|
Phelps
Dodge capital expenditures
|
|
|
(60.9
|
)
|
|
|
-
|
|
Other
capital expenditures
|
|
|
(7.5
|
)
|
|
|
(3.5
|
)
|
Sale
of assets and other
|
|
|
1.0
|
|
|
|
1.7
|
|
Net
cash used in investing activities
|
|
|
(14,029.5
|
)
|
|
|
(50.4
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from term loans under bank credit facility
|
|
|
10,000.0
|
|
|
|
-
|
|
Repayments
of term loans under bank credit facility
|
|
|
(5,618.0
|
)
|
|
|
-
|
|
Net
proceeds from sales of senior notes
|
|
|
5,880.0
|
|
|
|
-
|
|
Net
proceeds from sale of 6¾% mandatory convertible preferred
stock
|
|
|
2,803.1
|
|
|
|
-
|
|
Net
proceeds from sale of common stock
|
|
|
2,815.7
|
|
|
|
-
|
|
Proceeds
from other debt
|
|
|
100.9
|
|
|
|
55.5
|
|
Repayments
of other debt
|
|
|
(48.3
|
)
|
|
|
(201.0
|
)
|
Cash
dividends paid:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
(62.9
|
)
|
|
|
(153.2
|
)
|
Preferred
stock
|
|
|
(15.1
|
)
|
|
|
(15.1
|
)
|
Minority
interests
|
|
|
(47.0
|
)
|
|
|
(18.7
|
)
|
Net
(payments for) proceeds from exercised stock options
|
|
|
(44.9
|
)
|
|
|
11.1
|
|
Excess
tax benefit from exercised stock options
|
|
|
1.1
|
|
|
|
16.1
|
|
Bank
credit facilities fees and other
|
|
|
(185.0
|
)
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
15,579.6
|
|
|
|
(305.3
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
2,219.0
|
|
|
|
(479.5
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
907.5
|
|
|
|
763.6
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,126.5
|
|
|
$
|
284.1
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
TABLE OF CONTENTS
FREEPORT-McMoRan
COPPER & GOLD INC.
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Convertible
Perpetual
|
|
Mandatory
Convertible
|
|
|
|
|
|
|
|
Other
|
|
Common
Stock
|
|
|
|
|
|
|
Preferred
Stock
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
|
|
Compre-
|
|
Held
in Treasury
|
|
|
|
|
|
|
Number
|
|
|
|
Number
|
|
|
|
Number
|
|
|
|
Capital
in
|
|
|
|
hensive
|
|
Number
|
|
|
|
|
|
|
|
|
of
|
|
At
Par
|
|
of
|
|
At
Par
|
|
of
|
|
At
Par
|
|
Excess
of
|
|
Retained
|
|
Income
|
|
of
|
|
At
|
|
Stockholders’
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Par
Value
|
|
Earnings
|
|
(Loss)
|
|
Shares
|
|
Cost
|
|
Equity
|
|
|
|
(In
Millions)
|
|
Balance
at December 31, 2006
|
|
1.1
|
|
$
|
1,100.0
|
|
|
-
|
|
$
|
-
|
|
|
309.9
|
|
$
|
31.0
|
|
$
|
2,668.1
|
|
$
|
1,414.8
|
|
$
|
(19.9
|
)
|
|
113.0
|
|
$
|
(2,748.9
|
)
|
$
|
2,445.1
|
|
Sale
of 6¾% mandatory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
preferred stock
|
|
-
|
|
|
-
|
|
|
28.8
|
|
|
2,875.0
|
|
|
-
|
|
|
-
|
|
|
(71.9
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,803.1
|
|
Common
stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
acquire Phelps Dodge
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
136.9
|
|
|
13.7
|
|
|
7,767.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,781.2
|
|
Sale
of common stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
47.2
|
|
|
4.7
|
|
|
2,811.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,815.7
|
|
Exercised
stock options, issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock and other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.2
|
|
|
0.1
|
|
|
52.6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
52.7
|
|
Stock-based
compensation costs
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
36.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
36.1
|
|
Tax
benefit for stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
option
exercises
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.1
|
|
Tender
of shares for exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
options and restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.2
|
|
|
(73.9
|
)
|
|
(73.9
|
)
|
Adjustment
to initially
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
apply
FIN 48
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4.3
|
|
Dividends
on common stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(61.8
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(61.8
|
)
|
Dividends
on preferred stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(16.7
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(16.7
|
)
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
492.9
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
492.9
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss),
net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12.8
|
|
|
-
|
|
|
-
|
|
|
12.8
|
|
Translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.5
|
|
|
-
|
|
|
-
|
|
|
0.5
|
|
Change
in unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives
fair value
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.7
|
|
|
-
|
|
|
-
|
|
|
0.7
|
|
Reclass
to earnings
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.3
|
|
|
-
|
|
|
-
|
|
|
1.3
|
|
Change
in unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amounts
(SFAS 158)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
Amortization
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrecognized
amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(SFAS
158)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.5
|
|
|
-
|
|
|
-
|
|
|
1.5
|
|
Other
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16.9
|
|
|
-
|
|
|
-
|
|
|
16.9
|
|
Total
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
509.8
|
|
Balance
at March 31, 2007
|
|
1.1
|
|
$
|
1,100.0
|
|
|
28.8
|
|
$
|
2,875.0
|
|
|
495.2
|
|
$
|
49.5
|
|
$
|
13,266.5
|
|
$
|
1,833.5
|
|
$
|
(3.0
|
)
|
|
114.2
|
|
$
|
(2,822.8
|
)
|
$
|
16,298.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
TABLE OF CONTENTS
FREEPORT-McMoRan
COPPER & GOLD INC.
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with the instructions to Form 10-Q and do not include all information
and disclosures required by generally accepted accounting principles (GAAP)
in
the United States (U.S.). Therefore, this information should be read in
conjunction with Freeport-McMoRan Copper & Gold Inc.’s (FCX) consolidated
financial statements and notes contained in its 2006 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
interim periods reported. With the exception of certain adjustments associated
with the acquisition of Phelps Dodge Corporation (Phelps Dodge), all such
adjustments are, in the opinion of management, of a normal recurring nature.
Operating results for the three-month period ended March 31, 2007, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007.
For
comparative purposes, certain amounts for the first quarter of 2006 have been
reclassified to conform to current period presentation.
As
further discussed in Note 2, on March 19, 2007, FCX completed its acquisition
of
Phelps Dodge. First-quarter 2007 financial results include Phelps Dodge’s
results beginning March 20, 2007.
2.
|
ACQUISITION
OF PHELPS DODGE
|
On
March
19, 2007, FCX acquired Phelps Dodge. Phelps Dodge, now a wholly owned subsidiary
of FCX, is a fully integrated producer of copper and molybdenum, with mines
in
North and South America and processing capabilities for other minerals as
by-products, such as gold, silver and rhenium, and several development projects,
including the Tenke Fungurume mine in the Democratic Republic of Congo (DRC).
Additionally, Phelps Dodge has an international manufacturing division, Phelps
Dodge International Corporation (PDIC), which manufactures engineered products
principally for the global energy sector. The estimated fair value of assets
acquired and liabilities assumed and the results of Phelps Dodge’s operations
are included in FCX’s consolidated financial statements beginning March 20,
2007.
In
the
acquisition, each share of Phelps Dodge common stock was exchanged for 0.67
of a
share of FCX common stock and $88.00 in cash. As a result, FCX issued 136.9
million shares and paid $18.0 billion in cash to Phelps Dodge shareholders.
The
acquisition has been accounted for under the purchase method as required by
Statement of Financial Accounting Standards (SFAS) No. 141, “Business
Combinations,” with FCX as the accounting acquirer. Below is a summary of the
$25.9 billion purchase price, which was funded through a combination of common
shares issued, borrowings under a new $11.5 billion senior credit facility,
proceeds from the offering of $6 billion of senior notes (refer to Note 8 for
further discussion) and available cash resources (in millions, except exchange
ratio):
Phelps
Dodge common stock outstanding
|
|
|
|
and
issuable at March 19, 2007
|
|
204.3
|
|
Exchange
offer ratio of FCX common stock for each
|
|
|
|
Phelps
Dodge common share
|
|
0.67
|
|
Shares
of FCX common stock issued
|
|
136.9
|
|
|
|
|
|
Cash
consideration of $88.00 for each Phelps Dodge common share
|
$
|
17,979
|
a
|
Fair
value of FCX common stock
|
|
7,781
|
b
|
Estimated
change of control costs and related employee benefits
|
|
69
|
|
Estimated
transaction costs
|
|
62
|
|
Total
purchase price
|
$
|
25,891
|
|
a. |
Cash
consideration includes cash paid in lieu of any fractional shares
of FCX
stock.
|
b. |
Measurement
of the common stock component of the purchase price based on a weighted
average closing price of FCX’s common stock of $56.85 for the two days
prior to through two days after the public announcement of the merger
on
November 19, 2006.
|
In
accordance with SFAS No. 141, the purchase price paid is determined at the
date
of the public announcement of the transaction and is allocated to the assets
acquired and liabilities assumed based upon their estimated fair values on
the
closing date of March 19, 2007. The estimated fair values were based on internal
estimates and are subject to change as FCX completes its analysis. In valuing
acquired assets and assumed liabilities, fair values are based on, but are
not
limited to: quoted market prices, where available; the intent of FCX with
respect to whether the assets purchased are to be held, sold or abandoned;
expected future cash flows; current replacement cost for similar capacity for
certain fixed assets; market rate assumptions for contractual obligations;
and
appropriate discount rates and growth rates. The excess of the purchase price
over the estimated fair value of the net assets acquired has been recorded
as
goodwill. A significant decline in copper or molybdenum prices from those used
to estimate the fair values of the acquired assets could result in impairment
to
the carrying amounts assigned to inventories; mill and leach stockpiles;
property, plant, equipment and development costs and goodwill.
Below
provides a summary of the preliminary purchase price allocation as of March
31,
2007 (in billions):
|
|
|
|
|
Preliminary
|
|
|
|
|
|
|
Purchase
|
|
|
Historical
|
|
Fair
Value
|
|
Price
|
|
|
Balances
|
|
Adjustments
|
|
Allocation
|
|
Cash
and cash equivalents
|
$
|
4.2
|
|
$
|
-
|
|
$
|
4.2
|
|
Metals
inventories and mill and leach stockpilesa
|
|
0.7
|
|
|
1.7
|
|
|
2.4
|
|
Property,
plant, equipment and development costsb
|
|
6.0
|
|
|
14.6
|
|
|
20.6
|
|
Other
assets
|
|
3.3
|
|
|
(0.4
|
)
|
|
2.9
|
|
Allocation
to goodwillc
|
|
-
|
|
|
7.4
|
|
|
7.4
|
|
Total
assets
|
|
14.2
|
|
|
23.3
|
|
|
37.5
|
|
Deferred
income taxes (current and long-term)d
|
|
(0.7
|
)
|
|
(5.6
|
)
|
|
(6.3
|
)
|
Other
liabilities
|
|
(4.1
|
)
|
|
-
|
|
|
(4.1
|
)
|
Minority
interests
|
|
(1.2
|
)
|
|
-
|
|
|
(1.2
|
)
|
Total
|
$
|
8.2
|
|
$
|
17.7
|
|
$
|
25.9
|
|
a. |
Inventories
and stockpiles were valued using estimated discounted cash flows
based on
estimated selling prices less selling and completion costs and a
reasonable profit allowance. Application of fair value principles
to
metals inventories and stockpiles resulted in a significantly higher
value
being applied to inventory compared with the historical cost carrying
amounts recorded by Phelps Dodge. Consequently, when inventory on
hand as
of the date of acquisition is subsequently sold, FCX will recognize
incremental noncash costs and realize a significantly smaller profit
margin with respect to this
inventory.
|
b. |
Includes
amounts based on estimated discounted cash flows from future production
of
proven and probable reserves and for values of properties other than
proven and probable reserves (VBPP). Carrying amounts assigned to
proven
and probable reserves are depleted using the unit of production method
over the estimated lives of the reserves. Carrying amounts assigned
to
VBPP are not charged to income until the VBPP becomes associated
with
proven and probable reserves or are determined to be
impaired.
|
The
concept of VBPP is described in Emerging Issue Task Force (EITF) Issue
No. 04-3, “Mining
Assets: Impairment and Business Combinations,”
and has
been interpreted differently by different mining companies. FCX’s preliminary
adjustment to property, plant, equipment and development costs includes VBPP
attributable to mineralized material that FCX believes could be brought into
production with the establishment or modification of required permits and should
market conditions and technical assessments warrant. Mineralized material is
a
mineralized body that has been delineated by appropriately spaced drilling
and/or underground sampling to support reported tonnage and average
grade
of
metal(s). Such a deposit may not qualify as proven and probable reserves until
legal and economic feasibility are confirmed based upon a comprehensive
evaluation of development costs, unit costs, grades, recoveries and other
material factors. The carrying amount for property, plant, equipment and
development costs includes preliminary adjustments attributable to inferred
mineral resources and exploration potential. FCX is continuing to analyze VBPP
and the final values may vary significantly from preliminary
estimates.
c. |
The
final valuation of assets acquired and liabilities assumed is not
complete
and the net adjustments to those values will result in changes to
goodwill
and other carrying amounts assigned to assets and liabilities based
on the
preliminary analyses. None of the $7.4 billion allocation to goodwill
is
deductible for tax purposes.
|
d. |
Deferred
income taxes have been recognized based on the estimated fair value
adjustments to net assets.
|
As
of
March 31, 2007, FCX had not identified any material pre-acquisition
contingencies where the related asset, liability or impairment is probable
and
the amount of the asset, liability or impairment can be reasonably estimated.
Prior to the end of the purchase price allocation period, if information becomes
available that an
asset
existed, a liability had been incurred or an asset had been impaired as of
the
acquisition date, and
the
amounts can be reasonably estimated, such items will be included in the purchase
price allocation.
FCX
paid
a premium (i.e.,
goodwill) over the fair value of the net tangible and identified intangible
assets acquired for a number of potential strategic and financial benefits
that
are expected to be realized, including, but not limited to, the
following:
· |
The
combined company’s increased scale of operations, management depth and
strengthened cash flow provide an improved platform to capitalize
on
growth opportunities in the global
market.
|
· |
The
combined company is well-positioned to benefit from the positive
copper
market at a time when there is a scarcity of large-scale copper
development projects combined with strong global demand for
copper.
|
· |
The
combined company has long-lived, geographically diverse reserves,
totaling
approximately 77 billion pounds of copper, 38 million ounces of gold
and 2
billion pounds of molybdenum, net of minority interests as of December
31,
2006.
|
· |
The
combined company has exploration rights with significant potential
in
copper regions around the world, including FCX’s prospective acreage in
Papua, Indonesia, and Phelps Dodge’s opportunities at its Tenke Fungurume
concessions in the DRC.
|
TABLE OF CONTENTS
Pro
Forma Financial Information.
The
following pro forma information assumes that FCX acquired Phelps Dodge effective
January 1, 2007 for the three-month period ended March 31, 2007, and effective
January 1, 2006, for the three-month period ended March 31, 2006 (in millions,
except per share data):
|
Historical
|
|
Pro
forma
|
|
|
|
|
|
|
|
|
Phelps
|
|
Purchase
|
|
Pro
forma
|
|
Three
months ended March 31, 2007
|
FCX
|
|
Dodgea
|
|
Adjustments
|
|
Consolidated
|
|
Revenues
|
$
|
2,302.9
|
|
$
|
2,536.7
|
|
$
|
-
|
|
$
|
4,839.6
|
b
|
Operating
income
|
$
|
1,179.1
|
|
$
|
817.2
|
|
$
|
(375.7
|
)c
|
$
|
1,620.6
|
b
|
Income
before income taxes and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
interests
|
$
|
1,067.5
|
c,d,e
|
$
|
861.4
|
|
$
|
(469.0
|
)c,e
|
$
|
1,459.9
|
b
|
Net
income applicable to common stock
|
$
|
476.2
|
c,d,e
|
$
|
508.0
|
|
$
|
(363.0
|
)c
|
$
|
621.2
|
b
|
Diluted
net income per share of common stock
|
$
|
2.02
|
|
|
N/A
|
|
$
|
-
|
|
$
|
1.51
|
|
Diluted
weighted average shares outstanding
|
|
244.0
|
|
|
N/A
|
|
|
N/A
|
|
|
453.6
|
g
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,086.1
|
f
|
$
|
2,224.6
|
|
$
|
-
|
|
$
|
3,310.7
|
b
|
Operating
income
|
$
|
531.7
|
f
|
$
|
574.2
|
|
$
|
(686.8
|
)c
|
$
|
419.1
|
b
|
Income
from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes and minority interests
|
$
|
515.6
|
e,f
|
$
|
603.7
|
|
$
|
(895.4
|
)c,e
|
$
|
223.9
|
b
|
Income
(loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
applicable
to common stock
|
$
|
251.7
|
e,f
|
$
|
350.7
|
|
$
|
(669.1
|
)c,e
|
$
|
(66.7
|
)b
|
Diluted
income (loss) per share from continuing operations
|
$
|
1.23
|
|
$
|
1.72
|
|
$
|
-
|
|
$
|
(0.18
|
)
|
Weighted
average shares outstanding
|
|
221.5
|
|
|
203.4
|
|
|
N/A
|
|
|
372.2
|
g
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
First-quarter
2007 represents the results of Phelps Dodge’s operations from January 1,
2007, through March 19, 2007. Beginning March 20, 2007, the results
of
Phelps Dodge’s operations are included in FCX’s consolidated financial
statements.
|
b. |
Includes
charges to revenues for mark-to-market accounting adjustments on
Phelps
Dodge’s copper collar price protection program totaling $58.3 million
($35.6 million to net income or $0.08 per share) in the first quarter
of
2007, and $392.6 million ($298.4 million to net loss or $0.80 per
share)
in the first quarter of 2006.
|
c. |
Includes
charges to production and delivery costs of $425.3 million ($267.9
million
to net income) for first-quarter 2007 and $494.1 million ($311.3
million
to net loss) for first-quarter 2006 resulting from the purchase accounting
impacts of higher values for metals inventories, and also includes
charges
to depreciation, depletion and amortization of $185.5 million ($116.9
million to net income) for first-quarter 2007 and $196.5 million
($123.8
million to net loss) for first-quarter 2006 resulting from the purchase
accounting impacts of the increase in the carrying value of Phelps
Dodge’s
property, plant and equipment costs.
|
d. |
Excludes
net losses on early extinguishment of debt totaling $87.8 million
($74.6
million to net income, or $0.16 per share) for financing transactions
related to the acquisition of Phelps
Dodge.
|
e. |
Includes
interest expense from the debt issued in connection with the acquisition
of Phelps Dodge.
|
f. |
Includes
a charge to revenues on the redemption of FCX’s Gold-Denominated Preferred
Stock, Series II totaling $69.0 million ($36.6 million to net loss
or
$0.10 per share) in the first quarter of
2006.
|
g. |
Pro
forma diluted weighted average shares outstanding for the three months
ended March 31, 2007 and 2006, were estimated as follows (in
millions):
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
Average
number of basic shares of historical FCX common stock
|
|
|
|
|
|
outstanding
|
|
197.2
|
|
187.9
|
|
Dilutive
securities
|
|
25.2
|
|
-
|
a
|
Shares
of FCX common stock issued in acquisition
|
|
137.1
|
|
137.1
|
|
Sale
of FCX sharesb
|
|
47.2
|
|
47.2
|
|
Mandatory
convertible preferred stockb
|
|
46.9
|
|
-
|
a
|
Pro
forma average number of FCX common shares outstanding
|
|
453.6
|
|
372.2
|
|
a. These
securities were not dilutive because of the pro forma loss for the
period.
b. Refer
to
Note 8 for additional information.
The
above
pro forma consolidated information has been prepared for illustrative purposes
only and is not intended to be indicative of the results that would actually
have occurred, or the results expected in future periods, had the events
reflected herein occurred on the dates indicated.
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
As
a
result of the acquisition of Phelps Dodge, the following supplements the
significant accounting policies contained in FCX’s 2006 Annual Report on Form
10-K for the year ended December 31, 2006.
Basis
of Presentation.
Effective March 20, 2007, FCX began consolidating its wholly owned subsidiary,
Phelps Dodge. Phelps Dodge’s financial information consolidates the results of
operations and the assets and liabilities of majority-owned subsidiaries and
reports the minority interest. Investments in unincorporated joint ventures,
including Phelps Dodge’s Morenci copper mine, are reflected using the
proportionate consolidation method. All significant intercompany transactions
and balances have been eliminated.
Investments
in unconsolidated companies owned 20 percent or more are recorded on an equity
basis. Investments in companies owned less than 20 percent, and for which FCX
does not exercise significant influence, are carried at cost.
Foreign
Currencies.
Except
as noted below, the assets and liabilities of foreign subsidiaries are
translated at current exchange rates, while revenues and expenses are translated
at average rates in effect for the period. The related translation gains and
losses are included in accumulated other comprehensive income (loss) within
stockholders’ equity. For the translation of the financial statements of certain
foreign subsidiaries dealing predominantly in U.S. dollars, assets receivable
and liabilities payable in cash are translated at current exchange rates, and
inventories and other non-monetary assets and liabilities are translated at
historical rates. Gains and losses resulting from translation of such financial
statements are included in operating results, as are gains and losses incurred
on foreign currency transactions.
Mill
and Leach Stockpiles.
Mill and
leach stockpiles acquired in connection with the Phelps Dodge acquisition are
stated at the lower of cost or market. FCX uses the average cost method for
recording its mill and leach stockpiles.
Both
mill
and leach stockpiles contain low-grade ore that has been extracted from the
ore
body and is available for copper recovery. For mill stockpiles, recovery is
through milling, concentrating, smelting and refining or, alternatively, by
concentrate leaching, and for leach stockpiles through exposure to acidic
solutions that dissolve contained copper and deliver it in solution to
extraction processing facilities. The recorded cost of
mill
and
leach stockpiles include mining and haulage costs incurred to deliver ore to
stockpiles, including associated depreciation, depletion, amortization and
overhead costs.
Because
the determination of copper contained in mill and leach stockpiles by physical
count is often impracticable, reasonable estimation methods are employed. The
quantity of material delivered to mill and leach stockpiles is based on surveyed
volumes of mined material and daily production records. Sampling and assaying
of
blasthole cuttings determine the estimated copper grades of material delivered
to mill and leach stockpiles.
Expected
copper recovery rates for mill stockpiles are determined by metallurgical
testing. The recoverable copper in mill stockpiles can be extracted into copper
concentrate almost immediately. Estimates of copper contained in mill stockpiles
are adjusted as material is added or removed and fed to the mill. Expected
copper recovery rates for leach stockpiles are determined using small-scale
laboratory tests, small- to large-scale column testing (which simulates the
production-scale process), historical trends and other factors, including
mineralogy of the ore and rock type.
Ultimate
recovery of copper contained in leach stockpiles can vary from a low percentage
to more than 90 percent depending on several variables, including type of copper
recovery, mineralogy and particle size of the rock. Although as much as 70
percent of the copper ultimately recoverable may be extracted during the first
year, the remaining copper is recovered over several years. Processes and
recovery rates are monitored continuously. Recovery rate estimates are adjusted
periodically as additional information becomes available and as related
technology changes.
Goodwill.
Goodwill
has an indefinite useful life and is not amortized, but rather is tested for
impairment at least annually, unless events occur or circumstances change
between annual tests that would more likely than not reduce the fair value
of a
related reporting unit below its carrying amount.
Goodwill
totaling $7.4 billion at March 31, 2007, was recorded as a result of the Phelps
Dodge acquisition. This amount, which represents the excess of the purchase
price over the fair value of assets acquired and liabilities assumed, is subject
to adjustment as FCX completes its analysis of these fair values, which may
take
up to one year after the acquisition date. In accordance with accounting rules,
goodwill resulting from a business combination is assigned to the acquiring
entity's reporting units that are expected to benefit from the business
combination, regardless of whether other assets or liabilities of the acquired
entity have been assigned to those reporting units. FCX is in the process of
determining the appropriate definition of reporting units for the allocation
of
goodwill, which could range from either an individual mine to an aggregation
of
several mines. The allocation of goodwill to reporting units will be completed
at the conclusion of this analysis.
Intangible
Assets.
Intangible assets acquired as a result of the Phelps Dodge acquisition include
water rights, land easements and trademarks primarily at North American mining
sites. The principal amortization method for such intangible assets is the
computation of an overall unit rate applied to pounds of principal products
sold
from mine production. As of March 31, 2007, FCX has not completed the
identification and valuation of intangible assets resulting from the acquisition
of Phelps Dodge. FCX expects to record additional intangible assets, which
could
include such items as customer relationships and patents, as it identifies
and
values them, which will result in a reduction of the amount allocated to
goodwill.
Environmental
Expenditures.
Environmental expenditures are expensed or capitalized, depending upon their
future economic benefits. Liabilities for such expenditures are recorded when
it
is probable that obligations have been incurred and the costs can be reasonably
estimated. For closed facilities and closed portions of operating facilities
with environmental obligations, an environmental liability is accrued when
a
decision to close a facility, or a portion of a facility, is made by management
and the environmental liability is considered to be probable. Environmental
liabilities attributed to the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) or analogous state programs are
considered probable when a claim is asserted, or is probable of assertion,
and
FCX, or any of its subsidiaries, have been associated with the site. Other
environmental remediation liabilities are considered probable based on specific
facts and circumstances. FCX’s estimates of these costs are based on an
evaluation of various factors, including
currently
available facts, existing technology, presently enacted laws and regulations,
remediation experience, whether or not FCX is a potentially responsible party
(PRP) and the ability of other PRPs to pay their allocated portions. With the
exception of those obligations assumed in the acquisition of Phelps Dodge (see
Note 11), environmental obligations are recorded on an undiscounted basis.
Where
the available information is sufficient to estimate the amount of liability,
that estimate has been used. Where the information is only sufficient to
establish a range of probable liability and no point within the range is more
likely than any other, the lower end of the range has been used. Possible
recoveries of some of these costs from other parties are not recognized in
the
consolidated financial statements until they become probable. Legal costs
associated with environmental remediation, as defined in Statement of Position
96-1, “Environmental Remediation Liabilities,” are included as part of the
estimated liability.
At
March
31, 2007, FCX recorded approximately $356 million in the consolidated balance
sheet to reflect the fair value of environmental liabilities assumed in the
Phelps Dodge acquisition. At March 31, 2007, the unescalated, undiscounted
environmental reserve totaled approximately $382 million, leaving approximately
$26 million to be accreted over time.
4.
|
PENSION
AND POSTRETIREMENT BENEFITS
|
With
the
acquisition of Phelps Dodge, FCX acquired trusteed, non-contributory pension
plans covering substantially all of Phelps Dodge’s U.S. employees. The
applicable plan design determines the manner in which benefits are calculated
for any particular group of employees. With respect to certain of these plans,
benefits are calculated based on final average monthly compensation and years
of
service. In the case of other plans, benefits are calculated based on a fixed
amount for each year of service. Participants in the Phelps Dodge plans
generally vest in their accrued benefits after five years of service. At the
date of acquisition, Phelps Dodge had both underfunded and overfunded pension
plans. The funded status of Phelps Dodge’s overfunded pension plans was
approximately $129 million, which represents the fair value of plans assets
of
approximately $1,363 million less the projected benefit obligation of
approximately $1,234 million. The funded status of Phelps Dodge’s underfunded
pension plans was approximately $(70) million, which represents a projected
benefit obligation of approximately $81 million less the fair value of plan
assets of approximately $11 million. The majority of plan assets are invested
in
a diversified portfolio of stocks, bonds and cash and cash equivalents, which
consist primarily of equity and fixed-income securities. As of March 19, 2007,
a
discount rate of 5.78 percent and a wage increase assumption of 4.25 percent
were used to estimate the projected benefit obligation, and the long-term
expected rate of return on plan assets was 8.5 percent. Under the merger
agreement between FCX and Phelps Dodge, FCX will continue all of Phelps Dodge’s
existing pension plans until at least December 31, 2008.
In
addition to
the
pension benefits, Phelps Dodge provides postretirement medical and life
insurance benefits for certain U.S. employees and, in some cases, employees
of
international subsidiaries. These postretirement benefits vary among plans,
and
many plans require contributions from retirees. The expected cost of providing
such postretirement benefits is accrued during the years employees render the
necessary service. At the date of acquisition, the funded status of the Phelps
Dodge postretirement medical and life insurance benefits was approximately
$(80)
million, which represents a benefit obligation of approximately $253 million
less the fair value of plan assets of approximately $173 million. The plan
assets consist of two Voluntary Employees’ Beneficiary Association (VEBA)
trusts, which FCX acquired through the acquisition of Phelps Dodge. One trust
is
dedicated to funding postretirement medical obligations and the other to funding
postretirement life insurance obligations for eligible U.S. retirees. The
majority of the assets of the VEBA trusts are invested in U.S. fixed-income
securities. FCX’s funding policy provides that contributions to the VEBA trusts
shall be at least sufficient to pay plan benefits as they come due. Additional
contributions may be made from time to time. For participants not eligible
to
receive payments from the VEBA trusts, FCX’s funding policy provides that
contributions shall be at least equal to the cash basis obligations. As of
March
19, 2007, a discount rate of 5.62 percent was used to estimate the accumulated
postretirement benefit obligation for the medical plans and 5.66 percent for
the
retiree life insurance plan. The long-term expected rate of return on plan
assets for the VEBA medical and life insurance trusts was 3.7 percent and 4.5
percent, respectively.
Net
periodic benefit cost for pension and postretirement benefits for Phelps
Dodge
have been included in the consolidated financial statements beginning March
20,
2007. The components of net periodic benefit cost for pension and postretirement
benefits for all of FCX’s plans for the three-month periods ended March 31, 2007
and 2006, follow (in millions):
|
|
|
|
|
|
|
Phelps
|
|
|
FCX
|
|
PT
Freeport Indonesia
|
|
Atlantic
Copper
|
|
Dodge
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
Service
cost
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
1.2
|
|
$
|
1.0
|
|
$
|
-
|
|
$
|
-
|
|
$
|
0.8
|
|
Interest
cost
|
|
0.3
|
|
|
0.4
|
|
|
1.4
|
|
|
1.2
|
|
|
1.1
|
|
|
1.1
|
|
|
2.5
|
|
Expected
return on plan assets
|
|
(0.1
|
)
|
|
0.3
|
|
|
(0.8
|
)
|
|
(0.6
|
)
|
|
-
|
|
|
-
|
|
|
(3.5
|
)
|
Amortization
of prior service cost
|
|
1.1
|
|
|
1.1
|
|
|
0.2
|
|
|
0.2
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of net actuarial loss
|
|
-
|
|
|
-
|
|
|
0.2
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
|
-
|
|
Net
periodic benefit cost
|
$
|
1.4
|
|
$
|
1.9
|
|
$
|
2.2
|
|
$
|
1.9
|
|
$
|
1.3
|
|
$
|
1.3
|
|
$
|
(0.2
|
)
|
FCX’s
basic net income per share of common stock was calculated by dividing net income
applicable to common stock by the weighted-average number of common shares
outstanding during the year. The following is a reconciliation of net income
and
weighted-average common shares outstanding for purposes of calculating diluted
net income per share (in millions, except per share amounts):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
Net
income before preferred dividends
|
|
$
|
492.9
|
|
$
|
266.8
|
|
Preferred
dividends
|
|
|
(16.7
|
)
|
|
(15.1
|
)
|
Net
income applicable to common stock
|
|
|
476.2
|
|
|
251.7
|
|
Plus
income impact of assumed conversion of:
|
|
|
|
|
|
|
|
5½%
Convertible Perpetual Preferred Stock
|
|
|
15.1
|
|
|
15.1
|
|
6¾%
Mandatory Convertible Preferred Stock
|
|
|
1.6
|
|
|
-
|
|
7%
Convertible Senior Notes
|
|
|
0.1
|
|
|
5.1
|
|
Diluted
net income applicable to common stock
|
|
$
|
493.0
|
|
$
|
271.9
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
216.8
|
|
|
187.9
|
|
Add:
|
|
|
|
|
|
|
|
Shares
issuable upon conversion, exercise or vesting of:
|
|
|
|
|
|
|
|
5½%
Convertible Perpetual Preferred Stock
|
|
|
23.3
|
|
|
21.7
|
|
6¾%
Mandatory Convertible Preferred Stock
|
|
|
2.0
|
|
|
-
|
|
7%
Convertible Senior Notes
|
|
|
0.2
|
|
|
10.2
|
|
Dilutive
stock options
|
|
|
1.0
|
|
|
1.1
|
|
Restricted
stock
|
|
|
0.7
|
|
|
0.6
|
|
Weighted
average common shares outstanding for purposes of
calculating
|
|
|
|
|
|
|
|
diluted
net income per share
|
|
|
244.0
|
|
|
221.5
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share of common stock
|
|
$
|
2.02
|
|
$
|
1.23
|
|
Outstanding
stock options with exercise prices greater than the average market price of
FCX’s common stock during the period are excluded from the computation of
diluted net income per share of common stock. FCX’s convertible instruments are
also excluded when including the conversion of these instruments increases
reported diluted net income per share. A summary of the excluded amounts
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Weighted
average outstanding options (in thousands)
|
|
996.4
|
|
677.5
|
|
Weighted
average exercise price
|
|
$63.76
|
|
$63.77
|
|
TABLE OF CONTENTS
A
summary
of inventories, which were recorded using the average cost method (except where
otherwise indicated) and include the impact of purchase accounting adjustments
as described in Note 2, follows (in millions):
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Mining
Operations:
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1.7
|
|
$
|
-
|
|
Work-in-process
|
|
|
91.5
|
|
|
10.9
|
|
Finished
goodsa
|
|
|
1,300.4
|
|
|
3.8
|
|
Stockpiles
|
|
|
772.1
|
|
|
-
|
|
Atlantic
Copper:
|
|
|
|
|
|
|
|
Concentrates
- First in, first out (FIFO)
|
|
|
63.8
|
|
|
189.1
|
|
Work-in-process
- FIFO
|
|
|
276.7
|
|
|
168.1
|
|
Finished
goods - FIFO
|
|
|
5.5
|
|
|
12.3
|
|
PDIC:
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
122.7
|
|
|
-
|
|
Work-in-process
|
|
|
12.9
|
|
|
-
|
|
Finished
goods
|
|
|
62.8
|
|
|
-
|
|
Total
product inventories
|
|
|
2,710.1
|
|
|
384.2
|
|
Total
materials and supplies, netb
|
|
|
652.9
|
|
|
340.0
|
|
Total
inventories
|
|
$
|
3,363.0
|
|
$
|
724.2
|
|
|
|
|
|
|
|
|
|
a. |
Finished
goods inventory associated with mining operations primarily includes
concentrates and cathodes.
|
b. |
Materials
and supplies inventories are net of obsolescence reserves totaling
$16.7
million at March 31, 2007, and $16.4 million at December 31,
2006.
|
Following
is a summary of FCX’s trust assets, which were acquired in connection with the
acquisition of Phelps Dodge, at March 31, 2007 (in millions):
Global
reclamation and remediation
|
$
|
422.4
|
|
Financial
assurance
|
|
99.4
|
a
|
Non-qualified
retirement benefits
|
|
58.9
|
|
Change
of control
|
|
42.3
|
|
Other
|
|
0.2
|
|
Total
trust assets
|
$
|
623.2
|
|
a. |
Represents
legally restricted funds for the use of asset retirement obligation
activities at Chino, Tyrone and Cobre.
|
8.
|
DEBT
AND EQUITY TRANSACTIONS
|
At
March
31, 2007, FCX had $12.0 billion in debt, including $10.4 billion in acquisition
debt, $0.9 billion in Phelps Dodge debt and $0.7 billion of previously existing
FCX debt. In connection with financing its acquisition of Phelps Dodge, FCX
used
$2.5 billion of cash and funded the remainder with proceeds from the following
debt transactions:
· |
borrowed
$10.0 billion under a new $11.5 billion senior credit facility;
and
|
· |
issued
$6.0 billion in senior notes.
|
Additionally,
in accordance with its plan to reduce debt, FCX completed the following equity
transactions immediately following the closing of the acquisition, using the
net
proceeds to reduce borrowings under the credit facility:
· |
sold
47.15 million shares of common stock at $61.25 per share for net
proceeds
of $2.8 billion; and
|
· |
sold
28.75 million shares of 6¾% mandatory convertible preferred stock for net
proceeds of $2.8 billion.
|
A
summary
of the financing transactions associated with the Phelps Dodge acquisition
and
the related debt balances at March 31, 2007, follows (in billions):
|
|
|
|
|
|
|
March
31,
|
|
|
Borrowings
|
|
Repayments
|
|
2007
|
|
$11.5
billion senior credit facility:
|
|
|
|
|
|
|
|
|
|
$2.5
billion senior term loan due March 2012
|
$
|
2.5
|
|
$
|
(2.5
|
)
|
$
|
-
|
|
$7.5
billion senior term loan due March 2014
|
|
7.5
|
|
|
(3.1
|
)
|
|
4.4
|
|
$1.5
billion revolving credit facilities
|
|
-
|
|
|
-
|
|
|
-
|
|
$6.0
billion in senior notes:
|
|
|
|
|
|
|
|
|
|
$1.0
billion of senior floating rate notes due April 2015
|
|
1.0
|
|
|
-
|
|
|
1.0
|
|
$1.5
billion of 8¼% Senior Notes due April 2015
|
|
1.5
|
|
|
-
|
|
|
1.5
|
|
$3.5
billion of 8⅜% Senior Notes due April 2017
|
|
3.5
|
|
|
-
|
|
|
3.5
|
|
|
$
|
16.0
|
|
$
|
(5.6
|
)
|
$
|
10.4
|
|
Senior
Credit Facility.
At the
close of the Phelps Dodge acquisition, the senior credit facility consisted
of a
$2.5 billion term loan due March 2012, a $7.5 billion term loan due March 2014
and $1.5 billion in revolving credit facilities due March 2012. The revolving
credit facilities are composed of a $1.0 billion line of credit available to
FCX
and a $0.5 billion line of credit available to both FCX and PT Freeport
Indonesia. The $0.5 billion line of credit represents an amendment and
restatement to the FCX/PT Freeport Indonesia $465 million revolver that was
scheduled to mature in 2009. Following the closing of the Phelps Dodge
acquisition, FCX applied the net proceeds from the issuance and sale of its
common stock and mandatory convertible preferred stock to repay in full the
$2.5
billion term loan due March 2012 and to partially repay $3.1 billion of the
$7.5
billion term loan due March 2014. At March 31, 2007, $4.4 billion of the term
loan due March 2014 was outstanding.
Interest
on the $1.5 billion revolving credit facilities currently accrues at the London
Interbank Offered Rate (LIBOR) plus a margin 1.25 percent, subject to an
increase or decrease in the interest rate margin based on the credit rating
assigned by Standard & Poor’s and Moody’s to the senior credit facility.
Interest on the term loan due March 2014 accrues at LIBOR plus 1.75
percent.
The
senior credit facility contains covenants, including limitations on
indebtedness, liens, asset sales, prepayments of indebtedness and transactions
with affiliates. Financial leverage ratios must be met in order to incur certain
indebtedness and are required to be maintained when there are amounts drawn
or
letters of credits outstanding under the revolving credit facilities. The senior
credit facility is guaranteed by certain wholly owned subsidiaries of FCX and
is
secured by the pledge of equity in substantially all of these subsidiary
guarantors and certain other non-guarantor subsidiaries of FCX, and intercompany
indebtedness owed to
FCX.
Borrowings by FCX and PT Freeport Indonesia under the $0.5 billion revolver
are
also secured with a pledge of 50.1 percent of the outstanding stock of PT
Freeport Indonesia, over 90 percent of the assets of PT Freeport Indonesia
and,
with respect to borrowings by PT Freeport Indonesia, a pledge of the Contract
of
Work.
Senior
Notes.
Interest
on the senior notes is payable semiannually on April 1 and October 1, beginning
on October 1, 2007. Interest on the $1.0 billion of senior floating rate notes
due April 2015 accrues at the six-month LIBOR plus 3.25 percent. FCX may redeem
some or all of the notes at its option at make-whole redemption prices, and
afterwards at stated redemption prices. FCX may make these optional make-whole
redemptions prior to April 1, 2009, for the senior floating rate notes; April
1,
2011, for the 8¼% Senior Notes due April 2015; and April 1, 2012, for the 8⅜%
Senior Notes due April 2017. The indenture governing the notes contains
restrictions, including restrictions on incurring debt, creating liens, selling
assets, entering into certain transactions with affiliates, paying cash
dividends on common stock, repurchasing or redeeming common or preferred equity,
prepaying subordinated debt and making investments.
Preferred
Stock.
On May
10, 2010, the 6¾% mandatory convertible preferred stock will automatically
convert into between approximately 39 million and 47 million shares of FCX
common stock at a conversion rate that will be determined based on FCX’s common
stock price. The conversion rate per $100 face amount of mandatory preferred
will be 1.6327 when the FCX common stock price is at or below $61.25 and 1.3605
when the FCX common stock price is at or above $73.50. For FCX common stock
prices between these levels, the conversion rate will be equal to $100 divided
by FCX’s common stock price. Prior to May 1, 2010, holders may convert their 6¾%
mandatory convertible preferred stock at a conversion rate of 1.3605. Beginning
August 1, 2007, dividends are payable quarterly on February 1, May 1, August
1
and November 1.
In
the
first quarter of 2007, FCX recorded net charges totaling $87.8 million ($74.6
million to net income or $0.31 per share) associated with the accelerated
amortization of deferred financing costs for the credit facility.
In
May
2007, FCX redeemed its 10⅛% Senior Notes ($272.4 million balance) for $286.2
million. FCX also prepaid an additional $500 million of term debt in April
2007.
As a result of these transactions, FCX will record charges totaling
approximately $24 million (approximately $21 million to net income) in the
second quarter of 2007 related to the premiums paid and the accelerated
recognition of deferred financing costs associated with these debt reductions.
FCX’s
first-quarter 2007 income tax provision resulted from taxes on earnings of
international operations ($505.7 million), offset by a tax benefit from losses
in the U.S. ($45.5 million). The first-quarter 2007 income tax provision
primarily related to the operations of PT Freeport Indonesia, FCX’s Indonesian
mining unit. Also included is $33.5 million associated with Phelps Dodge’s
earnings for the 12-day period ending March 31, 2007. FCX’s income tax provision
($221.7 million) for first-quarter 2006 resulted from taxes on PT Freeport
Indonesia’s earnings.
FCX’s
effective income tax rate was approximately 43 percent for first-quarter 2007
and 2006. The difference between the effective income tax rates for the first
quarters of 2007 and 2006 and the U.S. federal statutory rate of 35 percent
primarily was attributable to withholding taxes incurred in connection with
earnings from Indonesian mining operations and income taxes incurred by PT
Indocopper Investama.
Effective
January 1, 2007, FCX adopted FASB Interpretation No. 48 (FIN 48), “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,”
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Upon adoption, FCX recognized a cumulative
effect adjustment to increase beginning retained earnings of approximately
$4
million. Following adoption of FIN 48, FCX no longer classifies interest and
penalties accrued for unrecognized tax benefits within the calculation of the
provision for income taxes. The following provides a summary of first-quarter
2007 activity associated with the reserve for unrecognized tax benefits,
interest and penalties (in millions):
|
Unrecognized
|
|
|
|
|
|
|
|
Tax
Benefit
|
|
Interest
|
|
Penalties
|
Balance,
at beginning of period
|
$
|
40.8
|
|
$
|
10.6
|
|
$
|
-
|
Additions:
|
|
|
|
|
|
|
|
|
Acquisition
of Phelps Dodge
|
|
220.4
|
|
|
6.6
|
|
|
1.7
|
Prior
year tax positions
|
|
1.2
|
|
|
1.0
|
|
|
-
|
Balance,
March 31, 2007
|
$
|
262.4
|
|
$
|
18.2
|
|
$
|
1.7
|
The
reserve for unrecognized tax benefits of $262.4 million at March 31, 2007,
includes $123.6 million ($116.3 million net of income tax benefits) that, if
recognized, would reduce FCX’s provision for income taxes.
For
first-quarter 2006, interest and penalties accrued for unrecognized tax benefits
recorded in the provision for income taxes totaled $3.1 million.
FCX
or
its subsidiaries file income tax returns in the U.S. federal jurisdiction and
various state and foreign jurisdictions. The tax years of FCX and its
significant subsidiaries that remain subject to examination are as
follows:
Jurisdiction
|
Years
Under Examination
|
Additional
Open Years
|
U.S.
Federal
|
1997-2005
|
2006
|
Indonesia
|
-
|
2002-2006
|
Peru
|
2003
|
1999-2002,
2004-2006
|
Chile
|
-
|
2003-2006
|
Arizona
|
-
|
2002-2006
|
New
Mexico
|
-
|
2003-2006
|
FCX
has
not identified any uncertain tax position for which it is reasonably possible
that the total amount of unrecognized tax benefit will significantly increase
or
decrease within the 12-month period following the date of adoption.
Interest
expense excludes capitalized interest of $6.8 million in the first quarter
of
2007 and $1.8 million in the first quarter of 2006.
11.
|
ENVIRONMENTAL,
RECLAMATION AND CLOSURE
|
FCX
has
the following environmental, reclamation and closure obligations following
its
acquisition of Phelps Dodge:
Environmental.
FCX
is
subject to various stringent federal, state and local environmental laws and
regulations that govern emissions of air pollutants; discharges of water
pollutants; and generation, handling, storage and disposal of hazardous
substances, hazardous wastes and other toxic materials. FCX also is subject
to
potential liabilities arising under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) or similar state laws that impose
responsibility on persons who arranged for the disposal of hazardous substances,
and on current and previous owners and operators of a facility for the cleanup
of hazardous substances released from the facility into the environment,
including damages to natural resources. In addition, FCX is subject to potential
liabilities under the Resource Conservation and Recovery Act (RCRA) and
analogous state laws that require responsible parties to remediate releases
of
hazardous or solid waste constituents into the environment associated with
past
or present activities.
Phelps
Dodge or its subsidiaries previously have been advised by EPA, the U.S. Forest
Service and several state agencies that, under CERCLA or similar state laws
and
regulations, they may be liable for costs of responding to environmental
conditions at a number of sites that have been or are being investigated by
EPA,
the U.S. Forest Service or states to determine whether releases of hazardous
substances have occurred and, if so, to develop and implement remedial actions
to address environmental concerns. Phelps Dodge or its
subsidiaries
also have previously been advised by trustees for natural resources that it
may
be liable under CERCLA or similar state laws for damages to natural resources
caused by releases of hazardous substances.
At
March
31, 2007, environmental reserves totaled approximately $356 million, which
reflected the fair value of the estimated obligations. The long-term portion
of
these reserves is included in accrued post retirement benefits and other
liabilities on the consolidated balance sheets and amounted to $250.4 million
at
March 31, 2007. At March 31, 2007, the unescalated, undiscounted environmental
reserve totaled approximately $382 million, leaving approximately $26 million
to
be accreted over time. These environmental obligations were estimated based
on
projected cash flows, which included an estimated long-term inflation rate
of
2.25 percent, and then discounted using a credit-adjusted risk-free interest
rate of 7.8 percent.
Pinal
Creek. The
Pinal
Creek site located near Miami, Arizona, has the most significant environmental
reserve of all sites totaling approximately $96 million. The Pinal Creek site
was listed under the Arizona Department of Environmental Quality (ADEQ) Water
Quality Assurance Revolving Fund program in 1989 for contamination in the
shallow alluvial aquifers within the Pinal Creek drainage near Miami, Arizona.
Since that time, environmental remediation has been performed by the members
of
the Pinal Creek Group (PCG), consisting of Phelps Dodge Miami, Inc., a
wholly owned subsidiary of Phelps Dodge, and two other companies. In 1998,
the
District Court approved a Consent Decree between the PCG members and the state
of Arizona resolving all matters related to an enforcement action contemplated
by the state of Arizona against the PCG members with respect to the groundwater
matter. The Consent Decree committed Phelps Dodge Miami, Inc. and the other
PCG
members to complete the remediation work outlined in the Consent Decree. That
work continues at this time pursuant to the Consent Decree and consistent with
state law and the National Contingency Plan prepared by EPA under
CERCLA.
Phelps
Dodge Miami, Inc. and the other PCG members have been pursuing contribution
litigation against three other parties involved with the site. Phelps Dodge
Miami, Inc. dismissed its contribution claims against one defendant when another
PCG member agreed to be responsible for any share attributable to that
defendant. Phelps Dodge Miami, Inc. and the other PCG members settled their
contribution claims against another defendant in April 2005. While the terms
of
the settlement are confidential, the proceeds of the settlement will be used
to
address remediation at the Pinal Creek site. The trial on the issue of
allocating liability has been postponed because of a discovery dispute and
related orders and appeals, and has not yet been rescheduled.
While recoveries
or payments may result from the contribution litigation, FCX cannot reasonably
estimate the amount and, therefore, has not taken this into consideration in
its
reserve estimates.
Phelps
Dodge Miami, Inc.’s share of the planned remediation work based on the interim
agreements between the parties has a cost range on an undiscounted and
unescalated basis for reasonably expected outcomes estimated to be from $90
million to $203 million. Approximately $96 million (based on discounted present
value calculations) remained in FCX’s Pinal Creek remediation reserve at March
31, 2007.
Other. At
March
31, 2007, the cost range for reasonably possible outcomes for all reservable
environmental remediation sites on an undiscounted and unescalated basis
(including Pinal Creek’s estimate of approximately $90 million to $203 million)
was approximately $336 million to $624 million (of which approximately $356
million has been reserved). Significant work is expected to be completed in
the
next several years to remediate these sites.
FCX
believes it has other potential claims for recovery from other third parties,
including the U.S. government and other potentially responsible parties (PRPs).
Neither claims nor offsets are recognized unless realization of such offsets
is
considered probable.
FCX
has
several sites for which no environmental reserve has been recognized because
it
is not probable that a successful claim will be made against FCX for those
sites, but for which there is a reasonably possible likelihood of an
environmental remediation liability. While liabilities, if any, ultimately
arising from potential environmental obligations that have not been reserved
at
this time may be material to the operating results of any single future quarter
or year, management does not believe such liability is likely to have a material
adverse
effect on FCX’s liquidity or financial position as such obligations could be
satisfied over a period of years.
The
following table summarizes environmental reserve activities for the period
ended
March 31, 2007 (in millions):
Balance,
beginning of period
|
$
|
-
|
|
Liabilities
assumed in acquisition of Phelps Dodge
|
|
358.4
|
|
Spending
against reserves
|
|
(2.3
|
)
|
Balance,
end of period
|
$
|
356.1
|
|
Asset
Retirement Obligations. In
connection with its acquisition of Phelps Dodge, FCX has recorded the following
asset retirement obligations (AROs) at March 31, 2007, accounted for in
accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations” (in
millions):
Asset
Retirement Obligations
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
$
|
-
|
|
Liabilities
assumed in acquisition of Phelps Dodge
|
|
406.2
|
|
Accretion
expense
|
|
1.0
|
|
Payments
|
|
(1.3
|
)
|
Balance,
end of period
|
$
|
405.9
|
|
At
March
31, 2007, FCX estimated its share of the total cost of AROs, including
anticipated future disturbances and cumulative payments, at approximately $1.3
billion (unescalated, undiscounted and on a third-party cost basis), leaving
approximately $900 million remaining to be accreted over time. These aggregate
costs may increase or decrease materially in the future as a result of changes
in regulations, engineering designs and technology, permit modifications or
updates, mine plans or other factors and as actual reclamation spending occurs.
ARO activities and expenditures generally are made over an extended period
of
time commencing near the end of the mine life; however, certain reclamation
activities could be accelerated if they are determined to be economically
beneficial.
At
March
31, 2007, FCX had a trust dedicated to funding global reclamation and
remediation activities totaling $422.4 million, and also had trust assets that
are legally restricted, totaling $99.4 million, to fund a portion of its asset
retirement obligations for Chino, Tyrone and Cobre as required for New Mexico
financial assurance.
FCX
has
the following additional contingencies in connection with the acquisition of
Phelps Dodge:
Letters
of Credit and Surety Bonds.
Standby
letters of credit totaled approximately $98 million at March 31, 2007, primarily
for reclamation, environmental obligations and workers’ compensation insurance
programs. In addition, FCX had surety bonds totaling approximately $94 million
at March 31, 2007, associated with reclamation, closure and environmental
obligations (approximately $66 million or 70 percent - see discussion below),
self-insurance bonds primarily for workers’ compensation (approximately $23
million or 25 percent) and miscellaneous bonds (approximately $5 million or
5
percent).
Insurance.
FCX
purchases a variety of insurance products to mitigate insurable losses. The
various insurance products typically have specified deductible amounts, or
self-insured retentions, and policy limits. FCX and Phelps Dodge each purchase
all-risk property insurance with varying site deductibles. FCX is in the process
of integrating the Phelps Dodge operations into its global property insurance
program and expects to complete this process by the end of second-quarter 2007.
FCX generally is self-insured for U.S. workers’ compensation, but purchases
excess insurance up to statutory limits. An actuarial study is performed twice
a
year by an independent, third-party actuary for various FCX casualty programs,
including workers’ compensation, to estimate required insurance reserves.
Insurance reserves totaled approximately $56 million at March 31,
2007.
Environmental
and Reclamation Programs. With
regard to the disclosed environmental, reclamation and closure obligations
discussed in Note 11, following provides a summary of the significant Arizona
and New Mexico environmental and reclamation programs and related
contingencies.
Significant
Arizona Environmental and Reclamation
Programs. FCX’s
Arizona properties are subject to regulatory oversight and compliance in several
areas. The ADEQ has adopted regulations for its aquifer protection permit (APP)
program that replaced previous Arizona groundwater quality protection permit
regulations. APP regulations require permits for certain facilities, activities
and structures for mining, concentrating and smelting and requires compliance
with aquifer water quality standards at an applicable point of compliance well
or location. The APP program also may require mitigation and discharge reduction
or elimination of some discharges.
An
application for an APP requires a description of a closure strategy to meet
applicable groundwater protection requirements following cessation of operations
and a cost estimate to implement the closure strategy. An APP may specify
closure requirements, which may include post-closure monitoring and maintenance
requirements. A more detailed closure plan must be submitted within 90 days
after a permitted entity notifies ADEQ of its intent to cease operations. A
permit applicant must demonstrate its financial capability to meet the closure
costs required under the APP.
Portions
of the acquired Phelps Dodge Arizona mining facilities that operated after
January 1, 1986, also are subject to the Arizona Mined Land Reclamation Act
(AMLRA). AMLRA requires reclamation to achieve stability and safety consistent
with post-mining land use objectives specified in a reclamation plan.
Reclamation plans require approval by the State Mine Inspector and must include
a cost estimate to perform the reclamation measures specified in the plan.
Financial assurance must be provided under AMLRA covering the estimated cost
of
performing the reclamation plan.
At
March
31, 2007, FCX had accrued closure costs of approximately $71 million for its
Arizona operations. The amount of financial assurance currently demonstrated
for
Arizona closure and reclamation activities is approximately $183 million.
The
Tohono facility is located on Tohono O’odham Nation (the Nation) property in
southern Arizona. Tohono’s leases and Mine Plans of Operations (MPOs) impose
certain environmental compliance, closure and reclamation requirements, with
closure and reclamation actions required upon termination of the leases, which
currently expire between 2012 and 2017, unless terminated earlier in accordance
with the terms of the leases. Previous studies indicate that closure and
reclamation requirements are estimated at approximately $5 million. Phelps
Dodge
previously provided interim financial assurance in the amount of $5.1 million,
of which $5.0 million is in the form of a corporate performance guarantee.
Tohono has informally obtained an extension from the Nation to update the
previous closure and reclamation studies and associated cost estimates by June
2008.
Significant
New Mexico Environmental and Reclamation
Programs. FCX’s
New
Mexico operations are subject to regulation under the New Mexico Water Quality
Act and the Water Quality Control Commission (WQCC) regulations adopted under
that Act. The New Mexico Environment Department (NMED) has required each of
these operations to submit closure plans for NMED’s approval. The closure plans
must describe measures to be taken to prevent groundwater quality standards
from
being exceeded following the closure of discharging facilities and to abate
any
groundwater or surface water contamination.
FCX’s
New
Mexico operations also are subject to regulation under the New Mexico Mining
Act
(the Mining Act), which was enacted in 1993, and the Mining Act Rules, which
are
administered by Mining Minerals Division (MMD). Under the Mining Act, mines
are
required to submit and obtain approval of closeout plans describing the
reclamation to be performed following closure of the mines or portions of the
mines.
Chino,
Tyrone and Cobre each have NMED-issued closure permits and MMD-approved closeout
plans. Chino’s closure permit was appealed to the WQCC by a third party. The
appeal originally was dismissed by the WQCC on procedural grounds, but that
decision was overturned by the New Mexico Court of Appeals. The WQCC has
postponed the hearing on the Chino closure permit pending a report by the
parties regarding
settlement
discussions. Tyrone appealed certain conditions in its closure permit to the
WQCC, which upheld the permit conditions. Tyrone appealed the WQCC’s decision to
the Court of Appeals, and on June 15, 2006, the Court of Appeals overturned
two
conditions that Tyrone had challenged in its closure permit. The New Mexico
Supreme Court denied Petitions for Certiorari filed by other parties. The case
has been remanded to the WQCC for further proceedings to address the Court
of
Appeals decision and a hearing before the WQCC is set for June 12, 2007. Hidalgo
has applied for renewal of its discharge permit, which includes a requirement
for an updated closure plan. Hidalgo expects NMED to issue a new permit,
including permit conditions regarding closure and financial
assurance.
The
terms
of the NMED closure permits and MMD-approved closeout plans for Chino, Tyrone
and Cobre require the facilities to conduct supplemental studies concerning
closure and closeout, including feasibility studies to evaluate additional
closure and reclamation alternatives. The feasibility studies are due, along
with amended closure plans, before the end of the five-year permit terms, which
end in 2008 for Chino and Tyrone and in 2009 for Cobre. Chino’s feasibility
study report was submitted in February 2007. The terms of the NMED closure
permits also require the facilities to prepare and submit abatement plans to
address groundwater that exceeds New Mexico groundwater quality standards as
well as potential sources of future groundwater contamination. Changes to the
existing closure plans and additional requirements arising from the abatement
plans could increase or decrease the cost of closure and closeout. Cobre
submitted an application to MMD and NMED for a standby permit to defer
implementation of closure and reclamation requirements, which was approved
on
December 5, 2006. Cobre continues on care-and-maintenance status.
Internal
cost estimates to perform the work (internal cost basis) generally are lower
than the cost estimates used for financial assurance because of savings from
the
use of internal personnel and equipment as opposed to third-party contractor
costs, and opportunities to prepare the site for more efficient reclamation
as
mining progresses, among other factors. FCX estimates its total cost, on an
internal cost basis, to perform the requirements of the approved closure and
closeout permits to be approximately $283 million for Chino, $338 million for
Tyrone and $39 million for Cobre (undiscounted and unescalated) over the
100-year period of the closure and closeout plans. Cost estimates, on a
third-party cost basis used to determine the fair value of closure and closeout
accrual for SFAS No. 143 totaled approximately $391 million for Chino, $438
million for Tyrone and $47 million for Cobre (undiscounted and unescalated).
At
March 31, 2007, FCX had accrued approximately $53 million for Chino, $201
million for Tyrone, $9 million for Cobre and $4 million for Hidalgo.
The
terms
of the permits also require Chino, Tyrone, Cobre and Hidalgo to provide and
maintain financial assurance based upon the estimated cost to the state of
New
Mexico to implement the closure and closeout plans, including any long-term
operation and maintenance obligations, in the event of a default by the
operators. The third-party cost estimates for financial assurance under the
existing permits are $395 million for Chino, $373 million for Tyrone and $45
million for Cobre on an undiscounted and unescalated basis over the 100-year
period of the closure and closeout plans. Hidalgo is updating its cost estimate
as part of its pending closure permit renewal. These cost estimates are
converted to a discounted present value basis to determine the amount of
financial assurance required for each facility. Financial assurance amounts
as
of March 31, 2007, which reflected reductions for work completed through 2006
and agreed upon by NMED and MMD, were $185 million for Chino and $29 million
for
Cobre. As of April 23, 2007, Tyrone’s financial assurance requirement was
adjusted to $218 million.
Up
to 70
percent of the financial assurance for Chino, Tyrone and Cobre is in the form
of
third-party guarantees provided by Phelps Dodge. The terms of the applicable
regulations and the guarantees require Phelps Dodge to meet certain financial
tests. Phelps Dodge provided demonstrations that it met the applicable financial
tests under the terms of the applicable regulations and the guarantees as of the
end of 2006. If it is determined that Phelps Dodge no longer meets the
applicable financial tests following its acquisition by FCX, the Phelps Dodge
guarantees would have to be replaced with financial assurance in another form.
Legal. Columbian
Chemicals Company (Columbian), formerly a subsidiary of Phelps Dodge, together
with several other companies, is a defendant in an action entitled
Technical
Industries, Inc. v. Cabot Corporation, et al.,
No. CIV
03-10191 WGY, filed on January 30, 2003, in the U.S. District Court in Boston,
Massachusetts, and 14 other actions filed in four U.S. district courts, on
behalf of a purported class of all individuals or entities who purchased carbon
black directly from the defendants since January 1999. The Judicial Panel on
Multidistrict
Litigation consolidated all of these actions in the U.S. District Court for
the
District of Massachusetts under the caption In
Re
Carbon Black Antitrust Litigation.
The
consolidated amended complaint, which alleges that the defendants fixed the
prices of carbon black and engaged in other unlawful activities in violation
of
the U.S. antitrust laws, seeks treble damages in an unspecified amount and
attorney’s fees. The court certified a class that includes all direct purchasers
of carbon black in the United States from January 30, 1999, through January
18,
2005. On March 20, 2007, the court approved a $4 million settlement by one
group
of defendants. The motion for summary judgment filed by Columbian and the other
remaining defendants is still pending. The court has scheduled a trial date
of
July 23, 2007, if the motion is not granted.
A
separate action entitled Carlisle
Companies Incorporated, et al. v. Cabot Corporation, et al.,
was
filed against Columbian and other defendants on behalf of a group of affiliated
companies that opted out of the federal class action. This action, which asserts
similar claims as the class action, was filed in the Northern District of New
York on July 28, 2005, but was transferred to the District of Massachusetts,
where the class action is pending, and was consolidated with the class action
for pretrial purposes. No separate proceedings have occurred in this action,
which is not subject to the summary judgment motion in the class
action.
Actions
are pending in state courts in California, Florida, Kansas, South Dakota and
Tennessee on behalf of purported classes of indirect purchasers of carbon black
in those and six other states, alleging violations of state antitrust and
deceptive trade practices laws. Motions to dismiss are pending in the Kansas
and
South Dakota actions. A motion for class certification has been filed in the
Tennessee action. Similar actions filed in state courts in New Jersey and North
Carolina, and additional actions in Florida and Tennessee, have been dismissed.
Columbian also received a demand for relief on behalf of indirect purchasers
in
Massachusetts, but no lawsuit has been filed.
Phelps
Dodge retained responsibility for the claims against Columbian pursuant to
the
agreement for the sale of Columbian. Columbian has committed to provide
appropriate assistance to defend these matters. FCX believes the claims are
without merit and intends to defend the lawsuits vigorously.
Since
approximately 1990, Phelps Dodge or its subsidiaries have been named as a
defendant in a large number of product liability or premises
lawsuits claiming injury from exposure to asbestos found in electrical
wire products produced or marketed many years ago, or from asbestos at certain
Phelps Dodge properties. FCX believes its liability, if any, in these
matters will not have a material adverse effect, either individually or in
the
aggregate, upon its business, financial condition, liquidity, results of
operations or cash flow. There can be no assurance, however, that future
developments will not alter this conclusion.
13.
|
COMMITMENTS
AND GUARANTEES
|
Following
its acquisition of Phelps Dodge, FCX has unconditional purchase obligations
(take-or-pay contracts with terms in excess of one year) of $774.2 million,
comprising the procurement of copper anodes, transportation, electricity, other
supplies and services, sulfuric acid, port fee commitments and oxygen that
are
essential to its worldwide operations. A summary of the maturities of these
take-or-pay obligations at March 31, 2007, follows (in millions):
|
Total
|
|
1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
+5
Years
|
Take-or-pay
obligations
|
$
|
774.2
|
|
$
|
398.2
|
|
$
|
288.8
|
|
$
|
64.8
|
|
$
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following
its acquisition of Phelps Dodge, FCX is also a guarantor in financial guarantees
(including option guarantees and indirect guarantees of the indebtedness of
others) and indemnities. At its Morenci mine in Arizona, FCX has a venture
agreement dated February 7, 1986, with its business partner, Sumitomo Metal
Mining Arizona, Inc. (Sumitomo), which includes a put/call option guarantee
clause. FCX holds an 85 percent undivided interest in the Morenci complex.
Under
certain conditions defined in the venture agreement, Sumitomo has the right
to
sell its 15 percent share to FCX. Likewise, under certain conditions, FCX has
the right to exercise its purchase option to acquire Sumitomo’s share of the
venture. Based on calculations defined in the venture agreement, at March 31,
2007, the maximum potential payment FCX is obligated to make to Sumitomo upon exercise of the put option
(or FCX’s exercise of
its call option) totaled $146.7 million. As of March 31, 2007, FCX had
not recorded any liability in its consolidated financial statements in
connection with this guarantee as FCX does not believe, based on information
available, that it is probable that any
amounts
will be paid under this guarantee as the fair value of Sumitomo’s 15 percent
share is well in excess of the exercise price.
Prior
to
its acquisition by FCX, Phelps Dodge and its subsidiaries have, as part of
merger, acquisition, divestiture and other transactions entered into during
the
ordinary course of business (including transactions involving the purchase
and
sale of property), from time to time, indemnified certain sellers, buyers or
other parties related to the transaction from and against certain liabilities
associated with conditions in existence (or claims associated with actions
taken) prior to the closing date of the transaction. As part of certain
transactions, Phelps Dodge indemnified the counterparty from and against certain
excluded or retained liabilities existing at the time of sale that would
otherwise have been transferred to the party at closing. These indemnity
provisions generally now require FCX to indemnify the party against certain
liabilities that may arise in the future from the pre-closing activities of
Phelps Dodge for assets sold or purchased. The indemnity classifications include
environmental, tax and certain operating liabilities, claims or litigation
existing at closing and various excluded liabilities or obligations. Most of
these indemnity obligations arise from transactions that closed many years
ago,
and given the nature of these indemnity obligations, it is impossible to
estimate the maximum potential exposure. Except as described in the following
sentence, FCX does not consider any of such obligations as having a probable
likelihood of payment that is reasonably estimable, and accordingly, has not
recorded any obligations associated with these indemnities. With respect to
FCX’s environmental indemnity obligations, any expected costs from these
guarantees are accrued when potential environmental obligations are considered
by management to be probable and the costs can be reasonably estimated.
14.
|
DERIVATIVE
FINANCIAL INSTRUMENTS
|
In
connection with the acquisition of Phelps Dodge, we acquired certain derivative
instruments entered into by Phelps Dodge. The most significant of these
derivatives are zero-premium copper collars (consisting of both put and call
options) and copper put options. These derivative instruments do not qualify
for
hedge accounting and are adjusted to fair market value based on the forward
curve price and implied volatility as of the last day of the respective
reporting period, with the gain or loss recorded in revenues. The fair values
of
derivative instruments of Phelps Dodge following its acquisition by FCX are
based on valuations provided by third parties, purchased derivative pricing
models or widely published market closing prices at period end. A summary of
the
most significant acquired derivative financial instruments as of March 31,
2007,
follows (in millions, except per unit prices):
|
|
|
Expired
Derivative
|
|
|
|
|
Positions
|
|
|
|
|
Hedged
|
|
|
|
|
Open
Derivative Positions
|
|
Sales
|
|
|
|
|
Open
|
|
Gain/
|
|
|
|
Price
Per
|
|
Gain/
|
|
|
Position
|
|
(Loss)a
|
|
Maturity
|
|
Unit
|
|
(Loss)a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
price protection (lbs.)b
|
1,215.6
|
|
$
|
(38.1
|
)
|
December
2007
|
|
$
|
-
|
|
$
|
-
|
|
Copper
fixed-price rod sales (lbs.)
|
121.0
|
|
|
12.8
|
|
November
2008
|
|
|
3.07/lb.
|
|
|
2.2
|
|
Metal
purchase (lbs.)
|
55.4
|
|
|
0.3
|
|
June
2008
|
|
|
-
|
|
|
0.1
|
|
a. |
Gains/losses
are recognized in the consolidated statements of income for the
March
20, 2007 to March 31, 2007 period.
|
b. |
With
the acquisition of Phelps Dodge, FCX assumed copper hedging contracts
whereby 486 million pounds of copper for 2007 are
capped at $2.00 per pound. Mark-to-market accounting adjustments
on these
contracts resulted in charges of $38.1 million to revenues for the
first
quarter of 2007. At March 31, 2007, the liability associated with
these
contracts is $461.5 million (refer to discussion of copper price
protection program below for additional
information).
|
A
summary
of the significant hedging strategies and the derivative instruments used in
FCX’s risk management programs are provided below:
Metals
Hedging
Copper
Price Protection Program. Following
the acquisition of Phelps Dodge, FCX
has
Phelps Dodge’s 2007 copper price protection program, which consists of
zero-premium copper collars for 486 million pounds of copper, capped at $2.00
per pound and put options for 730 million pounds with a floor price of $0.95
per
pound. Hedge gains or losses from the protection program are recognized in
revenue. The 2007 copper price protection program matures December 31, 2007,
and
will settle in the first quarter of 2008 based on the annual average London
Metal Exchange (LME) price. FCX does not currently intend to enter into similar
hedging programs in the future.
Copper
Fixed-Price Rod Sales.
Some
copper wire customers request a fixed sales price instead of the New York
Commodity Exchange (COMEX) average price in the month of shipment. This
fixed-price sales exposure is hedged in a manner that allows FCX to receive
the
COMEX average price in the month of shipment while customers receive the
requested fixed price. Gains or losses from these contracts are recognized
in
revenue.
Metal
Purchase. FCX’s
international manufacturing operations may enter into metal (aluminum, copper
and lead) swap contracts to hedge metal purchase price exposure on fixed-price
sales contracts to allow FCX to lock in the cost of the metal used in
fixed-price sales of cable to customers. These swap contracts are generally
settled during the month of finished product shipment and result in a net LME
metal price consistent with that agreed with FCX’s customers. Gains or losses
from the swap contracts are recognized in production and delivery
costs.
With
the
acquisition of Phelps Dodge, FCX’s business consists of three primary operating
divisions - Indonesian mining, North American mining and South American mining.
A discussion of the reportable segments included in these operating divisions,
as well as FCX’s other reportable segments - Atlantic Copper and PDIC, follows.
FCX continues to evaluate reportable segments in conjunction with its review
of
its management reporting structure following the acquisition of Phelps Dodge,
and therefore, the following reportable segments may change in the future.
Indonesian
Mining.
Indonesian mining includes PT Freeport Indonesia’s copper and gold mining
operations and PT Puncakjaya Power’s power-generating operations (after
eliminations with PT Freeport Indonesia).
North
American Mining. North
American mining comprises copper operations from mining through rod production,
molybdenum operations from mining through conversion to chemical and
metallurgical products, marketing and sales. The North American mining operating
division includes one reportable copper production segment (Morenci), and also
includes as reportable segments Primary Molybdenum and Manufacturing.
The
Morenci open-pit mine, located in southeastern Arizona, primarily produces
electrowon copper cathodes and copper concentrates. In addition to copper,
the
Morenci mine produces molybdenum. FCX owns an 85 percent undivided interest
in
Morenci, an unincorporated joint venture, and applies the proportional
consolidation method of accounting. The remaining 15 percent is owned by
Sumitomo Metal Mining Arizona, Inc., a jointly owned subsidiary of Sumitomo
Metal Mining Co., Ltd. and Sumitomo Corporation. Each partner takes in kind
its
share of Morenci’s production.
The
Manufacturing segment consists of copper conversion facilities, including a
smelter, refinery, rod mills and specialty copper products facility. This
segment processes copper produced at the North American mines and copper
purchased from others into copper anode, cathode, rod and custom copper shapes.
The Miami smelter is the most significant source of sulfuric acid for the
various North American leaching operations. In addition, at times it smelts
and
refines copper and produces copper rod and shapes for customers on a toll basis.
Toll arrangements require the tolling customer to deliver appropriate
copper-bearing material to FCX’s facilities for processing into a product that
is returned to the customer. The customer pays FCX for processing its material
into the specified products.
The
Primary Molybdenum segment includes FCX’s wholly owned Henderson and Climax
molybdenum mines in Colorado, related conversion facilities and a technology
center. This segment is an integrated producer of molybdenum, with mining,
roasting and processing facilities that produce high-purity, molybdenum-based
chemicals, molybdenum metal powder and metallurgical products, which are sold
to
customers around the world. In addition, at times this segment roasts and/or
processes material on a toll basis. Toll arrangements require the tolling
customer to deliver appropriate molybdenum-bearing material to FCX’s facilities
for processing into a product that is returned to the customer. The customer
pays FCX for processing its material into the specified products. This segment
also includes a technology center whose primary activity is developing new
engineered products and applications.
Other
North American mining operations, although not reportable segments, include
FCX’s other southwestern U.S. copper mines - Bagdad, Sierrita, Chino, Cobre,
Tyrone, Miami, Bisbee and Tohono. In addition to copper, the Bagdad, Sierrita
and Chino mines produce molybdenum, gold, silver and rhenium. Other North
American mining operations also include the Safford project, which is currently
under development and a sales company, which functions as an agent to purchase
and sell copper from the North American mines and the Manufacturing segment
and
also purchases and sells any copper not sold by the South American mines to
third parties.
Intersegment
revenues of individual North American mines represent an internal allocation
based on sales to unaffiliated customers and realized copper prices.
Intersegment sales by the South American mines are based upon arms-length prices
at the time of the sale. Intersegment sales of any individual mine may not
be
reflective of the actual prices ultimately realized because of a variety of
factors, including additional processing, timing of sales to unaffiliated
customers and transportation premiums.
South
American Mining.
South
American mining includes one reportable copper production segment (Cerro Verde).
The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces
electrowon copper cathodes and copper concentrates. In addition to copper,
the
Cerro Verde mine produces molybdenum and silver. FCX owns a 53.56 percent equity
interest in Cerro Verde, which it fully consolidates and reports the minority
interest. The remaining 46.44 percent is held by SMM Cerro Verde Netherlands
B.V., Compañía de Minas Buenaventura S.A.A. and other minority shareholders
through shares publicly traded on the Lima Stock Exchange.
Cerro
Verde has recently completed an approximate $900 million expansion project,
which permits the mining of a primary sulfide ore body beneath the leachable
ore
body currently in production. Through the expansion, approximately 1.5 billion
tons of sulfide ore reserves averaging 0.47 percent copper and 0.02 percent
molybdenum will be processed through the new concentrator. Processing of the
sulfide ore began in the fourth quarter of 2006, and the mill is on schedule
to
reach design capacity during the second quarter of 2007. With the completion
of
the expansion, copper production at Cerro Verde initially is expected to
approximate 650 million pounds per year (approximately 348 million pounds per
year for FCX’s share). In addition, the expansion is expected to produce an
average of approximately 8 million pounds of molybdenum per year (approximately
4 million pounds per year for FCX’s share) for the next 10 years.
Other
South American mining operations, although not reportable segments, include
FCX’s other South American copper mines - Candelaria, Ojos del Salado and El
Abra - which include open-pit and underground mining, sulfide ore concentrating,
leaching, solution extraction and electrowinning. In addition to copper, the
Candelaria and Ojos del Salado mines produce gold and silver. FCX owns an 80
percent partnership interest in both the Candelaria and Ojos del Salado mines,
and owns a 51 percent partnership interest in the El Abra mine. FCX fully
consolidates these operations and reports the minority interest. Other South
American mining operations also includes other ancillary
operations.
Atlantic
Copper Smelting & Refining.
Atlantic
Copper smelting & refining includes FCX’s smelting and refining operations
in Spain.
PDIC.
PDIC
is
FCX’s international manufacturing division, which produces engineered products
principally for the global energy sector. Its operations are characterized
by
products with internationally competitive costs
and
quality, and specialized engineering capabilities. Its factories, which are
located in nine countries throughout Latin America, Asia and Africa, manufacture
energy cables for international markets. Three of PDIC’s international
manufacturing companies have continuous-cast copper rod facilities, and three
have continuous-cast aluminum rod facilities.
In
addition to the allocation of revenues, FCX allocates certain operating costs,
expenses and capital to the individual segments that may not be reflective
of
market conditions. FCX does not allocate all costs and expenses applicable
to a
mine or operation from the division or corporate offices. Accordingly, the
following segment information reflects management determinations that may not
be
indicative of actual financial performance of each segment as if it was an
independent entity.
(in
millions)
|
Indonesia
|
|
North
America
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Other
|
|
Total
|
|
Atlantic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
North
|
|
|
|
South
|
|
South
|
|
Copper
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
Manufac-
|
|
Primary
|
|
American
|
|
American
|
|
Cerro
|
|
American
|
|
American
|
|
Smelting
|
|
|
|
Other
&
|
|
FCX
|
|
First-Quarter
2007
|
Grasberg
|
|
Morenci
|
|
turing
|
|
Molybdenum
|
|
Mining
|
|
Mining
|
|
Verde
|
|
Mining
|
|
Mining
|
|
&
Refining
|
|
PDIC
|
|
Eliminations
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customers
|
$
|
1,331.9
|
a
|
-
|
|
206.6
|
|
52.2
|
|
60.4
|
|
319.2
|
|
14.4
|
|
125.1
|
|
139.5
|
|
454.0
|
|
57.0
|
|
1.3
|
|
2,302.9
|
|
Intersegment
|
|
376.6
|
|
21.6
|
|
8.8
|
|
-
|
|
(6.1
|
)
|
24.3
|
|
96.8
|
|
25.4
|
|
122.2
|
|
-
|
|
0.1
|
|
(523.2
|
)
|
-
|
|
Production
and delivery
|
|
322.5
|
|
29.5
|
|
209.8
|
|
51.8
|
|
61.0
|
|
352.1
|
b
|
44.6
|
|
71.4
|
|
116.0
|
b
|
427.0
|
|
48.6
|
|
(314.1
|
)
|
952.1
|
|
Depreciation,
depletion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
amortization
|
|
59.2
|
|
5.0
|
|
0.4
|
|
3.3
|
|
5.3
|
|
14.0
|
|
8.8
|
|
19.6
|
|
28.4
|
|
10.5
|
|
0.5
|
|
3.7
|
|
116.3
|
|
Exploration
and research
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
-
|
|
-
|
|
-
|
|
-
|
|
0.2
|
|
0.2
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
6.3
|
|
6.5
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
43.8
|
|
-
|
|
-
|
|
0.5
|
|
0.3
|
|
0.8
|
|
-
|
|
-
|
|
-
|
|
4.1
|
|
0.9
|
|
(0.7
|
)
|
48.9
|
|
Operating
income (loss)
|
$
|
1,283.0
|
|
(12.9
|
)
|
5.2
|
|
(3.4
|
)
|
(12.5
|
)
|
(23.6
|
)
|
57.8
|
|
59.5
|
|
117.3
|
|
12.4
|
|
7.1
|
|
(217.1
|
)
|
1,179.1
|
|
Interest
expense, net
|
$
|
4.0
|
|
-
|
|
0.2
|
|
-
|
|
(0.2
|
)
|
-
|
|
0.4
|
|
(0.2
|
)
|
0.2
|
|
7.2
|
|
0.3
|
|
40.2
|
|
51.9
|
|
Equity
in affiliated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
companies’
net earnings
|
$
|
-
|
|
-
|
|
-
|
|
-
|
|
0.2
|
|
0.2
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
4.3
|
|
4.5
|
|
Provision
for income taxes
|
$
|
452.9
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
21.7
|
|
19.2
|
|
40.9
|
|
-
|
|
-
|
|
(33.6
|
)
|
460.2
|
|
Minority
interests in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
of consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
$
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
25.3
|
|
21.8
|
|
47.1
|
|
-
|
|
0.7
|
|
66.6
|
|
114.4
|
|
Total
assets at March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
$
|
4,549.3
|
|
4,775.5
|
|
779.0
|
|
1,918.1
|
|
8,635.7
|
|
16,108.3
|
|
4,010.6
|
|
4,484.9
|
|
8,495.5
|
|
1,074.8
|
|
1,119.5
|
|
10,086.6
|
|
41,434.0
|
|
Capital
expenditures
|
$
|
74.0
|
|
15.3
|
|
1.7
|
|
1.5
|
|
34.3
|
|
52.8
|
|
0.6
|
|
1.6
|
|
2.2
|
|
7.5
|
|
0.5
|
|
5.4
|
|
142.4
|
|
First-Quarter
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customers
|
$
|
568.4
|
a
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
516.1
|
|
-
|
|
1.6
|
|
1,086.1
|
|
Intersegment
|
|
228.4
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(228.4
|
)
|
-
|
|
Production
and delivery
|
|
286.7
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
491.4
|
|
-
|
|
(300.2
|
)
|
477.9
|
|
Depreciation,
depletion and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
|
|
33.8
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
7.4
|
|
-
|
|
2.1
|
|
43.3
|
|
Exploration
and research
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
2.6
|
|
2.6
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
82.3
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
3.8
|
|
-
|
|
(55.5
|
)
|
30.6
|
|
Operating
income (loss)
|
$
|
394.0
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
13.5
|
|
-
|
|
124.2
|
|
531.7
|
|
Interest
expense, net
|
$
|
3.3
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
5.4
|
|
-
|
|
14.0
|
|
22.7
|
|
Equity
in affiliated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
companies’
net earnings
|
$
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
3.6
|
|
3.6
|
|
Provision
for income taxes
|
$
|
144.6
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
77.1
|
|
221.7
|
|
Minority
interests in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
of consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
$
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
27.1
|
|
27.1
|
|
Total
assets at March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
$
|
3,724.4
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
963.6
|
|
-
|
|
108.2
|
|
4,796.2
|
|
Capital
expenditures
|
$
|
48.9
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
3.5
|
|
-
|
|
(0.3
|
)
|
52.1
|
|
a. |
Includes
PT Freeport Indonesia’s sales to PT Smelting totaling $584.3 million in
the 2007 quarter and $282.5 million in the 2006
quarter.
|
b. |
Includes
the purchase accounting impact of the increase in the carrying amount
of
Phelps Dodge’s metals inventories totaling $47.8 million for North
American mining and $47.8 million for South American
mining.
|
TABLE OF CONTENTS
TO
THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan
COPPER & GOLD INC.:
We
have
reviewed the condensed consolidated balance sheet of Freeport-McMoRan Copper
& Gold Inc. as of March 31, 2007, the related consolidated statements of
income and cash flows for the three-month periods ended March 31, 2007 and
2006,
and the related consolidated statement of stockholders’ equity for the
three-month period ended March 31, 2007. These financial statements are the
responsibility of the Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It
is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective
of
which is the expression of an opinion regarding the financial statements
taken
as a whole. Accordingly, we do not express such an opinion.
Based
on
our review, we are not aware of any material modifications that should be
made
to the condensed consolidated financial statements referred to above for
them to
be in conformity with U.S. generally accepted accounting
principles.
We
have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
of
Freeport-McMoRan Copper & Gold Inc. as of December 31, 2006, 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 February
26,
2007, we expressed an unqualified opinion on those consolidated financial
statements and which report included an explanatory paragraph for the Company’s
adoption of Statement of Financial Accounting Standards No. 123 (revised
2004),
“Share-Based Payment,” effective January 1, 2006; Emerging Issues Task Force
Issue No. 04-6, “Accounting for Stripping Costs Incurred during Production in
the Mining Industry,” effective January 1, 2006; and Statement of Financial
Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88,
106
and 132R,” effective December 31, 2006. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 2006, 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
May
8,
2007
TABLE OF CONTENTS
OVERVIEW
In
management’s discussion and analysis, “we,” “us” and “our” refer to
Freeport-McMoRan Copper & Gold Inc. (FCX) and its consolidated subsidiaries,
including, except as otherwise stated, Phelps Dodge Corporation (Phelps Dodge)
and its subsidiaries, which we acquired March 19, 2007. You should read this
discussion in conjunction with our financial statements, the related discussion
and analysis of financial condition and results of operations and the discussion
of our “Business and Properties” in our Form 10-K for the year ended December
31, 2006, filed with the Securities and Exchange Commission. The results of
operations reported and summarized below are not necessarily indicative of
future operating results. In particular, the financial results discussed include
the operations of Phelps Dodge for only 12 days, not the full first quarter
of
2007 because of the accounting treatment for the acquisition. References to
“Notes” are Notes included in our “Notes to Consolidated Financial
Statements.” Throughout
management's discussion and analysis of financial condition and results of
operations, all references to earnings or losses per share are based on diluted
earnings or losses per common share.
Through
our majority-owned subsidiary, PT Freeport Indonesia, and our wholly owned
subsidiary, Phelps Dodge, we are one of the world’s largest copper, gold and
molybdenum mining companies in terms of reserves and production. Our principal
asset is the Grasberg minerals district, which based on available year-end
2005
copper reserve data and year-end 2006 gold reserve data provided by third-party
industry consultants, contains the largest single copper reserve and the largest
single gold reserve of any mine in the world.
On
March
19, 2007, we acquired Phelps Dodge, a fully integrated producer of copper and
molybdenum, with mines in North and South America and processing capabilities
for other by-product minerals, such as gold, silver and rhenium, and several
development projects, including the Tenke Fungurume mine in the Democratic
Republic of Congo (DRC). Additionally, Phelps Dodge has an international
manufacturing division, Phelps Dodge International Corporation (PDIC), which
manufactures engineered products principally for the global energy sector.
Through
Phelps Dodge, we have five operating open-pit copper mines in North America
-
Morenci, Bagdad and Sierrita in Arizona and Chino/Cobre and Tyrone in New
Mexico, and two primary molybdenum mines - Henderson and Climax (not currently
operating) in Colorado. In addition, a new copper mine is under construction
at
Safford, Arizona. All of these mining operations are wholly owned, except for
Morenci. FCX records its 85 percent interest in Morenci, an unincorporated
joint
venture, using the proportionate consolidation method. The North American mining
operations are operated in an integrated fashion and have long-lived reserves
with additional development potential.
Additionally,
through Phelps Dodge, we have four copper mines in South America - Candelaria,
Ojos del Salado and El Abra in Chile and Cerro Verde in Peru. We own an 80
percent partnership interest in both Candelaria and Ojos del Salado, a 51
percent partnership interest in El Abra and a 53.56 percent equity interest
in
Cerro Verde. FCX
fully
consolidates the results of these operations and reports the minority
interest.
ACQUISITION
OF PHELPS DODGE
Phelps
Dodge became a wholly owned subsidiary of FCX on March 19, 2007. In the
acquisition, each share of Phelps Dodge common stock was exchanged for 0.67
of a
share of FCX common stock and $88.00 in cash. As a result, FCX issued 136.9
million shares and paid approximately $18.0 billion in cash to Phelps Dodge
shareholders. The estimated fair value of assets acquired and liabilities
assumed and the results of Phelps Dodge’s operations are included in FCX’s
consolidated financial statements beginning March 20, 2007.
FCX
paid
a premium (i.e.,
goodwill) over the estimated fair value of the net tangible and identified
intangible assets acquired for a number of potential strategic and financial
benefits that are expected to be realized. Refer to Note 2 for a discussion
of
these potential benefits.
Accounting
for the Acquisition of Phelps Dodge.
The
acquisition of Phelps Dodge is being accounted for under the purchase method
as
required by Statement of Financial Accounting Standards (SFAS) No. 141,
“Business Combinations,” with FCX as the accounting acquirer. Refer to Note 2
for a summary of the $25.9 billion purchase price, which was funded through
a
combination of common shares issued, borrowings under a new $11.5 billion senior
credit facility, proceeds from the offering of $6 billion senior notes and
available cash resources.
In
accordance with the purchase method of accounting, the purchase price paid
for
our acquisition of Phelps Dodge was determined at the date of the public
announcement of the transaction and has been allocated to the assets acquired
and liabilities assumed based upon their estimated fair values on the closing
date of March 19, 2007. The estimated fair values were based on internal
estimates and are subject to change as we complete our analyses. In valuing
acquired assets and liabilities, fair values were based on, but were not limited
to: quoted market prices, where available; our intent with respect to whether
the assets purchased are to be held, sold or abandoned; expected future cash
flows; current replacement cost for similar capacity for certain fixed assets;
market rate assumptions for contractual obligations; and appropriate discount
rates and growth rates. A significant decline in copper or molybdenum prices
from those used to estimate the fair values of the acquired assets could result
in an impairment to the carrying amounts assigned to inventories, mill and
leach
stockpiles, property, plant and equipment, and goodwill.
The
following table summarizes the estimated impacts of fair value adjustments
on
2007 production and delivery costs and depreciation, depletion and amortization
expense. These amounts do not affect cash flows and are based on the preliminary
purchase price allocations and projected sales volumes (refer to Note 2 for
a
summary of the March 31, 2007, preliminary purchase price allocation). Changes
to fair value estimates of inventories (including mill and leach stockpiles)
and/or property, plant and equipment, as well as, changes in the timing of
quarterly sales volumes, could result in actual amounts differing significantly
from those shown below. Additionally, inventories (including mill and leach
stockpiles) are subject to lower of cost or market assessments, and significant
declines in metals prices could result in future impairment
charges.
|
2007
|
|
|
First
|
|
Second
|
|
Second
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Half
|
|
Total
|
|
(In
Millions)
|
Actual
|
|
Estimate
|
|
Estimate
|
|
Estimate
|
|
Depreciation,
depletion and amortization
|
$
|
28
|
|
$
|
200
|
|
$
|
450
|
|
$
|
678
|
|
Production
costs
|
|
96
|
|
|
340
|
|
|
250
|
|
|
686
|
|
Total
|
$
|
124
|
|
$
|
540
|
|
$
|
700
|
|
$
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
reduction in net income
|
$
|
79
|
|
$
|
340
|
|
$
|
440
|
|
$
|
859
|
|
COPPER,
GOLD AND MOLYBDENUM MARKETS
As
shown
in the graphs below, world metal prices for copper have fluctuated during the
period from 1992 through April 2007 with the London Metal Exchange (LME) spot
copper price varying from a low of approximately $0.60 per pound in 2001 to
a
high of approximately $4.00 per pound in May 2006. World gold prices have
fluctuated during the period from 1998 through April 2007 from a low of
approximately $250 per ounce in 1999 to a high of approximately $725 per ounce
in May 2006. During the past 15 years, Metals
Week
Dealer
Oxide prices for molybdenum have ranged from a low of $1.82 per pound in 1992
to
a high of $40.00 per pound in June 2005. Copper, gold and molybdenum prices
are
affected by numerous factors beyond our control as described further in our
“Risks Factors” contained in Part II, Item 1A of this Quarterly Report on Form
10-Q.
*
Excludes Shanghai stocks, producer, consumer and merchant stocks.
The
graph
above presents LME spot copper prices and reported stocks of copper at the
LME
and New York Commodity Exchange (COMEX) through April 30, 2007. From 2003
through 2005, global demand exceeded supply, evidenced by the decline in
exchange warehouse inventories. LME and COMEX inventories have risen from the
2005 lows but combined stocks of approximately 211,000 metric tons at March
31,
2007, remain at historically low levels, representing less than one week of
global consumption. Disruptions associated with strikes, unrest and other
operational issues resulted in low levels of inventory throughout 2006. However,
in December 2006 and early 2007, prices declined on concerns about reduced
demand, especially in the United States (U.S.), and rising inventories. LME
copper prices averaged $2.69 per pound in the first quarter of 2007, with prices
ranging from $2.37 per pound to approximately $3.15 per pound. Copper prices
have risen recently and the LME spot price closed at $3.55 per pound on April
30, 2007. Future copper prices are expected to continue to be influenced 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 the level of direct participation by
investors. We consider the current underlying supply and demand conditions
in
the global copper markets to be positive for our company.
After
reaching new 25-year highs above $700 per ounce in May 2006, gold prices
declined in the second half of 2006. Gold prices averaged approximately $650
per
ounce in the first quarter of 2007, with prices ranging from approximately
$608
per ounce to approximately $686 per ounce. Gold prices continued to be supported
by increased investment demand for gold, ongoing geopolitical tensions, a weak
U.S. dollar, inflationary pressures, falling production from older mines,
limited development of new mines and actions by gold producers to reduce hedge
positions. The London gold price closed at approximately $677 per ounce on
April
30, 2007.
Molybdenum
markets have been strong in recent years as demand has exceeded available
supplies. In 2006, the molybdenum market was generally balanced with prices
ranging from $20.50 per pound to $28.40 per pound and averaging $24.75 per
pound. Demand for molybdenum continued to be strong in the first quarter of
2007. With strong demand and a constrained supply environment, prices averaged
$25.99 per pound in the first quarter of 2007, ranging from $24.50 per pound
to
$28.13 per pound. The Metals
Week
Dealer
Oxide price was $28.33 per pound on April 30, 2007.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management’s
discussion and analysis of financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
conformity with generally accepted accounting principles in the United States
(U.S.). The preparation of these statements requires that we make estimates
and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. We base these estimates on historical experience and on
assumptions that we consider reasonable under the circumstances; however,
reported results could differ from those based on the current estimates under
different assumptions or conditions. As a result of the acquisition of Phelps
Dodge, the following provides additional and/or revised critical accounting
policies and estimates to those presented in our 2006 Annual Report on Form
10-K
for the year ended December 31, 2006.
Recoverable
Copper.
We
record as inventory applicable costs for copper contained in mill and leach
stockpiles that are expected to be processed in the future based on proven
processing technologies. The mill and leach stockpiles are evaluated
periodically to ensure that they are stated at the lower of cost or market.
Because the determination of copper contained in mill and leach stockpiles
by
physical count is impractical, we employ reasonable estimation methods.
The
quantity of material delivered to mill stockpiles and in leach stockpiles is
based on surveyed volumes of mined material and daily production records.
Sampling and assaying of blasthole cuttings determine the estimated copper
grade
contained in the material delivered to the mill and leach stockpiles. Expected
copper recovery rates for mill stockpiles are determined by metallurgical
testing. The recoverable copper in mill stockpiles can be extracted into copper
concentrate almost immediately upon processing.
Estimates
of copper contained in mill stockpiles are adjusted as material is added or
removed and fed to the mill.
Expected
copper recovery rates for leach stockpiles are determined using small-scale
laboratory tests, small- to large-scale column testing (which simulates the
production-scale process), historical trends and other factors, including
mineralogy of the ore and rock type. Estimated amounts of copper contained
in
the leach stockpiles are reduced as stockpiles are leached, the leach solution
is fed to the electrowinning process, and copper cathodes are produced. Ultimate
recovery of copper contained in leach stockpiles can vary significantly
depending on several variables, including type of processing, mineralogy and
particle size of the rock. Although as much as 70 percent of the copper
ultimately recoverable may be extracted during the first year of processing,
recovery of the remaining copper may take many years.
Asset
Impairments.
We
evaluate long-term assets to be held and used for impairment when events or
changes in economic circumstances indicate the carrying amount of such assets
may not be recoverable. Goodwill, investments and our identifiable intangible
assets are evaluated at least annually for impairment. Evaluations are based
on
business plans developed using a time horizon reflective of the historical,
moving average for the full price cycle. We use an estimate of future pre-tax,
undiscounted net cash flows of the related asset or asset grouping over the
remaining life to measure whether the assets are recoverable and measure any
impairment by reference to fair value. Fair value is based on observable market
prices; in the absence of observable market prices, fair value is generally
estimated using estimated after-tax, discounted net cash flows. Should estimates
of future copper, gold and molybdenum prices decrease, impairments may
result.
Deferred
Taxes.
In
preparing our consolidated financial statements, we recognize income taxes
in
each of the jurisdictions in which we operate. For each jurisdiction, we
estimate the actual amount of taxes currently payable or receivable as well
as
deferred tax assets and liabilities attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a
change in tax rates and laws is recognized in income in the period in which
such
changes are enacted.
A
valuation allowance is provided for those deferred tax assets for which it
is
more likely than not that the related benefits will not be realized. In
determining the amount of the valuation allowance, we consider estimated future
taxable income as well as feasible tax planning strategies in each jurisdiction.
If we determine that we will not realize all or a portion of our deferred tax
assets, we will increase our valuation allowance with a charge to income tax
expense. Conversely, if we determine that we will ultimately be able to realize
all or a portion of the related benefits for which a valuation allowance has
been provided, all or a portion of the related valuation allowance will be
reduced with a credit to income tax expense.
Environmental
Obligations.
Our
mining, exploration, production and historical operating activities are subject
to stringent laws and regulations governing the protection of the environment
and compliance with those laws requires significant expenditures. Environmental
expenditures for closed facilities and closed portions of operating facilities
are expensed or capitalized depending upon their future economic benefits.
The
general guidance provided by U.S. generally accepted accounting principles
requires that liabilities for contingencies be recorded when it is probable
that
a liability has been incurred and that the amount can be reasonably estimated.
Refer to Note 3 for further discussion of our accounting policy for
environmental expenditures.
Significant
management judgment and estimates are required to comply with this guidance.
Accordingly, management reviews changes in facts and circumstances associated
with the environmental obligations. Judgments and estimates are based upon
available facts, existing technology, and current laws and regulations, and
take
into consideration reasonably possible outcomes. The estimates can change
substantially as additional information becomes available regarding the nature
or extent of site contamination, required remediation methods, and actions
by or
against governmental agencies or private parties.
At
March
31, 2007, the fair value of environmental reserves from Phelps Dodge totaled
approximately $356 million for environmental liabilities attributed to
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)
or analogous state programs and for estimated future costs associated with
environmental matters at closed facilities and closed portions of certain
facilities. The cost range for reasonably possible outcomes for all remediation
sites where a liability was recognized, on an undiscounted and unescalated
basis, was approximately $336 million to $624 million.
We
have a
number of sites for which an environmental reserve has not been recorded because
it is not probable that a successful claim will be made against us for those
sites, but for which there is a reasonably possible likelihood of an
environmental remediation liability. The liabilities arising from these
potential environmental obligations for which an environmental reserve has
not
been recorded at this time may be material to the operating results of any
quarter or year in the future. However, we believe any liability arising from
potential environmental obligations is not likely to have a material adverse
effect on our liquidity or financial position as such obligations could be
satisfied over a number of years.
Purchase
Accounting.
We
accounted for the acquisition of Phelps Dodge under the purchase method as
required by SFAS No. 141, with FCX as the accounting acquirer. In accordance
with the purchase method of accounting, the price paid by us for Phelps Dodge
was allocated to the assets acquired and liabilities assumed based upon their
estimated fair values at the date of acquisition. The excess of the purchase
price over the fair value of the net assets acquired represents goodwill that
will be allocated to reporting units and subject to annual impairment
testing.
At
March
31, 2007, we completed a preliminary purchase price allocation. The estimated
fair values of assets acquired and liabilities assumed were based on internal
estimates and are subject to change as we complete more detailed analyses.
Refer
to Note 2 for a summary of the March 31, 2007, preliminary purchase price
allocation. At March 31, 2007, the difference between the purchase price and
the
preliminary fair value of net identifiable assets and liabilities acquired
was
recorded as goodwill. Upon finalization of the purchase price allocation, any
resulting goodwill will be allocated to the reporting units, which could range
from individual mines to groups of mines in each regional business unit.
CONSOLIDATED
RESULTS
Below
is
a summary of comparative results for the first quarter of 2007 (which includes
the results of Phelps Dodge beginning March 20, 2007), and the first quarter
of
2006:
|
First
Quarter
|
|
|
2007
|
|
2006
|
|
Revenues
(in millions)
|
$
|
2,302.9
|
a,b
|
$
|
1,086.1
|
c
|
Operating
income (in millions)
|
$
|
1,179.1
|
b,d
|
$
|
531.7
|
c
|
Net
income applicable to common stock (in millions)e
|
$
|
476.2
|
b,d,f
|
$
|
251.7
|
c
|
Diluted
net income per share of common stockg
|
$
|
2.02
|
b,d,f
|
$
|
1.23
|
c
|
|
|
|
|
|
|
|
Sales
from Mines
|
|
|
|
|
|
|
Copper
|
|
|
|
|
|
|
Consolidated
share (millions of recoverable pounds)
|
|
520.3
|
a
|
|
225.2
|
|
Average
realized price per pound
|
$
|
3.00
|
b
|
$
|
2.43
|
|
Gold
|
|
|
|
|
|
|
Consolidated
share (thousands of recoverable pounds)
|
|
955.9
|
a
|
|
472.5
|
|
Average
realized price per ounce
|
$
|
654.63
|
|
$
|
405.54
|
c
|
Molybdenum
|
|
|
|
|
|
|
Consolidated
share (millions of recoverable pounds)
|
|
1.7
|
a
|
|
N/A
|
|
Average
realized price per pound
|
$
|
23.26
|
|
|
N/A
|
|
|
|
|
|
|
|
|
a. |
Phelps
Dodge consolidated revenues for the 12-day period ending March 31,
2007,
totaled $515.7 million from consolidated sales totaling 103.2 million
pounds of copper, 9.4 thousand ounces of gold and 1.7 million pounds
of
molybdenum.
|
b. |
Includes
charges to revenues for noncash mark-to-market accounting adjustments
on
Phelps Dodge’s 2007 copper price protection programs totaling $38.1
million ($23.2 million to net income or $0.10 per share) or $0.07
per
pound, representing the increase in the mark-to-market liability
from
March 20, 2007, to March 31, 2007.
|
c. |
Includes
a loss on redemption of our Gold-Denominated Preferred Stock, Series
II
totaling $69.0 million ($36.6 million to net income or $0.17 per
share)
and a reduction in average realized prices of $150.46 per ounce for
the
revenue adjustment relating to the
redemption.
|
d. |
Includes
the purchase accounting impact of the increase in the carrying amount
of
Phelps Dodge’s property, plant and equipment costs and metals inventories
totaling $124.2 million ($79.0 million to net income or $0.32 per
share).
|
e. |
After
preferred dividends.
|
f. |
Includes
net losses on early extinguishment of debt totaling $87.8 million
($74.6
million to net income or $0.31 per share) for financing transactions
related to the acquisition of Phelps
Dodge.
|
g. |
On
March 19, 2007, we issued 136.9 million common shares to acquire
Phelps
Dodge. On March 28, 2007, we sold 47.15 million common shares. Common
shares outstanding on March 31, 2007, totaled 380.9 million. Assuming
conversion of all our convertible instruments, total potential common
shares outstanding would be 451.3 million at March 31,
2007.
|
Below
is
a summary of the key components contributing to first-quarter 2007 results
(in
millions):
|
|
|
Operating
|
|
|
|
|
Revenues
|
|
Income
|
|
Net
Income
|
|
FCX,
excluding Phelps Dodge
|
$
|
1,787.2
|
|
$
|
1,085.7
|
|
$
|
451.8
|
|
Phelps
Dodge 12-day results
|
|
515.7
|
|
|
217.6
|
|
|
103.4
|
|
Purchase
accounting
|
|
-
|
|
|
(124.2
|
)a
|
|
(79.0
|
)
|
Consolidated
|
$
|
2,302.9
|
|
$
|
1,179.1
|
|
$
|
476.2
|
a.
Includes charges of $96.4 million to production and delivery costs related
to
the purchase accounting impacts of the increase in metals inventories carrying
value and $27.8 million to depreciation, depletion and amortization related
to
the purchase accounting impacts of the increases in carrying value of property,
plant and equipment costs.
Outlook
Our
consolidated sales volumes for 2007, including Phelps Dodge sales volumes
beginning March 20, 2007, are currently projected to approximate 3.4 billion
pounds of copper, 1.9 million ounces of gold and 53 million pounds of
molybdenum. Pro forma sales volumes for 2007, including sales prior to the
acquisition of Phelps Dodge, are estimated to approximate 3.9 billion pounds
of
copper, 1.9 million ounces of gold and 70 million pounds of molybdenum.
Projected sales volumes for the second quarter of 2007 total 970 million pounds
of copper, 600 thousand ounces of gold and 17 million pounds of molybdenum.
The
achievement of these sales estimates will be dependent, among other factors,
on
the achievement of targeted mining rates and expansion plans, the successful
operation of production facilities, the impact of weather conditions and other
factors.
Refer
to
Note 2 for pro forma financial information, which assumes that FCX acquired
Phelps Dodge effective January 1, 2007, for the three-month period ended March
31, 2007, and January 1, 2006, for the three-month period ended March 31,
2006.
Revenues
Consolidated
revenues include PT Freeport Indonesia’s sale of copper concentrates, which also
contain significant quantities of gold and silver, the sale by Atlantic Copper
of copper anodes, copper cathodes, and gold in anodes and slimes, and, beginning
March 20, 2007, the sales of copper, gold, molybdenum and other metals and
metal-related products by Phelps Dodge. Excluding the addition of revenues
in
the
first
quarter of 2007 associated with Phelps Dodge’s operations ($515.7 million),
revenues for the first quarter of 2007 were 65 percent higher than for the
first
quarter of 2006, reflecting substantially higher copper and gold prices than
the
2006 quarter and higher sales volumes. As anticipated, PT Freeport Indonesia
mined higher grade ore and reported higher production and sales in the first
quarter of 2007, compared with the first quarter of 2006.
At
March
31, 2007, our consolidated copper sales included 556.5 million pounds of copper
priced at an average of $3.12 per pound and subject to final pricing over the
next several months. We estimate that each $0.05 change in the price realized
from the March 31, 2007, pricing would impact our 2007 net income by
approximately $16 million.
Adjustments
to concentrate sales recognized in prior quarters decreased first-quarter 2007
revenues by $8.5 million ($4.5 million to net income or $0.02 per share),
compared with an increase of $110.2 million ($58.4 million to net income or
$0.26 per share) in the first quarter of 2006.
Consolidated
revenues and net income vary significantly with fluctuations in the market
prices of copper, gold and molybdenum, sales volumes and other factors. Based
on
projected consolidated copper sales, excluding purchased copper, for the
remainder of 2007 (approximately 2.9 billion pounds) and provisionally priced
sales at March 31, 2007, and assuming an average price of $3 per pound of
copper, each $0.20 per pound change in the average price realized in the balance
of the year would have an approximate $650 million impact on our revenues and
an
approximate $300 million impact on our 2007 net income. Based on projected
consolidated gold sales for the remainder of 2007 (0.9 million ounces), a $50
per ounce change in the average price realized would have an approximate $50
million impact on our revenues and an approximate $25 million impact on our
2007
net income. Based on projected consolidated molybdenum sales for the remainder
of 2007 (51 million pounds), a $2 per pound change in the average price realized
would have an approximate $80 million impact on our revenues and an approximate
$50 million impact on our 2007 net income.
On
limited past 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 a very small quantity of gold production subject to price protection
contracts acquired in the Phelps Dodge transaction. In connection with the
acquisition of Phelps Dodge, FCX also now has Phelps Dodge’s 2007 copper price
protection programs, which resulted in first-quarter 2007 mark-to-market
accounting adjustments to revenues totaling $38.1 million ($23.2 million to
net
income or $0.10 per share). Refer to Note 14 and “Contractual Obligations -
Hedging Activities” for further discussion of the 2007 copper price protection
programs. FCX does not currently intend to enter into similar hedging programs
in the future. In February 2006, we redeemed our Gold-Denominated Preferred
Stock, Series II, which resulted in a $69.0 million ($36.6 million to net income
or $0.17 per share) charge to revenues.
Production
and Delivery Costs
Consolidated
production and delivery costs were higher in the first quarter of 2007 at $952.1
million compared with $477.9 million for the first quarter of 2006. Excluding
the addition of production and delivery costs in the first quarter of 2007
associated with the Phelps Dodge operations ($369.3 million, including $96.4
million related to purchase accounting impacts), the increase of $104.9 million
was primarily because of a $56.5 million increase related to the change in
the
amount of intercompany profits eliminated on sales from PT Freeport Indonesia
to
its 25-percent owned affiliate, PT Smelting. Production and delivery costs
for
Phelps Dodge operations included $96.4 million of production costs related
to
the purchase accounting impact of the increase in inventory carrying
values.
Energy
Costs.
Energy,
including electricity, diesel fuel, coal and natural gas, represents a
significant portion of our production and delivery costs. To moderate the impact
of increasing energy costs, we have in place (primarily involving North America
operations) a combination of multi-year energy contracts, as well as
self-generation and diesel fuel and natural gas hedging contracts. We will
continue to review our energy costs and consider appropriate hedging strategies.
We may continue to experience high energy costs if prices remain at the levels
experienced in 2006.
As
a
result of the acquisition of Phelps Dodge, we own a one-third interest in the
Luna Energy Facility (Luna) located near Deming, New Mexico, which became
operational in April 2006. Public Service Company of New Mexico (PNM), a
subsidiary of PNM Resources, and Tucson Electric Power, a subsidiary of
Unisource Energy Corporation, partnered in the purchase of Luna, each owning
a
one-third interest and each responsible for one-third of the costs and expenses.
PNM is the operating partner of the plant. Approximately 190 megawatts, or
one-third of the plant’s electricity, is available to satisfy a significant
portion of the electricity demands of our New Mexico and Arizona operations.
Electricity in excess of our demand is sold on the wholesale market. Our
interest in this efficient, low-cost plant is expected to continue to stabilize
our southwest North American mining operations’ energy costs and increase the
reliability of our energy supply.
Cost
Structure.
We
continue to experience increases in our worldwide copper production costs.
One
factor affecting the increase in average copper production costs is Phelps
Dodge’s previous restart of certain higher-cost properties in response to strong
demand for copper. Costs are also affected by the prices of commodities and
equipment consumed or used in our operations. In addition, our cost structure
in
certain of our North American operations is higher than that of some mines
located outside the U.S. This is because of lower ore grades, higher labor
costs
(including pension and health-care costs) and, in some cases, stricter
regulatory requirements.
Depreciation,
Depletion and Amortization
Consolidated
depreciation, depletion and amortization expense increased to $116.3 million
in
the first quarter of 2007 compared with $43.3 million in the first quarter
of
2006. Excluding the addition of depreciation, depletion and amortization in
the
first quarter of 2007 associated with the Phelps Dodge operations ($43.3
million, including $27.8 million related to purchase accounting impacts), the
remaining $29.7 million increase was primarily because of higher copper sales
volumes at PT Freeport Indonesia during the first quarter of 2007 which resulted
in higher depreciation, depletion and amortization expense determined using
the
unit-of-production method.
Selling,
General and Administrative Expense
Consolidated
selling, general and administrative expense increased to $48.9 million in the
first quarter of 2007, compared with $30.6 million in the first quarter of
2006.
Excluding the addition of selling, general and administrative expense in the
first quarter of 2007 associated with the Phelps Dodge operations ($6.3
million), the remaining increase of $12.0 million was primarily because of
sharing arrangements pursuant to our joint venture agreement in Indonesia.
Our
parent company charges PT Freeport Indonesia for the in-the-money value of
exercised employee stock options. These charges are eliminated in consolidation;
however, PT Freeport Indonesia shares a portion of these charges with Rio Tinto
plc (our joint venture partner in Indonesia) and Rio Tinto’s reimbursements
reduce our consolidated selling, general and administrative expenses. Selling,
general and administrative expenses are net of Rio Tinto’s share of joint
venture reimbursements for employee stock option exercises, which decreased
selling, general and administrative expenses by $0.6 million in the first
quarter of 2007 and $4.5 million in the first quarter of 2006. In accordance
with our joint venture agreement, Rio Tinto’s percentage share of PT Freeport
Indonesia’s general and administrative expenses varies with metal sales volumes
and prices and totaled approximately 4 percent in the first quarter of 2007,
compared with 8 percent in the first quarter of 2006.
Interest
Expense, Net
Total
consolidated interest cost (before capitalization) increased to $58.7 million
in
the first quarter of 2007 from $24.4 million in the first quarter of 2006.
Interest costs increased primarily because of the debt we incurred to acquire
Phelps Dodge (refer to Note 8 and “Capital Resources and Liquidity - Financing
Activities” for further discussion). We expect our interest cost for 2007 to be
significantly higher compared with 2006 because of this new debt.
Capitalized
interest totaled $6.8 million in the first quarter of 2007, compared to $1.8
million in the first quarter of 2006.
Losses
on Early Extinguishment and Conversion of Debt, Net
We
recorded net charges totaling $87.8 million ($74.6 million to net income or
$0.31 per share) in the first quarter of 2007 related to acceleration of
amortization of deferred financing costs for the credit facility, net of a
$34.6
million refund of fees for early repayment (refer to Note 8 and “Capital
Resources and Liquidity - Financing Activities” for further
discussion).
Other
Income, Net
Other
income, net increased to $23.6 million in the first quarter of 2007, compared
with $5.0 million in the first quarter of 2006. The increase primarily relates
to higher interest income which totaled $18.0 million in the first quarter
of
2007, including interest income on cash acquired from Phelps Dodge of $10.8
million for the 12-day period ended March 31, 2007, compared to $7.0 million
in
the first quarter of 2006. Higher cash balances caused the increase in interest
income.
Provision
for Income Taxes
Our
first-quarter 2007 income tax provision resulted from taxes on earnings at
international operations ($505.7 million), partly offset by a tax benefit from
losses in the U.S. ($45.5 million). The first-quarter 2007 income tax provision
primarily related to the operations of PT Freeport Indonesia. Also included
was
$33.5 million associated with Phelps Dodge’s earnings for the 12-day period
ending March 31, 2007. Our income tax provision ($221.7 million) for
first-quarter 2006 resulted from taxes on PT Freeport Indonesia’s earnings.
Our
effective income tax rate was approximately 43 percent for first-quarter 2007
and 2006. The difference between the effective income tax rates for the first
quarters of 2007 and 2006 and the U.S. federal statutory rate of 35 percent
primarily was attributable to withholding taxes incurred in connection with
earnings from Indonesian mining operations and income taxes incurred by PT
Indocopper Investama. Refer to Note 9 for further discussion of first-quarter
2007 income taxes.
Summaries
of the approximate significant components of the calculation of our consolidated
provision for income taxes are shown below (in millions, except
percentages):
|
|
|
Effective
|
|
|
|
|
Income
|
|
Tax
Rate
|
|
Tax
|
|
North
America
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interests
|
$
|
(76.2
|
)
|
|
32%
|
|
$
|
(24.4
|
)
|
Purchase
accounting adjustments
|
|
(54.1
|
)
|
|
39%
|
|
|
(21.1
|
)
|
Subtotal
|
|
(130.3
|
)
|
|
|
|
|
(45.5
|
)
|
South
America
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interest
|
|
187.1
|
|
|
34%
|
|
|
64.5
|
|
Purchase
accounting adjustments
|
|
(70.0
|
)
|
|
34%
|
|
|
(24.0
|
)
|
Subtotal
|
|
117.1
|
|
|
|
|
|
40.5
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interests
|
|
1,086.1
|
|
|
43%
|
|
|
462.3
|
|
Other
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interests
|
|
(5.4
|
)
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
totals
|
$
|
1,067.5
|
|
|
43%
|
|
$
|
460.2
|
|
Minority
Interests in Net Income of Consolidated Subsidiaries
Minority
interests in net income of consolidated subsidiaries increased to $114.4 million
in the first quarter of 2007, compared with $27.1 million in the first quarter
of 2006. Excluding the amounts in the first quarter of 2007 associated with
the
Phelps Dodge operations ($48.1 million), the increase of $39.2 million was
primarily because of higher earnings at PT Freeport Indonesia. First-quarter
2007 minority interest associated with Phelps Dodge’s operations primarily
relates to South American mining operations.
RESULTS
OF OPERATIONS
Following
with the acquisition of Phelps Dodge, our business consists of three primary
operating divisions - Indonesian mining, North American mining and South
American mining. Refer to “Mining Operations” for further discussion of the
operations associated with these divisions.
A
summary
of revenues from unaffiliated customers and intersegment revenues for the first
quarter of 2007 (which includes the results of Phelps Dodge beginning March
20,
2007) and for the first quarter of 2006 follows (in millions):
|
2007
|
|
2006
|
|
|
Unaffiliated
|
|
|
|
|
|
|
|
Unaffiliated
|
|
|
|
|
|
|
|
|
Customers
|
|
Intersegment
|
|
Total
|
|
Customers
|
|
Intersegment
|
|
Total
|
|
Indonesian
mining
|
$
|
1,331.9
|
|
$
|
376.6
|
|
$
|
1,708.5
|
|
$
|
568.4
|
|
$
|
228.4
|
|
$
|
796.8
|
|
North
American mininga
|
|
319.2
|
|
|
24.3
|
|
|
343.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
South
American miningb
|
|
139.5
|
|
|
122.2
|
|
|
261.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Atlantic
Copper smelting &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
refining
|
|
454.0
|
|
|
-
|
|
|
454.0
|
|
|
516.1
|
|
|
-
|
|
|
516.1
|
|
PDIC
|
|
57.0
|
|
|
0.1
|
|
|
57.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Corporate,
other & eliminations
|
|
1.3
|
|
|
(523.2
|
)
|
|
(521.9
|
)
|
|
1.6
|
|
|
(228.4
|
)
|
|
(226.8
|
)
|
Consolidated
revenues
|
$
|
2,302.9
|
|
$
|
-
|
|
$
|
2,302.9
|
|
$
|
1,086.1
|
|
$
|
-
|
|
$
|
1,086.1
|
|
a. |
Includes
our operating mines at Morenci, Bagdad, Sierrita, Chino and Tyrone.
Also
includes our Manufacturing and Primary Molybdenum operations (see
Note
15).
|
b. |
Includes
our mines at Candelaria, Ojos del Salado, El Abra and Cerro Verde
(see
Note 15).
|
Intersegment
revenues of individual North American mines represent an internal allocation
based on sales to unaffiliated customers and realized copper prices.
Intersegment sales by the South American mines are based upon arms-length prices
at the time of the sale. Intersegment sales of any individual mine may not
be
reflective of the actual prices ultimately realized due to a variety of factors,
including additional processing, timing of sales to unaffiliated customers
and
transportation premiums. In addition to the allocation of revenues, we allocate
certain operating costs, expenses and capital to the individual divisions and
segments that may not be reflective of market conditions. We do not allocate
all
costs and expenses applicable to a mine or operation from the division or
corporate offices. Accordingly, the division segment information reflects
management determinations that may not be indicative of actual financial
performance of each division or segment as if it was an independent entity.
A
summary
of operating income (loss) data for the first quarter of 2007 (which includes
the results of Phelps Dodge beginning March 20, 2007) and for the first quarter
of 2006 follows (in millions):
|
First
Quarter
|
|
|
2007
|
|
2006
|
|
Indonesian
mining
|
$
|
1,283.0
|
|
$
|
394.0
|
|
North
American mining
|
|
(23.6
|
)a
|
|
-
|
|
South
American mining
|
|
117.3
|
a
|
|
-
|
|
Atlantic
Copper smelting & refining
|
|
12.4
|
|
|
13.5
|
|
PDIC
|
|
7.1
|
|
|
-
|
|
Corporate,
other & eliminations
|
|
(217.1
|
)
|
|
124.2
|
|
Consolidated
operating income
|
$
|
1,179.1
|
|
$
|
531.7
|
|
a.
Includes
the purchase accounting impact of the increase in the carrying amount of Phelps
Dodge’s property, plant and equipment costs and metals inventories totaling
$54.2 million for North American mining and $69.2 million for South America
mining.
MINING
OPERATIONS
Indonesian
Mining Operations
PT
Freeport Indonesia operates under an agreement, called a Contract of Work,
with
the Government of Indonesia. The Contract of Work allows us to conduct
exploration, mining and production activities in a 24,700-acre area called
Block
A located in Papua, Indonesia. Under the Contract of Work, PT Freeport Indonesia
also conducts exploration activities (which had been suspended, but have resumed
in 2007) in an approximate 500,000-acre area called Block B in Papua. All of
PT
Freeport Indonesia’s proven and probable mineral reserves and current mining
operations are located in Block A.
We
own
90.64 percent of PT Freeport Indonesia, including 9.36 percent owned through
our
wholly owned subsidiary, PT Indocopper Investama. The Government of Indonesia
owns the remaining 9.36 percent of PT Freeport Indonesia. In
July
2004, we received a request from the Indonesian Department of Energy and Mineral
Resources that we offer to sell shares in PT Indocopper Investama to Indonesian
nationals at fair market value. In response to this request and in view of
the
potential benefits of having additional Indonesian ownership in our operations,
we have agreed to consider a potential sale of an interest in PT Indocopper
Investama at fair market value. Neither our Contract of Work nor Indonesian
law
requires us to divest any portion of our ownership interest in PT Freeport
Indonesia or PT Indocopper Investama.
In
1996,
we established joint ventures with Rio Tinto plc (Rio Tinto), an international
mining company with headquarters in London, England. One joint venture covers
PT
Freeport Indonesia’s mining operations in Block A and gives Rio Tinto, through
2021, a 40 percent interest in certain assets and future production exceeding
specified annual amounts of copper, gold and silver in Block A, and, after
2021,
a 40 percent interest in all production from Block A. Operating, nonexpansion
capital and administrative costs are shared proportionately between PT Freeport
Indonesia and Rio Tinto based on the ratio of (a) the incremental revenues
from
production from our expansion completed in 1998 to (b) total revenues from
Block
A, including production from PT Freeport Indonesia’s previously 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. PT Freeport Indonesia records its joint
venture interest using the proportionate consolidation method.
|
|
First
Quarter
|
|
|
|
2007
|
|
2006
|
|
Consolidated,
net of Rio Tinto’s interest
|
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
Production
|
|
|
467.6
|
|
|
221.3
|
|
Sales
|
|
|
417.1
|
|
|
225.2
|
|
Average
realized price per pound
|
|
$
|
3.09
|
|
$
|
2.43
|
|
Gold
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
Production
|
|
|
1,074.7
|
|
|
461.8
|
|
Sales
|
|
|
946.5
|
|
|
472.5
|
|
Average
realized price per ounce
|
|
$
|
654.79
|
|
$
|
405.54
|
a
|
a.
|
Amount
was $556.00 per ounce before a loss resulting from redemption of
FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
|
|
|
First
Quarter
|
|
100%
Operating Data, including Rio Tinto’s interest |
|
|
2007
|
|
|
2006
|
|
Ore
milled (metric tons per day)
|
|
|
228,500
|
|
|
216,800
|
|
Average
ore grade
|
|
|
|
|
|
|
|
Copper
(percent)
|
|
|
1.21
|
|
|
0.72
|
|
Gold
(grams per metric ton)
|
|
|
2.01
|
|
|
0.92
|
|
Recovery
rates (percent)
|
|
|
|
|
|
|
|
Copper
|
|
|
91.0
|
|
|
82.5
|
|
Gold
|
|
|
87.8
|
|
|
80.6
|
|
|
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
Production
|
|
|
479.9
|
|
|
246.6
|
|
Sales
|
|
|
428.2
|
|
|
251.3
|
|
Gold
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
Production
|
|
|
1,146.9
|
|
|
470.7
|
|
Sales
|
|
|
1,010.1
|
|
|
486.3
|
|
|
|
|
|
|
|
|
|
PT
Freeport Indonesia reported higher first-quarter 2007 sales volumes compared
with the first quarter of 2006, primarily because of higher ore grades. PT
Freeport Indonesia's share of first-quarter 2007 sales totaled 417.1 million
pounds of copper and 946.5 thousand ounces of gold, exceeding previous estimates
reported in January 2007 of 400 million pounds of copper and 850 thousand ounces
of gold, primarily because it mined certain sections of high-grade ore
previously expected to be mined in future periods.
Mill
throughput, which varies depending on ore types being processed, averaged
228,500 metric tons of ore per day in the first quarter of 2007, compared with
216,800 metric tons of ore per day in the first quarter of 2006. Mill rates
will
vary during 2007 depending on ore types mined and are expected to average in
excess of 200,000 metric tons of ore per day during the remainder of the year.
Grasberg operated at reduced mining and milling rates during a four-day period
from April 18 to April 21, 2007, as a result of peaceful protests by certain
workers regarding benefits. The protests ended on April 21 with an agreement
on
a framework for minimum wages for workers and Grasberg has returned to normal
operations. The impacts to production were not significant. Approximate average
daily throughput processed at our mill facilities from each of our producing
mines follows (metric tons of ore per day):
|
First
Quarter
|
|
|
2007
|
|
2006
|
|
Grasberg
open pit
|
179,300
|
|
173,000
|
|
Deep
Ore Zone underground mine
|
49,200
|
|
43,800
|
|
Total
mill throughput
|
228,500
|
|
216,800
|
|
|
|
|
|
|
In
the
first quarter of 2007, copper ore grades averaged 1.21 percent and recovery
rates averaged 91.0 percent, compared with 0.72 percent and 82.5 percent for
the
first quarter of 2006. Gold ore grades averaged 2.01 grams per metric ton (g/t)
and recovery rates averaged 87.8 percent in the first quarter of 2007, compared
with 0.92 g/t and 80.6 percent for the first quarter of 2006. At the Grasberg
mine, the sequencing in mining areas with varying ore grades causes fluctuations
in the timing of ore production, resulting in varying quarterly and annual
sales
of copper and gold. Approximately 65 percent of PT Freeport Indonesia’s copper
sales and 85 percent of PT-FI’s gold sales in 2007 are expected in the first
half of the year.
Production
from the Deep Ore Zone (DOZ) underground mine averaged 49,200 metric tons of
ore
per day in the first quarter of 2007, representing approximately 22 percent
of
mill throughput. DOZ continues to perform above design capacity of 35,000 metric
tons of ore per day. PT Freeport Indonesia is expanding
the
capacity of the DOZ underground operation to a sustained rate of 50,000 metric
tons per day with the installation of a second crusher and additional
ventilation, expected to be completed in mid-2007. PT Freeport Indonesia’s 60
percent share of capital expenditures for the DOZ expansion totaled
approximately $2 million in the first quarter of 2007 (approximately $36 million
through March 31, 2007). PT Freeport Indonesia anticipates a further expansion
of the DOZ mine to 80,000 metric tons of ore per day, with budgeted capital
of
approximately $21 million in 2007 for its 60 percent share. The success of
the
development of the DOZ mine, one of the world’s largest underground mines,
provides confidence in the future development of PT Freeport Indonesia’s
large-scale undeveloped ore bodies.
In
2004,
PT Freeport Indonesia commenced its “Common Infrastructure” project, which will
provide access to its large undeveloped underground ore bodies located in the
Grasberg minerals district through a tunnel system located approximately 400
meters deeper than its existing underground tunnel system. In addition to
providing access to our underground ore bodies, the tunnel system will enable
PT
Freeport Indonesia to conduct future exploration in prospective areas associated
with currently identified ore bodies. The Common Infrastructure project is
progressing according to plan. PT Freeport Indonesia has also advanced
development of the Grasberg spur and as of March 31, 2007, has completed 73
percent of the tunneling required to reach the Grasberg underground ore body.
PT
Freeport Indonesia expects the Grasberg spur to reach the Grasberg underground
ore body and to initiate multi-year mine development activities in the second
half of 2007. Work on the Grasberg underground ore body continues with PT
Freeport Indonesia’s share of capital expenditures totaling approximately $15
million in the first quarter of 2007 and projected to total approximately $70
million for 2007.
The
Big
Gossan underground mine is a high-grade deposit located near the existing
milling complex. Remaining capital expenditures for the $260 million Big Gossan
project to be incurred over the next few years total approximately $185 million
($175 million net to PT Freeport Indonesia, with approximately $90 million
in
2007). PT Freeport Indonesia’s share of capital expenditures for Big Gossan
totaled approximately $20 million in the first quarter of 2007. Production
is
expected to ramp up to full production of 7,000 metric tons per day in late
2010
(average annual aggregate incremental production of 135 million pounds of copper
and 65,000 ounces of gold, with PT Freeport Indonesia receiving 60 percent
of
these amounts). The Big Gossan mine is being developed as an open-stope mine
with backfill consisting of mill tailings and cement, an established mining
methodology expected to be higher-cost than the block-cave method used at the
DOZ mine.
Indonesian
Mining Revenues.
A
summary of changes in PT Freeport Indonesia revenues between the periods follows
(in millions):
|
2007
|
|
PT
Freeport Indonesia revenues - prior year period
|
$
|
796.8
|
|
Sales
volumes:
|
|
|
|
Copper
|
|
466.2
|
|
Gold
|
|
192.2
|
|
Price
realizations:
|
|
|
|
Copper
|
|
274.3
|
|
Gold
|
|
236.5
|
|
Adjustments,
primarily for copper pricing on prior year
|
|
|
|
open
sales
|
|
(157.5
|
)
|
Treatment
charges, royalties and other
|
|
(100.0
|
)
|
PT
Freeport Indonesia revenues - current year period
|
$
|
1,708.5
|
|
|
|
|
|
PT
Freeport Indonesia’s share of first-quarter 2007 sales increased to 417.1
million pounds of copper and 946.5 thousand ounces of gold, compared with 225.2
million pounds and 472.5 thousand ounces in the 2006 quarter primarily because
of higher ore grades. Realized copper prices improved by 27 percent to an
average of $3.09 per pound in the first quarter of 2007 from $2.43 in the first
quarter of 2006. Realized gold prices in the first quarter of 2007 averaged
$654.79 compared to $405.54 per ounce in the first
quarter
of 2006, which included a reduction of $150.46 per ounce for revenue adjustments
associated with the redemption of our Gold-Denominated Preferred Stock, Series
II.
Treatment
charges vary with the volume of metals sold and the price of copper, and
royalties vary with the volume of metals sold and the prices of copper and
gold.
Market rates for treatment and refining charge rates began to increase
significantly in late 2004. A large part of the increase relates to the price
participation and price sharing components of our concentrate sales agreements.
Royalties totaled $49.8 million in the first quarter of 2007, compared with
$19.9 million in the first quarter of 2006, reflecting higher sales volumes
and
metal prices.
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 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 pricing.
PT
Freeport Indonesia’s first-quarter 2007 revenues include net additions of $139.0
million for adjustments to the fair value of embedded copper derivatives in
concentrate sales contracts, compared with $184.6 million in the first quarter
of 2006.
PT
Freeport Indonesia has long-term contracts to provide approximately 60 percent
of Atlantic Copper’s copper concentrate requirements at market prices and nearly
all of PT Smelting’s copper concentrate requirements. PT Freeport Indonesia owns
25 percent of PT Smelting. Under the PT Smelting contract, for the first 15
years of PT Smelting’s operations beginning December 1998, the treatment and
refining charges on the majority of the concentrate PT Freeport Indonesia
provides will not fall below specified minimum rates, subject to renegotiation
in 2008. The rate was $0.23 per pound during the period from the commencement
of
PT Smelting’s operations in 1998 until April 2004, when it declined to a minimum
of $0.21 per pound. PT Smelting’s rates for 2007 are expected to exceed the
minimum $0.21 per pound. Current rates are substantially higher than the minimum
rate.
Indonesian
Mining Costs.
Gross
Profit per Pound of Copper/per Ounce of Gold and
Silver
|
|
|
|
Three
Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
|
$3.09
|
|
|
$3.09
|
|
|
$654.79
|
|
|
$13.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net
|
|
|
|
|
|
|
|
|
|
|
|
|
noncash
and nonrecurring costs shown below
|
|
0.75
|
|
|
0.50
|
|
|
106.26
|
|
|
2.15
|
|
Gold
and silver credits
|
|
(1.54
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.37
|
|
|
0.25
|
|
|
51.94
|
|
|
1.05
|
|
Royalty
on metals
|
|
0.12
|
|
|
0.08
|
|
|
16.86
|
|
|
0.34
|
|
Unit
net cash (credits) costsa
|
|
(0.30
|
)
|
|
0.83
|
|
|
175.06
|
|
|
3.54
|
|
Depreciation
and amortization
|
|
0.14
|
|
|
0.10
|
|
|
20.05
|
|
|
0.40
|
|
Noncash
and nonrecurring costs, net
|
|
0.02
|
|
|
0.01
|
|
|
2.99
|
|
|
0.06
|
|
Total
unit (credits) costs
|
|
(0.14
|
)
|
|
0.94
|
|
|
198.10
|
|
|
4.00
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
(0.04
|
)
|
|
(0.04
|
)
|
|
2.72
|
|
|
(0.01
|
)
|
PT
Smelting intercompany profit elimination
|
|
(0.09
|
)
|
|
(0.06
|
)
|
|
(12.09
|
)
|
|
(0.24
|
)
|
Gross
profit
|
|
$3.10
|
|
|
$2.05
|
|
|
$447.32
|
|
|
$9.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of copper sold (in millions)
|
|
417.1
|
|
|
417.1
|
|
|
|
|
|
|
|
Ounces
of gold sold (000s)
|
|
|
|
|
|
|
|
946.5
|
|
|
|
|
Ounces
of silver sold (000s)
|
|
|
|
|
|
|
|
|
|
|
1,576.9
|
|
|
|
|
|
|
|
|
a. |
For
a reconciliation of unit net cash (credits) costs to production and
delivery costs applicable to sales reported in FCX’s consolidated
financial statements refer to “Product Revenues and Production
Costs.”
|
Three
Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Gold
|
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
|
$2.43
|
|
|
$2.43
|
|
|
$405.54
|
a
|
|
$9.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
1.22
|
|
|
0.80
|
|
|
197.43
|
|
|
3.62
|
|
Gold
and silver credits
|
|
(1.29
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.37
|
|
|
0.24
|
|
|
60.05
|
|
|
1.10
|
|
Royalty
on metals
|
|
0.09
|
|
|
0.06
|
|
|
14.31
|
|
|
0.26
|
|
Unit
net cash costsb
|
|
0.39
|
|
|
1.10
|
|
|
271.79
|
|
|
4.98
|
|
Depreciation
and amortization
|
|
0.15
|
|
|
0.10
|
|
|
24.25
|
|
|
0.44
|
|
Noncash
and nonrecurring costs, net
|
|
0.05
|
|
|
0.03
|
|
|
8.38
|
|
|
0.15
|
|
Total
unit costs
|
|
0.59
|
|
|
1.23
|
|
|
304.42
|
|
|
5.57
|
|
Revenue
adjustments, primarily for pricing on
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
period open sales
|
|
0.28
|
c
|
|
0.59
|
|
|
47.03
|
|
|
1.20
|
|
PT
Smelting intercompany profit recognized
|
|
0.09
|
|
|
0.06
|
|
|
14.95
|
|
|
0.27
|
|
Gross
profit
|
|
$2.21
|
|
|
$1.85
|
|
|
$163.10
|
|
|
$5.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pounds
of copper sold (in millions)
|
|
225.2
|
|
|
225.2
|
|
|
|
|
|
|
|
Ounces
of gold sold (000s)
|
|
|
|
|
|
|
|
472.5
|
|
|
|
|
Ounces
of silver sold (000s)
|
|
|
|
|
|
|
|
|
|
|
707.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. |
Amount
was $556.00 before a loss resulting from redemption of FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
b. |
See
Footnote a to previous table.
|
c. |
Includes
a $69.0 million or $0.31 cents per pound loss on the redemption of
FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
Because
of the fixed nature of a large portion of our costs, unit costs vary
significantly from period to period depending on volumes of copper and gold
sold
during the period. Lower unit site production and delivery costs in the first
quarter of 2007, compared with the 2006 quarter, primarily reflected higher
sales volumes resulting from mine sequencing in the Grasberg open pit, partly
offset by higher input costs (including energy). Although higher sales volumes
more than offset increases in input costs this quarter, we have experienced
significant increases in our production costs in recent years primarily as
a
result of higher energy costs and costs of other consumables, higher mining
costs and milling rates, labor costs and other factors. Aggregate energy costs,
which approximate 20 percent of PT Freeport Indonesia’s production costs,
primarily include purchases of approximately 100 million gallons of diesel
fuel
per year and approximately 650,000 metric tons of coal per year. Diesel prices
have more than doubled and our coal costs are approximately 35 percent higher
since the beginning of 2003. The costs of other consumables, including steel
and
reagents, also have increased. Our Indonesian mining costs also have been
affected by the stronger Australian dollar against the U.S. dollar (approximate
45 percent increase since the beginning of 2003), as approximately 15 percent
of
PT Freeport Indonesia’s production costs are denominated in Australian dollars.
We are pursuing cost reduction initiatives to mitigate the impacts of these
increases.
Unit
treatment charges vary with the price of copper, and unit royalty costs vary
with prices of copper and gold. In addition, market rates for treatment charges
have increased significantly since 2004 and will vary based on PT Freeport
Indonesia’s customer mix. The copper royalty rate payable by PT Freeport
Indonesia under its Contract of Work varies from 1.5 percent of copper net
revenue at a copper price of $0.90 or less per pound to 3.5 percent at a copper
price of $1.10 or more per pound. The Contract of Work royalty rate for gold
and
silver sales is 1.0 percent.
In
connection with our fourth concentrator mill expansion completed in 1998, PT
Freeport Indonesia agreed to pay the Government of Indonesia additional
royalties (royalties not required by the Contract of Work) to provide further
support to the local governments and the people of the Indonesian province
of
Papua (see Note 1 in our 2006 Annual Report on Form 10-K). The additional
royalties are paid on production exceeding specified annual amounts of copper,
gold and silver expected to be generated when PT Freeport Indonesia’s milling
facilities operate above 200,000 metric tons of ore per day. PT Freeport
Indonesia’s royalty rate on copper net revenues from production above the agreed
levels is double the Contract of Work royalty rate, and the royalty rates on
gold and silver sales from production above the agreed levels are triple the
Contract of Work royalty rates.
First-quarter
2007 royalty costs totaled $49.8 million, including a $0.2 million final
adjustment related to 2006 sales, compared with royalty costs of $19.9 million,
including a $1.4 million final adjustment related to 2005 sales, in the first
quarter of 2006. If copper prices average $3 per pound and gold prices average
$650 per ounce for the remainder of 2007, we would expect royalty costs to
total
approximately $110 million ($0.10 per pound of copper) in 2007. These estimates
assume 2007 PT Freeport Indonesia sales volumes of 1.1 billion pounds of copper
and 1.8 million ounces of gold.
As
a
result of the higher copper production and sales volumes in the first quarter
of
2007, PT Freeport Indonesia’s unit depreciation rate decreased compared with the
2006 quarter. Because certain assets are depreciated on a straight-line basis,
the unit rate will vary with the level of copper production and sales. As a
result, PT Freeport Indonesia expects its depreciation rate for 2007 to average
$0.18 per pound compared with $0.15 per pound for 2006.
PT
Freeport Indonesia has a labor agreement covering its hourly paid Indonesian
employees, the key provisions of which are renegotiated biannually. In June
2005, PT Freeport Indonesia and its workers agreed to terms for a new labor
agreement that expires in September 2007. On April 21, 2007, PT Freeport
Indonesia reached an agreement on a framework for minimum wages for its workers.
This agreement successfully resolved peaceful protests by certain workers and
returned Grasberg to normal operations after a four-day period from April 18
to
April 21, 2007 of reduced mining and milling rates. PT Freeport Indonesia’s
relations with the workers’ union have generally been satisfactory.
Unit
Net
Cash Costs: By-Product Method - Unit net cash costs per pound of copper
calculated using a by-product method is a measure intended to provide investors
with information about the cash generating capacity of our mining operations
expressed on a basis relating to our primary metal product, copper. PT Freeport
Indonesia uses this measure for the same purpose and for monitoring operating
performance by its mining operations. This information differs from measures
of
performance determined in accordance with generally accepted accounting
principles and should not be considered in isolation or as a substitute for
measures of performance determined in accordance with generally accepted
accounting principles. 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.
Unit
site
production and delivery costs averaged $0.75 per pound of copper in the first
quarter of 2007, $0.47 per pound lower than the $1.22 reported in the first
quarter of 2006. Unit site production and delivery costs in the first quarter
of
2007 benefited from higher copper sales volumes resulting from higher ore
grades, but were adversely affected by higher input costs (primarily
energy).
Gold
and
silver credits increased to $1.54 per pound in the first quarter of 2007,
compared with $1.29 per pound in the first quarter of 2006, reflecting higher
gold sales volumes and average realized gold prices. Royalties of $0.12 per
pound in the first quarter of 2007 were $0.03 per pound above the 2006 period
primarily because of higher copper and gold prices and sales
volumes.
Assuming
average copper prices of $3 per pound and average gold prices of $650 per ounce
for the remainder of 2007 and achievement of current 2007 sales estimates,
PT
Freeport Indonesia estimates that its annual 2007 unit net cash costs, including
gold and silver credits, would approximate $0.55 per pound. Because the majority
of PT Freeport Indonesia’s costs are fixed, unit costs vary with the volumes
sold
and
the price of gold, and are therefore currently projected to be lower during
the
first half of 2007 and higher during the second half. Unit net cash costs for
2007 would change by approximately $0.02 per pound for each $25 per ounce change
in the average price of gold for the remainder of 2007.
Unit
Net
Cash Costs: Co-Product Method - Using the co-product method, unit site
production and delivery costs in the first quarter of 2007 averaged $0.50 per
pound of copper, compared with $0.80 in the 2006 period. For gold, unit site
production and delivery costs in the first quarter of 2007 averaged $106 per
ounce, compared with $197 in the 2006 period. As discussed above, unit site
production and delivery costs in the first quarter of 2007 benefited from higher
sales volumes resulting from higher ore grades, but were adversely affected
by
higher input costs (including energy). Royalties per pound and per ounce were
also higher in the first quarter of 2007 because of higher sales volumes and
realized prices compared with the 2006 period.
North
American Mining
Our
North
American mining operations comprise copper operations from mining through rod
production, molybdenum operations from mining through conversion to chemical
and
metallurgical products, marketing and sales. Through Phelps Dodge, we have
five
operating copper mines in North America - Morenci, Bagdad, Sierrita, Chino
and
Tyrone. In addition to copper, the Bagdad, Sierrita and Chino mines produce
molybdenum, gold, silver and rhenium and the Morenci mine produces molybdenum.
The North American mining division also includes Primary Molybdenum,
Manufacturing, Sales and other mining activities. In addition, a new copper
mine
is under construction at Safford, Arizona. All of these mining operations are
wholly owned, except for Morenci. We record our 85 percent joint venture
interest in Morenci using the proportionate consolidation method.
For
the
12-day period ended March 31, 2007, North American mining added $343.5 million
in revenues and $23.6 million of operating losses to our first-quarter 2007
results, which included charges to revenues for mark-to-market accounting
adjustments on Phelps Dodge’s 2007 copper price protection program totaling
$38.1 million (refer to Note 14 and “Contractual Obligations - Hedging
Activities”).
The
following discussion about our North American mining operations covers the
full
first quarters of 2007 and 2006, including periods prior to our acquisition
of
these operations.
Pro
Forma Consolidated
|
|
First
Quarter
|
|
North
American Mining Operationsa
|
|
2007
|
|
2006
|
|
Copper
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
Production
|
|
|
301.2
|
|
|
320.2
|
|
Sales
|
|
|
306.7
|
|
|
333.5
|
|
Average
realized price per pound, excluding hedging
|
|
$
|
2.82
|
|
$
|
2.16
|
|
Average
realized price per pound, including hedgingb
|
|
$
|
2.63
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
Molybdenum
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
Production
|
|
|
16.5
|
|
|
17.2
|
|
Sales
|
|
|
18.6
|
|
|
16.9
|
|
Average
realized price per pound
|
|
$
|
23.00
|
|
$
|
21.18
|
|
|
|
|
|
|
|
|
|
a.
|
Pro
forma results include the results of Phelps Dodge prior to March
20, 2007,
and exclude purchased metal.
|
b.
|
Includes
impact of hedging losses related to Phelps Dodge’s copper price protection
programs.
|
First-quarter
2007 North America sales volumes were lower than first-quarter 2006 volumes
primarily because of lower ore grades. Consolidated copper sales from North
American operations totaled 1.3 billion pounds in 2006 and are expected to
approximate 1.3 billion pounds for the full year 2007. In the first quarter
of
2007, sales from these operations totaled 306.7 million pounds of
copper.
With
the
acquisition of Phelps Dodge, we are now the world’s largest producer of
molybdenum through the Henderson molybdenum mine in Colorado and as a by-product
at several of our copper mines. The
Henderson
block-cave underground mining complex produces high-purity, chemical-grade
molybdenum concentrates, which are further processed into value-added molybdenum
chemical products. A feasibility study is ongoing for reopening the Climax
open-pit mine, which has been on care-and-maintenance status since 1995.
Assuming a favorable feasibility study and market conditions and timely receipt
of permits, the Climax mine could resume operation by the end of
2009.
Consolidated
molybdenum sales volumes totaled 68.8 million pounds in 2006 and are expected
to
approximate 70 million pounds for the full year 2007, including sales volumes
prior to our acquisition of Phelps Dodge. Consolidated molybdenum sales volumes
totaled 18.6 million pounds in the first quarter of 2007 and are expected to
approximate 17 million pounds in the second quarter of 2007.
Approximately
60 percent of our expected 2007 molybdenum production is committed for sale
throughout the world pursuant to annual or quarterly agreements based primarily
on prevailing market prices one month prior to the time of sale. The
Metals
Week
Dealer
Oxide closing price for molybdenum on April 30, 2007, was $28.33 per
pound.
Unit
Net Cash Costs.
The
following table summarizes the pro forma unit net cash costs at the North
American copper mines for the full first quarters of 2007 and 2006. Henderson
is
a molybdenum mine and, therefore, is not a part of these gross profit per pound
calculations (refer to the “Primary Molybdenum” discussion).
Gross
Profit per Pound of Copper and Molybdenum/per Ounce of Gold and
Silver
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Molybdenum
|
|
Three
Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
|
$2.70
|
|
|
$2.70
|
|
|
$597.80
|
|
|
$15.17
|
|
|
$25.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
noncash and nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
shown below
|
|
1.31
|
|
|
1.15
|
|
|
298.89
|
|
|
5.50
|
|
|
9.59
|
|
By-product
credits
|
|
(0.54
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.07
|
|
|
0.07
|
|
|
55.83
|
|
|
1.06
|
|
|
-
|
|
Unit
net cash costsa
|
|
0.84
|
|
|
1.22
|
|
|
354.72
|
|
|
6.56
|
|
|
9.59
|
|
Depreciation
and amortization
|
|
0.13
|
|
|
0.11
|
|
|
25.16
|
|
|
0.51
|
|
|
0.79
|
|
Noncash
and nonrecurring costs, net
|
|
0.02
|
|
|
0.02
|
|
|
3.48
|
|
|
0.02
|
|
|
0.03
|
|
Total
unit costs
|
|
0.99
|
|
|
1.35
|
|
|
383.36
|
|
|
7.09
|
|
|
10.41
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging
|
|
(0.03
|
)
|
|
(0.03
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Idle
facility and other non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
inventoriable
costs
|
|
0.02
|
|
|
0.02
|
|
|
(0.79
|
)
|
|
(0.01
|
)
|
|
-
|
|
Gross
profit
|
|
$1.70
|
|
|
$1.34
|
|
|
$213.65
|
|
|
$8.07
|
|
|
$14.72
|
|
TABLE OF CONTENTS
Gross
Profit per Pound of Copper and Molybdenum/per Ounce of Gold and
Silver
|
|
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Molybdenum
|
|
Three
Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
|
$2.24
|
|
|
$2.24
|
|
|
$515.44
|
|
|
$9.52
|
|
|
$24.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
noncash and nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
shown below
|
|
0.99
|
|
|
0.77
|
|
|
320.03
|
|
|
4.32
|
|
|
9.63
|
|
By-product
credits
|
|
(0.58
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.07
|
|
|
0.06
|
|
|
91.65
|
|
|
1.64
|
|
|
-
|
|
Unit
net cash costsa
|
|
0.48
|
|
|
0.83
|
|
|
411.68
|
|
|
5.96
|
|
|
9.63
|
|
Depreciation
and amortization
|
|
0.11
|
|
|
0.09
|
|
|
38.60
|
|
|
0.43
|
|
|
0.84
|
|
Noncash
and nonrecurring costs, net
|
|
0.02
|
|
|
0.02
|
|
|
6.06
|
|
|
0.03
|
|
|
0.03
|
|
Total
unit costs
|
|
0.61
|
|
|
0.94
|
|
|
456.34
|
|
|
6.42
|
|
|
10.50
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging
|
|
(1.13
|
)
|
|
(1.13
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Idle
facility and other non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
inventoriable
costs
|
|
(0.02
|
)
|
|
(0.02
|
)
|
|
-
|
|
|
(0.05
|
)
|
|
-
|
|
Gross
profit
|
|
$0.48
|
|
|
$0.15
|
|
|
$59.10
|
|
|
$3.05
|
|
|
$13.88
|
|
a. |
For
a reconciliation of pro forma unit net cash costs per pound to production
and delivery costs applicable to pro forma sales refer to “Product
Revenues and Production Costs.”
|
North
American unit cash costs were higher in the first quarter of 2007 compared
with
the first quarter of 2006 primarily because of lower volumes and higher costs
at
the Morenci operation associated with equipment maintenance, an increase in
consumables and mill restart costs.
Assuming
an average price of $20 per pound of molybdenum for the remainder of 2007 and
achievement of current 2007 sales estimates, we estimate that our pro forma
2007
average unit net cash costs for our North American mines, including molybdenum
credits, would approximate $0.87 per pound of copper. Average unit net cash
costs for 2007 would change by approximately $0.03 per pound for each $2 per
pound change in the average price of molybdenum for the remainder of
2007.
A
further
discussion of North American mining operations follows.
Morenci.
The
Morenci open-pit mine, located in southeastern Arizona, primarily produces
electrowon copper cathodes and copper concentrates. We own an 85 percent
undivided interest in Morenci and the remaining 15 percent is owned by Sumitomo
Metal Mining Arizona, Inc., a jointly owned subsidiary of Sumitomo Metal Mining
Co., Ltd. and Sumitomo Corporation. Each partner takes in kind its share of
Morenci’s production.
Construction
of a concentrate-leach, direct-electrowinning facility at Morenci is on schedule
for completion in the third quarter of 2007. The facility uses Phelps Dodge’s
proprietary medium-temperature, pressure-leaching and direct-electrowinning
technology, which will enhance cost savings by processing concentrates on-site
instead of shipping concentrates to smelters for treatment. FCX’s share of the
concentrate produced by Morenci will continue to be treated at the smelter
located in Miami, Arizona, until the facility is completed.
Manufacturing.
The
Manufacturing segment consists of copper conversion facilities, including our
smelter, refinery, rod mills and specialty copper products facility. This
segment processes copper produced at our North American mines and copper
purchased from others into copper anode, cathode, rod and custom copper shapes.
The Miami smelter is the most significant source of sulfuric acid for the
various North American leaching operations. In addition, at times it smelts
and
refines copper and produces copper rod
and
shapes for customers on a toll basis. Toll arrangements require the tolling
customer to deliver appropriate copper-bearing material to our facilities for
processing into a product that is returned to the customer. The customer pays
us
for processing their material into the specified products.
Primary
Molybdenum.
The
Primary Molybdenum segment includes our wholly owned Henderson and Climax
molybdenum mines in Colorado, related conversion facilities and a technology
center. This segment is an integrated producer of molybdenum, with mining,
roasting and processing facilities that produce high-purity, molybdenum-based
chemicals, molybdenum metal powder and metallurgical products, which are sold
to
customers around the world. In addition, at times this segment roasts and/or
processes material on a toll basis. Toll arrangements require the tolling
customer to deliver appropriate molybdenum-bearing material to our facilities
for processing into a product that is returned to the customer. The customer
pays us for processing their material into the specified products. This segment
also includes a technology center whose primary activity is developing new
engineered products and applications.
The
Henderson underground mine produces high-purity, chemical-grade molybdenum
concentrates, which are further processed into value-added molybdenum chemical
products.
The
Climax mine has been on care-and-maintenance status since 1995. Prior to its
acquisition by FCX, Phelps Dodge had conditionally approved the restart of
the
Climax mine. Final approval is contingent upon completion of a favorable
feasibility study for a new mill and obtaining all required operating permits
and regulatory approvals. A pre-feasibility study indicates that the open-pit
mine could annually produce approximately 20 million to 30 million pounds of
molybdenum contained in high-quality concentrates at highly competitive unit
production costs with a capital investment of approximately $250 million for
a
new, state-of-the-art concentrator and associated facilities. Assuming a
favorable feasibility study and market conditions and timely receipt of permits,
we could have the Climax mine in production by the end of 2009.
The
following discussion about our Primary Molybdenum mining operations covers
the
full first quarters of 2007 and 2006, including periods prior to our acquisition
of these operations.
Pro
Forma Consolidated
|
|
First
Quarter
|
|
Primary
Molybdenum Mining Operationsa
|
|
2007
|
|
2006
|
|
Molybdenum
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
Production
|
|
|
16.5
|
|
|
17.2
|
|
Sales
|
|
|
18.6
|
|
|
16.9
|
|
Average
realized price per pound
|
|
$
|
23.00
|
|
$
|
21.18
|
|
|
|
|
|
|
|
|
|
a. |
Pro
forma results include the results of Phelps Dodge prior to March
20, 2007,
and exclude purchased metal.
|
b. |
Includes
by-product molybdenum production of 7.1 million pounds for first-quarter
2007 and 7.8 million pounds for first-quarter
2006.
|
Unit
Net Cash Costs.
The
following table summarizes the pro forma unit net cash costs at the Henderson
molybdenum mine for the full first quarters of 2007 and 2006.
Gross
Profit per Pound of Molybdenum
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
2007
|
|
2006
|
|
Revenues,
after adjustments shown below
|
$
|
22.17
|
|
$
|
21.53
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
4.15
|
|
|
3.62
|
|
Unit
net cash costsa
|
|
4.15
|
|
|
3.62
|
|
Depreciation
and amortization
|
|
0.92
|
|
|
0.89
|
|
Noncash
and nonrecurring costs, net
|
|
0.02
|
|
|
0.02
|
|
Total
unit costs
|
|
5.09
|
|
|
4.53
|
|
Gross
profit
|
$
|
17.08
|
|
$
|
17.00
|
|
a. |
For
a reconciliation of unit net cash costs to production and delivery
costs
applicable to sales reported in FCX’s consolidated financial statements
refer to “Product Revenues and Production
Costs.”
|
Other
North America Mining Operations.
Other
North America mining operations include our other southwestern U.S. copper
mines
- Bagdad, Sierrita, Chino, Cobre, Miami, Bisbee and Tohono. In addition to
copper, the Bagdad, Sierrita and Chino mines produce molybdenum, gold, silver
and rhenium.
Our
North
America mining operations also include the Safford copper mine, which is
currently under construction and is expected to produce ore from two open-pit
copper mines located in southeastern Arizona. All requisite permits have been
received and construction commenced in early August 2006. We anticipate that
Safford will be in production by early 2008, with full copper production
initially expected to approximate 240 million pounds per year. Life of the
operation is expected to be at least 18 years. The Safford mining complex will
require a total capital investment of approximately $580 million, of which
approximately $300 million was spent on the project prior to our acquisition
of
Phelps Dodge, and approximately $25 million was spent during the 12-day period
ending March 31, 2007. For the remainder of 2007, approximately $190 million
is
expected to be spent on development of the Safford mining complex.
South
American Mining
Through
Phelps Dodge, we have four copper mines in South America - Candelaria, Ojos
del
Salado and El Abra in Chile and Cerro Verde in Peru. These operations include
open-pit and underground mining, sulfide ore concentrating, leaching, solution
extraction and electrowinning. In addition to copper, the Candelaria and Ojos
del Salado mines produce gold and silver, and the Cerro Verde mine produces
molybdenum and silver. These operations are consolidated in our financial
statements, with outside ownership reported as minority interests.
For
the
12-day period ending March 31, 2007, South American mining added $261.7 million
in revenues and $117.3 million in operating income to our first-quarter 2007
results.
The
following discussion about our South American mining operations covers the
full
first quarters of 2007 and 2006, including periods prior to our acquisition
of
these operations.
Pro
Forma Consolidated
|
|
First
Quarter
|
|
South
American Mining Operationsa
|
|
2007
|
|
2006
|
|
Copper
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
Production
|
|
|
307.2
|
|
|
288.3
|
|
Sales
|
|
|
301.8
|
|
|
275.5
|
|
Average
realized price per pound
|
|
$
|
2.73
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
Gold
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
Production
|
|
|
24.5
|
|
|
30.2
|
|
Sales
|
|
|
25.5
|
|
|
29.3
|
|
a. |
Pro
forma results include the results of Phelps Dodge prior to March
20,
2007.
|
Copper
sales in the first quarter of 2007 were higher than in the first quarter of
2006
primarily reflecting the start up of expanded production at Cerro Verde partly
offset by lower El Abra sales. Consolidated copper sales totaled 1.1 billion
pounds from South American operations in 2006 and are expected to approximate
1.5 billion pounds for the full year 2007. In the first quarter of 2007, these
operations sold 301.8 million pounds of copper. The projected increases for
full-year 2007 reflect incremental production from the new Cerro Verde
concentrator, partly offset by lower grades at El Abra.
Unit
Net Cash Costs.
The
following table summarizes the pro forma unit net cash costs at the South
American mines for the full first quarters of 2007 and 2006.
Gross
Profit per Pound of Copper/per Ounce of Gold and
Silver
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Three
Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
|
$2.74
|
|
|
$2.74
|
|
|
$657.27
|
|
|
$13.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before
|
|
|
|
|
|
|
|
|
|
|
|
|
net
noncash and nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
shown below
|
|
0.84
|
|
|
0.80
|
|
|
286.47
|
|
|
5.25
|
|
By-product
credits
|
|
(0.08
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.18
|
|
|
0.18
|
|
|
44.63
|
|
|
1.39
|
|
Unit
net cash costs
|
|
0.94
|
|
|
0.98
|
|
|
331.10
|
|
|
6.64
|
|
Depreciation
and amortization
|
|
0.15
|
|
|
0.14
|
|
|
27.39
|
|
|
0.55
|
|
Noncash
and nonrecurring costs, net
|
|
-
|
|
|
-
|
|
|
0.40
|
|
|
0.01
|
|
Total
unit costs
|
|
1.09
|
|
|
1.12
|
|
|
358.89
|
|
|
7.20
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging
|
|
0.19
|
|
|
0.19
|
|
|
(15.57
|
)
|
|
(0.24
|
)
|
Idle
facility and other non-
|
|
|
|
|
|
|
|
|
|
|
|
|
inventoriable
costs
|
|
(0.02
|
)
|
|
(0.02
|
)
|
|
(9.63
|
)
|
|
(0.14
|
)
|
Gross
profit
|
|
$1.82
|
|
|
$1.79
|
|
|
$273.18
|
|
|
$5.63
|
|
Three
Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
|
$2.58
|
|
|
$2.58
|
|
|
$579.11
|
|
|
$9.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before
|
|
|
|
|
|
|
|
|
|
|
|
|
net
noncash and nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
shown below
|
|
0.74
|
|
|
0.72
|
|
|
177.85
|
|
|
3.06
|
|
By-product
credits
|
|
(0.08
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
0.15
|
|
|
0.15
|
|
|
42.39
|
|
|
0.63
|
|
Unit
net cash costs
|
|
0.81
|
|
|
0.87
|
|
|
220.24
|
|
|
3.69
|
|
Depreciation
and amortization
|
|
0.17
|
|
|
0.16
|
|
|
21.39
|
|
|
0.36
|
|
Noncash
and nonrecurring costs, net
|
|
-
|
|
|
-
|
|
|
0.24
|
|
|
0.01
|
|
Total
unit costs
|
|
0.98
|
|
|
1.03
|
|
|
241.87
|
|
|
4.06
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging
|
|
(0.17
|
)
|
|
(0.14
|
)
|
|
(163.38
|
)
|
|
(2.95
|
)
|
Idle
facility and other non-
|
|
|
|
|
|
|
|
|
|
|
|
|
inventoriable
costs
|
|
(0.02
|
)
|
|
(0.02
|
)
|
|
(8.50
|
)
|
|
(0.12
|
)
|
Gross
profit
|
|
$1.41
|
|
|
$1.39
|
|
|
$165.36
|
|
|
$2.44
|
|
a.
|
For
a reconciliation of pro forma unit net cash costs per pound to production
and delivery costs applicable to pro forma sales refer to “Product
Revenues and Production Costs.”
|
South
American unit net cash costs were higher in the first quarter of 2007 compared
with the first quarter of 2006 primarily resulting from mill start-up activities
and higher employee costs at Cerro Verde, and the impact of lower volumes at
El
Abra. We estimate that pro forma annual 2007 average unit net cash costs for
our
South American mines, including gold credits, would approximate $0.85 per pound
of copper.
A
further
discussion of South American mining operations follows.
Cerro
Verde.
The
Cerro Verde open-pit mine, located near Arequipa, Peru, produces electrowon
copper cathodes and copper concentrates. We own a 53.56 percent equity interest
in Cerro Verde, which we fully consolidate and report the minority interest.
The
remaining 46.44 percent is held by SMM Cerro Verde Netherlands B.V.,
Compañía de Minas Buenaventura S.A.A. and other minority shareholders through
shares publicly traded on the Lima Stock Exchange.
Cerro
Verde has recently completed an approximate $900 million mill expansion project,
which permits the mining and processing of a primary sulfide ore body beneath
the leachable ore body currently in production. Through the expansion,
approximately 1.5 billion tons of sulfide mill ore reserves averaging 0.47
percent copper and 0.02 percent molybdenum will be processed through the new
concentrator. Processing of the sulfide ore began in the fourth quarter of
2006
and the mill is on schedule to reach design capacity during the second quarter
of 2007. With the completion of the expansion, copper production at Cerro Verde
initially is expected to approximate 650 million pounds per year (approximately
348 million pounds per year for our share). The expansion is expected to add
approximately 430 million pounds of copper per year. In addition, the expansion
is expected to produce an average of approximately 8 million pounds of
molybdenum per year (approximately 4 million pounds per year for our share)
for
the next 10 years. Cerro Verde has long-term contracts that provide for fixed
treatment and refining charges through 2011 on approximately 50 percent of
its
projected copper concentrate production.
Other
South America Mining Operations. Other
South American mining operations include our other South American copper mines
-
Candelaria, Ojos del Salado and El Abra - which include open-pit and underground
mining, sulfide ore concentrating, leaching, solution extraction and
electrowinning. In addition to copper, the Candelaria and Ojos del Salado mines
produce gold and silver. We own an 80 percent partnership interest in both
the
Candelaria and Ojos del Salado mines, and own a 51 percent partnership interest
in the El Abra mine.
At
the
end of 2006, a feasibility study was completed that evaluated the development
of
the large sulfide deposit at El Abra. This project would extend the mine
life
by nine years. Copper production from the sulfides is expected to begin in
2010. The existing facilities at El Abra will be used to process the additional
reserves, minimizing capital spending requirements. Total initial capital
for
the project is approximately $350 million, which will be spent between 2008
and 2011. In March 2007, an environmental impact study associated with the
sulfide project was submitted to Chilean authorities.
Other
Mining Matters
Africa. We
hold
an effective 57.75 percent interest in the Tenke
Fungurume
copper/cobalt mining concessions in the Katanga province of the Democratic
Republic of Congo. We are the operator of the project. The Tenke Fungurume
feasibility study completed in the fourth quarter of 2006 is based on ore
reserves of 103 million metric tons with ore grades of 2.1 percent copper and
0.3 percent cobalt. Based on the current mine plan, ore grades for the first
10
years are expected to average 4.6 percent copper and 0.4 percent cobalt.
Operations are expected to commence by early 2009, with initial production
of
approximately 250 million pounds of copper and approximately 18 million pounds
of cobalt per year for the first 10 years. Based on the recent feasibility
study, which assumes a long-term cobalt price of $12 per pound, life-of-mine
unit net cash costs after by-product credits are estimated to be a net credit
of
$0.19 per pound of copper.
We
are
responsible for funding 70 percent of project development costs. The Tenke
Fungurume project will require a capital investment of approximately $650
million.
Cerro
Verde. In
June
2004, the executive branch of the Peruvian government approved legislation
incorporating a royalty on mining activities, which would be assessed at a
graduated rate of up to three percent on the value of Cerro Verde’s sales, net
of certain related expenses. In June 2006, an amendment to the royalty law
was
approved by the Peruvian congress, which granted the Peruvian tax authorities
the right to levy mining royalties on all mining companies operating in Peru,
including those with stability agreements. This amendment was subsequently
rejected by the executive branch on the grounds that the government cannot
modify stability agreements entered into with mining companies without their
consent. However, the government has requested that all mining companies make
additional payments to
local
communities where they operate during times of high metal prices to partially
offset proceeds that would have otherwise come from the royalty.
Cerro
Verde’s Mining Stability Agreement contains a provision that allows it to
exclude from taxable income qualifying profits that are reinvested in an
investment program filed with and approved by the Ministry of Energy and
Mines.
Cerro Verde’s reinvestment program associated with its sulfide expansion project
has resulted in lower revenues being returned to the Arequipa region from
the
federal government under the mining law of Peru. During 2006, the Peruvian
government announced that all mining companies operating in Peru will make
annual contributions equal to 3.75 percent of after-tax profits to local
development funds for a five-year period, with each company negotiating
an
individual agreement with the government. Cerro Verde has negotiated an
agreement to pay the 3.75 percent contribution, of which 2.75 percent will
be
contributed to a local mining fund and 1.00 percent to a regional mining
fund.
Cerro Verde would also receive a credit against the local contribution
for any
contributions made to the Arequipa region for the partial financing of
the
construction of local water and sewage treatment facilities. Based on the
agreement and prior to our acquisition of Phelps Dodge, Cerro Verde paid
approximately $5 million to the Arequipa region. Cerro Verde also agreed
to
conduct and fund technical studies for the construction of water and sewage
treatment facilities in Arequipa. Based on the results of the studies,
Cerro
Verde will finance 50 percent of the construction of both facilities. The
cost
associated with the construction of these facilities is currently under
review,
but Cerro Verde’s share is expected to approximate $40 million, which is
recorded as a liability.
Curtailed
Properties. We
base
our decision to temporarily curtail production on a variety of factors. We
may
temporarily curtail production in response to external, macro-level factors
such
as prevailing and projected global copper production and demand, and the
magnitude and trend of changes in world copper inventories. The lead times
involved in temporarily curtailing and restarting open-pit copper mines are
such
that careful consideration must be given to long-term planning rather than
immediate reaction to price fluctuations.
Our
decisions concerning temporary curtailment of certain mining operations also
take into account molybdenum market conditions. This includes overall molybdenum
market supply/demand fundamentals, inventory levels and published
prices.
We
also
may adjust production at various properties in response to internal, micro-level
factors such as the need to balance smelter feed or an internal shortage or
surplus of sulfuric acid for our leaching operations. In other cases, facilities
may be temporarily curtailed as a result of changes in technology that may
make
one technology, at a given copper price, more attractive than another
technology. Unique regional issues, such as the energy crisis in the
southwestern United States in 2000 and 2001, also may result in temporary
curtailments.
We
have
additional sources of copper that could be developed; however, such
additional
sources would require the development of greenfield projects that would involve
significant capital expenditures and could require long lead-times.
EXPLORATION
ACTIVITIES
We
are
conducting exploration activities near our existing mines and in other areas
around the world. Exploration expenditures in 2007 are expected to approximate
$125 million.
Our
exploration efforts in North
America
include
drilling
within the Safford district of the Lone Star deposit, located approximately
four
miles from the ore body currently under development, and targets in the Morenci
district. In Africa, we plan to explore targets outside of the area of initial
development at Tenke Fungurume and to advance a pre-feasibility study on the
separate Kisanfu project.
We
are
reviewing the development potential of each mining district acquired from Phelps
Dodge and all of its ongoing exploration activities. These reviews could result
in changes in our exploration and development plans.
PT
Freeport Indonesia’s 2007 exploration efforts in Indonesia
will
continue to test extensions of the Deep Grasberg and Kucing Liar mine complex.
PT Freeport Indonesia also expects to test the open-pit potential of the
Wanagon
gold prospect, the Ertsberg open-pit resource through surface drilling programs,
possible extensions of the Deep Mill Level Zone deposit and other targets
in the
area between the Ertsberg and Grasberg mineral systems from the new Common
Infrastructure tunnels. During 2007, we have resumed exploration activities
that
were suspended in recent years in certain prospective areas outside Block
A
including the Kamopa prospect. Field programs were initiated at the Ular
Merah
copper/gold prospect in our Eastern Minerals contract of work area during
the
first quarter of 2007.
ATLANTIC
COPPER SMELTING & REFINING
Our
investment in smelters serves an important role in our concentrate marketing
strategy. PT Freeport Indonesia generally sells under long-term contracts
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
PT
Freeport Indonesia’s concentrate production. Low smelter treatment and refining
charges will adversely affect the operating results of Atlantic Copper and
benefit the operating results of Indonesian and South America mining operations.
Smelting and refining charges consist of a base rate and, in certain contracts,
price participation based on copper prices. Higher treatment and refining
charges benefit our smelter operations at Atlantic Copper and adversely affect
our mining operations in Indonesia and South America. North American mining
operations are not affected by changes in treatment and refining charges because
of our integrated operations.
Atlantic
Copper Operating Results
|
First
Quarter
|
|
(In
Millions)
|
2007
|
|
2006
|
|
Gross
profit
|
$
|
16.5
|
|
$
|
17.3
|
|
Add
depreciation and amortization expense
|
|
10.5
|
|
|
7.4
|
|
Other
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Cash
margin
|
$
|
26.6
|
|
$
|
24.3
|
|
|
|
|
|
|
|
|
Operating
income (in millions)
|
$
|
12.4
|
|
$
|
13.5
|
|
Concentrate
and scrap treated (thousand metric tons)
|
|
242.5
|
|
|
250.7
|
|
Anodes
production (million pounds)
|
|
149.0
|
|
|
157.1
|
|
Treatment
rates per pound
|
$
|
0.35
|
|
$
|
0.29
|
|
Cathodes
sales (million pounds)
|
|
134.6
|
|
|
136.6
|
|
Gold
sales in anodes and slimes (thousand ounces)
|
|
114.2
|
|
|
245.6
|
|
|
|
|
|
|
|
|
Atlantic
Copper’s operating cash margin was $26.6 million in the first quarter of 2007,
compared with $24.3 million in the 2006 period. Atlantic Copper reported
operating income of $12.4 million in the first quarter of 2007, compared with
$13.5 million in the 2006 period. Atlantic Copper has a 23-day maintenance
turnaround currently scheduled for the second quarter of 2007.
Atlantic
Copper treated 242,500 metric tons of concentrate and scrap in the first quarter
of 2007, compared with 250,700 metric tons in the 2006 period. Cathode
production totaled 132.2 million pounds and sales totaled 134.6 million pounds
during the first quarter of 2007, compared with cathode production of 129.4
million pounds and sales of 136.6 million pounds during the first quarter of
2006. Atlantic Copper’s treatment charges (including price participation), which
are what PT Freeport Indonesia and third parties pay Atlantic Copper to smelt
and refine concentrates, averaged $0.35 per pound during the first quarter
of
2007 and $0.29 per pound during the first quarter of 2006. The increase in
treatment charges in the 2007 period primarily reflects higher treatment rates
negotiated under the terms of Atlantic Copper’s concentrate purchase and sales
agreements.
TABLE
OF CONTENTS
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 the final sales
to third parties occur. Changes in these net deferrals resulted in reductions
to
our operating income totaling $206.0 million ($109.3 million to net income
or
$0.45 per share) in the first quarter of 2007, compared with an increase
of
$74.2 million ($39.3 million to net income or $0.18 per share) in the first
quarter of 2006. At March 31, 2007, our net deferred profits on PT Freeport
Indonesia concentrate inventories at Atlantic Copper and PT Smelting to be
recognized in future periods’ net income after taxes and minority interest
sharing totaled $210.1 million. Based on copper prices of $3 per pound and
gold
prices of $650 per ounce for the second quarter of 2007 and current shipping
schedules, we estimate the net change in deferred profits on intercompany
sales
will result in an increase to net income of approximately $50 million in
the
second quarter of 2007. The actual change in deferred intercompany profits
may
differ substantially from this estimate because of changes in the timing
of
shipments to affiliated smelters and metal prices.
The
majority of Atlantic Copper’s revenues are denominated in U.S. dollars; however,
operating costs, other than concentrate purchases, and certain asset and
liability accounts are denominated in euros. Atlantic Copper’s estimated annual
euro payments total approximately 100 million euros. A $0.05 increase or
decrease in the exchange rate would result in an approximate $5 million change
in annual costs. The exchange rate on March 31, 2007, was $1.33 per
euro.
PHELPS
DODGE INTERNATIONAL CORPORATION (PDIC)
PDIC,
our
international manufacturing division, produces engineered products principally
for the global energy sector. Its operations are characterized by products
with
internationally competitive costs and quality, and specialized engineering
capabilities. Its factories, which are located in nine countries throughout
Latin America, Asia and Africa, manufacture energy cables for international
markets. Three of our international wire and cable companies have
continuous-cast copper rod facilities and three have continuous-cast aluminum
rod facilities.
For
the
12-day period ended March 31, 2007, PDIC added $57.1 million in revenues and
$7.1 million in operating income to FCX’s first-quarter 2007 results.
CAPITAL
RESOURCES AND LIQUIDITY
Our
operating cash flows vary with prices realized from copper, gold and molybdenum
sales, our production levels, production costs, cash payments for income taxes
and interest, other working capital changes and other factors. Based on current
mine plans and subject to future copper, gold and molybdenum prices, we expect
to generate cash flows significantly greater than our budgeted capital
expenditures, scheduled debt maturities and other cash requirements, thereby
providing us with opportunities to reduce debt.
Following
the significant increase in our debt associated with the acquisition of Phelps
Dodge, we have placed a high priority on debt reduction, and if market
conditions remain favorable, we expect to achieve our objective of meaningful
debt reduction in the near-term. We will continue to consider opportunities
to
reduce debt through possible asset sales.
Cash
and cash equivalents
At
March
31, 2007, we had consolidated cash and cash equivalents of $3.1 billion. The
following table reflects the U.S. and international components of consolidated
cash and cash equivalents at March 31, 2007, and December 31, 2006 (in
billions):
|
March
31,
|
|
December
31,
|
|
|
2007
|
|
2006
|
|
Cash
from U.S. operations
|
$
|
0.3
|
|
$
|
-
|
|
Cash
from international operations
|
|
2.8
|
|
|
0.9
|
|
Total
consolidated cash and cash equivalents
|
|
3.1
|
|
|
0.9
|
|
Less:
minority interests’ share
|
|
(0.5
|
)
|
|
-
|
|
Cash,
net of minority interests’ share
|
|
2.6
|
|
|
0.9
|
|
Withholding
taxes if distributeda
|
|
(0.2
|
)
|
|
(0.1
|
)
|
Net
cash available to parent company
|
$
|
2.4
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
a. |
Cash
at our international operations is subject to foreign withholding
taxes of
up to 22 percent upon repatriation into the U.S.
|
Using
estimated sales volumes for the remainder of 2007 and assuming average prices
of
$3 per pound of copper, $650 per ounce of gold and $20 per pound of molybdenum
for the remainder of 2007, our consolidated operating cash flows would exceed
$5.3 billion in 2007, including over $4.6 billion projected in the remaining
three quarters. Each $0.20 per pound change in copper prices would affect 2007
cash flows
by
approximately $400 million, each $50 per ounce change in gold prices would
affect 2007 cash flows by approximately $30 million, and each $2 per pound
change in molybdenum prices would affect 2007 cash flows by approximately $50
million.
We
expect
to generate cash flows during 2007 significantly greater than our capital
expenditures, minority interests distributions, dividends and other cash
requirements. Using the same assumptions regarding average prices for the
remainder of 2007, and assuming excess cash is applied to reduce debt, total
debt at year-end 2007 would approximate $9 billion and consolidated cash would
approximate $2 billion.
Operating
Activities
Net
cash
provided by operating activities totaled $668.9 million during the first quarter
of 2007, net of $202.2 million used for working capital requirements. In the
first quarter of 2006, net cash used in operating activities totaled $123.8
million, including $501.1 million in working capital requirements. First-quarter
2007 operating cash flows benefited from higher net income because of higher
sales volumes and metals prices, and $108.3 million of cash flows from Phelps
Dodge’s operations for the 12-day period ended March 31, 2007.
First-quarter
2006 operating cash flows were reduced by $453.7 million of income tax payments,
including $328.4 million attributable to 2005 results, other working capital
requirements totaling $172.7 million and a $44.9 million net use of operating
cash resulting from the loss on the redemption of our Gold-Denominated Preferred
Stock, Series II.
Investing
Activities
On
March
19, 2007, we issued 136.9 million shares of common stock and paid $13.9 billion
(net of cash acquired) to acquire Phelps Dodge (refer to Note 2 for further
discussion).
Capital
expenditures, including capitalized interest, totaled $142.4 million in the
first quarter of 2007 and $52.1 million in the first quarter of 2006. PT
Freeport Indonesia capital expenditures for the first quarter of 2007 totaled
$74.0 million, which included approximately $20 million for Big Gossan and
approximately $15 million for the development of the underground Grasberg ore
body. Also included in first-quarter 2007 capital expenditures were Phelps
Dodge
capital expenditures of $60.9 million for the 12-day period ended March 31,
2007, which included approximately $25 million associated with the Safford
project and approximately $5 million associated with Tenke Fungurume.
Capital
expenditures, including approximately $800 million for long-term projects,
are
estimated to total $1.6 billion for 2007. The increase in capital expenditures
for 2007 primarily is associated with the addition of Phelps Dodge capital
spending, which is expected to approximate $1.2 billion for 2007, and includes
amounts for the development of the Tenke Fungurume copper/cobalt mining project
(approximately $300
million)
and the Safford copper mine (approximately $270 million). PT Freeport
Indonesia’s projected capital expenditures for 2007 include approximately $90
million for Big Gossan.
Financing
Activities
At
March
31, 2007, we had $12.0 billion in debt, including $10.4 billion in acquisition
debt, $0.9 billion of debt assumed in the Phelps Dodge acquisition and $0.7
billion of previously existing debt. In connection with financing our
acquisition of Phelps Dodge, we used $2.5 billion of cash and completed the
following debt transactions:
· |
borrowed
$10.0 billion in term loans under a new $11.5 billion senior credit
facility
|
· |
issued
$6.0 billion in senior notes
|
Additionally,
in accordance with our plan to reduce debt, we completed the following equity
transactions immediately following closing of the acquisition, using the net
proceeds to reduce borrowings under the credit facility:
· |
sold
47.15 million shares of common stock at $61.25 per share for net
proceeds
of $2.8 billion
|
· |
sold
28.75 million shares of 6¾% mandatory convertible preferred stock with a
liquidation preference of $100 per share for net proceeds of $2.8
billion
|
In
the
first quarter of 2007, we recorded net charges totaling $87.8 million ($74.6
million to net income or $0.31 per share) associated with the acceleration
of
amortization of deferred financing costs for the credit facility because of
prepayments on the term loans, net of a $34.6 million refund of fees for early
repayment.
In
May
2007, we redeemed our 10⅛% Senior Notes ($272.4 million balance) for $286.2
million. We also prepaid an additional $500 million of term debt in April 2007.
As a result, we will record charges totaling approximately $24 million
(approximately $21 million to net income) in the second quarter of 2007 related
to the premiums paid and the accelerated recognition of deferred financing
costs
associated with these debt reductions.
In
2003,
our Board of Directors approved an open market share purchase program for up
to
20 million shares, which replaced our previous program. Through April 30, 2007,
we had acquired 2.0 million shares in 2006 for $99.8 million ($49.94 per share
average), 2.4 million shares in 2005 for $80.2 million ($33.83 per share
average) and 3.4 million shares in 2004 for $99.5 million ($29.39 per share
average); 12.2 million shares remain available. The timing of future purchases
of our common stock is dependent on many factors including the price of our
common shares, our cash flows and financial position, copper and gold prices
and
general economic and market conditions.
Common
stock dividends totaled $62.9 million in the first quarter of 2007. Our current
regular annual common stock dividend is $1.25 per share, paid at a quarterly
rate of $0.3125 per share. Based on outstanding common shares on March 31,
2007,
our annual common stock dividend totals approximately $475 million. The
declaration and payment of dividends is at the discretion of our Board of
Directors. The amount of our current quarterly cash dividend on our common
stock
will be dependent upon our financial results, cash requirements, future
prospects and other factors deemed relevant by our Board of Directors. On March
29, 2007, FCX declared a regular quarterly dividend, which was paid on May
1,
2007, to common shareholders of record at the close of business on April 16,
2007.
Cash
dividends on preferred stock of $15.1 million in each of the first quarters
of
2007 and 2006, represent dividends on our 5½% Convertible Perpetual Preferred
Stock. Each share of preferred stock was initially convertible into 18.8019
shares of our common stock, equivalent to an initial conversion price of
approximately $53.19 per common share. The conversion rate is adjustable upon
the occurrence of certain events, including any quarter that our common stock
dividend exceeds $0.20 per share. As a result of the quarterly and supplemental
common stock dividends paid through May 1, 2007, each share of preferred stock
is now convertible into 21.1923 shares of FCX common stock, equivalent to a
conversion price of approximately $47.19 per common share. On March 29, 2007,
FCX declared a regular quarterly
dividend
of $13.75 per share of FCX’s 5½% Convertible Perpetual Preferred Stock, which
was paid on May 1, 2007, to shareholders of record at the close of business
on
April 16, 2007.
The
6¾%
mandatory convertible preferred stock sold in March 2007, will automatically
convert on May 1, 2010, into between approximately 39 million and 47 million
shares of FCX common stock. The conversion rate will be subject to anti-dilution
adjustments in certain circumstances. Holders may elect to convert at any time
at a conversion rate equal to 1.3605 shares of common stock for each share
of
6¾% mandatory convertible preferred stock. We will pay, when declared by our
Board of Directors, quarterly dividends at a rate of 6.75 percent per annum.
The
first dividend date is August 1, 2007.
Cash
dividends to minority interests of $47.0 million in the first quarter of 2007
and $18.7 million in the first quarter of 2006 represent dividends paid to
the
minority interest owners of PT Freeport Indonesia and Puncakjaya
Power.
Pursuant
to the restricted payment covenants in our $11.5 billion senior credit facility
and certain senior notes, the amount available for dividend payments, purchases
of our common stock and other restricted payments as of March 31, 2007, was
approximately $3.6 billion.
DISCLOSURES
ABOUT MARKET RISKS
In
connection with the acquisition of Phelps Dodge, the following supplements
the
disclosures about market risks contained in our 2006 Annual Report on Form
10-K
for the year ended December 31, 2006.
Commodity
Price Risk
Our
consolidated revenues include the sale of copper concentrates, which also may
contain significant quantities of gold and silver, the sale of copper anodes,
cathodes, wire rod, wire and gold in anodes and slimes, and the sale of
molybdenum. Consolidated revenues and net income vary significantly with
fluctuations in the market prices of copper, gold and molybdenum, sales volumes
and other factors. For further information on commodity price risk see the
discussion under “Consolidated Results - Revenues.”
Foreign
Currency Exchange Risk
The
functional currency for most of our operations is the U.S. dollar. All of our
revenues and a significant portion of our costs are denominated in U.S. dollars;
however, some costs and certain assets and liability accounts are denominated
in
local currencies, including the Indonesian rupiah, Australian dollars, Chilean
pesos, Peruvian nuevos soles and euros. Generally, our results are positively
affected when the U.S. dollar strengthens in relation to those foreign
currencies and adversely affected when the U.S. dollar weakens in relation
to
those foreign currencies.
One
U.S.
dollar was equivalent to 8,989 rupiah at December 31, 2006 and 9,113 rupiah
at
March 31, 2007. PT Freeport Indonesia’s labor costs are mostly rupiah
denominated. At estimated aggregate annual rupiah payments of 1.6 trillion
for
operating costs and an exchange rate of 9,113 rupiah to one U.S. dollar, the
exchange rate as of March 31, 2007, a one-thousand-rupiah increase in the
exchange rate would result in an approximate $17 million decrease in aggregate
annual operating costs. A one-thousand-rupiah decrease in the exchange rate
would result in an approximate $22 million increase in aggregate annual
operating costs.
Approximately
14 percent of PT Freeport Indonesia’s total projected 2007 purchases of
materials, supplies and services are denominated in Australian dollars. The
exchange rate was $0.79 to one Australian dollar at December 31, 2006, and
$0.81
to one Australian dollar at March 31, 2007. At estimated annual aggregate
Australian dollar payments of 250 million and an exchange rate of $0.81 to
one
Australian dollar, the exchange rate as of March 31, 2007, a $0.01 increase
or
decrease in the exchange rate would result in an approximate $2.5 million change
in aggregate annual operating costs.
The
majority of Atlantic Copper’s revenues are denominated in U.S. dollars; however,
operating costs, other than concentrate purchases, and certain asset and
liability accounts are denominated in euros. Atlantic Copper’s estimated annual
euro payments total approximately 100 million euros. A $0.05
increase
or
decrease in the exchange rate would result in an approximate $5 million change
in annual costs. The exchange rate on December 31, 2006, was $1.32 per euro
and
on March 31, 2007, was $1.33 per euro.
At
our
South American mining operations, labor costs and local supply costs are mostly
denominated in the local currencies. One U.S. dollar was equivalent to 532.4
Chilean pesos and 3.2 Peruvian nuevos soles at December 31, 2006, and 539.4
Chilean pesos and 3.2 Peruvian nuevos soles at March 31, 2007. At estimated
aggregate annual Chilean peso payments of 160 billion for operating costs and
an
exchange rate of 539.4 Chilean pesos to one U.S. dollar, the exchange rate
as of
March 31, 2007, a ten-peso increase or decrease in the exchange rate would
result in an approximate $5.5 million change in aggregate annual operating
costs. At estimated aggregate annual Peruvian nuevo sol payments of 330
million for operating costs and an exchange rate of 3.2 Peruvian nuevos soles
to
one U.S. dollar, the exchange rate as of March 31, 2007, a 0.10 nuevo sol
increase or decrease in the exchange rate would result in an approximate $3.0
million change in aggregate annual operating costs.
Interest
Rate Risk
As
of
March 31, 2007, we had approximately $12.0 billion of long-term debt.
Approximately 48 percent of our debt is variable rate debt, with an interest
rate based on London Interbank Offered Rate (LIBOR). An increase in LIBOR would
increase our interest costs and would negatively affect our cash flows and
results of operations.
CONTRACTUAL
OBLIGATIONS
In
connection with the acquisition of Phelps Dodge, contractual obligations
(including debt) as of March 31, 2007, have increased when compared to December
31, 2006. The following table, as of March 31, 2007, reflects an update of
only
the major changes to the similar table presented in our 2006 Annual Report
on
Form 10-K, and the effect such obligations are expected to have on our liquidity
and cash flows in future periods (in
millions):
|
|
|
|
Less
Than
|
|
|
|
|
|
After
|
|
Total
|
|
1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
+5
Years
|
Short-term
debt
|
$
|
96.1
|
|
$
|
96.1
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Long-term
debt
|
|
11,940.0
|
|
|
103.1
|
|
|
379.5
|
|
|
181.4
|
|
|
11,276.0
|
Scheduled
interest payment obligationsa
|
|
7,663.4
|
|
|
887.2
|
|
|
2,519.7
|
|
|
1,669.1
|
|
|
2,587.4
|
Asset
retirement obligationsb
|
|
104.4
|
|
|
65.1
|
|
|
36.9
|
|
|
2.1
|
|
|
0.3
|
Take-or-pay
contractsc
|
|
1,574.9
|
|
|
1,132.1
|
|
|
320.6
|
|
|
85.8
|
|
|
36.4
|
Total
contractual cash obligationsd
|
$
|
21,378.8
|
|
$
|
2,283.6
|
|
$
|
3,256.7
|
|
$
|
1,938.4
|
|
$
|
13,900.1
|
a.
|
Scheduled
interest payment obligations were calculated using stated coupon
rates for
fixed debt and interest rates applicable at March 31, 2007, for variable
debt.
|
b.
|
Asset
retirement obligations only include our estimated contractual cash
payments associated with reclamation activities at certain Phelps
Dodge
sites we acquired for which our costs are estimable and the timing
of
payments was reasonably determinable as of March 31, 2007. The timing
and
the amount of these payments could change as a result of changes
in
regulatory requirements, changes in scope of reclamation activities
and as
actual reclamation spending occurs. The table excludes remaining
cash
payments of approximately $66 million that are expected to be incurred
in
connection with accelerating certain closure projects at our discretion.
We have also excluded payments for reclamation activities that are
expected to occur after five years and the associated trust assets
of
approximately $522 million that have been dedicated to funding those
reclamation activities because a majority of these cash flows are
expected
to occur over an extended period of time and are dependent upon the
timing
of the end of the mine life, which is subject to
revision.
|
c.
Take-or-pay contracts acquired in the acquisition of Phelps Dodge primarily
include contracts for copper deliveries of specified volumes
at
market-based prices (approximately $1 billion), transportation and port fee
commitments (approximately $211 million) and contracts for electricity
(approximately
|
$124
million). Approximately 39 percent of our take-or-pay electricity
obligations are through Phelps Dodge Energy Services (PDES), the
legal
entity used to manage power for North American operations at generally
fixed-priced arrangements. PDES has the right and the ability to
resell
the electricity as circumstances warrant.
|
d.
|
This
table excludes certain other obligations in our Condensed Consolidated
Balance Sheet, including estimated funding for pension obligations
as the
funding may vary from year-to-year based on changes in the fair value
of
plan assets and actuarial assumptions. Environmental obligations
and
contingencies for which the timing of payments is not determinable
are
also excluded.
|
Hedging
Activities
In
connection with the acquisition of Phelps Dodge, we acquired certain derivative
instruments entered into by Phelps Dodge. The most significant of these
derivatives are zero-premium copper collars (consisting of both put and call
options) and copper put options (see Note 14). These derivative instruments
do not qualify for hedge accounting and are adjusted to fair market value based
on the forward curve price and implied volatility as of the last day of the
respective reporting period, with the gain or loss recorded in revenues.
First-quarter 2007 results include charges to revenues totaling $38.1 million
($23.2 million to net income or $0.10 per share) representing the increase
in
the mark-to-market liability from March 20, 2007, to March 31, 2007. The actual
impact of our 2007 zero-premium copper collar price protection program will
not
be fully determinable until their maturity at year-end 2007, with final
adjustments based on the average annual LME price.
At
March
31, 2007, these zero-premium copper collars covered 486.0 million pounds of
copper sales. At March 31, 2007, the liability associated with these contracts
totaled $461.5 million. At March 31, 2007, we also had in place copper put
options acquired in the Phelps Dodge acquisition at a strike price of $0.95
per
pound for approximately 730 million pounds of 2007 copper sales.
Based on
copper prices at April 30, 2007, the mark-to-market accounting adjustments
in
the second quarter of 2007 for the copper collars would reduce revenues by
approximately $147 million (approximately $90 million to net income). The 2007
copper collars and put contracts will settle in the first quarter of 2008 based
on the average 2007 LME price.
We
do not
currently intend to enter into similar hedging programs in the future.
ENVIRONMENTAL
AND RECLAMATION MATTERS
Environmental
We
are
subject to stringent federal, state and local environmental laws and regulations
that govern emissions of air pollutants; discharges of water pollutants; and
generation, handling, storage and disposal of hazardous substances, hazardous
wastes and other toxic materials. We also are subject to potential liabilities
arising under CERCLA and similar state laws that impose responsibility on
persons who arranged for the disposal of hazardous substances, and on current
and previous owners and operators of a facility for the cleanup of hazardous
substances released from the facility into the environment, including damages
to
natural resources. In addition, we are subject to potential liabilities under
the Resource Conservation and Recovery Act (RCRA) and analogous state laws
that
require responsible parties to remediate releases of hazardous or solid waste
constituents into the environment associated with past or present
activities.
Phelps
Dodge or its subsidiaries previously have been advised by the U.S. Environmental
Protection Agency (EPA), U.S. Forest Service and several state agencies that
under CERCLA or similar state laws and regulations, they may be liable for
costs
of responding to environmental conditions at a number of sites that have been
or
are being investigated by the EPA, the U.S. Forest Service or states to
determine whether releases of hazardous substances have occurred and, if so,
to
develop and implement remedial actions to address environmental concerns. Phelps
Dodge has also been advised by trustees for natural resources that it may be
liable under CERCLA or similar state laws for damages to natural resources
caused by releases of hazardous substances.
Asset
Retirement Obligations
In
connection with the acquisition of Phelps Dodge, we acquired certain asset
retirement obligations (AROs). At March 31, 2007, we had $405.9 million recorded
for AROs in current and long-term liabilities on the balance sheet. We estimate
at March 31, 2007, that our share of the total cost of Phelps Dodge’s AROs,
including anticipated future disturbances and cumulative payments, to be
approximately $1.3 billion (unescalated, undiscounted and on a third-party
cost
basis), leaving approximately $900 million remaining to be accreted over time.
These aggregate costs may increase or decrease materially in the future as
a
result of changes in regulations, engineering designs and technology, permit
modifications or updates, mine plans or other factors and as actual reclamation
spending occurs. ARO activities and expenditures generally are made over an
extended period of time commencing near the end of the mine life; however,
certain reclamation activities could be accelerated if they are determined
to be
economically beneficial.
At
March
31, 2007, we had a
trust
dedicated to funding global reclamation and remediation activities totaling
$422.4 million and also had trust assets that are legally restricted, totaling
$99.4 million, to fund a portion
of our asset retirement obligations for Chino, Tyrone and Cobre as required
for
New Mexico financial assurance.
Refer
to
Note 11 for additional information on significant environmental matters and
asset retirement obligations.
Prior
to
its acquisition by FCX, Phelps Dodge had initiated a process of identifying
and
prioritizing opportunities to accelerate certain demolition, environmental
reserve and asset retirement obligation projects. The projects were prioritized
based on projects where it has regulatory flexibility to remediate at a faster
pace, structures that can be readily demolished, reclamation of visibly impacted
areas, and projects in Arizona and New Mexico where we have substantial
long-term closure obligations. The current plan is to spend, including capital,
at least $300 million through 2008 associated with environmental reserve and
reclamation projects.
NEW
ACCOUNTING STANDARDS
Effective
January 1, 2007, we adopted FASB Interpretation No. (FIN) 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,”
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The cumulative effect of adopting FIN 48
was
an increase in beginning retained earnings of approximately $4 million. Refer
to
Note 9 for further discussion.
In
February 2007, the Financial Accounting Standards Board issued SFAS No. 159
“The
Fair Value Option for Financial Assets and Liabilities - Including an amendment
of FASB No. 115.” SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement
is
effective for fiscal years beginning after November 15, 2007, with early
adoption allowed. We have not yet determined the impact, if any, that adopting
this standard might have on our financial statements.
PRODUCT
REVENUES AND PRODUCTION COSTS
Unit
net
cash costs per pound of copper is a measure intended to provide investors with
information about the cash generating capacity of our mining operations
expressed on a basis relating to our primary metal product, copper. We use
this
measure for the same purpose and for monitoring operating performance by our
mining operations. This information differs from measures of performance
determined in accordance with generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance determined in accordance with generally accepted accounting
principles. 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
present gross profit per pound of copper using both a “by-product” method and a
“co-product” method. We use the by-product method in our presentation of gross
profit per pound of copper because (1) the majority of our revenues are copper
revenues, (2) we mine ore, which contains copper, gold, molybdenum and other
metals, (3) it is not possible to specifically assign all of our costs to
revenues from the copper, gold, and molybdenum and other metals we produce,
(4)
it is the method used to compare mining operations in certain industry
publications and (5) it is the method used by our management and Board of
Directors to monitor operations. In the co-product method presentation below,
costs are allocated to the different products based on their relative revenue
values, which will vary to the extent our metals sales volumes and realized
prices change.
In
both
the by-product and the co-product method calculations below, we show adjustments
to copper revenues for prior period open sales as separate line items. Because
the copper pricing adjustments do not result from current period sales, we
have
reflected these separately from revenues on current period sales. Noncash and
nonrecurring costs consist of items such as stock-based compensation costs,
write-offs
of
equipment or unusual charges. They are removed from site production and delivery
costs in the calculation of unit net cash costs. In addition, costs resulting
from the application of the purchase accounting method are removed. As discussed
above, gold, molybdenum and other metal revenues, excluding any impacts from
redemption of the gold- and silver-denominated preferred stocks, are reflected
as credits against site production and delivery costs in the by-product method.
Presentations under both methods are shown below together with reconciliations
to amounts reported in our consolidated financial statements or pro forma
consolidated results.
Indonesia
Mining Product Revenues and Production Costs
Three
Months Ended March 31, 2007
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Millions)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
1,297.6
|
|
$
|
1,297.6
|
|
$
|
622.3
|
|
$
|
21.0
|
|
$
|
1,940.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncash
and nonrecurring costs shown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
|
313.7
|
|
|
209.7
|
|
|
100.6
|
|
|
3.4
|
|
|
313.7
|
|
Gold
and silver credits
|
|
(643.3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
153.3
|
|
|
102.5
|
|
|
49.1
|
|
|
1.7
|
|
|
153.3
|
|
Royalty
on metals
|
|
49.8
|
|
|
33.3
|
|
|
16.0
|
|
|
0.5
|
|
|
49.8
|
|
Unit
net cash (credits) costs
|
|
(126.5
|
)
|
|
345.5
|
|
|
165.7
|
|
|
5.6
|
|
|
516.8
|
|
Depreciation
and amortization
|
|
59.2
|
|
|
39.6
|
|
|
19.0
|
|
|
0.6
|
|
|
59.2
|
|
Noncash
and nonrecurring costs, net
|
|
8.8
|
|
|
5.9
|
|
|
2.8
|
|
|
0.1
|
|
|
8.8
|
|
Total
unit (credits) costs
|
|
(58.5
|
)
|
|
391.0
|
|
|
187.5
|
|
|
6.3
|
|
|
584.8
|
|
Revenue
adjustments, primarily for pricing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
prior period open sales
|
|
(29.3
|
)
|
|
(29.3
|
)
|
|
-
|
|
|
-
|
|
|
(29.3
|
)
|
PT
Smelting intercompany profit elimination
|
|
(35.7
|
)
|
|
(23.9
|
)
|
|
(11.4
|
)
|
|
(0.4
|
)
|
|
(35.7
|
)
|
Gross
profit
|
$
|
1,291.1
|
|
$
|
853.4
|
|
$
|
423.4
|
|
$
|
14.3
|
|
$
|
1,291.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
and
|
|
and
|
|
|
|
|
|
|
|
(In
Millions)
|
Revenues
|
|
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
1,940.9
|
|
$
|
313.7
|
|
$
|
59.2
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
above
|
|
N/A
|
|
|
8.8
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(153.3
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Royalty
per above
|
|
(49.8
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
prior period open sales per above
|
|
(29.3
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Total
Indonesian mining operations
|
|
1,708.5
|
|
|
322.5
|
|
|
59.2
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
594.4
|
|
|
629.6
|
|
|
57.1
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
statements
|
$
|
2,302.9
|
|
$
|
952.1
|
|
$
|
116.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
Mining Product Revenues and Production Costs
Three
Months Ended March 31, 2006
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Millions)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
543.1
|
|
$
|
543.1
|
|
$
|
282.8
|
|
$
|
7.8
|
|
$
|
833.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncash
and nonrecurring costs shown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
|
275.0
|
|
|
179.2
|
|
|
93.3
|
|
|
2.5
|
|
|
275.0
|
|
Gold
and silver credits
|
|
(290.6
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
83.6
|
|
|
54.5
|
|
|
28.3
|
|
|
0.8
|
|
|
83.6
|
|
Royalty
on metals
|
|
19.9
|
|
|
13.0
|
|
|
6.7
|
|
|
0.2
|
|
|
19.9
|
|
Unit
net cash costs
|
|
87.9
|
|
|
246.7
|
|
|
128.3
|
|
|
3.5
|
|
|
378.5
|
|
Depreciation
and amortization
|
|
33.8
|
|
|
22.0
|
|
|
11.5
|
|
|
0.3
|
|
|
33.8
|
|
Noncash
and nonrecurring costs, net
|
|
11.7
|
|
|
7.6
|
|
|
4.0
|
|
|
0.1
|
|
|
11.7
|
|
Total
unit costs
|
|
133.4
|
|
|
276.3
|
|
|
143.8
|
|
|
3.9
|
|
|
424.0
|
|
Revenue
adjustments, primarily for pricing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
prior period open sales and gold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging
|
|
66.7
|
a
|
|
135.7
|
|
|
(69.0
|
)
|
|
-
|
|
|
66.7
|
|
PT
Smelting intercompany profit recognized
|
|
20.8
|
|
|
13.6
|
|
|
7.1
|
|
|
0.1
|
|
|
20.8
|
|
Gross
profit
|
$
|
497.2
|
|
$
|
416.1
|
|
$
|
77.1
|
|
$
|
4.0
|
|
$
|
497.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
and
|
|
and
|
|
|
|
|
|
|
|
(In
Millions)
|
Revenues
|
|
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
833.7
|
|
$
|
275.0
|
|
$
|
33.8
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
above
|
|
N/A
|
|
|
11.7
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(83.6
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Royalty
per above
|
|
(19.9
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
prior period open sales and hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
above
|
|
66.7
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Total
Indonesia mining operations
|
|
796.9
|
|
|
286.7
|
|
|
33.8
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
2,513.8
|
|
|
2,140.0
|
|
|
313.0
|
|
|
|
|
|
|
|
As
reported in FCX’s pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated
financial results
|
$
|
3,310.7
|
|
$
|
2,426.7
|
|
$
|
346.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
a $69.0 million or $0.31 per pound loss on the redemption of FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
TABLE OF CONTENTS
North
America Mining Product Revenues and Production Costs (Pro
Forma)
Three
Months Ended March 31, 2007
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Millions)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Molybdenum
|
|
Other
|
|
Total
|
|
Revenues,
after adjustments shown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
$
|
812.3
|
|
$
|
812.3
|
|
$
|
2.0
|
|
$
|
4.5
|
|
$
|
178.5
|
|
$
|
3.5
|
|
$
|
1,000.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
noncash and nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
shown below
|
|
394.1
|
|
|
347.4
|
|
|
1.0
|
|
|
1.6
|
|
|
68.1
|
|
|
3.1
|
|
|
421.2
|
|
By-product
credits
|
|
(161.4
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
22.0
|
|
|
21.5
|
|
|
0.2
|
|
|
0.3
|
|
|
-
|
|
|
-
|
|
|
22.0
|
|
Unit
net cash costs
|
|
254.7
|
|
|
368.9
|
|
|
1.2
|
|
|
1.9
|
|
|
68.1
|
|
|
3.1
|
|
|
443.2
|
|
Depreciation
and amortization
|
|
39.6
|
|
|
33.7
|
|
|
0.1
|
|
|
0.2
|
|
|
5.6
|
|
|
-
|
|
|
39.6
|
|
Noncash
and nonrecurring costs, net
|
|
5.8
|
|
|
5.6
|
|
|
-
|
|
|
-
|
|
|
0.2
|
|
|
-
|
|
|
5.8
|
|
Total
unit costs
|
|
300.1
|
|
|
408.2
|
|
|
1.3
|
|
|
2.1
|
|
|
73.9
|
|
|
3.1
|
|
|
488.6
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging
|
|
8.5
|
|
|
8.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8.5
|
|
Idle
facility and other non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
inventoriable
costs
|
|
(10.0
|
)
|
|
(10.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(10.0
|
)
|
Gross
profit
|
$
|
510.7
|
|
$
|
402.6
|
|
$
|
0.7
|
|
$
|
2.4
|
|
$
|
104.6
|
|
$
|
0.4
|
|
$
|
510.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Millions)
|
Revenues
|
|
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
1,000.8
|
|
$
|
421.2
|
|
$
|
39.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
above
|
|
N/A
|
|
|
5.8
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-acquisition
amounts
|
|
(943.4
|
)
|
|
(413.6
|
)
|
|
(34.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
North America operations
|
|
277.6
|
|
|
311.4
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
accounting impact
|
|
N/A
|
|
|
27.3
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging per above
|
|
8.5
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
North American mining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
343.5
|
|
|
352.1
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
1,959.4
|
|
|
600.0
|
|
|
102.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
statements
|
$
|
2,302.9
|
|
$
|
952.1
|
|
$
|
116.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE OF CONTENTS
North
America Mining Product Revenues and Production Costs (Pro
Forma)
Three
Months Ended March 31, 2006
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Millions)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Molybdenum
|
|
Other
|
|
Total
|
|
Revenues,
after adjustments shown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
$
|
740.5
|
|
$
|
740.5
|
|
$
|
2.8
|
|
$
|
4.8
|
|
$
|
190.6
|
|
$
|
3.1
|
|
$
|
941.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
noncash and nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
shown below
|
|
327.7
|
|
|
256.2
|
|
|
1.7
|
|
|
2.2
|
|
|
75.3
|
|
|
2.5
|
|
|
337.9
|
|
By-product
credits
|
|
(191.1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
22.5
|
|
|
21.2
|
|
|
0.5
|
|
|
0.8
|
|
|
-
|
|
|
-
|
|
|
22.5
|
|
Unit
net cash costs
|
|
159.1
|
|
|
277.4
|
|
|
2.2
|
|
|
3.0
|
|
|
75.3
|
|
|
2.5
|
|
|
360.4
|
|
Depreciation
and amortization
|
|
36.3
|
|
|
29.2
|
|
|
0.2
|
|
|
0.2
|
|
|
6.6
|
|
|
0.1
|
|
|
36.3
|
|
Noncash
and nonrecurring costs, net
|
|
5.1
|
|
|
4.9
|
|
|
-
|
|
|
-
|
|
|
0.2
|
|
|
-
|
|
|
5.1
|
|
Total
unit costs
|
|
200.5
|
|
|
311.5
|
|
|
2.4
|
|
|
3.2
|
|
|
82.1
|
|
|
2.6
|
|
|
401.8
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging
|
|
(374.8
|
)
|
|
(374.8
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(374.8
|
)
|
Idle
facility and other non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
inventoriable
costs
|
|
(6.8
|
)
|
|
(6.8
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6.8
|
)
|
Gross
profit
|
$
|
158.4
|
|
$
|
47.4
|
|
$
|
0.4
|
|
$
|
1.6
|
|
$
|
108.5
|
|
$
|
0.5
|
|
$
|
158.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Millions)
|
Revenues
|
|
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
941.8
|
|
$
|
337.9
|
|
$
|
36.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
above
|
|
N/A
|
|
|
5.1
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging per above
|
|
(374.8
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
accounting impact
|
|
N/A
|
|
|
501.4
|
|
|
196.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
2,743.7
|
|
|
1,582.3
|
|
|
114.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported in FCX's pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated
financial results
|
$
|
3,310.7
|
|
$
|
2,426.7
|
|
$
|
346.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE OF CONTENTS
South
America Mining Product Revenues and Production Costs (Pro
Forma)
Three
Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Millions)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
$
|
828.1
|
|
$
|
828.1
|
|
$
|
16.7
|
|
$
|
7.1
|
|
$
|
851.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
noncash and nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
shown below
|
|
252.5
|
|
|
243.1
|
|
|
7.3
|
|
|
2.8
|
|
|
253.2
|
|
By-product
credits
|
|
(23.1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
54.8
|
|
|
52.9
|
|
|
1.1
|
|
|
0.8
|
|
|
54.8
|
|
Unit
net cash costs
|
|
284.2
|
|
|
296.0
|
|
|
8.4
|
|
|
3.6
|
|
|
308.0
|
|
Depreciation
and amortization
|
|
44.1
|
|
|
43.1
|
|
|
0.7
|
|
|
0.3
|
|
|
44.1
|
|
Noncash
and nonrecurring costs, net
|
|
0.7
|
|
|
0.7
|
|
|
-
|
|
|
-
|
|
|
0.7
|
|
Total
unit costs
|
|
329.0
|
|
|
339.8
|
|
|
9.1
|
|
|
3.9
|
|
|
352.8
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging
|
|
57.1
|
|
|
57.6
|
|
|
(0.4
|
)
|
|
(0.1
|
)
|
|
57.1
|
|
Idle
facility and other non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
inventoriable
costs
|
|
(6.3
|
)
|
|
(6.0
|
)
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
(6.3
|
)
|
Gross
profit
|
$
|
549.9
|
|
$
|
539.9
|
|
$
|
7.0
|
|
$
|
3.0
|
|
$
|
549.9
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
and
|
|
|
|
|
|
|
|
(In
Millions)
|
Revenues
|
|
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
851.9
|
|
$
|
253.2
|
|
$
|
44.1
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
above
|
|
N/A
|
|
|
0.7
|
|
|
N/A
|
|
|
|
|
|
|
|
Treatment
charges per above
|
|
(54.8
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Pre-acquisition
amounts
|
|
(631.7
|
)
|
|
(230.9
|
)
|
|
(37.2
|
)
|
|
|
|
|
|
|
Purchased
metal
|
|
68.0
|
|
|
68.0
|
|
|
N/A
|
|
|
|
|
|
|
|
Purchase
accounting impact
|
|
N/A
|
|
|
47.8
|
|
|
21.4
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
(28.8
|
)
|
|
(22.8
|
)
|
|
0.1
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging per above
|
|
57.1
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Total
South American mining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
261.7
|
|
|
116.0
|
|
|
28.4
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
2,041.2
|
|
|
836.1
|
|
|
87.9
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
statements
|
$
|
2,302.9
|
|
$
|
952.1
|
|
$
|
116.3
|
|
|
|
|
|
|
|
South
America Mining Product Revenues and Production Costs (Pro
Forma)
Three
Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
(In
Millions)
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
Revenues,
after adjustments shown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
$
|
710.9
|
|
$
|
710.9
|
|
$
|
17.0
|
|
$
|
6.2
|
|
$
|
734.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
noncash and nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
shown below
|
|
205.3
|
|
|
198.1
|
|
|
5.2
|
|
|
2.0
|
|
|
205.3
|
|
By-product
credits
|
|
(23.2
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Treatment
charges
|
|
42.2
|
|
|
40.5
|
|
|
1.3
|
|
|
0.4
|
|
|
42.2
|
|
Unit
net cash costs
|
|
224.3
|
|
|
238.6
|
|
|
6.5
|
|
|
2.4
|
|
|
247.5
|
|
Depreciation
and amortization
|
|
46.6
|
|
|
45.8
|
|
|
0.6
|
|
|
0.2
|
|
|
46.6
|
|
Noncash
and nonrecurring costs, net
|
|
0.4
|
|
|
0.4
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
Total
unit costs
|
|
271.3
|
|
|
284.8
|
|
|
7.1
|
|
|
2.6
|
|
|
294.5
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging
|
|
(45.9
|
)
|
|
(39.2
|
)
|
|
(4.8
|
)
|
|
(1.9
|
)
|
|
(45.9
|
)
|
Idle
facility and other non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
inventoriable
costs
|
|
(4.3
|
)
|
|
(4.0
|
)
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
(4.3
|
)
|
Gross
profit
|
$
|
389.4
|
|
$
|
382.9
|
|
$
|
4.9
|
|
$
|
1.6
|
|
$
|
389.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
and
|
|
|
|
|
|
|
|
(In
Millions)
|
Revenues
|
|
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
734.1
|
|
$
|
205.3
|
|
$
|
46.6
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
above
|
|
N/A
|
|
|
0.4
|
|
|
N/A
|
|
|
|
|
|
|
|
Treatment
charges per above
|
|
(42.2
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Purchased
metal
|
|
45.1
|
|
|
45.0
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pricing
on prior period open sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
hedging per above
|
|
(45.9
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Purchase
accounting adjustments
|
|
-
|
|
|
501.4
|
|
|
196.5
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
2,619.6
|
|
|
1,674.6
|
|
|
103.7
|
|
|
|
|
|
|
|
As
reported in FCX’s pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated
financial results
|
$
|
3,310.7
|
|
$
|
2,426.7
|
|
$
|
346.8
|
|
|
|
|
|
|
|
Henderson
Product Revenues and Production Costs (Pro
Forma)
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
(In
Millions)
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
|
$
|
207.9
|
|
$
|
201.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
noncash and nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
shown below
|
|
38.9
|
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
Unit
net cash costs
|
|
38.9
|
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
8.7
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
Noncash
and nonrecurring costs, net
|
|
0.2
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Total
unit costs
|
|
47.8
|
|
|
42.4
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
$
|
160.1
|
|
$
|
159.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depreciation
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2007
|
|
|
|
and
|
|
and
|
|
|
|
|
|
|
|
(In
Millions)
|
Revenues
|
|
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
207.9
|
|
$
|
38.9
|
|
$
|
8.7
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
above
|
|
N/A
|
|
|
0.2
|
|
|
N/A
|
|
|
|
|
|
|
|
Purchase
accounting adjustments
|
|
N/A
|
|
|
N/A
|
|
|
1.7
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
2,095.0
|
|
|
913.0
|
|
|
105.9
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
results
|
$
|
2,302.9
|
|
$
|
952.1
|
|
$
|
116.3
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depreciation
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2006
|
|
|
|
and
|
|
and
|
|
|
|
|
|
|
|
(In
Millions)
|
Revenues
|
|
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
201.4
|
|
$
|
33.8
|
|
$
|
8.4
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
above
|
|
N/A
|
|
|
0.2
|
|
|
N/A
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
3,109.3
|
|
|
2,392.7
|
|
|
338.4
|
|
|
|
|
|
|
|
As
reported in FCX’s pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated
financial results
|
$
|
3,310.7
|
|
$
|
2,426.7
|
|
$
|
346.8
|
|
|
|
|
|
|
|
TABLE OF CONTENTS
CAUTIONARY
STATEMENT
Our
discussion and analysis contains forward-looking statements in which we discuss
our expectations regarding future performance. Forward-looking statements are
all statements other than historical facts, such as those regarding anticipated
sales volumes, ore grades, milling rates, commodity prices, selling, general
and
administrative expenses, unit net cash costs, operating cash flows, royalty
costs, capital expenditures, reclamation and closure costs, environmental
expenditures, litigation expenses and liabilities, the impact of copper, gold
and molybdenum price changes, the impact of changes in deferred intercompany
profits on earnings, projected debt and cash balances, treatment charge rates,
depreciation rates, exploration efforts and results, dividend payments,
liquidity and other financial commitments. Accuracy of the forward-looking
statements depends on assumptions about events that change over time and is
thus
susceptible to periodic change based on actual experience and new developments.
We caution readers that we assume no obligation to update or publicly release
any revisions to the forward-looking statements in this Form 10-Q and, except
to
the extent required by applicable law, do not intend to update or otherwise
revise the forward-looking statements more frequently than quarterly.
Additionally, important factors that might cause future results to differ from
these forward-looking statements include mine sequencing, production rates,
industry risks, regulatory changes, commodity prices, political risks,
weather-related risks, labor relations, environmental risks, litigation results,
currency translation risks and other factors described in more detail under
the
heading “Risk Factors” in Part II, Item 1A. of this Quarterly Report on Form
10-Q.
For
information about changes in our market risks since the year ended December
31,
2006, see “Disclosures About Market Risks” included in Part I, Item 2 of this
Quarterly Report on Form 10-Q.
On
March
19, 2007, Freeport McMoRan Copper & Gold Inc. (FCX) completed its
acquisition of Phelps Dodge Corporation (Phelps Dodge), at which time Phelps
Dodge became a wholly owned subsidiary of FCX. For accounting purposes, FCX
was
designated the acquiring entity.
FCX
considers the acquisition of Phelps Dodge material to the results of its
operations, financial position and cash flows from the date of acquisition
through March 31, 2007, and believes that the internal controls and procedures
of Phelps Dodge have a material effect on FCX’s internal control over financial
reporting. FCX is integrating the Phelps Dodge operations and has extended
its
Sarbanes-Oxley Act Section 404 compliance program to include Phelps Dodge.
FCX will report on its assessment of its combined operations within the time
provided by the Sarbanes-Oxley Act and applicable rules relating to business
acquisitions.
Although
FCX has generally maintained its disclosure controls and procedures that were
in
effect prior to the acquisition, since the acquisition there have been changes
in FCX’s internal control over financial reporting, including preparation of the
consolidated financial statements and changes of personnel with direct
responsibility for financing reporting. FCX believes these changes have not
negatively affected its internal control over financial reporting.
In
addition, as a matter of course, FCX continues to update its internal controls
over financial reporting as necessary to accommodate any modifications to its
business processes or accounting procedures.
Our
chief
executive officer and chief financial officer, with the participation of
management, have evaluated the effectiveness of our “disclosure controls and
procedures” (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of the end of the period covered by this quarterly
report on Form 10-Q. Based on their evaluation, they have concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to FCX (including our consolidated subsidiaries)
required to be disclosed in our periodic Securities and Exchange Commission
filings.
TABLE OF CONTENTS
Environmental
Proceedings
Pinal
Creek
The
Pinal
Creek site was listed under the Arizona Department of Environmental Quality’s
(ADEQ) Water Quality Assurance Revolving Fund program in 1989 for contamination
in the shallow alluvial aquifers within the Pinal Creek drainage near Miami,
Arizona. Since that time, environmental remediation has been performed by
members of the Pinal Creek Group (PCG), consisting of Phelps Dodge
Miami, Inc. (a wholly owned subsidiary of Phelps Dodge) and two other companies.
In 1998, the District Court approved a Consent Decree between the PCG members
and the state of Arizona resolving all matters related to an enforcement action
contemplated by the state of Arizona against the PCG members with respect to
the
groundwater matter. The Consent Decree committed Phelps Dodge Miami, Inc. and
the other PCG members to complete the remediation work outlined in the Consent
Decree. That work continues at this time pursuant to the Consent Decree and
consistent with state law and the National Contingency Plan prepared by the
U.S.
Environmental Protection Agency (EPA) under the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA).
Phelps
Dodge Miami, Inc. and the other PCG members have been pursuing contribution
litigation against three other parties involved with the site. Phelps Dodge
Miami, Inc. dismissed its contribution claims against one defendant when another
PCG member agreed to be responsible for any share attributable to that
defendant. Phelps Dodge Miami, Inc. and the other members of the PCG settled
their contribution claims against another defendant in April 2005. While the
terms of the settlement are confidential, the proceeds of the settlement will
be
used to address remediation at the Pinal Creek site. The trial on the issue
of allocating liability has been postponed because of a discovery
dispute and related orders and appeals, and has not yet been
rescheduled.
Approximately
$96 million based on discounted present value calculations remained in the
Pinal
Creek remediation reserve at March 31, 2007. While recoveries or payments
may result from the contribution litigation, we cannot reasonably estimate
the
amount and, therefore, have not taken this into consideration in the recorded
reserve.
New
Mexico Closure Permits
Litigation
is pending regarding closure permits issued by the New Mexico Environmental
Department for the Phelps Dodge Tyrone, Inc. (Tyrone) and Chino Mines Company
(Chino) operations. Tyrone appealed a decision by the New Mexico Water Quality
Control Commission (WQCC) upholding certain conditions imposed by the New Mexico
Environment Department in Tyrone’s Supplemental Discharge Permit for Closure,
DP-1341. Phelps
Dodge Tyrone, Inc. v. New Mexico Water Quality Control
Commission,
No.
25027. In this case, Tyrone objected to permit conditions requiring Tyrone
to
perform approximately $75 million of additional closure work. On June 15, 2006,
the New Mexico Court of Appeals issued its decision overturning two permit
conditions that Tyrone had challenged in its closure permit. The New Mexico
Supreme Court denied Petitions for Certiorari and the case has been remanded
by
the Court of Appeals to WQCC for further proceedings to address the Court of
Appeals decision and a hearing before the WQCC is set for June 12,
2007.
Chino’s
Supplemental Discharge Permit for Closure, DP-1340, was appealed by a third
party, whose appeal was dismissed by WQCC on procedural grounds. WQCC’s decision
dismissing the appeal was overturned by the New Mexico Court of Appeals.
Gila
Resources Information Project v. New Mexico Water Quality Control
Commission,
No.
24478. The permit decision has been remanded to WQCC for further proceedings.
WQCC has postponed the hearing on the Chino closure permit pending a report
by
the parties on settlement discussions, which are ongoing.
Arizona
Notice of Violation (NOV) - Sierrita operations
In
September and October 2006, ADEQ sent NOVs to the Phelps Dodge Sierrita
operations in southeastern Arizona. The two NOVs alleged certain visibility
and
permit violations associated with dust emissions from Sierrita’s tailing
facility during high-wind events. No action has been filed at this time and
Sierrita has responded to the NOVs by acknowledging that dust likely did exceed
a certain visibility standard, but denying the other allegations. Sierrita
has
implemented response actions that ADEQ has accepted, and has entered into
discussions with ADEQ to seek to resolve the NOVs.
EPA
Notice re Violation of Consent Decree - Sierrita
operations
In
September 2006, EPA notified Phelps Dodge Sierrita, Inc. (PDSI) of the possible
assessment of stipulated penalties arising from deviations from certain
provisions of a Consent Decree dated June 21, 2004, by and among PDSI, the
United States and ADEQ, entitled United
States and the State of Arizona v. Phelps Dodge Sierrita, Inc.
No. CIV
04-312 TUC FRZ. PDSI is preparing to enter into negotiations with EPA and ADEQ
concerning the potential assessment of the stipulated penalties.
Asbestos
Claims
Since
approximately 1990, Phelps Dodge or its subsidiaries have been named as a
defendant in a large number of product liability or premises
lawsuits
claiming
injury from exposure to asbestos found in electrical wire products produced
or marketed many years ago, or from asbestos at certain Phelps Dodge
properties. We believe our liability, if any, in these matters
will not have a material adverse effect, either individually or in the
aggregate, upon our business, financial condition, liquidity, results of
operations or cash flow. There can be no assurance, however, that future
developments will not alter this conclusion.
Antitrust
Claims
Columbian
Chemicals Company (Columbian), formerly a subsidiary of Phelps Dodge, together
with several other companies, is a defendant in an action entitled
Technical
Industries, Inc. v. Cabot Corporation, et al.,
No. CIV
03-10191 WGY, filed on January 30, 2003, in the U.S. District Court in Boston,
Massachusetts, and 14 other actions filed in four U.S. district courts, on
behalf of a purported class of all individuals or entities who purchased carbon
black directly from the defendants since January 1999. The Judicial Panel on
Multidistrict Litigation consolidated all of these actions in the U.S. District
Court for the District of Massachusetts under the caption In
Re
Carbon Black Antitrust Litigation.
The
consolidated amended complaint, which alleges that the defendants fixed the
prices of carbon black and engaged in other unlawful activities in violation
of
the U.S. antitrust laws, seeks treble damages in an unspecified amount and
attorney’s fees. The court certified a class that includes all direct purchasers
of carbon black in the United States from January 30, 1999 through January
18,
2005. On March 20, 2007, the court approved a $4 million settlement by one
group
of defendants. The motion for summary judgment filed by Columbian and the other
remaining defendants is still pending. The court has scheduled a trial date
of
July 23, 2007, if the motion is not granted.
A
separate action entitled Carlisle
Companies Incorporated, et al. v. Cabot Corporation, et al.,
was
filed against Columbian and other defendants on behalf of a group of affiliated
companies that opted out of the federal class action. This action, which asserts
similar claims as the class action, was filed in the Northern District of New
York on July 28, 2005, but was transferred to the District of Massachusetts,
where the class action is pending, and was consolidated with the class action
for pretrial purposes. No separate proceedings have occurred in this action,
which is not subject to the summary judgment motion in the class
action.
Actions
are pending in state courts in California, Florida, Kansas, South Dakota
and
Tennessee on behalf of purported classes of indirect purchasers of carbon
black
in those and six other states, alleging violations of state antitrust and
deceptive trade practices laws. Motions to dismiss are pending in the Kansas
and
South Dakota actions. A motion for class certification has been filed in
the
Tennessee action.
Similar
actions filed in state courts in New Jersey and North Carolina, and additional
actions in Florida and Tennessee, have been dismissed. Columbian also received
a
demand for relief on behalf of indirect purchasers in Massachusetts, but
no
lawsuit has been filed.
Phelps
Dodge retained responsibility for the claims against Columbian pursuant to
the
agreement for the sale of Columbian. Columbian has committed to provide
appropriate assistance to defend these matters. We believe the claims are
without merit and intend to defend the lawsuits vigorously.
Shareholder
Litigation
Phelps
Dodge and its directors were named as defendants in three actions brought on
behalf of a purported class of all shareholders of Phelps Dodge, one filed
in
the Supreme Court of the State of New York, County of New York (Phillips
v. Phelps Dodge Corporation, et al.,
No.
06604255, filed December 12, 2006) and two in the Superior Court of the state
of
Arizona, county of Maricopa, (Nathanson
v. Phelps Dodge Corporation, et al.,
No.
CV2006-017963, filed November 22, 2006, and Knisley
v. Phelps Dodge Corp. et al.,
No.
CV2006-053422, filed December 14, 2006), alleging that the directors breached
their fiduciary duties when they approved the proposed merger of Phelps Dodge
and FCX. We were also named as a defendant in the Knisley
case.
The complaints in these actions seek various forms of injunctive relief,
including prohibition of the consummation of the merger, imposition of a
constructive trust on any benefits improperly received by the defendants, an
accounting for any damages sustained by the purported class members, and costs
and disbursements, including plaintiffs’ attorney fees.
We
have entered into a memorandum of understanding with the plaintiffs with
respect to a settlement of the three cases. Pursuant to this agreement in
principle, we agreed that if, within 12 months after the closing of the merger,
we sell all or substantially all of the capital stock or assets of Phelps Dodge,
we will pay $125 million in additional pro rata consideration (less any fees
awarded to plaintiffs’ counsel with respect to such consideration) to the
shareholders of Phelps Dodge who received the merger consideration in the
merger. In addition, Phelps Dodge agreed to make additional disclosures beyond
the information provided in the definitive joint proxy statement/prospectus,
which was provided in a Current Report on Form 8-K filed March 9,
2007.
The
settlement is subject to agreement on a stipulation of settlement and court
approval after notice to the class members.
Arizona
Water Rights
Arizona
surface water law is based on the doctrine of prior appropriation (first in
time, first in right) and permits the water right holder the right to use public
waters for a statutorily defined beneficial use, at a designated location.
Arizona has initiated two water rights adjudications in order to quantify and
prioritize all of the surface water rights and water right claims to two of
the
state’s river systems and sources. Groundwater is not subject to the
adjudication; however, wells may be adjudicated to the extent that they are
found to produce or impact surface water. The two cases that could
potentially impact Phelps Dodge’s surface water rights and claims (including
some wells) are entitled In
Re
The General Adjudication of All Rights to Use Water in the Little Colorado
Water
System and Source,
Arizona
Superior Court, Apache County, Cause No. 6417 (1978) and In
Re
The General Adjudication of All Rights to Use Water in the Gila River System
and
Source,
Arizona
Superior Court, Maricopa County, Cause Nos. W-1 (Salt), W-2 (Verde), W-3 (Upper
Gila), W-4 (San Pedro), (1974). The major parties in addition to Phelps Dodge
in
these matters are: the State of Arizona, Arizona Public Service Company, the
Gila Valley Irrigation District, the San Carlos Irrigation and Drainage
District, the Salt River Project, the San Carlos Apache Tribe, the Gila River
Indian Community, and the United States on behalf of those Tribes, on its own
behalf, and on the behalf of the White Mountain Apache Tribe, Ft. McDowell
Mohave-Apache Indian Community, Salt River Pima-Maricopa Indian Community,
the
Payson Community of Yavapai Apache Indians, the Navajo Nation, the Hopi Indian
Tribe, and the San Juan Southern Paiute Tribe.
TABLE
OF
CONTENTSPhelps
Dodge has four active operations in Arizona: Morenci, Miami, Sierrita and
Bagdad. Each facility requires water for operational and related support
facilities. With the exception of Bagdad, each operation is located in a
watershed subject to ongoing surface water adjudication. Each operation has
sufficient water claims in the ongoing adjudications to cover operational
demands. In many instances, the water supply comes from a variety of possible
sources.
Other
Water Adjudications and Settlements
Gila
River Indian Community Water Settlement
In
1988,
Phelps Dodge executed a settlement agreement with the Gila River Indian
Community (the Community). The Phelps Dodge settlement with the Community
was
later incorporated into the comprehensive Gila River Settlement which was
authorized by federal legislation passed in December 2004. The legislation
authorizing the settlement provided that the parties must obtain necessary
court
approval and that the Secretary of Interior must make certain findings by
December 31, 2007 in order for the settlement to become enforceable. The
remaining contractual obligations prior to December 31, 2007 include
participation on a technical committee for implementation of certain aspects
of
the settlement, and cooperation to obtain court approval of the settlement.
Our
remaining payment obligations may not occur until up to seven years after
December 31, 2007. The exact payment date is dependent on the outcome of
future
water exchange negotiations.
Gila
River Indian Community
In
1988,
the Community intervened in United
States v. Gila Valley Irrigation District, et al.,
and
Globe
Equity No. 59.
The
underlying actions were initiated by the United States in 1925 to settle
conflicting claims to water rights in certain portions of the Gila River
watershed, although Phelps Dodge was dismissed as a defendant in March 1935.
In
1935, the Court entered a decree setting forth the water rights of numerous
parties, minus Phelps Dodge, but retained jurisdiction of the case. The 1988
intervention does not name Phelps Dodge as a defendant; however, it does name
the Gila Valley Irrigation District as a defendant which could affect the
approximately 3,000 acre-feet of water that Phelps Dodge has the right to divert
annually from Eagle Creek, Chase Creek or the San Francisco River pursuant
to
decreed rights and an agreement between Phelps Dodge and the Gila Valley
Irrigation District.
During
1997, 1998 and 2007, Phelps Dodge purchased additional water rights that are
subject to this litigation. As a result, Phelps Dodge has been named and served
as a party in this case. The lands and associated water rights are not currently
used in connection with any Phelps Dodge mining operation.
The
Miami
operation’s predecessor (formerly named Cyprus Miami Mining Corporation) was
named and served as a defendant in this action in 1989. These proceedings
potentially affect water rights associated with Miami holdings in the Gila
River
watershed.
Various
Indian Tribes
Prior
to
January 1, 1983, various Indian tribes filed several suits in Arizona Federal
Court claiming superior rights to use waters, which at present are being used
by
many water users, including Phelps Dodge, and claiming damages for prior use
in
derogation of their allegedly superior rights. These federal proceedings have
been stayed pending state court adjudication.
Tohono
O’odham Nation
Cyprus
Sierrita Corporation, a subsidiary of Phelps Dodge, was a defendant in
United
States, et al. v. City of Tucson, et al.,
No. CIV 75-39 (D. Ariz.). This is a consolidation of several actions
seeking a declaration of the rights of the United States, the Tohono O’odham
Nation (the Nation), and individual allottees of the Nation, to surface water
and groundwater in the Santa Cruz River watershed; damages from the defendants’
use of surface water and groundwater from the watershed in derogation of
those
rights; and injunctive relief. Federal legislation has been passed authorizing
a
settlement. The parties have until
December
31, 2007, to finalize the agreements and
meet certain obligations for the settlement to become enforceable. The outcome
of this dispute could impact water right claims associated with the operations
at Sierrita, and miscellaneous land holdings in the Santa Cruz River
watershed.
FINANCIAL
RISKS
Our
substantial indebtedness, including the indebtedness incurred in connection
with
our recent acquisition of Phelps Dodge, could adversely affect our
operating
results and financial condition.
We
incurred significant debt to fund a portion of the cash consideration
paid
to
the Phelps Dodge shareholders in our acquisition of Phelps Dodge. As of
March 31, 2007, the
outstanding principal amount of our indebtedness was approximately
$12.0 billion (excluding unused availability under our revolving credit
facility of approximately $1.4 billion after giving effect to outstanding
letters of credit). Our level of indebtedness could have important consequences.
For example, it could:
· |
make
it difficult for us to satisfy our debt
obligations;
|
· |
increase
our vulnerability to general adverse economic and industry
conditions;
|
· |
require
us to dedicate a substantial portion of our cash flow from operations
and
proceeds of equity issuances or asset sales to payments on our
indebtedness, thereby reducing the availability of cash flows to
fund
working capital, capital expenditures, acquisitions, investments
and other
general corporate purposes;
|
· |
limit
our flexibility in planning for, or reacting to, changes in our businesses
and the markets in which we
operate;
|
· |
place
us at a competitive disadvantage to our competitors that have less
debt;
|
· |
limit
our ability to borrow money or sell stock to fund our working capital,
capital expenditures, acquisitions and debt service requirements
and other
financing needs; and
|
· |
increase
our interest expense if interest rates in general increase, because
a
substantial portion of our indebtedness bears interest at floating
rates.
|
In
addition, we may need to incur additional indebtedness in the future in the
ordinary course of business. The terms of our new senior credit facilities
and
other agreements governing our indebtedness allow us to incur additional
debt,
subject
to limitations. If new debt is added to current debt levels, the risks described
above could intensify. Further, if future debt financing is not available to
us
when required or is not available on acceptable terms, we may be unable to
grow
our business, take advantage of business opportunities, respond to competitive
pressures or refinance maturing debt, any of which could have a material adverse
effect on our operating results and financial condition. Most of the financial
assurance provided for our southwestern U.S. mines requires a demonstration
that
we meet financial tests showing our capability to perform the required closure
and remediation. Demonstrations of financial capability have been made for
all
of the financial assurance for our Arizona mines. We maintain a part of our
financial assurance using financial strength tests in New Mexico and Arizona.
However, a portion of our financial assurance requirements might be required
to
be supplied in another form, such as letters of credit, real property collateral
or cash. Moreover, our ability to satisfy financial tests or utilize third-party
guarantees for financial assurance with respect to reclamation obligations
may
be adversely affected if our credit
ratings continue to be rated below investment grade and we are unable to pass
the affirmative financial tests.
The
agreements governing our indebtedness contain provisions that limit our
discretion in the operation of our business and require us to meet financial
maintenance tests and other covenants. The failure to comply with such tests
and
covenants could have a material adverse effect on us.
The
agreements governing our indebtedness contain covenants that restrict our
ability to:
· |
incur
additional indebtedness;
|
· |
engage
in transactions with affiliates;
|
· |
create
liens on our assets;
|
· |
make
payments
in respect of, or redeem or acquire, debt or equity issued by us
or our
subsidiaries, including the payment of dividends on our common
stock;
|
· |
make
acquisitions of new subsidiaries;
|
· |
make
investments in, or loans, to entities that we do not control, including
joint ventures;
|
· |
use
assets as security in other
transactions;
|
· |
sell
assets, subject to certain
exceptions;
|
· |
merge
with or into other companies;
|
· |
enter
into sale and leaseback
transactions;
|
· |
enter
into unrelated businesses;
|
· |
enter
into agreements or arrangements that restrict the ability of certain
of
our subsidiaries to pay dividends or other
distributions;
|
· |
prepay
indebtedness; and
|
· |
enter
into certain new hedging transactions other than in the ordinary
course of
business.
|
In
addition, our senior credit facilities require that we meet specified financial
tests at any time that borrowings are outstanding under our revolving credit
facility, including a leverage ratio test and a secured leverage ratio test.
Any
failure to comply with the restrictions of our senior credit facilities or
any
agreement governing our other indebtedness may result in an event of default.
Such default may allow the creditors to accelerate the related debt, which
may
trigger cross-acceleration or cross-default provisions in other debt agreements.
Our assets and cash flow may not be sufficient to fully repay borrowings under
our debt instruments that are accelerated upon an event of default.
If
we are
unable to repay, refinance or restructure our indebtedness under, or amend
the
covenants contained in, our senior credit agreements at maturity or in the
event
of a default, the lenders under our senior credit facilities could terminate
their commitments thereunder, cease making further loans, declare all borrowings
outstanding (together with accrued interest and other fees) immediately due
and
payable and institute foreclosure proceedings against the security. Any such
actions could force us into bankruptcy or liquidation.
We
need significant amounts of cash to service our debt. If we are unable to
generate sufficient cash to service our debt, our financial condition and
results of operations could be negatively affected.
We
must
generate significant amounts of cash to service and repay our debt. Our ability
to generate cash will be affected by general economic, financial, competitive
and other factors that may be beyond our control.
Future
borrowings may not be available to us under our senior credit facilities or
from
the capital markets in amounts sufficient to pay our obligations as they mature
or to fund other liquidity needs. If we are not able to obtain such borrowings
or generate sufficient cash from operations to service and repay our
indebtedness, we will need to refinance our indebtedness to avoid any default.
Such refinancing may not be available on favorable terms or at all. The
inability to service, repay or refinance our indebtedness could negatively
affect our financial condition and results of operations.
Declines
in the market prices of copper, gold and molybdenum could adversely affect
our
earnings and cash flows and, therefore, our ability to repay debt. Such declines
could also cause significant volatility in our financial performance and
adversely affect the trading prices of our debt and equity
securities.
Our
earnings and cash flows will be affected significantly by the market prices
of
copper and, to a lesser extent, gold and molybdenum. The world market prices
of
these commodities have fluctuated historically and are
affected by numerous factors beyond our control. Many financial analysts who
follow the metals markets are predicting that copper prices will decline
significantly from their current, historically high levels over the next few
years. A decline in the world market price
of
one or more of these commodities could adversely affect our earnings and cash
flows and, therefore, could adversely affect the ability to repay our debt
and
depress the trading prices of our common and preferred stock and of our publicly
traded debt securities.
World
copper prices have historically fluctuated widely. During the two years ended
December 31, 2006, LME daily closing spot prices ranged from $1.39 to
$3.99 per pound for copper. World copper prices are affected by numerous
factors beyond our control, including:
· |
the
strength of the U.S. economy and the economies of other
industrialized and developing nations, including China, which has
become
the largest consumer of refined copper in the
world;
|
· |
available
supplies of copper from mine production and
inventories;
|
· |
sales
by holders and producers of copper;
|
· |
demand
for industrial products containing
copper;
|
· |
investment
activity, including speculation, in copper as a
commodity;
|
· |
the
availability and cost of substitute materials;
and
|
· |
currency
exchange fluctuations, including the relative strength or weakness
of the
U.S. dollar.
|
World
gold prices have historically fluctuated widely. During the two years ended
December 31, 2006, the daily closing prices on the London spot market
ranged from $411 to $726 per ounce for gold. World gold prices are affected
by numerous factors beyond our control, including:
· |
the
strength of the U.S. economy and the economies of other
industrialized and developing nations, including
China;
|
· |
global
or regional political or economic
crises;
|
· |
the
relative strength of the U.S. dollar and other
currencies;
|
· |
expectations
with respect to the rate of
inflation;
|
· |
purchases
and sales of gold by central banks and other
holders;
|
· |
demand
for jewelry containing gold; and
|
· |
investment
activity, including speculation, in gold as a
commodity.
|
Molybdenum
prices also fluctuate widely, even more so than copper. Molybdenum demand
depends primarily on the global steel industry, which uses the metal as a
hardening and corrosion inhibiting agent. Approximately 80 percent of
molybdenum production is used in this application. The remainder is used in
specialty chemical applications such as catalysts, water treatment agents and
lubricants. Approximately 65 percent of global molybdenum production is a
by-product of copper mining, which is relatively insensitive to molybdenum
prices. During the two years ended December 31, 2006, the
Metals Week
Dealer
Oxide price for molybdenum ranged from $20.50 to $40.00 per pound.
Molybdenum prices are affected by numerous factors beyond our control,
including:
· |
the
worldwide balance of molybdenum demand and
supply;
|
· |
rates
of global economic growth, especially construction and infrastructure
activity that requires significant amounts of
steel;
|
· |
the
volume of molybdenum produced as a by-product of copper
production;
|
· |
currency
exchange fluctuations, including the relative strength of the U.S.
dollar;
and
|
· |
production
costs of U.S. and foreign
competitors.
|
Our
2007 copper price protection program may cause significant volatility in our
financial performance.
At
March 31, 2007, we had in place zero-premium copper collars (consisting of
both put and call options) for approximately 486 million pounds of our expected
2007 copper sales. For 2007, the annual average LME call strike price (ceiling)
for our zero-premium copper collars is $2.00 per pound. At March 31, 2007,
we
also had in place copper put options for approximately 730 million pounds of
our
expected 2007 copper sales, with an annual average LME put strike price (floor)
of $0.95 per pound for 2007. In accordance with generally accepted accounting
principles in the U.S., transactions under the 2007 copper price protection
programs do not qualify for hedge accounting treatment and are adjusted to
fair
market value based on the forward-curve price and implied volatility as of
the
last day of the reporting period, with the gain or loss recorded in revenues.
These adjustments represent non-cash events as the contracts are settled in
cash
only after the end of 2007 based on the annual average LME copper price. The
2007 copper price protection program resulted in charges to revenues totaling
$38.1 million ($23.2 million to net income or $0.10 per share) for the first
quarter of 2007.
Movements
in foreign currency exchange rates or interest rates could negatively affect
our
operating results.
Substantially
all of our revenues and a significant portion of our costs are denominated
in
U.S. dollars; however, some of our costs, and certain of our asset and
liability accounts, are denominated in Indonesian rupiah, Chilean pesos,
Peruvian nuevos soles, Australia dollars, Euros and other foreign currencies.
As
a result,
we will be generally less profitable when the U.S. dollar weakens in
relation to these foreign currencies.
As
of
March 31, 2007, approximately 48 percent of outstanding
debt of
approximately $12 billion was subject to variable interest rates. Increases
in
these rates will increase our interest costs and reduce our profits and
operating cash flows.
From
time
to time, we may implement currency or
interest rate hedges intended to reduce our exposure to changes in foreign
currency exchange or interest rates. However, our hedging strategies may not
be
successful, and any of our unhedged foreign exchange or interest payments will
continue to be subject to market fluctuations.
OPERATIONAL
RISKS
The
volume and grade of ore reserves that we recover and our rate of production
may
be more or less than anticipated. In addition, our exploration activities may
not result in additional discoveries.
Our
ore
reserve amounts are determined in accordance with established mining industry
practices and standards, but are estimates of the mineral deposits that can
be
recovered economically and legally based on currently available data. Ore bodies
may not conform to standard geological expectations, and estimates may change
as
new data becomes available. Because ore bodies do not contain uniform grades
and
types
of minerals, our metal recovery rates will vary from time to time. There are
also uncertainties inherent in estimating quantities of ore reserves and copper
recovered from stockpiles. The quantity of copper contained in mill and leach
stockpiles is based on surveyed volumes of mined material and daily production
records. The volume and grade of ore reserves recovered, rates of production
and
recovered copper from stockpiles may be less than anticipated. Additionally,
because the determination of reserves is based partially on historical selling
prices, a prospective decrease in such prices may result in a reduction in
economically recoverable, and therefore reported, ore reserves. These factors
may result in variations in the volumes of mineral reserves that we report
and
the volume of minerals that we can sell from period to period.
Our
ability to replenish our ore reserves is important to our long-term viability.
Our exploration programs may not result in the discovery of sufficient
additional mineral deposits that can be mined profitably.
TABLE
OF
CONTENTSOur
business is subject to operational risks that are generally outside of our
control and could adversely affect our business.
Mines
by
their nature are subject to many operational risks and factors that are
generally outside of our control and could adversely affect our business,
operating results and cash flows. These operational risks and factors include
the following:
· |
unanticipated
ground and water conditions;
|
· |
adverse
claims to water rights;
|
· |
geological
problems, including earthquakes and other natural
disasters;
|
· |
metallurgical
and other processing problems;
|
· |
the
occurrence of unusual weather or operating conditions and other force
majeure events;
|
· |
lower
than expected ore grades or recovery
rates;
|
· |
delays
in the receipt of or failure to receive necessary government
permits;
|
· |
the
results of litigation, including appeals of agency
decisions;
|
· |
uncertainty
of exploration and development;
|
· |
delays
in transportation;
|
· |
inability
to hire and retain a sufficient number of skilled
employees;
|
· |
inability
to obtain satisfactory insurance
coverage;
|
· |
unavailability
of materials and equipment; and
|
· |
the
failure of equipment or processes to operate in accordance with
specifications or expectations.
|
Increased
energy and other production costs could reduce our profitability and cash
flow.
Our
production costs have increased significantly in recent years, primarily because
of higher costs of energy and other consumables, higher mining costs and higher
labor costs (including pension and health-care costs).
Energy
represents a significant portion of our production costs. Our principal energy
sources are electricity, purchased petroleum products, natural gas and coal.
Because energy represents a significant portion of our production costs, an
inability to procure sufficient energy at reasonable prices could adversely
affect our profits and cash flow.
Our
production costs also are affected by the prices of commodities we consume
or
use in our operations, such as sulfuric acid, grinding media, steel, reagents,
liners, explosives and diluents. The prices of such commodities are influenced
by supply and demand trends affecting the copper industry in general and other
factors outside our control, and such prices are at times subject to volatile
movements. Increases in the cost of these commodities could make our operations
less profitable, even in an environment of relatively high copper prices.
Increases in the costs of commodities that we consume or use may also
significantly affect the capital costs of new projects.
In
addition to the usual risks encountered in the mining industry, our Indonesian
operations involve additional risks because they are located on unusually
difficult terrain in a very remote area.
Our
Grasberg
mining
operations are located in steeply mountainous terrain in a very remote area
in
Indonesia. Because of these conditions, we have had to overcome special
engineering difficulties and develop extensive infrastructure facilities. In
addition, the area receives considerable rainfall, which has led to periodic
floods and mudslides. The mine site is also in an active seismic area and has
experienced earth tremors from time to time. Our insurance may not sufficiently
cover an unexpected natural or operating disaster.
On
October 9, 2003, a slippage of material occurred in a section of the
Grasberg open pit, resulting in eight fatalities. On December 12, 2003, a
debris flow involving a relatively small amount of loose material
occurred
in the same section of the open pit resulting in only minor property damage.
The
events caused us to alter our short-term mine sequencing plans, which adversely
affected our 2003 and 2004 production. While we resumed normal production
activities in the second quarter of 2004, no assurance can be given that similar
events will not occur in the future.
On
March 23, 2006, a mud/topsoil slide involving approximately 75,000 metric
tons of material occurred from a mountain ridge above service facilities
supporting PT Freeport Indonesia’s mining facilities. Regrettably, three
contract workers were fatally injured in the event. The material damaged a
mess
hall and an adjacent area. As a result of investigations by PT Freeport
Indonesia and the Indonesian Department of Energy and Mineral Resources, we
conducted geotechnical studies to identify any potential hazards to facilities
from slides. The existing early warning system for potential slides, based
upon
rainfall and other factors, has also been expanded.
ENVIRONMENTAL
RISKS
Our
domestic and international operations are subject to complex and evolving
environmental laws and regulations, and compliance with environmental and
regulatory requirements involves significant costs.
Our
domestic operations are subject to various federal, state and local
environmental laws and regulations relating to improving or maintaining
environmental quality. Environmental laws often require parties to pay for
remedial action or to pay damages regardless of fault and may also often impose
liability with respect to divested or terminated operations, even if the
operations were terminated or divested many years ago. The federal Clean Air
Act
has had a significant impact, particularly on our domestic smelter and power
plants. We also have potential liability for certain U.S. sites we currently
operate or formerly operated and for certain third-party sites under the federal
Superfund law and similar state laws. We are also subject to claims for natural
resource damages where the release of hazardous substances is alleged to have
injured natural resources.
Our
mining operations and exploration activities, both in the U.S. and elsewhere,
are subject to extensive laws and regulations governing exploration,
development, production, exports, taxes, labor standards, occupational health,
mine safety, toxic substances, waste disposal, protection and remediation of
the
environment, protection of endangered and protected species, and other matters.
Compliance with these laws and regulations imposes substantial costs and
subjects us to significant potential liabilities.
In
addition to the cost of ongoing environmental regulation, we incur significant
costs for remediating environmental conditions and monitoring remediation
efforts on properties that we owned or operated in the past, or that were owned
or operated by companies we acquired or affiliates of those companies, including
properties that have been out of production for many years.
The
environmental laws and regulations that apply to us are complex and continuously
evolving, and they vary considerably from country to country. Costs associated
with environmental and regulatory compliance have increased over time, and
we
expect these costs to continue to increase in the future. In addition,
environmental laws and regulations may change in ways that could adversely
affect our operations or financial results. The costs of environmental
obligations may exceed the reserves that we have established for such
liabilities.
Although
the Kyoto Protocol, established in December 1997, has not been ratified by
the
U.S., several states have initiated potential legislative action on climate
change in late 2006 and early 2007. During 2007, the United States Congress
may
consider federal legislation on climate change, which could increase future
energy costs. We are evaluating the impact of potential climate change programs
on our operations.
Mine
closure regulations impose substantial costs on our
operations.
Our
domestic
operations are subject to various federal and state mine closure and mined-land
reclamation laws. The requirements of these laws vary depending upon the
jurisdiction. Over the last several years, there have been substantial changes
in these laws and regulations in the states in which
our
mines
are located, as well as changes in the regulations promulgated by the federal
Bureau of Land Management (BLM) for mining operations located on federal public
lands. The amended BLM regulations governing reclamation for mining on federal
lands will likely increase our regulatory obligations and compliance costs
over
time. As estimated costs increase, our domestic mines are required to post
increasing amounts of financial assurance to ensure the availability of funds
to
meet future closure and reclamation obligations.
Our
New
Mexico financial assurance amounts at March 31, 2007, which reflected reductions
for work completed through 2006 and agreed upon by the New Mexico Environment
Department and Mining Minerals Division, were $185 million for Chino and $29
million for Cobre. As of April 23, 2007, Tyrone’s financial assurance
requirement was adjusted to $218 million. Up to 70 percent of the financial
assurance for Chino, Tyrone and Cobre is in the form of guarantees issued by
Phelps Dodge on behalf of our operating subsidiaries and the balance is in
the
form of real property collateral, letters of credit and cash. These amounts
may
change based on the completion of additional permitting procedures, final agency
determinations and the results of administrative appeals, which could result
in
changes to the closure and reclamation plans and lead to increases in the cost
estimates and our related financial assurance obligations.
At
March
31, 2007, we had accrued closure costs of approximately $71 million for our
Arizona operations. The amount of financial assurance currently demonstrated
for
Arizona closure and reclamation activities is approximately $183
million.
We have
also approved mined-land reclamation plans and financial assurance in place
for
our two Colorado mines totaling approximately $81 million.
Most
of
the financial assurance provided for our U.S. mines requires that we meet
financial tests that demonstrate our capability to perform the required closure
and remediation. We have satisfactorily demonstrated our financial capability
for all of the financial assurances given for our Arizona mines. We maintain
a
part of our financial assurance using financial strength tests in New Mexico
and
Arizona. However, a portion of our financial assurance requirements might be
required to be supplied in another form, such as letters of credit, real
property collateral or cash.
In
recent
years, many surety companies have begun to require a significant level of
collateral to support surety bonds, and the costs associated with such bonds
have increased significantly. As a result, if surety bonds are unavailable
at
commercially reasonable terms to support our financial assurance obligations,
we
could be required to post other collateral or cash or cash equivalents directly
in support of those obligations.
In
addition, our international mines are subject to various mine closure and
mined-land reclamation laws, and there have recently been significant changes
in
closure and reclamation programs in both Peru and Chile that impose more
stringent obligations on us for closure and reclamation.
Our
mining operations in Indonesia create difficult and costly environmental
challenges, and future changes in environmental laws, or unanticipated
environmental impacts from those operations, could require us to incur increased
costs.
Mining
operations on the scale of our operations in Papua involve significant
environmental risks and challenges. Our primary challenge is to dispose of
the
large amount of crushed and ground rock material, called tailings, that results
from the process by which we physically separate the copper-, gold- and
silver-bearing materials from the ore that we mine. Our tailings management
plan,
which
has been approved by the Government of Indonesia, uses the river system near
our
mine to transport the tailings to the lowlands where the tailings and natural
sediments are deposited in a controlled area contained within an engineered
levee system that will be revegetated. We incurred aggregate costs relating
to
tailings management of $3.6 million in the first three months of 2007,
$12.8 million in 2006 and $8.7 million in 2005.
Another
major environmental challenge is managing overburden, which is the rock that
must be moved aside in the mining process in order to reach the ore. In the
presence of air, water and naturally occurring
bacteria,
some overburden can cause acid rock drainage, or acidic water containing
dissolved metals which, if not properly managed, can have a negative impact
on
the environment.
Certain
Indonesian governmental officials have from time to time raised issues with
respect to our tailings and overburden management plans, including a suggestion
that we implement a pipeline system rather than our river deposition system
for
tailings disposal. Because our mining operations are remotely located in steep
mountainous terrain and in an active seismic
area, a pipeline system would be costly, difficult to construct and maintain,
and more prone to catastrophic failure, and could therefore involve significant
potentially adverse environmental issues. Based on our own studies and others
conducted by third parties, we do not believe that a pipeline system is
necessary or practical.
In
March
2006, the Indonesian Ministry of Environment announced the preliminary results
of its PROPER (Program for Pollution Control, Evaluation and Rating)
environmental management audit, acknowledging the effectiveness of PT Freeport
Indonesia’s environmental management practices in some areas while making
several suggestions for improvement in others. We are working with the Ministry
of Environment to address the issues raised as it completes the audit
process.
We
plan
to continue to spend significant financial and managerial resources on
environmental compliance related to our Indonesian operations. In addition,
changes in Indonesian environmental laws or unanticipated environmental impacts
from our operations could require us to incur significant unanticipated
costs.
INTERNATIONAL
RISKS
Our
acquisition of Phelps Dodge in March 2007 has broadened the geographical scope
of our operations, thereby broadening
the range of political, social and geographic risks to which we are
exposed.
Prior
to
our acquisition of Phelps Dodge, our primary operating assets were located
in
Indonesia, and our business could be adversely affected by Indonesian political,
economic and social uncertainties, in addition to the usual risks associated
with conducting business in a foreign country. As a result of the Phelps Dodge
acquisition, we now also conduct mining operations in the U.S.
and
have expanded our international operations to Chile and Peru. We also have
a
significant development project in the Democratic Republic of Congo, which
is
expected to begin production by early 2009. Accordingly, our business may also
be adversely affected by political, economic and social uncertainties in each
of
these countries, in addition to the usual risks associated with conducting
business in a foreign country.
Such
risks include (1) forced modification of existing contracts, (2) changes in
a
country’s laws and policies, including those relating to labor, taxation,
royalties, divestment, imports, exports, trade regulations, currency and
environmental matters, (3) political instability and civil strife, (4) exchange
controls, and (5) the risk of having to submit to the jurisdiction of a foreign
court or arbitration panel or having to enforce the judgment of a foreign court
or arbitration panel against a sovereign nation within its own territory. We
may
also be subject to the risk of expropriation, and our insurance does not cover
losses caused by expropriation.
Our
Grasberg mine in Papua, Indonesia remains our most significant operating asset,
and because it is located in the Republic of Indonesia, our business may
continue to be adversely affected by Indonesian political, economic and social
uncertainties.
Indonesia
has faced political, economic and social uncertainties, including separatist
movements and civil and religious strife in a number of provinces. In
particular, several separatist groups are opposing Indonesian rule over the
province of Papua, where our Grasberg mine is located, and have sought political
independence for the province. In response, Indonesia enacted regional autonomy
laws, which became effective January 1, 2001. The manner in which the new
laws are being implemented and the degree of political and economic autonomy
that they may bring to individual provinces, including Papua, are uncertain
and
are ongoing issues in Indonesian politics. In Papua, there have been sporadic
attacks on civilians by separatists and sporadic but highly publicized conflicts
between separatists and the Indonesian
military.
Social, economic and political instability in Papua could materially and
adversely affect us if it results in damage to our property or interruption
of
our activities.
Maintaining
a good working relationship with the Indonesian government is important to
us
because our mining operations there are among Indonesia’s most significant
business enterprises and are conducted pursuant to a Contract of Work with
the
Indonesian government. Partially because of their significance to Indonesia’s
economy, the environmentally sensitive area in which they are located, and
the
number of people employed, our operations are occasionally the subject of
criticism in the Indonesian press and in political debates, and have been the
target of protests and occasional violence.
Most
recently, Grasberg operated at reduced mining and milling rates during a
four-day period from April 18 to April 21 as a result of peaceful protests
by
certain workers regarding benefits. The protests ended on April 21 with an
agreement on a framework for minimum wages for its workers and Grasberg has
returned to normal operations. The impacts to production were not
significant.
We
cannot
predict whether additional incidents will occur that could disrupt our
Indonesian operations, or whether similar incidents may occur in other countries
that could affect our other operations. If additional protests or other
disruptive incidents occur at any of our facilities, they could adversely affect
our business and profitability in ways that we cannot predict at this
time.
We
do not expect to mine all of our Indonesian ore reserves before the initial
term
of our Contract of Work in Indonesia expires.
All
of
our Indonesian
proven and probable ore reserves, including the Grasberg deposit, are located
in
Block A. The initial term of our Contract of Work covering these ore reserves
expires at the end of 2021. We can extend this term for two successive 10-year
periods, subject to the approval of the Indonesian government, which under
our
Contract of Work cannot be withheld or delayed unreasonably. Our ore reserves
reflect estimates of minerals that can be recovered through the end of 2041
(i.e., through the expiration of the two 10-year extensions) and our current
mine plan has been developed, and our operations are based on the assumption
that we will receive the two 10-year extensions. As a result, we will not mine
all of these ore reserves during the current term of our Contract of Work,
and
there can be no assurance that the Indonesian government will approve the
extensions. Prior to the end of 2021, we expect to mine approximately 39 percent
of aggregate proven and probable recoverable ore at December 31, 2006,
representing approximately 45 percent of PT Freeport Indonesia’s share of
recoverable copper reserves and approximately 59 percent of its share of
recoverable gold reserves.
The
terrorist attacks in the U.S.
in 2001, subsequent attacks in other parts of the world and the potential for
additional future terrorist acts have created economic and political
uncertainties that could materially and adversely affect our
business.
On
August 31, 2002, three people were killed and 11 others were wounded in an
ambush by a group of unidentified assailants on the road near Tembagapura,
the
mining town where the majority of PT Freeport Indonesia’s personnel reside. The
assailants shot at several vehicles transporting international contract teachers
from our school in Tembagapura, their family members and other contractors
to PT
Freeport Indonesia.
The
U.S. FBI investigated the incident, which resulted in the U.S. indictment of
an
alleged operational commander of the Free Papua Movement/National Freedom Force.
In January 2006, Indonesian Police, accompanied by FBI agents, arrested the
alleged operational commander and 11 other Papuans. In November 2006, verdicts
and sentencing were announced for seven of those accused in the August 2002
shooting, including a life sentence for the confessed leader of the
attack.
On
October 12, 2002, a bombing killed 202 people in the Indonesian province of
Bali, which is 1,500 miles west of our mining and milling operations. Indonesian
authorities arrested 35 people in connection with this bombing and 29 of those
arrested have been tried and convicted. On August 5, 2003, 12
people
were killed and over 100 others were injured by a car bomb detonated outside
of
the JW Marriott Hotel in Jakarta, Indonesia. On September 9, 2004, 11
people were killed and over 200 others injured by a car bomb detonated in front
of the Australian embassy in Jakarta. On October 1, 2005, three suicide
bombers killed 19 people and wounded over 100 others in Bali. The same
international terrorist organizations are suspected in each of these incidents.
In November 2005, Indonesian Police raided a house in East Java
that
resulted in the death of other accused terrorists linked to the bombings
discussed above. Our mining and milling operations were not interrupted by
these
incidents, but PT Freeport Indonesia’s corporate office in Jakarta had to
relocate for several months following the bombing in front of the Australian
embassy.
In
addition to the Bali, JW Marriott Hotel and Australian embassy bombings, there
have been anti-American demonstrations in certain sections of Indonesia
reportedly led by radical Islamic activists. Radical activists have also
threatened to attack foreign interests and have called for the expulsion of
U.S.
and British citizens and companies from Indonesia.
We
cannot
predict whether additional incidents similar to those described above will
occur
in Indonesia or in other countries where we operate. Any such incidents that
do
occur could materially and adversely affect our business and profitability
in
ways that we cannot predict at this time.
Terrorist
attacks and other events have caused uncertainty in the world’s financial and
insurance markets and may significantly increase global political, economic
and
social instability. It is possible that further acts of terrorism may be
directed against the U.S. domestically or abroad, and such acts could be
directed against properties and personnel of companies such as ours. The attacks
and the resulting economic and political uncertainties, including the potential
for further terrorist acts, have negatively affected insurance markets.
Moreover, while our property and business interruption insurance covers damages
to insured property directly caused by terrorism, this insurance does not cover
damages and losses caused by war. Terrorism and war developments may materially
and adversely affect our business and profitability in ways that we cannot
predict at this time.
Our
Contracts of Work in Indonesia are subject to termination if we do not comply
with our contractual obligations, and if a dispute arises, we may have to submit
to the jurisdiction of a foreign court or arbitration
panel.
PT
Freeport Indonesia’s Contract of Work and other Contracts of Work in which we
have an interest were entered into under Indonesia’s 1967 Foreign Capital
Investment Law, which provides guarantees of remittance rights and protection
against nationalization. Our Contracts of Work can be terminated by the
Government of Indonesia if we do not satisfy our contractual obligations, which
include the payment of royalties and taxes to the government and the
satisfaction of certain mining, environmental, safety and health
requirements.
At
times,
certain government officials and others in Indonesia have questioned the
validity of contracts entered into by the Government of Indonesia prior to
May
1998 (i.e., during the Suharto regime, which lasted over 30 years),
including PT Freeport Indonesia’s Contract of Work, which was signed in December
1991. We cannot assure you that the validity of, or our compliance with, the
Contracts of Work will not be challenged for political or other reasons. PT
Freeport Indonesia’s Contract of Work and our other Contracts of Work require
that disputes with the Indonesian government be submitted to international
arbitration. Consequently, if a dispute arises under the Contracts of Work,
we
face the risk of having to submit to the jurisdiction of a foreign court or
arbitration panel, and if we prevail in such a dispute, we will face the
additional risk of having to enforce the judgment of a foreign court or
arbitration panel against Indonesia within its own territory.
Indonesian
government officials have periodically undertaken reviews regarding our
compliance with Indonesian environmental laws and regulations and the terms
of
the Contracts of Work. In 2006, the Government of Indonesia created a joint
team
for “Periodic Evaluation on Implementation of the PT-FI Contract of Work (COW)”
to conduct an evaluation every five years. The team consists of five
working
groups, whose members are from relevant ministries or agencies, covering
production, state revenues, community development, environmental issues and
security issues. We have conducted numerous meetings with these groups. The
joint team has indicated that it will issue a report. While we believe that
we
comply with PT Freeport Indonesia’s Contract of Work in all material respects,
we cannot assure you that the report will support that conclusion. Separately,
the Indonesian House of Representatives created a working committee on PT
Freeport Indonesia. Members of this group have also visited our operations
and
held a number of hearings in Jakarta. We will continue to work with these groups
to respond to their questions about our operations and our compliance with
PT
Freeport Indonesia’s Contract of Work.
TABLE
OF
CONTENTSAny
suspension of required activities under our Contracts of Work requires the
consent of the Indonesian government.
Our
Contracts of Work permit us to suspend certain contractually required
activities, including exploration, for a period of one year by making a written
request to the Indonesian government. These requests are subject to the approval
of the Indonesian government and are renewable annually. If we do not request
a
suspension or are denied a suspension, then we are required to continue our
activities under the Contract of Work or potentially be declared in default.
Moreover, if a suspension continues for more than one year for reasons other
than force majeure and the Indonesian government has not approved such
continuation, then the government would be entitled to declare a default under
the Contract of Work.
We
suspended our field exploration activities outside of Block A in recent years
due to safety and security issues and regulatory uncertainty relating to a
possible conflict between our mining and exploration rights in certain forest
areas and an Indonesian Forestry law enacted in 1999 prohibiting open-pit mining
in forest preservation areas. In 2001, we requested and received from the
Government of Indonesia, formal temporary suspensions of our obligations under
the Contracts of Work in all areas outside of Block A. Recent Indonesian
legislation permits open-pit mining in PT Freeport Indonesia’s Block B area,
subject to certain requirements. Following an assessment of these requirements
and a review of security issues, in 2007 we resumed exploration activities
in
certain prospective Contract of Work areas outside of Block A.
OTHER
RISKS
The
impact of purchase accounting in connection with our acquisition of Phelps
Dodge
in March 2007 will
adversely affect our reported earnings.
Purchase
accounting requires us to allocate the price paid in our acquisition of Phelps
Dodge on the basis of the fair value of Phelps Dodge’s assets at the time the
transaction closed. Those adjustments resulted in significant increases in
the
carrying values of certain acquired assets, including, based on preliminary
estimates, increases of approximately $1.7 billion in metal inventories and
stockpiles and approximately $14.6 billion in property, plant and equipment
costs.
The
increased value of metal inventories and stockpiles will cause our cost of
goods
sold to increase in the year those inventories are recognized as sold, and
because we changed Phelps Dodge’s method of accounting for metal inventories
from their previous method of last-in, first-out to the average cost method,
the
increase in our cost of goods will occur in the near term. The increased value
of property, plant and equipment costs will increase our depreciation, depletion
and amortization expense. These items will reduce reported earnings but have
no
effect on cash flows.
A
decline
in the market price of metals produced by us could result in a write down of
metal and stockpile inventories to recoverable values and the recognition of
impairment charges to property, plant and equipment costs. These charges would
have the effect of reducing reported earnings, although they would have no
effect on cash flows.
In
addition, our estimate of goodwill associated with the acquisition of Phelps
Dodge is approximately $7.4 billion. We will annually assess this amount for
impairment. If we conclude that the goodwill associated with the transaction
is
impaired, the amount of the impairment would reduce our reported earnings but
would have no effect on cash flows.
As
a result of our acquisition of Phelps Dodge, we may experience difficulty in
effectively integrating both businesses, which could deprive us of many of
the
anticipated benefits of these transactions.
Achieving
the anticipated benefits of the acquisition of Phelps Dodge will depend in
part
on whether we integrate the businesses in an efficient and effective manner.
We
may not be able to accomplish this integration process smoothly or successfully.
The difficulties of combining both companies’ businesses potentially will
include, among other things:
· |
the
necessity of coordinating geographically separated organizations
and
addressing possible differences in corporate cultures and management
philosophies, and the integration of diverse operations, which will
require the dedication of significant management resources that may
temporarily distract management’s attention from our day-to-day
business;
|
· |
any
inability of our management to adapt to the addition of lines of
business
in which we have not historically
engaged; and
|
· |
any
inability of our management to cause best practices to be applied
to all
of our businesses.
|
An
inability to realize the full extent of the anticipated benefits of the
acquisition, as well as any delays encountered in the transition process, could
have an adverse effect on the revenues, level of expenses and our operating
results.
We
depend on our senior management team and other key employees, and the loss
of
any of these employees could adversely affect our
business.
Our
success depends in part on our ability to retain senior management and other
key
employees. Competition for qualified personnel can be very intense. In addition,
senior management and key employees may depart because of issues relating to
the
uncertainty or difficulty associated with the successful integration of the
business and operations as formerly conducted by Phelps Dodge, or a desire
not
to remain with us. Accordingly, no assurance can be given that we will be able
to retain senior management and key employees to the same extent that we have
been able to do so in the past.
Our
holding company structure may impact your ability to receive
dividends.
We
are a
holding company with no material assets other than the capital stock of our
subsidiaries. As a result, our ability to repay our indebtedness and pay
dividends is dependent on the generation of cash flow by our subsidiaries and
their ability to make such cash available to us, by dividend, debt repayment
or
otherwise. Our subsidiaries do not have any obligation to make funds available
to us to repay our indebtedness or pay dividends. In addition, our subsidiaries
may not be able to, or be permitted to, make distributions to enable us to
repay
our indebtedness or pay dividends. Each of our subsidiaries is a distinct legal
entity and, under certain circumstances, legal and contractual restrictions,
as
well as the financial condition and operating requirements of our subsidiaries,
may limit our ability to obtain cash from our subsidiaries. Our rights to
participate in any distribution of our subsidiaries’ assets upon their
liquidation, reorganization or insolvency would generally be subject to the
prior claims of the subsidiaries’ creditors, including any trade creditors and
preferred shareholders.
Anti-takeover
provisions in our charter documents and Delaware law may make an acquisition
of
us more difficult.
Anti-takeover
provisions in our charter documents and Delaware law may make an acquisition
of
us more difficult. These provisions:
· |
authorize
our board of directors to issue preferred stock without stockholder
approval and to designate the rights, preferences and privileges
of each
class; if issued, such preferred stock would increase the number
of
outstanding shares of our capital stock and could include terms that
may
deter an acquisition of us;
|
· |
establish
advanced notice requirements for nominations to the board of directors
or
for proposals that can be acted on at stockholder
meetings; and
|
· |
limit
who may call stockholder meetings.
|
In
addition, because we are incorporated in Delaware, we are governed by the
provisions of Section 203 of the Delaware General Corporation Law, which
may prohibit large stockholders from consummating a merger with, or acquisition
of, us.
These
provisions may deter an acquisition of us that might otherwise be attractive
to
stockholders.
(c)
In
October 2003, our Board of Directors approved a new open market share purchase
program for up to 20 million shares, which replaced our previous program. The
program does not have an expiration date. No shares were purchased during the
three-month period ended March 31, 2007, and 12.2 million shares remain
available for purchase.
The
following table sets forth information with respect to shares of common stock
of
FCX purchased by FCX during the three months ended March 31, 2007:
|
|
|
|
|
|
|
|
|
(d)
Maximum Number
|
|
|
|
|
|
|
|
(c)
Total Number of
|
|
(or
Approximate
|
|
|
(a)
Total
|
|
|
|
|
Shares
(or Units)
|
|
Dollar
Value) of Shares
|
|
|
Number
of
|
|
(b)
Average
|
|
Purchased
as Part of
|
|
(or
Units) That May
|
|
|
Shares
(or Units)
|
|
Price
Paid Per
|
|
Publicly
Announced
|
|
Yet
Be Purchased Under
|
Period
|
|
Purchaseda
|
|
Share
(or Unit)
|
|
Plans
or Programs
|
|
the
Plans or Programs
|
January
1-31, 2007
|
|
-
|
|
$
|
-
|
|
-
|
|
-
|
February
1-28, 2007
|
|
237,517
|
|
|
-
|
|
-
|
|
-
|
March
1-31, 2007
|
|
854,988
|
|
|
61.59
|
|
-
|
|
-
|
Total
|
|
1,092,505
|
|
|
61.59
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
a.
|
This
category include shares repurchased under FCX’s applicable stock incentive
plans (Plans) and its non-qualified supplemental savings plan (SSP).
In
February 2007 FCX repurchased previously issued shares to satisfy
exercise
prices on option awards under the Plans. In March 2007 FCX repurchased
shares to satisfy tax obligations on restricted stock awards under
the
Plans. In the SSP, FCX repurchases shares as a result of changes
in
investment elections by plan
participants.
|
A
special
meeting of stockholders was held on March 14, 2007 (the “Special Meeting”).
Proxies were solicited pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended. The following matters were submitted to a vote of
security holders during our Special Meeting:
|
For
|
Against
|
Abstentions
|
1.
Proposal to amend our certificate of incorporation to increase the
authorized number of shares of capital stock to 750,000,000, increase
the
number of shares of Class B common stock to 700,000,000, rename the
Class
B common stock as common stock and delete the provisions governing
and
references to the previously designated classes and series of our
preferred stock of which no shares are outstanding (other than the
Series
A Participating Cumulative Preferred Stock and the 5½% Convertible
Perpetual Preferred Stock).
|
131,604,795
|
1,168,227
|
1,189,607
|
TABLE OF CONTENTS
|
For
|
Against
|
Abstentions
|
2.
Proposal to issue shares of our common stock in connection with the
transaction contemplated by the Agreement and Plan of Merger dated
as of
November 18, 2006, among Freeport-McMoRan Copper & Gold Inc., Phelps
Dodge Corporation, and Panther Acquisition Corporation, a direct
wholly
owned subsidiary of Freeport-McMoRan Copper & Gold Inc., as amended.
|
131,641,450
|
1,131,345
|
1,189,834
|
3.
Proposal to approve an adjournment of the Special Meeting, if necessary,
to permit solicitation of additional proxies in favor of the above
proposals.
|
121,694,167
|
11,012,900
|
1,255,562
|
The
exhibits to this report are listed in the Exhibit Index beginning on Page E-1
hereof.
TABLE OF CONTENTS
FREEPORT-McMoRan
COPPER & GOLD INC.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
FREEPORT-McMoRan
COPPER & GOLD INC.
By:
/s/
C. Donald Whitmire, Jr.
C.
Donald
Whitmire, Jr.
Vice
President and
Controller-Financial
Reporting
(authorized
signatory and
Principal
Accounting Officer)
Date:
May
10, 2007
TABLE OF CONTENTS
Freeport-McMoRan
Copper & Gold Inc.
Exhibit
Number Description
2.1
|
|
Agreement
and Plan of Merger dated as of November 18, 2006, by and among
Freeport-McMoRan Copper & Gold Inc. (FCX), Phelps Dodge Corporation
and Panther Acquisition Corporation. Incorporated by reference to
Exhibit
2.1 to the Preliminary Joint Proxy Statement/Prospectus included
in the
Registration Statement on Form S-4 (File No. 333-139252) filed December
11, 2006, as amended on January 18, 2007 and February 12, 2007.
|
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of FCX. Incorporated by
reference to Exhibit 3.1 to the Current Report on Form 8-K of FCX
dated
March 19, 2007.
|
|
|
|
3.2
|
|
Amended
and Restated By-Laws of FCX, as amended effective May 1, 2007.
Incorporated by reference to Exhibit 3.3 to the Current Report on
Form 8-K
of FCX dated May 1, 2007.
|
|
|
|
4.1
|
|
Certificate
of Designations of 5½% Convertible Perpetual Preferred Stock of FCX.
Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K
of FCX dated March 30, 2004.
|
|
|
|
4.2
|
|
Credit
Agreement dated as of March 19, 2007, by and among FCX, the lenders
party
thereto, the issuing banks party thereto, JPMorgan Chase Bank, N.A.
as
administrative agent and collateral agent, and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as syndication agent. Incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K of FCX
dated
March 19, 2007.
|
|
|
|
4.3
|
|
Amended
and Restated Credit Agreement dated as of March 19, 2007, by and
among
FCX, PT Freeport Indonesia, the lenders party thereto, the issuing
banks
party thereto, JPMorgan Chase Bank, N.A. as administrative agent,
collateral agent, security agent and JAA security agent, U.S. Bank
National Association, as FI trustee, and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, as syndication agent. Incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K of FCX dated March
19,
2007.
|
|
|
|
4.4
|
|
Senior
Indenture dated as of November 15, 1996, from FCX to The Chase Manhattan
Bank, as Trustee. Incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-3 (File No. 333-72760) of FCX filed
November 5, 2001 (the FCX November 5, 2001 Form S-3).
|
|
|
|
4.5
|
|
First
Supplemental Indenture dated as of November 18, 1996, from FCX to
The
Chase Manhattan Bank, as Trustee, providing for the issuance of the
Senior
Notes and supplementing the Senior Indenture dated November 15, 1996,
from
FCX to such Trustee, providing for the issuance of the 7.50% Senior
Notes
due 2006 and the 7.20% Senior Notes due 2026. Incorporated by reference
to
Exhibit 4.5 to the FCX November 5, 2001 Form S-3.
|
|
|
|
4.6
|
|
Indenture
dated as of January 29, 2003, from FCX to The Bank of New York, as
Trustee, with respect to the 10⅛%
Senior Notes due 2010. Incorporated by reference to Exhibit 4.1 to
the
Current Report on Form 8-K of FCX dated February 6,
2003.
|
|
|
|
|
|
Supplemental
Indenture dated March 19, 2007 from FCX to the Bank of New York,
as
Trustee, providing for an equal and ratable subsidiary guaranty and
supplementing the Indenture dated January 23, 2003.
|
|
|
|
4.8
|
|
Indenture
dated as of February 11, 2003, from FCX to The Bank of New York,
as
Trustee, with respect to the 7% Convertible Senior Notes due 2011.
Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K
of FCX dated February 11, 2003.
|
4.9
|
|
Indenture
dated as of February 3, 2004, from FCX to The Bank of New York, as
Trustee, with respect to the 6⅞% Senior Notes due 2014. Incorporated by
reference to Exhibit 4.12 to the Annual Report on Form 10-K of FCX
for the
fiscal year ended December 31, 2003 (the FCX 2003 Form
10-K).
|
|
|
|
|
|
Supplemental
Indenture dated March 19, 2007 from FCX to the Bank of New York,
as
Trustee, providing for an equal and ratable subsidiary guaranty and
supplementing the Indenture dated February 3, 2004.
|
|
|
|
4.11
|
|
Rights
Agreement dated as of May 3, 2000, between FCX and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent. Incorporated by reference to Exhibit
4.26 to the Quarterly Report on Form 10-Q of FCX for the quarter
ended
March 31, 2000.
|
|
|
|
4.12
|
|
Amendment
No. 1 to Rights Agreement dated as of February 26, 2002, between
FCX and
Mellon Investor Services. Incorporated by reference to Exhibit 4.16
to the
Quarterly Report on Form 10-Q of FCX for the quarter ended March
31,
2002.
|
|
|
|
4.13
|
|
Indenture
dated as of March 19, 2007, from FCX to The Bank of New York, as
Trustee,
with respect to the 8.25% Senior Notes due 2015, 8.375% Senior Notes
due
2017, and the Senior Floating Rate Notes due 2015. Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K of FCX
dated
March 19, 2007.
|
|
|
|
4.14
|
|
Certificate
of Designations of 6¾%
Mandatory Convertible Preferred Stock of FCX. Incorporated by reference
to
Exhibit 4.1 to the Current Report on Form 8-K of FCX dated March
22,
2007.
|
|
|
|
|
|
Note:
Certain instruments with respect to long-term debt of FCX have not
been filed as exhibits to this Quarterly Report on Form 10-Q since
the
total amount of securities authorized under any such instrument does
not
exceed 10 percent of the total assets of FCX and its
subsidiaries on a consolidated basis. FCX agrees to furnish a copy of
each such instrument upon request of the Securities and Exchange
Commission.
|
|
|
|
10.1
|
|
Contract
of Work dated December 30, 1991, between the Government of the Republic
of
Indonesia and PT Freeport Indonesia. Incorporated by reference to
Exhibit
10.1 to the FCX November 5, 2001 Form S-3.
|
|
|
|
10.2
|
|
Contract
of Work dated August 15, 1994, between the Government of the Republic
of
Indonesia and PT Irja Eastern Minerals Corporation. Incorporated
by
reference to Exhibit 10.2 to the FCX November 5, 2001 Form
S-3.
|
|
|
|
10.3
|
|
Participation
Agreement dated as of October 11, 1996, between PT Freeport Indonesia
and
P.T. RTZ-CRA Indonesia with respect to a certain contract of work.
Incorporated by reference to Exhibit 10.4 to the FCX November 5,
2001 Form
S-3.
|
|
|
|
10.4
|
|
Agreement
dated as of October 11, 1996, to Amend and Restate Trust Agreement
among
PT Freeport Indonesia, FCX, the RTZ Corporation PLC, P.T. RTZ-CRA
Indonesia, RTZ Indonesian Finance Limited and First Trust of New
York,
National Association, and The Chase Manhattan Bank, as Administrative
Agent, JAA Security Agent and Security Agent. Incorporated by reference
to
Exhibit 10.3 to the Current Report on Form 8-K of FCX dated November
13,
1996.
|
|
|
|
10.5
|
|
Concentrate
Purchase and Sales Agreement dated effective December 11, 1996, between
PT
Freeport Indonesia and PT Smelting. Incorporated by reference to
Exhibit
10.3 to the FCX November 5, 2001 Form
S-3.
|
10.6
|
|
Second
Amended and Restated Joint Venture and Shareholders’ Agreement dated as of
December 11, 1996, among Mitsubishi Materials Corporation, Nippon
Mining
and Metals Company, Limited and PT Freeport Indonesia. Incorporated
by
reference to Exhibit 10.5 to the FCX November 5, 2001 Form
S-3.
|
|
|
|
10.7
|
|
Participation
Agreement, dated as of March 16, 2005, among Phelps Dodge Corporation,
Cyprus Amax Minerals Company, a Delaware corporation, Cyprus Metals
Company, a Delaware corporation, Cyprus Climax Metals Company, a
Delaware
corporation, Sumitomo Corporation, a Japanese corporation, Summit
Global
Management, B.V., a Dutch corporation, Sumitomo Metal Mining Co.,
Ltd., a
Japanese corporation, Compañia
de Minas Buenaventura S.A.A., a Peruvian sociedad anonima abierta,
and
Sociedad Minera Cerro Verde S.A.A., a Peruvian sociedad anonima abierta.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form
8-K of Phelps Dodge Corporation dated March 16, 2005.
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10.8
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|
Guarantee,
dated as of March 16, 2005, among Phelps Dodge Corporation, Sumitomo
Corporation, a Japanese corporation, and Sumitomo Metal Mining Co.,
Ltd.,
a Japanese corporation incorporated by reference to Exhibit 10.2
to the
Current Report on Form 8-K of Phelps Dodge Corporation dated March
16,
2005.
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10.9
|
|
Shareholders
Agreement, dated as of June 1, 2005, among Phelps Dodge Corporation,
Cyprus Climax Metals Company, a Delaware corporation, Sumitomo
Corporation, a Japanese corporation, Sumitomo Metal Mining Co., Ltd.,
a
Japanese corporation, Summit Global Management B.V., a Dutch corporation,
SMM Cerro Verde Netherlands, B.V., a Dutch corporation, Compañia
de Minas Buenaventura S.A.A., a Peruvian sociedad anonima abierta,
and
Sociedad Minera Cerro Verde S.A.A., a Peruvian sociedad anonima abierta.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form
8-K of Phelps Dodge Corporation dated June 1, 2005.
|
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10.10
|
|
Master
Participation Agreement, dated as of September 30, 2005, among Sociedad
Minera Cerro Verde S.A.A., Japan Bank for International Cooperation,
Sumitomo Mitsui Banking Corporation, The Bank of Tokyo-Mitsubishi,
Ltd.,
KfW, Calyon New York Branch, The Royal Bank of Scotland plc, The
Bank of
Nova Scotia, Mizuho Corporation Bank, Ltd. and Calyon New York Branch,
as
administrative agent. Incorporated by reference to Exhibit 10.1 to
the
Quarterly Report on Form 10-Q of Phelps Dodge Corporation for the
quarter
ended September 30, 2005 (the PD 2005 Third Quarter Form 10-Q). First
Amendment to Master Participation Agreement, dated as of December
16,
2005. Incorporated by reference to Exhibit 10.22 to the Annual Report
on
Form 10-K of Phelps Dodge Corporation for the fiscal year ended December
31, 2005 (the PD 2005 Form 10-K).
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10.11
|
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Completion
Guarantee, dated as of September 30, 2005, among Sumitomo Metal Mining
Co., Ltd., Sumitomo Corporation, Compañia de Minas Buenaventura S.A.A.,
Phelps Dodge Corporation, Japan Bank for International Cooperation,
Sumitomo Mitsui Banking Corporation, The Bank of Tokyo-Mitsubishi,
Ltd.,
KfW, Calyon New York Branch, The Royal Bank of Scotland plc, The
Bank of
Nova Scotia, Mizuho Corporate Bank, Ltd. and Calyon New York Branch,
as
administrative agent. Incorporated by reference to Exhibit 10.2 to
the PD 2005 Third Quarter Form 10-Q.
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10.12
|
|
Master
Security Agreement, dated as of September 30, 2005, among Sociedad
Minera
Cerro Verde S.A.A., Japan Bank for International Cooperation, Sumitomo
Mitsui Banking Corporation, The Bank of Tokyo-Mitsubishi, Ltd., KfW,
Calyon New York Branch, The Royal Bank of Scotland plc, The Bank
of Nova
Scotia, Mizuho Corporate Bank, Ltd., Calyon New York Branch, as
administrative agent, and Citibank, N.A. and Citibank del Peru S.A.
Incorporated by reference to Exhibit 10.3 to the PD 2005 Third Quarter
Form 10-Q.
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TABLE
OF
CONTENTS
10.13
|
|
Transfer
Restrictions Agreement, dated as of September 30, 2005, among SMM
Cerro
Verde Netherlands, B.V., Compañia de Minas Buenaventura S.A.A., Cyprus
Climax Metals Company, Sumitomo Metal Mining Co., Ltd., Sumitomo
Corporation, Phelps Dodge Corporation, Japan Bank for International
Cooperation, Sumitomo Mitsui Banking Corporation, The Bank of
Tokyo-Mitsubishi, Ltd., KfW, Calyon New York Branch, The Royal
Bank of
Scotland plc, The Bank of Nova Scotia, Mizuho Corporate Bank, Ltd.,
and
Calyon New York Branch, as administrative agent. Incorporated by
reference
to Exhibit 10.4 to the PD 2005 Third Quarter Form 10-Q
.
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10.14
|
|
JBIC
Loan Agreement, dated as of September 30, 2005, among Sociedad
Minera
Cerro Verde S.A.A., Japan Bank for International Cooperation, and
Sumitomo
Mitsui Banking Corporation, as JBIC Agent. Incorporated by reference
to
Exhibit 10.5 to the PD 2005 Third Quarter Form 10-Q. First Amendment
to
JBIC Loan Agreement, dated as of December 19, 2005. Incorporated
by
reference to Exhibit 10.26 to the PD 2005 Form 10-K.
|
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10.15
|
|
KfW
Loan Agreement, dated as of September 30, 2005, between Sociedad
Minera
Cerro Verde S.A.A. and KfW. Incorporated by reference to Exhibit
10.6 to
the PD 2005 Third Quarter Form 10-Q.
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10.16
|
|
Loan
Agreement, dated as of September 30, 2005, among Sociedad Minera
Cerro
Verde S.A.A., Calyon New York Branch (as administrative agent),
Calyon New
York Branch, Mizuho Corporate Bank, Ltd., The Bank of Nova Scotia,
and The
Royal Bank of Scotland plc. Incorporated by reference to Exhibit
10.7 to
the PD 2005 Third Quarter Form 10-Q.
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10.17
|
|
Parent
Company Guarantee, dated as of September 30, 2005, between Phelps
Dodge
Corporation and Sociedad Minera Cerro Verde S.A.A. (this guarantee
is with
respect to the Operator’s Agreement, dated June 1, 2005, between Sociedad
Minera Cerro Verde S.A.A. and Minera Phelps Dodge del Peru S.A.C.).
Incorporated by reference to Exhibit 10-8 to the PD 2005 Third
Quarter
Form 10-Q.
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10.18
|
|
Master
Agreement and Plan of Merger between Columbian Chemicals Company,
Columbian Chemicals Acquisition LLC and Columbian Chemicals Merger
Sub,
Inc., dated November 15, 2005. Incorporated by reference to Exhibit
10.31
to the PD 2005 Form 10-K.
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|
|
10.19
|
|
Phelps
Dodge Corporation Retiree Medical Plan Welfare Benefit Trust Agreement
between Phelps Dodge Corporation and The Northern Trust Company,
dated
December 15, 2005. Incorporated by reference to Exhibit 10.33 to
the PD
2005 Form 10-K.
|
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|
10.20
|
|
Reclamation
and Remediation Trust Agreement between Phelps Dodge Corporation
and Wells
Fargo Delaware Trust Company, dated December 22, 2005. Incorporated
by
reference to Exhibit 10.34 to the PD 2005 Form 10-K.
|
|
|
|
|
|
Executive
Compensation Plans and Arrangements (Exhibits 10.21 through
10.80)
|
|
|
|
10.21
|
|
FCX
Performance Incentive Awards Program as amended effective February
2,
1999. Incorporated by reference to the Annual Report on Form 10-K
of FCX
for the fiscal year ended December 31, 1998 (the FCX 1998 Form
10-K).
|
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|
|
10.22
|
|
FCX
President’s
Award Program. Incorporated by reference to Exhibit 10.7 to the
FCX
November 5, 2001 Form S-3.
|
|
|
|
|
|
FCX
1995 Stock Option Plan, as amended and restated.
|
|
|
|
|
|
FCX
Amended and Restated 1999 Stock Incentive Plan, as amended and
restated.
|
|
|
|
10.25
|
|
Form
of Notice of Grant of Nonqualified Stock Options under the 1999 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.14 to the
Quarterly Report on Form 10-Q of FCX for the quarter ended June 30,
2005
(the FCX 2005 Second Quarter Form 10-Q).
|
|
|
|
10.26
|
|
Form
of Restricted Stock Unit Agreement under the 1999 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.15 to the FCX 2005 Second
Quarter
Form 10-Q.
|
|
|
|
10.27
|
|
Form
of Performance-Based Restricted Stock Unit Agreement under the 1999
Stock
Incentive Plan. Incorporated by reference to Exhibit 10.16 to the
FCX 2005
Second Quarter Form 10-Q.
|
|
|
|
10.28
|
|
FCX
1999 Long-Term Performance Incentive Plan. Incorporated by reference
to
Exhibit 10.19 to the Annual Report of FCX on Form 10-K for the fiscal
year
ended December 31, 1999 (the FCX 1999 Form 10-K).
|
|
|
|
10.29
|
|
FCX
Stock Appreciation Rights Plan dated May 2, 2000. Incorporated by
reference to Exhibit 10.20 to the Quarterly Report on Form 10-Q of
FCX for
the quarter ended June 30, 2001 (the FCX 2001 Second Quarter Form
10-Q).
|
|
|
|
|
|
FCX
2003 Stock Incentive Plan, as amended and restated.
|
|
|
|
10.31
|
|
Form
of Notice of Grant of Nonqualified Stock Options under the 2003 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.20 to the
FCX 2005
Second Quarter Form 10-Q.
|
|
|
|
10.32
|
|
Form
of Restricted Stock Unit Agreement under the 2003 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.21 to the FCX 2005 Second
Quarter
Form 10-Q.
|
|
|
|
10.33
|
|
Form
of Performance-Based Restricted Stock Unit Agreement under the 2003
Stock
Incentive Plan. Incorporated by reference to Exhibit 10.22 to the
FCX 2005
Second Quarter Form 10-Q.
|
|
|
|
|
|
FCX
1995 Stock Option Plan for Non-Employee Directors, as amended and
restated.
|
|
|
|
|
|
FCX
2004 Director Compensation Plan, as amended and restated.
|
|
|
|
10.36
|
|
Form
of Amendment No. 1 to Notice of Grant of Nonqualified Stock Options
and
Stock Appreciation Rights under the 2004 Director Compensation Plan.
Incorporated by reference to Exhibit 10.4 to the Current Report on
Form
8-K of FCX dated May 2, 2006.
|
|
|
|
|
|
FCX
2006 Stock Incentive Plan, as amended and restated.
|
|
|
|
10.38
|
|
Form
of Notice of Grant of Nonqualified Stock Options under the 2006 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.7 to the
Current
Report on Form 8-K of FCX dated May 2, 2006.
|
|
|
|
10.39
|
|
Form
of Restricted Stock Unit Agreement under the 2006 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.8 to the Current Report on
Form
8-K of FCX dated May 2, 2006.
|
|
|
|
10.40
|
|
Form
of Performance-Based Restricted Stock Unit Agreement under the 2006
Stock
Incentive Plan. Incorporated by reference to Exhibit 10.9 to the
Current
Report on Form 8-K of FCX dated May 2, 2006.
|
|
|
|
10.41
|
|
FCX
Director Compensation. Incorporated by reference to Exhibit 10.25
to the
Annual Report on Form 10-K of FCX for the fiscal year ended December
31,
2004 (the FCX 2004 Form 10-K).
|
|
|
|
10.42
|
|
FCX
Supplemental Executive Retirement Plan, as amended and restated.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form
8-K of FCX dated January 30, 2007.
|
|
|
|
10.43
|
|
FCX
2005 Annual Incentive Plan. Incorporated by reference to Exhibit
10.1 to
the Current Report on Form 8-K of FCX dated May 5,
2005.
|
|
|
|
10.44
|
|
FCX
Executive Services Program. Incorporated by reference to Exhibit
10.5 to
the Current Report on Form 8-K of FCX dated May 2,
2006.
|
|
|
|
10.45
|
|
FM
Services Company Performance Incentive Awards Program as amended
effective
February 2, 1999. Incorporated by reference to Exhibit 10.19 to the
FCX
1998 Form 10-K.
|
|
|
|
10.46
|
|
Consulting
Agreement dated as of December 22, 1988, with Kissinger Associates,
Inc.
(Kissinger Associates). Incorporated by reference to Exhibit 10.21
to the
Annual Report on Form 10-K of FCX for the fiscal year ended December
31,
1997 (the FCX 1997 Form 10-K).
|
|
|
|
10.47
|
|
Letter
Agreement dated May 1, 1989, with Kent Associates, Inc. (Kent Associates,
predecessor in interest to Kissinger Associates). Incorporated by
reference to Exhibit 10.22 to the FCX 1997 Form 10-K.
|
|
|
|
10.48
|
|
Letter
Agreement dated January 27, 1997, among Kissinger Associates, Kent
Associates, FCX, Freeport-McMoRan Inc., and FM Services Company (FMS).
Incorporated by reference to Exhibit 10.26 to the Annual Report on
Form
10-K of FCX for the fiscal year ended December 31, 2001 (the FCX
2001 Form
10-K).
|
|
|
|
10.49
|
|
Supplemental
Consulting Agreement with Kissinger Associates and Kent Associates,
effective as of January 1, 2007. Incorporated by reference to Exhibit
10.38 to the Quarterly Report on Form 10-Q of FCX for the quarter
ended
September 30, 2006 (the FCX 2006 Third Quarter Form
10-Q).
|
|
|
|
10.50
|
|
Agreement
for Consulting Services between FTX and B. M. Rankin, Jr. effective
as of
January 1, 1990 (assigned to FMS as of January 1, 1996). Incorporated
by
reference to Exhibit 10.24 to the FCX 1997 Form 10-K.
|
|
|
|
10.51
|
|
Supplemental
Agreement between FMS and B. M. Rankin, Jr. dated December 15, 1997.
Incorporated by reference to Exhibit 10.25 to the FCX 1997 Form
10-K.
|
|
|
|
10.52
|
|
Supplemental
Letter Agreement between FMS and B. M. Rankin, Jr., effective as
of
January 1, 2007. Incorporated by reference to Exhibit 10.41 to the
Annual
Report on Form 10-K of FCX for the fiscal year ended December 31,
2006.
|
|
|
|
10.53
|
|
Letter
Agreement effective as of January 7, 1997, between Senator J. Bennett
Johnston, Jr. and FMS. Incorporated by reference to Exhibit 10.31
to the
FCX 2001 Form 10-K.
|
|
|
|
10.54
|
|
Supplemental
Letter Agreement dated July 14, 2003, between J. Bennett Johnston,
Jr. and
FMS. Incorporated by reference to Exhibit 10.28 to the Quarterly
Report on
Form 10-Q of FCX for the quarter ended June 30, 2003.
|
|
|
|
10.55
|
|
Supplemental
Letter Agreement between FMS and J. Bennett Johnston, Jr., dated
January
18, 2005. Incorporated by reference to Exhibit 10.40 to the FCX 2004
Form
10-K.
|
|
|
|
10.56
|
|
Supplemental
Consulting Agreement between FMS and J. Bennett Johnston, Jr., effective
as of January 1, 2007. Incorporated by reference to Exhibit 10.45
to the
FCX 2006 Third Quarter Form 10-Q.
|
|
|
|
10.57
|
|
Letter
Agreement dated November 1, 1999, between FMS and Gabrielle K. McDonald.
Incorporated by reference to Exhibit 10.33 to the FCX 1999 Form
10-K.
|
|
|
|
10.58
|
|
Supplemental
Letter Agreement, between FMS and Gabrielle K. McDonald, effective
as of
January 1, 2007. Incorporated by reference to Exhibit 10.47 to the
FCX
2006 Third Quarter Form 10-Q.
|
|
|
|
10.59
|
|
Executive
Employment Agreement dated April 30, 2001, between FCX and James
R.
Moffett. Incorporated by reference to Exhibit 10.35 to the FCX 2001
Second
Quarter Form 10-Q.
|
|
|
|
10.60
|
|
Executive
Employment Agreement dated April 30, 2001, between FCX and Richard
C.
Adkerson. Incorporated by reference to Exhibit 10.36 to the FCX 2001
Second Quarter Form 10-Q.
|
|
|
|
10.61
|
|
Change
of Control Agreement dated April 30, 2001, between FCX and James
R.
Moffett. Incorporated by reference to Exhibit 10.37 to the FCX 2001
Second
Quarter Form 10-Q.
|
|
|
|
10.62
|
|
Change
of Control Agreement dated April 30, 2001, between FCX and Richard
C.
Adkerson. Incorporated by reference to Exhibit 10.38 to the FCX 2001
Second Quarter Form 10-Q.
|
|
|
|
10.63
|
|
First
Amendment to Executive Employment Agreement dated December 10, 2003,
between FCX and James R. Moffett. Incorporated by reference to Exhibit
10.36 to the FCX 2003 Form 10-K.
|
|
|
|
10.64
|
|
First
Amendment to Executive Employment Agreement dated December 10, 2003,
between FCX and Richard C. Adkerson. Incorporated by reference to
Exhibit
10.37 to the FCX 2003 Form 10-K.
|
|
|
|
10.65
|
|
First
Amendment to Change of Control Agreement dated December 10, 2003,
between
FCX and James R. Moffett. Incorporated by reference to Exhibit 10.38
to
the FCX 2003 Form 10-K.
|
|
|
|
10.66
|
|
First
Amendment to Change of Control Agreement dated December 10, 2003,
between
FCX and Richard C. Adkerson. Incorporated by reference to Exhibit
10.39 to
the FCX 2003 Form 10-K.
|
|
|
|
10.67
|
|
Change
of Control Agreement dated February 3, 2004, between FCX and Michael
J.
Arnold. Incorporated by reference to Exhibit 10.40 to the FCX 2003
Form
10-K.
|
|
|
|
10.68
|
|
Change
of Control Agreement dated February 3, 2004, between FCX and Mark
J.
Johnson. Incorporated by reference to Exhibit 10.41 to the FCX 2003
Form
10-K.
|
|
|
|
10.69
|
|
Change
of Control Agreement dated February 3, 2004, between FCX and Kathleen
L.
Quirk. Incorporated by reference to Exhibit 10.42 to the FCX 2003
Form
10-K.
|
|
|
|
10.70
|
|
Phelps
Dodge 2003 Stock Option and Restricted Stock Plan, as amended.
Incorporated by reference to Exhibit 10.1 to the Registration Statement
on
Form S-8 (File No. 333-141358) of FCX filed March 16, 2007 (the FCX
March
16, 2007 Form S-8).
|
|
|
|
10.71
|
|
Phelps
Dodge 1998 Stock Option and Restricted Stock Plan, as amended.
Incorporated by reference to Exhibit 10.2 to the FCX March 16, 2007
Form
S-8.
|
|
|
|
10.72
|
|
Phelps
Dodge Corporation 2006 Executive Performance Incentive Plan. Incorporated
by reference to Appendix A of Phelps Dodge Corporation’s 2005 definitive
Proxy Statement on Schedule 14A filed April 15, 2005.
|
|
|
|
|
|
Letter
of employment by and between Freeport-McMoRan Copper & Gold Inc. and
Timothy R. Snider dated April 4, 2007.
|
|
|
|
10.74
|
|
Form
of Change of Control Agreement (amended and restated effective January
1,
2005), adopted by Phelps Dodge Corporation for agreements entered
into
between Phelps Dodge Corporation and other of its executive officers
and
other members of its senior management team. Incorporated by reference
to
Exhibit 10.1 to Amendment No. 1 to the Annual Report on Form 10-K
of
Phelps Dodge Corporation for the fiscal year ended December 31, 2006
(Amendment No. 1 to the PD 2006 Form 10-K).
|
|
|
|
TABLE OF CONTENTS
10.75
|
|
Form
of Severance Agreement (as amended and restated effective January
1, 2005)
adopted by Phelps Dodge Corporation and entered into between Phelps
Dodge
Corporation and certain of its executives. Incorporated by reference
to
Exhibit 10.2 of Amendment No. 1 to the PD 2006 Form
10-K.
|
|
|
|
|
|
Form
of Amendment to the ELIP Split Dollar Life Insurance Agreement
(Endorsement Method) adopted by Phelps Dodge Corporation and entered
into
by and between Phelps Dodge and certain of its
executives.
|
|
|
|
|
|
The
Phelps Dodge Corporation Supplemental Retirement Plan, amended and
restated effective January 1, 2005 and adopted on March 16,
2007.
|
|
|
|
|
|
The
Phelps Dodge Corporation Supplemental Savings Plan, amended and restated
effective January 1, 2005, and adopted on March 16,
2007.
|
|
|
|
|
|
First
Amendment to the Phelps Dodge Corporation Supplemental Savings Plan,
dated
March 16, 2007.
|
|
|
|
|
|
Second
Amendment to the Phelps Dodge Corporation Supplemental Savings Plan,
dated
as of March 16, 2007.
|
|
|
|
|
|
Letter
from Ernst & Young LLP regarding unaudited interim financial
statements.
|
|
|
|
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d -
14(a).
|
|
|
|
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d -
14(a).
|
|
|
|
|
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
|
|
|
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C Section
1350.
|