fcx123107-10k.htm
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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
10-K
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(Mark
One)
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2007
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OR
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[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 1-9916
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Freeport-McMoRan
Copper & Gold Inc.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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74-2480931
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification No.)
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One
North Central Avenue
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Phoenix,
Arizona
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85004-4414
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(Address
of principal executive offices)
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(Zip
Code)
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(602)
366-8100
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(Registrant's
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $0.10 per share
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New
York Stock Exchange
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7% Convertible
Senior Notes due 2011 of the registrant
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New
York Stock Exchange
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6¾%
Mandatory Convertible Preferred Stock, par value $0.10 per
share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act R
Yes 0
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. 0
Yes R
No
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 0
No
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained,
to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. 0
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one): R
Large accelerated filer 0
Accelerated filer 0
Non-accelerated filer 0
Smaller reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the
Act). 0
Yes R
No
The
aggregate market value of common stock held by non-affiliates of the registrant
was approximately $35.0 billion on February 15, 2008, and approximately $31.3
billion on June 30, 2007.
Common
stock issued and outstanding was 382,767,582 shares on February 15, 2008, and
381,655,613 shares on June 30, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of our Proxy Statement for our 2008 Annual Meeting are incorporated by
reference into Part III (Items 10, 11, 12, 13 and 14) of this
report.
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FREEPORT-McMoRan
COPPER & GOLD INC.
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All
of our periodic report filings with the Securities and Exchange Commission (SEC)
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, are available, free of charge, through our web site, www.fcx.com,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports. These reports
and amendments are available through our web site as soon as reasonably
practicable after we electronically file or furnish such material to the
SEC.
References
to “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
on March 19, 2007. References to “Notes” refer to the “Notes to Consolidated
Financial Statements” included in our 2007 Annual Report included
herein (see Item 8. Financial Statements and Supplementary
Data).
GENERAL
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 in Papua, Indonesia, which based on the latest available reserve data
provided by third-party industry consultants, contains the largest single
recoverable 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, processing capabilities
for other by-product minerals and several development projects, including Tenke
Fungurume in the Democratic Republic of Congo (DRC).
In
North America we have six operating copper mines – Morenci, Bagdad, Sierrita and
Safford in Arizona, and Chino and Tyrone in New Mexico, as well as one operating
molybdenum mine – Henderson in Colorado. In addition, we have
announced plans to restart the Miami copper mine in Arizona, and the Climax
molybdenum mine in Colorado. All of these operations are wholly owned, except
for Morenci, in which we have an 85 percent joint venture interest. The North
American mining operations are operated in an integrated fashion and have
long-lived reserves with additional development potential.
In
South America we have four operating copper mines – Cerro Verde in Peru, and
Candelaria, Ojos del Salado and El Abra in Chile. We own a 53.56 percent
interest in Cerro Verde, 80 percent interests in Candelaria and Ojos del Salado,
and a 51 percent interest in El Abra.
In
Indonesia 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. PT Freeport Indonesia operates under an agreement called a
Contract of Work with the Government of Indonesia. The Contract of
Work permits us to conduct exploration, mining and production activities in a
24,700-acre area called Block A, which includes the Grasberg mineral district.
Under the Contract of Work, PT Freeport Indonesia also conducts exploration
activities (which had been suspended, but resumed in 2007) in an approximate
500,000-acre area called Block B.
In
Africa, we have a 57.75 percent interest in the Tenke Fungurume project in the
DRC. The Tenke Fungurume mine will produce copper and cobalt and is
expected to commence mining operations in 2009.
Our
mining revenue for 2007 (pro forma to include the operations of Phelps Dodge
before the acquisition), includes sales of copper (approximately 79 percent),
molybdenum (approximately 11 percent) and gold (approximately 6
percent). Our consolidated copper production (on a proforma basis to
include the operations of Phelps Dodge before the acquisition) was primarily
from three mines, the Grasberg minerals district in Indonesia (approximately 30
percent), the Morenci mine in Arizona (approximately 18 percent), and the Cerro
Verde mine in Peru (approximately 15 percent).
For
information about our segments and geographic areas see Note
18.
The
locations of our operating mines, as well those in development are shown on the
map below.
As
a mining company, our principal assets are our reserves. At December 31, 2007,
consolidated recoverable proven and probable reserves totaled 93.2 billion
pounds of copper, 41.0 million ounces of gold, 2.0 billion pounds of molybdenum,
230.9 million ounces of silver and 0.6 billion pounds of cobalt. Approximately
40 percent of our copper reserves were in Indonesia, approximately 28 percent
were in South America, approximately 27 percent were in North America and
approximately five percent were in Africa. Approximately 96 percent
of our gold reserves were in Indonesia, with our remaining gold reserves in
South America. Our molybdenum reserves are primarily in North America
(approximately 90 percent), with our remaining molybdenum reserves in South
America. (See “Ore Reserves”).
The
diagram below shows our corporate structure.
NORTH
AMERICA
Our
North American mining operations comprise copper operations from mining through
rod production, molybdenum operations from mining through conversion to chemical
and metallurgical products, and the marketing and sale of both product lines. We
have six operating copper mines in North America – Morenci, Bagdad, Sierrita,
Safford, Chino and Tyrone, and one operating molybdenum mine – Henderson.
Additionally, in December 2007, we announced our plan to restart the
Climax molybdenum mine and in January 2008, our plan to restart our Miami
mine. Our North American mining division also includes rod and
refining operations, which consist of copper conversion facilities including a
smelter, refinery, rod mills and a specialty copper products
facility.
Following
are maps and descriptions of our North American mining operations:
Morenci
and Safford
Morenci. Morenci,
the largest copper mine in North America, is an open-pit copper mining complex
located in Greenlee County, Arizona, approximately 50 miles northeast of Safford
on U.S. Highway 191. The site is accessible by a paved highway and a
railway spur. We own an 85 percent interest in Morenci, and 15 percent is owned
by affiliates of Sumitomo Corporation. Each partner takes in kind its share of
Morenci’s production. The open-pit mine has been in continuous operation
since 1939 and previously was mined through underground workings. The
Morenci mine is a porphyry copper deposit that has leachable oxide and secondary
sulfide mineralization, and millable primary sulfide mineralization. The
predominant oxide copper mineral is chrysocolla. Chalcocite is the most
important secondary copper sulfide mineral and chalcopyrite the dominant primary
copper sulfide.
The
Morenci operation consists of a 49,000 metric ton-per-day (54,000 short tons per
day) concentrator that produces copper and molybdenum concentrate, an
80,000 metric ton-per-day crushed-ore leach pad and stacking system, a large
low-grade run-of-mine (ROM) leaching system, four solution-extraction (SX)
plants, and three electrowinning (EW) tank houses that produce copper cathode.
Total EW tank house capacity is approximately 965 million pounds of copper per
year. Total annual copper production over the next three years is expected to
range between 790 to 990 million pounds (670 to 840 million pounds for our
share) and total annual molybdenum production approximates one million pounds
per year. Morenci uses a fleet of 115 235-metric ton haul trucks loaded by
15 shovels with bucket sizes ranging from 47 to 55 cubic meters, which are
capable of moving an average of 1,000,000 metric tons of material per
day.
The
concentrate leach, direct-electrowinning facility at Morenci is ramping up
production following commissioning in third-quarter 2007. This project uses our
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 and by providing acid
as a by-product for use in leaching operations. The concentrate-leach project
included the restart of a mill, which adds 115 million pounds of copper
production per year and the mill is operating near capacity of 49,000 metric
tons-per day.
Morenci
is located in a desert environment with rainfall averaging 13 inches per year.
The highest bench elevation is 1,950 meters above sea level, and the ultimate
pit bottom is expected to have an elevation of 900 meters above sea level. The
Morenci operation encompasses approximately 53,944 acres comprising 47,609 acres
of patented mining claims and other fee lands, 5,914 acres of unpatented mining
claims, and 421 acres of land held by state or federal permits, easements and
rights-of-way.
Morenci
receives electrical power from Tucson Electric Power Company, Arizona Public
Service, and the Luna Energy Facility in Deming, New Mexico (in which we own a
one-third interest). Although we believe the Morenci operation has sufficient
water sources to support mining operations as currently planned, we are a party
to litigation that could adversely affect our water rights at Morenci and
at our other properties in Arizona. (Refer to Item 3, Legal Proceedings, for
information concerning the status of these proceedings.)
Safford. The
Safford project is an open-pit copper mining complex located in Graham County,
Arizona, approximately eight miles north of the town of Safford and 170 miles
east of Phoenix. The site is accessible by paved county road off U.S. Highway
70. The project construction is essentially complete, and initial production
commenced in late 2007 with a ramp up to full production of 240 million pounds
of copper per year expected in the first half of 2008. The Safford mine
includes two porphyry copper deposits that have leachable oxide and
secondary sulfide mineralization. The predominant oxide copper minerals are
chrysocolla and copper-bearing iron oxides. Chalcocite is the most important
secondary copper sulfide mineral.
The
property is a mine-for-leach project and produces copper cathodes. The operation
will consist of two open pits feeding a crushing facility with a capacity of
103,000 metric tons per day of crushed ore. The crushed ore is delivered to a
single leach pad by a series of overland and portable conveyors. ROM ore is
placed on the leach pad by trucks. Leach solutions feed an SX/EW facility with a
capacity of 240 million pounds of copper per year. Average annual copper
production over the next three years is expected to range between 205 to 240
million pounds. The mining fleet consists of 17 235-metric ton haul trucks,
expanding to 21 trucks by the end of 2008, loaded by five shovels with bucket
sizes ranging from 31 to 34 cubic meters, which are capable of moving an average
of approximately 285,000 metric tons per day.
Safford
is located in a desert environment with rainfall averaging 10 inches per year.
The highest bench elevation is expected to be 1,350 meters above sea level,
and the ultimate pit bottom is expected to have an elevation of 750 meters above
sea level. The Safford operation encompasses approximately 24,957 acres
comprising 20,994 acres of patented lands, 3,932 acres of unpatented lands and
31 acres of land held by federal permit.
The
Safford project receives electrical power through the Southwest Transmission
Cooperative, a subsidiary of Arizona Electric Power Cooperative, Inc. Although
we believe the Safford operation has sufficient water resources to support
mining operations as currently planned, we are a party to litigation that could
adversely impact the water rights at Safford and at our other properties in
Arizona. (Refer to Item 3, Legal Proceedings, for information
concerning the status of these proceedings.)
Bagdad
Bagdad
is an open-pit copper and molybdenum mining complex located in Yavapai County in
west-central Arizona. It is approximately 60 miles west of Prescott and 100
miles northwest of Phoenix. The property can be reached by Arizona Highway
96, which ends at the town of Bagdad. The closest railroad siding is at
Hillside, Arizona, approximately 24 miles southeast on Arizona Highway 96. The
open-pit mining operation has been ongoing since 1945, and prior mining was
conducted through underground workings. The Bagdad mine is a porphyry copper
deposit that has leachable oxide and secondary sulfide mineralization, and
millable primary sulfide mineralization. The predominant oxide copper minerals
are chrysocolla, malachite and azurite. Chalcocite is the most important
secondary copper sulfide mineral, and chalcopyrite and molybdenite the dominant
primary sulfides.
The
Bagdad operation consists of a 75,000 metric ton-per-day concentrator that
produces copper and molybdenum concentrates, and an SX/EW plant that produces
copper cathode from solution generated by low-grade ROM leaching and from
conversion of a portion of mill copper concentrates in a concentrate-leach
plant. The majority of concentrate produced is smelted at our Miami, Arizona,
facility. Additionally, up to 35 million pounds per year are produced as cathode
from the SX/EW and concentrate-leach plants and up to 20 million pounds per year
from the ROM leaching system. Total projected annual copper production over the
next three years is expected to range from 200 to 225 million pounds.
Molybdenum production at the Bagdad mill ranges from 8 million to 11 million
pounds per year. The current mining fleet has the capacity to move in excess of
180,000 metric tons of material per day using 25 235-metric ton haul trucks
loaded by seven shovels with bucket sizes ranging from 20 to 47 cubic
meters.
In
2002, we constructed a high-temperature, concentrate-leaching demonstration
plant designed to recover 35 million pounds of commercial-grade copper cathode
annually from chalcopyrite concentrates. The facility is the first of its kind
in the world to use high-temperature, pressure leaching to process chalcopyrite
concentrates. During 2005, this facility was used to test and demonstrate
medium-temperature, pressure leaching and direct-electrowinning technology,
which is now used at the Morenci concentrate-leaching facility, and was
converted back to high-temperature, pressure leaching in December 2005. In
December 2007, we announced plans to convert this facility to a molybdenum
concentrate leach facility by 2010, which is expected to increase our annual
molybdenum processing capacity by approximately 20 million pounds.
Bagdad
is located in a desert environment with rainfall averaging 15 inches per year.
The highest bench elevation is 1,200 meters above sea level, and the ultimate
pit bottom is expected to be 475 meters above sea level. The Bagdad
operation encompasses approximately 21,743 acres comprising 21,143 acres of
patented mining claims and other fee lands, and 600 acres of unpatented mining
claims.
Bagdad
receives electrical power from Arizona Public Service Company. Although we
believe the Bagdad operation has sufficient water resources to support mining
operations as currently planned, we are a party to litigation that could
adversely affect our water rights at Bagdad and at our other properties in
Arizona. (Refer to Item 3, Legal Proceedings, for information
concerning the status of these proceedings.)
Sierrita
Sierrita
is an open-pit copper and molybdenum mining complex located in Pima County,
Arizona, approximately 20 miles southwest of Tucson and seven miles west of the
town of Green Valley and Interstate Highway 19. The site is accessible by
a paved highway and by rail. The mine has been in operation since 1959. The
Sierrita mine is a porphyry copper deposit that has leachable oxide and
secondary sulfide mineralization, and millable primary sulfide mineralization.
The predominant oxide copper minerals are malachite, azurite and chrysocolla.
Chalcocite is the most important secondary copper sulfide mineral, and
chalcopyrite and molybdenite the dominant primary sulfides.
The
Sierrita operation consists of a 102,000 metric ton-per-day concentrator, two
molybdenum roasters and a rhenium processing facility. The facility produces
copper and molybdenum concentrates. Sierrita also produces copper from a ROM
oxide-leaching system. Cathode copper is plated at the Twin Buttes EW facility
which has a design capacity of approximately 50 million pounds of copper per
year. In 2004, a copper sulfate crystal plant began production. The facility has
the capacity to produce 40 million pounds of copper sulfate per year. Total
annual copper production over the next three years is expected to range
from 155 to 190 million pounds. Molybdenum production averages approximately 20
million pounds per year. The molybdenum facility consists of a leaching circuit,
two molybdenum roasters and a packaging facility. The molybdenum facilities
process Sierrita concentrate, concentrate from our other mines and concentrate
from third-party sources. The current mining fleet has the capacity to move an
average of 200,000 metric tons of material per day using 23 210- to
235-metric ton haul trucks loaded by five shovels with bucket sizes ranging from
21 to 47 cubic meters.
Sierrita
is located in a desert environment with rainfall averaging 12 inches per year.
The highest bench elevation is 1,350 meters above sea level, and the ultimate
pit bottom is expected to be 600 meters above sea level. The Sierrita
operation encompasses approximately 22,320 acres comprising 14,400 acres of
patented mining claims and other fee lands, 5,725 acres of unpatented mining
claims (includes 3,655 acres overlaying federal minerals on previously counted
fee lands), and 2,195 acres of leased lands.
Sierrita
receives electrical power through long-term contracts with the Tucson Electric
Power Company. Although we believe the Sierrita operation has sufficient water
resources to support mining operations as currently planned, we are a party to
litigation that could adversely affect our water rights at Sierrita and at our
other properties in Arizona. (Refer to Item 3, Legal Proceedings, for
information concerning the status of these proceedings.)
Miami
Miami is an open-pit copper mining complex located
in Gila County, Arizona, approximately 90 miles east of Phoenix and six miles
west of the city of Globe on U.S. Highway 60. The site is accessible by a paved
highway and by rail. The Miami mining operation has been on
care-and-maintenance status since 2002, but has historically processed copper
ore using both flotation and leaching technologies since about 1915. Since 2002,
residual leaching of stockpiles has continued with copper recovered by the SX/EW
process. The Miami mine is a porphyry copper deposit that has leachable oxide
and secondary sulfide
mineralization.
The predominant oxide copper minerals are chrysocolla, copper-bearing clays,
malachite and azurite. Chalcocite and covellite are the most important secondary
copper sulfide minerals.
The
design capacity of the SX/EW plant is 200 million pounds per year. In
January 2008, we announced our plan to restart the Miami mine. We
expect full rates of production to approximate 100 million pounds of copper
per year. Refer to “Development and Exploration” for further
discussion.
The
Miami smelter processes concentrate primarily from Bagdad, Sierrita,
Morenci and Chino and has been in production for over 80 years. The smelter has
been upgraded during that period to implement new technologies, to improve
production and to comply with current air quality standards. Concentrate
processed through the smelter totaled approximately 759,000 metric tons in 2007
and 612,000 metric tons in 2006. Sulfuric acid is a by-product of smelting
concentrates, and the Miami smelter is the most significant source of
sulfuric acid for our domestic leaching operations. The Miami rod plant treats
cathodes from Miami and other domestic operations and produces approximately 316
million pounds of copper rod per year.
Miami
is located in a desert environment with rainfall averaging approximately 18
inches per year. The highest bench elevation is 1,400 meters above sea level,
and the ultimate pit bottom is expected to be 800 meters above sea level.
The Miami operation encompasses approximately 9,058 acres comprising 8,725 acres
of patented mining claims and other fee lands, and 333 acres of unpatented
mining claims.
Miami
receives electrical power through long-term contracts with the Salt River
Project and natural gas through long-term contracts with El Paso Natural Gas.
Although we believe the Miami operation has sufficient water resources to
support mining operations as currently planned, we are a party to litigation
that could adversely affect our water rights at Miami and at our other
properties in Arizona. (Refer to Item 3, Legal Proceedings, for
information concerning the status of these proceedings.)
Chino
and Tyrone
Chino. Chino
is an open-pit copper mining complex located in southwestern New Mexico in
Grant County, approximately 15 miles east of the town of Silver City off of
State Highway 180. The mine is accessible by paved roads and by rail. Chino has
been in operation since 1910. The Chino mine is a porphyry copper deposit with
adjacent copper skarn deposits. There is leachable oxide and secondary sulfide
mineralization, and millable primary sulfide mineralization. The predominant
oxide copper minerals are chrysocolla and azurite. Chalcocite is the most
important secondary copper sulfide mineral, and chalcopyrite and molybdenite the
dominant primary sulfides.
The
Chino operation consists of a 39,000 metric ton-per-day concentrator that
produces copper and molybdenum concentrates, and a 150 million pound-per-year
SX/EW plant that produces copper cathode from solution generated by ROM
leaching. Total annual copper production over the next three years is
expected to range from 180 to 245 million pounds, along with annual molybdenum
production of approximately one million pounds. The current mining fleet has the
capacity to move an average of 180,000 metric tons of material per day utilizing
a fleet of 23 245- and 290-metric ton haul trucks loaded
by
eight shovels/loaders with bucket sizes ranging from 14 to 47 cubic meters.
Copper ore is crushed and sent to the concentrator. Leach ore is placed on
stockpiles located throughout the property and the leach solution is processed
at Chino’s SX/EW facility that has a maximum capacity of 153 million pounds of
copper cathode per year.
Chino
is located in a desert environment with rainfall averaging 16 inches per year.
The highest bench elevation is 2,250 meters above sea level, and the ultimate
pit bottom is expected to be 1,500 meters above sea level. The Chino operation
encompasses approximately 118,062 acres comprising 113,258 acres of patented
mining claims and other fee lands, and 4,804 acres of unpatented mining claims
(including 22,907 acres overlaying federal and state minerals on previously
counted fee lands).
Chino
receives power from the Luna Energy Facility and from the open market. It also
has the ability to self-generate power. We believe Chino has sufficient water
resources to support mining operations as currently planned.
Tyrone. Tyrone
is an open-pit copper mining complex located in southwestern New Mexico in Grant
County, approximately 10 miles south of Silver City, New Mexico, along State
Highway 90. The site is accessible by paved road. The open-pit mine has been in
operation since 1967. The Tyrone mine is a porphyry copper deposit.
Mineralization is predominantly leachable secondary sulfide consisting of
chalcocite.
Copper
processing facilities consist of an SX/EW operation with a maximum capacity of
168 million pounds of copper cathodes per year. Annual copper production over
the next three years is expected to range from 80 to 115 million pounds.
The current mining fleet has the capacity to move an average of 120,000 metric
tons of material per day using a fleet of 15 190-metric ton haul trucks loaded
by five shovels with bucket sizes ranging from 22 to 54 cubic meters.
Historically, ore production has occurred from numerous open pits throughout the
site. Mining is currently ongoing in a single, large, central open
pit.
Tyrone
is located in a desert environment with rainfall averaging 16 inches per year.
The highest bench elevation is 2,000 meters above sea level, and the ultimate
pit bottom is expected to have an elevation of 1,500 meters above sea level. The
Tyrone operation encompasses approximately 35,200 acres comprising 18,755 acres
of patented mining claims and other fee lands, and 16,445 acres of unpatented
mining claims (includes 1,116 acres overlaying federal minerals on previously
counted fee lands).
Tyrone
receives electrical power from the Luna Energy Facility and from the open
market. Tyrone also has the ability to self-generate power. We believe the
Tyrone operation has sufficient water resources to support mining
operations as currently planned.
Henderson
and Climax
Henderson. The
Henderson molybdenum mine is located approximately 42 miles west of Denver,
Colorado, off U.S. Highway 40. Nearby communities include the towns of Empire,
Georgetown and Idaho Springs. The Henderson mill site is
located approximately 15 miles west of the mine, and is accessible from Colorado
State Highway 9. The Henderson mine and mill are connected by a 10-mile conveyor
tunnel under the Continental Divide and an additional five-mile surface
conveyor. The tunnel portal is located five miles east of the mill. The mine has
been in operation since 1976. The Henderson mine is a porphyry molybdenum
deposit with molybdenite as the primary sulfide mineral.
The
Henderson operation consists of a large block-cave underground mining complex
feeding a 36,000 metric ton-per-day concentrator. Henderson has the capacity to
produce approximately 40 million pounds of molybdenum per year with production
expected to be at or near capacity over the next three years. The underground
mining equipment fleet consists of 17 nine-metric ton load-haul-dumps, and seven
36- and 73-metric ton haul trucks, which feed a gyratory crusher feeding a
series of three overland conveyors to the mill stockpiles. Mining is currently
from two production levels. The majority of the molybdenum concentrate produced
is shipped to our Fort Madison, Iowa, processing facility.
The
Henderson mine is located in a mountain region with the main access shaft at
3,180 meters above sea level. The main production levels are currently at
elevations of 2,350 and 2,000 meters above sea level. This region experiences
significant snowfall during the winter months.
The
Henderson mine and mill operations encompass approximately 11,878 acres
comprising 11,843 acres of patented mining claims and other fee lands, and a
35-acre easement with the U.S. Forest Service for the surface portion of the
conveyor corridor.
Henderson
operations receive electrical power through long-term contracts with Xcel Energy
and natural gas through long-term contracts with BP Energy with Xcel Energy as
the transporter. We believe Henderson has sufficient water resources at the
mine and mill for any planned production scenarios.
Climax. The
Climax molybdenum mine is located 13 miles northeast of Leadville, Colorado, off
Colorado State Highway 91 at the top of Freemont Pass. The mine is accessible by
paved roads. The Climax mine is a porphyry molybdenum deposit with molybdenite
as the primary sulfide mineral.
The
Climax mine was placed on care-and-maintenance status in 1995. In December
2007, we announced plans to restart the Climax mine. This $500 million
project involves construction of new milling facilities and the restart of
open-pit mining. Refer to “Development and Exploration” for further
discussion.
The
Climax mine is located in a mountain region. The highest bench elevation is
approximately 4,050 meters above sea level, and the ultimate pit bottom is
expected to be approximately 3,100 meters above sea level. This region
experiences significant snowfall during the winter months. The Climax
operation encompasses approximately 14,339 acres of patented mining claims and
other fee lands.
Climax’s
electrical power is supplied by Xcel Energy. We expect that once the operations
are restarted, Xcel Energy will be able to supply sufficient energy to the
Climax mine. Although we believe the Climax operation has sufficient water
resources to support mining operations as currently planned, we are a party to
litigation that could adversely affect our water rights at Climax. (Refer to
Item 3, Legal Proceedings, for information concerning the status of these
proceedings.)
Other
North American Operations
Rod and
Refining operations. Our
rod and refining operations consist of conversion facilities including a
refinery in El Paso, Texas, rod mills in El Paso, Texas; Norwich, Connecticut;
Miami, Arizona and Chicago, Illinois, and a specialty copper products facility
in Bayway, New Jersey. We refine our anode copper production from our
smelter in Miami, Arizona, along with purchased anodes at our El Paso refinery.
The El Paso refinery has an annual production capacity of about 900 million
pounds of copper cathode, which is sufficient to refine all the anode copper we
produce at Miami. Our El Paso refinery also produces nickel carbonate, copper
telluride, and autoclaved slimes material containing gold, silver, platinum and
palladium.
We
are the world’s largest producer of continuous-cast copper rod, which is the
basic feed for the electrical wire and cable industry. Most of our refined
copper and additional purchased copper cathode is converted into rod at our four
continuous-cast copper rod mills, which have a collective annual capacity to
convert more than two billion pounds of refined copper into rod and other
refined copper products.
Molybdenum
Conversion facilities. We
process molybdenum concentrates at our conversion plants in the United States
and Europe into such products as technical-grade molybdic oxide,
ferromolybdenum, pure molybdic oxide, ammonium molybdates, molybdenum metal
powders and molybdenum disulfide. We operate molybdenum roasters at Green
Valley, Arizona; Fort Madison, Iowa; and Rotterdam, the
Netherlands.
The
Green Valley, Arizona facility, which is located at our Sierrita mine, consists
of two molybdenum roasters that process molybdenum concentrates produced at our
mines and on a toll basis for third parties. The facility produces molybdenum
oxide and related products.
The
Fort Madison, Iowa, facility consists of two molybdenum roasters, a sulfuric
acid plant, a metallurgical (technical oxide) packaging facility, and a chemical
conversion plant, which includes a wet-chemicals plant and sublimation
equipment. In the chemical plant, molybdic oxide is further refined into various
high-purity molybdenum chemicals for a wide range of uses by chemical and
catalyst manufacturers. In addition to metallurgical oxide products, the Fort
Madison facility produces ammonium dimolybdate, pure molybdic oxide, ammonium
heptamolybdate, ammonium octamolybdate, sodium molybdate, sublimed pure molybdic
oxide and molybdenum disulfide.
The
Rotterdam conversion plant consists of a molybdenum roaster, sulfuric acid
plant, metallurgical packaging facility and chemical conversion plant. The plant
produces metallurgical products primarily for third parties. Ammonium
dimolybdate and pure molybdic oxide are produced in the wet-chemicals
plant.
We
also produce ferromolybdenum and molybdenum disulfide for worldwide customers at
our conversion plant located in Stowmarket, United Kingdom. The plant is
operated both as an internal and external customer tolling
facility.
Process
Technology Centers. We
have a process technology center located in Safford, Arizona. The objective of
the center is to develop technologies that will enhance our competitive position
in the world copper market. The center provides metallurgical process
development capabilities, process optimization services, metallurgical testing
and advanced material characterization services to meet the needs of our
operations. Activities are focused on the development of new cost-competitive,
“step change” technologies and the continuous improvement of existing processes,
with an emphasis on the effective implementation, transfer and sharing of
technology within our operations and projects. The center employs approximately
125 engineers, scientists and technical support staff. The facilities
include:
·
|
a
large-diameter, column-leach facility for testing run-of-mine material,
which is capable of processing up to approximately 550 metric tons of ore
annually;
|
·
|
a
continuous SX/EW test facility capable of producing approximately 3,000
pounds of copper cathode per day;
|
·
|
a
small-diameter, column-leach facility with a capacity of about 250
individual tests per year for crushed
material;
|
·
|
a
metallurgical laboratory for the development of biological leaching
processes and enhancements, and other biological
applications;
|
·
|
a
demonstration facility for production of new copper products;
and
|
·
|
a
state-of-the-art material characterization laboratory with advanced
mineralogy, analytical chemistry and metallography
capabilities.
|
The
principal areas of activity include hydrometallurgy (leaching and SX/EW),
mineral processing (crushing, grinding and flotation), material
characterization, environmental technology, new copper products and technical
information services.
We
also have a molybdenum technology center located in Sahuarita, Arizona, focused
on new product development and product applications as an extension of our
metals business. In addition, our Climax technology center produces molybdenum
metal powders.
SOUTH
AMERICA
We
have four operating copper mines in South America – Cerro Verde in Peru, and
Candelaria, Ojos del Salado and El Abra in Chile. These operations include
open-pit and underground mining, sulfide ore concentrating, leaching and
SX/EW.
Following
are maps and descriptions for our South American Mining operations:
Cerro
Verde
Cerro
Verde is an open-pit copper and molybdenum mining complex located 20 miles
southwest of Arequipa, Peru. The site is accessible by paved highway. We have a
53.56 percent interest in Cerro Verde. The remaining 46.44 percent is held by
SMM Cerro Verde Netherlands B.V. (21.0 percent), Compañia de Minas Buenaventura
S.A.A. (18.5 percent) and other shareholders whose shares are publicly traded on
the Lima Stock Exchange (6.94 percent). The Cerro Verde mine has been in
operation since 1976.
The
Cerro Verde mine is a porphyry copper deposit that has leachable oxide and
secondary sulfide mineralization, and millable primary sulfide mineralization.
The predominant oxide copper minerals are brochantite, chrysocolla, malachite
and copper “pitch.” Chalcocite and covellite are the most important secondary
copper sulfide minerals. Chalcopyrite and molybdenite are the dominant primary
sulfides.
Cerro
Verde’s current operation consists of an open-pit copper mine and SX/EW leaching
facilities. Leach-copper production is derived from a 39,000 metric ton-per-day
crushed leach facility and a ROM leach system. This leaching operation has a
capacity of approximately 200 million pounds of copper per year. A new 108,000
metric ton-per-day concentrator was completed in late 2006, and processing of
sulfide ore began in the fourth quarter of 2006. Annual production over the next
three years is expected to range from 655 to 705 million pounds of copper (350
to 375 million pounds for our share) and seven to nine million pounds of
molybdenum (four to five million pounds for our share).
Cerro
Verde has sufficient equipment to move an average of 295,000 metric tons of
material per day using a fleet of 26 180-metric ton and 230-metric ton haul
trucks loaded by six shovels with bucket sizes ranging in size from 21 to 46
cubic meters.
Copper
cathodes and concentrate production are transported approximately 70 miles by
truck and rail to the Pacific Port of Matarani for shipment to international
markets.
Cerro
Verde is located in a desert environment with rainfall averaging 1.5 inches per
year and is in an active seismic zone. The highest bench elevation is 2,900
meters above sea level, and the ultimate pit bottom is expected to be 2,000
meters above sea level. Cerro Verde has a mining concession covering
approximately
53,094 acres plus 15 acres of owned property and 22 acres of rights-of-way
outside the mining concession area.
Cerro
Verde receives electrical power under long-term contracts with Electroperu and
Empresa de Generación Eléctrica de Arequipa. The existing freshwater intake and
supply system on the Rio Chili was expanded for the Cerro Verde concentrator
project. Cerro Verde’s participation in the Pillones Reservoir Project has
secured water rights that we believe will be sufficient to support Cerro
Verde’s operations as currently planned.
Candelaria
and Ojos del Salado
Candelaria. Candelaria
is an open-pit and underground copper mining complex located approximately 12
miles south of Copiapó in northern Chile’s Atacama province, Region III. The
site is accessible by two maintained dirt roads, one coming through the Tierra
Amarilla community and the other off of Route 5 of the International
Pan-American Highway. We have an 80 percent interest in Candelaria. The
remaining 20 percent interest is owned by affiliates of the Sumitomo
Corporation. The open-pit copper mine has been in operation since 1993 and
the underground copper mine since 2005.
The
Candelaria mine is an iron oxide, copper/gold deposit. Millable primary sulfide
mineralization consists of chalcopyrite.
The
Candelaria operation consists of an open-pit copper mine and a 4,000 metric
ton-per-day underground copper mine, which is mined by sublevel stoping,
feeding a 67,000 metric ton-per-day concentrator. On average, open-pit mining
operations move 290,000 metric tons of material per day using a fleet of 50
225-metric ton haul trucks loaded by nine shovels with bucket sizes ranging from
13 to 43 cubic meters. Copper concentrates are transported by truck to the Punta
Padrones port facility located in Caldera, approximately 50 miles northwest of
the mine. Annual copper production is expected to range from 300 to 360 million
pounds (240 to 285 million pounds for our share) over the next three
years.
Candelaria
is located in a desert environment with rainfall averaging less than one inch
per year and is in an active seismic zone. The highest bench elevation
is 675 meters above sea level, and the ultimate pit bottom is expected
to be 30 meters below sea level. The Candelaria property encompasses
approximately 13,390 acres, including approximately 544 acres for the port
facility in Caldera. The remaining property consists of mineral rights owned by
us in which the surface is not owned but is controlled by us consistent with
Chilean law.
Candelaria
receives electrical power through long-term contracts with Empresa Eléctrica
Guacolda S.A., a local energy company. Candelaria’s water supply comes from well
fields in the area of Tierra Amarilla and Copiapó that draw water from the
Copiapó River aquifer. Because of rapid depletion of that aquifer in recent
years, ongoing studies are addressing the adequacy of this water supply for
mining operations as planned.
Ojos
del Salado. Ojos del Salado consists of two underground copper
mines (Santos and Alcaparrosa) and a 4,000 metric ton-per-day concentrator. The
operation is located approximately 10 miles east of
Copiapó in northern Chile’s Atacama province, Region
III, and is accessible by paved highway. We have an 80 percent interest in Ojos
del Salado. The remaining 20 percent interest is owned by affiliates of the
Sumitomo Corporation. The Ojos del Salado operation began commercial production
in 1929.
The
Ojos del Salado mines are iron oxide and copper/gold deposits. Millable primary
sulfide mineralization consists of chalcopyrite.
The
Ojos del Salado operation has a capacity of 3,800 metric tons per day of ore
from the Santos underground mine and 4,000 metric tons per day from the
Alcaparrosa underground mine. The ore from both mines is mined by sublevel
stoping, which is a variation of blasthole stoping, because both the ore and
enclosing rocks are competent. The broken ore is removed from the stopes using
front-end loaders and loaded into 18 28-metric ton trucks, which transport the
ore to the surface. The ore from the Santos mine is hauled directly to the Ojos
del Salado mill for processing, and the ore from the Alcaparrosa mine is
reloaded into five 54-metric ton trucks and hauled 12 miles to the Candelaria
mill for processing. The Ojos del Salado concentrator has the capacity to
produce over 60 million pounds of copper and 19,000 ounces of gold per year.
Annual copper production over the next three years is expected to range from 30
to 60 million pounds (24 to 48 million pounds for our share), and annual gold
production is expected to range from 6,000 to 19,000 ounces (4,800 to 15,200
ounces for our share) over the next four years. Tailings from the Ojos del
Salado mill are pumped to the Candelaria tailings facility for final deposition.
The Candelaria facility has sufficient capacity for the remaining Ojos del
Salado tailings in addition to Candelaria’s tailings.
Ojos
del Salado is located in a desert environment with rainfall averaging less than
one inch per year and is in an active seismic zone. The highest
underground level is at an elevation of 500 meters above sea level, with the
lowest underground level at 150 meters above sea level. The Ojos del Salado
mineral rights encompass approximately 15,815 acres, which includes
approximately 6,784 acres of owned land in and around the Ojos del Salado
underground mines and plant site.
Ojos
del Salado receives electrical power through long-term contracts with Empresa
Eléctrica Guacolda S.A. Ojos del
Salado’s water supply draws water from the Copiapo River
aquifer. Because of rapid depletion of this aquifer in recent years,
ongoing studies are addressing the adequacy of this water supply for the mining
operation as planned.
El
Abra
El
Abra is an open-pit copper mining complex located 47 miles north of Calama in
Chile’s El Loa province, Region II. The site is accessible by paved highway and
by rail. We have a 51 percent interest in El Abra. The remaining 49 percent
interest is held by the state-owned copper enterprise Corporación Nacional del
Cobre de Chile (CODELCO). The mine has been in operation since
1996.
The
El Abra mine is a porphyry copper deposit that has leachable oxide and sulfide
mineralization. The predominant oxide copper minerals are chrysocolla and
pseudomalachite. There are lesser amounts of
copper-bearing
clays and tenorite. The predominant primary sulfide copper minerals are bornite
and chalcopyrite. The secondary sulfide mineralization is chalcocite. The El
Abra operation consists of an open-pit copper mine and an SX/EW facility with a
capacity of 500 million pounds of copper cathode per year from a 120,000 metric
ton-per-day crushed leach circuit and a similar-sized, ROM leaching operation.
Annual copper production is expected to range from 335 pounds to 370 million
pounds over the next three years (170 million to 190 million pounds for our
share). The mining operation has sufficient equipment to move an average of
223,000 metric tons per day using a fleet of 26 220-metric ton haul trucks
loaded by six shovels with buckets ranging in size from 26 to 41 cubic meters.
At the end of 2006, we completed a feasibility study to evaluate the development
of the large sulfide deposit at El Abra. This project would extend
the mine life by over ten years and is expected to provide an additional 325
million pounds of copper per year compared to the current oxide operation.
Copper production from the sulfides is expected to begin in
2010. Refer to “Development and Exploration” for further
discussion.
El
Abra is located in a desert environment with rainfall averaging less than one
inch per year and is in an active seismic zone. The highest bench elevation is
4,180 meters above sea level, and the ultimate pit bottom is expected
to be 3,410 meters above sea level. El Abra controls a total of
110,268 acres of mining claims covering the ore deposit, stockpiles, process
plant, and water wellfield and pipeline. In addition, El Abra has acquired land
surface rights for the plant to mine access road, the wellfield, power
transmission line, and for the water pipeline from the Salar de Ascotán.
Acquisition of additional land surface area required for the future development
of the sulfide project is in process.
El
Abra currently receives electrical power under a contract with Electroandina,
which will expire at the end of 2017. We believe the El Abra operation has
sufficient water rights to support operations as currently planned.
INDONESIA
PT
Freeport Indonesia is a limited liability company organized under the laws of
the Republic of Indonesia and incorporated in Delaware. We directly own 81.28
percent of PT Freeport Indonesia, 9.36 percent indirectly through our
subsidiary, PT Indocopper Investama, and the Government of Indonesia owns the
remaining 9.36 percent. PT Freeport Indonesia mines, processes and explores for
ore containing copper, gold and silver. It operates in the remote highlands of
the Sudirman Mountain Range in the province of Papua, Indonesia, which is on the
western half of the island of New Guinea. PT Freeport Indonesia markets its
concentrates containing copper, gold and silver worldwide.
PT
Freeport Indonesia operates under an agreement, the 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, referred to as Block A,
located in Papua. Under the Contract of Work, PT Freeport Indonesia also
conducts exploration activities (which had been suspended, but resumed in 2007)
in an approximate 500,000-acre area, referred to as Block B, in Papua. All of PT
Freeport Indonesia’s proven and probable mineral reserves and current mining
operations are located in Block A.
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 agreed at that time 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.
Contracts
of Work
Through
a Contract of Work with the Government of Indonesia, PT Freeport Indonesia
conducts its current exploration and mining operations in Indonesia.
The Contract of Work governs our rights and obligations relating to taxes,
exchange controls, royalties, repatriation and other matters, and was concluded
pursuant to the 1967 Foreign Capital Investment Law, which expresses Indonesia’s
foreign investment policy and provides basic guarantees of remittance rights and
protection against nationalization, a framework for economic incentives and
basic rules regarding other rights and obligations of foreign investors.
Specifically, the Contract of Work provides that the Government of Indonesia
will not nationalize or expropriate PT Freeport Indonesia’s mining operations.
Any disputes regarding the provisions of the Contract of Work are subject to
international arbitration. We have experienced no disputes requiring arbitration
during the 40 years we have operated in Indonesia.
PT
Freeport Indonesia’s Contract of Work covers both Block A, which was first
included in a 1967 Contract of Work that was replaced by a new Contract of Work
in 1991, and Block B, to which we gained rights in 1991. The initial term of our
Contract of Work expires in December 2021, but we can extend it for two 10-year
periods subject to Indonesian government approval, which cannot be withheld or
delayed unreasonably. We originally had the rights to explore 6.5 million acres
in Block B, but pursuant to the Contract of Work we have only retained the
rights to approximately 500,000 acres following significant geological
assessment.
PT
Irja Eastern Minerals (Eastern Minerals), of which we own 100 percent, has a
Contract of Work with the Government of Indonesia containing similar terms to PT
Freeport Indonesia’s Contract of Work. Eastern Minerals signed its Contract of
Work in August 1994. The Contract of Work originally covered approximately 2.5
million exploration acres. Eastern Minerals’ Contract of Work
provides for a four-to-seven year exploratory term and a 30-year term for mining
operations. Subject to Indonesian government approval, which cannot be withheld
or delayed unreasonably, we can extend this period for two 10-year
periods. Eastern Minerals’ Contract of Work requires us to relinquish
our rights to 25 percent of the original 2.5-million-acre Contract of Work area
at the end of each of three specified periods. As of December 31, 2007, we had
relinquished approximately 1.3 million acres and we expect to relinquish an
additional 0.6 million acres in early 2008. The exploration activities under
Eastern Minerals’ Contract of Work also have been suspended in recent years;
however, in December 2006, Eastern Minerals received approval from the
Government of Indonesia to resume exploration activities in 2007.
Under
a joint venture agreement through PT Nabire Bakti Mining, we conduct exploration
activities in an area covering approximately 500,000 acres in five parcels
contiguous to PT Freeport Indonesia’s Block B and one of Eastern Minerals’
blocks.
PT
Freeport Indonesia pays a copper royalty under its Contact of Work that 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.
A
large part of the mineral royalties under Government of Indonesia regulations
are designated to the provinces from which the minerals are extracted. In
connection with our fourth concentrator mill expansion, PT Freeport Indonesia
agreed to pay the Government of Indonesia additional royalties (royalties not
required by our Contract of Work) to provide further support to the local
governments and the people of Papua. PT Freeport Indonesia pays the additional
royalties on production exceeding specified annual amounts of copper, gold and
silver expected to be generated when its milling facilities operate above
200,000 metric tons of ore per day. The additional royalty for copper equals the
Contract of Work royalty rate and for gold and silver equals twice the Contract
of Work royalty rates. Therefore, our royalty rate on copper net revenues from
production above the agreed levels is double the Contract of Work royalty rate,
and our royalty rates on gold and silver sales from production above the agreed
levels are triple the Contract of Work royalty rates.
PT Freeport Indonesia’s share of the combined
royalties, including the additional royalties which became
effective January 1, 1999, totaled $133 million in 2007, $126
million in 2006 and $104 million in 2005.
Grasberg Minerals District
We
and our predecessors have conducted exploration and mining operations in Block A
since 1967 and have been the only operator of these operations. We currently
have two mines in operation: the Grasberg open pit and the Deep Ore Zone
(DOZ) underground block cave. The DOZ and the Ertsberg Stockwork Zone are
adjacent to each other and are being mined together following our recently
completed expansion of our underground operations to 50,000 metric tons per day,
and the planned expansion to 80,000 metric tons per day.
Grasberg
open-pit. We
began open-pit mining of the Grasberg ore body in 1990. Open-pit operations are
expected to continue until mid-2015 at which time the Grasberg underground
mining operations are scheduled to begin. Production is currently at
the 3,305- to 4,285-meter elevation level and totaled 57.5 million metric
tons of ore in 2007 and 63.7 million metric tons of ore in 2006, which
provided 75 percent of our 2007 mill feed and 80 percent of our 2006 mill feed.
Our open-pit mining rate, including ore and overburden, totaled 667,600 metric
tons per day in 2007 and 677,200 metric tons per day in 2006. Approximate annual
production rates are expected to range between 600,000 metric tons per day and
700,000 metric tons per day through 2010 and then decline through
2015.
The
current Grasberg equipment fleet consists of over 500 units. As of December 31,
2007, the larger mining equipment directly associated with production includes
143 haul trucks with payloads ranging from approximately 215 metric tons to 330
metric tons, 18 shovels with bucket sizes ranging from 30 cubic meters to 42
cubic meters.
Grasberg
crushing and conveying systems are integral to the mine and provide the capacity
to transport up to 225,000 metric tons per day of Grasberg ore to the mill and
135,000 metric tons per day of overburden to the overburden stockpiles. The
remaining ore and overburden is moved by haul trucks.
Deep
Ore Zone. The DOZ ore body lies vertically below the now
depleted Intermediate Ore Zone. We began production from the DOZ ore body in
1989 using open stope mining methods, but we suspended production in 1991 in
favor of production from the Grasberg deposit. Production resumed in September
2000 using the block-cave method. Production is at the 3,110-meter elevation
level and totaled 19.5 million metric tons of ore in 2007 and 16.5 million
metric tons of ore in 2006. Production from the DOZ
averaged
53,500 metric tons of ore per day in 2007 and 45,200 metric tons of ore per day
in 2006.
During
2007, we completed over 16,300 meters of development drifting in support of the
block-cave mining method, and in mid-2007 we completed an expansion of the
DOZ underground operation to allow a sustained rate of 50,000 metric tons of ore
per day. Further expansion of the DOZ operation to 80,000 metric tons of ore per
day is under way with completion targeted by 2010. Our success in developing the
DOZ mine, one of the world’s largest underground mines, has given us additional
confidence in the future development of our large-scale undeveloped ore
bodies.
The
DOZ mine fleet consists of over 175 pieces of mobile heavy equipment. The
primary mining equipment directly associated with production and development
includes 51 load-haul-dump (LHD) units and 20 haul trucks. Our production LHD
units typically carry approximately 11 metric tons of ore. Using ore passes and
chutes, the LHD units transfer ore into 55-ton capacity haul trucks. The trucks
dump into two gyratory crushers and ore is then conveyed to the surface
stockpiles.
Our
principal source of power for all our Indonesian operations is a coal-fired
power plant that we built in conjunction with our fourth concentrator mill
expansion. Diesel generators supply peaking and backup electrical power
generating capacity. A combination of naturally occurring mountain streams and
water derived from our underground operations provides water for our operations.
Our Indonesian operations are in an active seismic zone and experience average
annual rainfall of 195 inches.
Mining
Operations - Mines in Development
Development
projects. In addition to the Grasberg open pit and DOZ, four
other ore bodies (the underground Grasberg, Kucing Liar, Mill Level Zone/Deep
Mill Level Zone and Big Gossan) are located in Block A. These ore bodies are at
various stages of development, and are included in our proven and probable
recoverable reserves. We continually review our operation’s development
opportunities to maximize the value of the reserves. We incurred $270 million
($247 million for our share) for mine development, and supporting infrastructure
capital expenditures related primarily to the Grasberg block cave and Big Gossan
ore bodies and $40 million ($30 million for our share) for common underground
infrastructure development during the three years ended December 31, 2007. See
“Risk Factors.”
The
underground Grasberg reserves will be mined using the block-cave method at the
end of open-pit mining, which is expected to continue until approximately
mid-2015. The Kucing Liar ore body lies on the southern flank of and underneath
the southern portion of the Grasberg open pit at the 2,605- to 3,115-meter
elevation level. We expect to mine the Kucing Liar ore body using the block-cave
method.
Beginning
in 2007, we report the Mill Level Zone and Deep Mill Level Zone ore bodies as
one ore body because we plan to mine them using some of the same infrastructure.
The Mill Level Zone lies directly below the DOZ mine at the 2,890-meter
elevation and the Deep Mill Level Zone lies beneath the Mill Level Zone at the
2,590-meter elevation. This ore represents the downward continuation of
mineralization in the Ertsberg East Skarn system and neighboring Ertsberg
porphyry. Drilling efforts continue to determine the extent of this ore body. We
expect to mine the Mill Level Zone using a block-cave method near completion of
mining at the DOZ. Near the end of mining the Mill Level Zone, we expect to mine
the Deep Mill Level Zone also using a block-cave method.
The
Big Gossan ore body is located approximately 1,000 meters southwest of the
original Ertsberg open-pit deposit. We began the initial underground development
of the ore body in 1993 when we drove tunnels from the mill area into the ore
zone at the 3,000-meter elevation level. A stope and fill mining method will be
used on the Big Gossan deposit. We expect to begin mining the Big Gossan ore
body in 2008, with production expected to ramp up to 7,000 metric tons per day
in late 2010 (average annual aggregate incremental production of 125 million
pounds of copper and 65,000 ounces of gold with PT Freeport Indonesia receiving
60 percent of these amounts).
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 us to conduct future exploration in
prospective areas associated with currently identified ore bodies. The tunnel
system
has
reached the Big Gossan terminal and we are proceeding with development of the
lower Big Gossan infrastructure. We have also advanced development of the
Grasberg spur and as of December 31, 2007, has completed 96 percent of the
tunneling required to reach the Grasberg underground ore body. We expect the
Grasberg spur to reach the Grasberg underground ore body and to initiate
multi-year mine development activities in the second half of 2008.
Studies
are under way to update the estimated aggregate capital expenditures to reach
full production capacity for the undeveloped ore bodies in the Grasberg
district. Previous estimates of approximately $3.1 billion for the development
of these ore bodies were primarily based on studies completed in 2003. These
amounts included $1.2 billion in estimated capital for the Grasberg underground,
$0.7 billion for Kucing Liar, $0.2 billion for Big Gossan and $0.6 billion for
MLZ/Deep MLZ. Recent estimates for the development of the Grasberg underground
ore body, which continue to be reviewed, indicate aggregate capital
approximating $3 billion to be incurred between 2008 and 2021. The increase of
approximately $1.8 billion primarily reflects higher labor and contractor costs,
increased costs for mobile equipment and other input costs. Current cost
estimates for Big Gossan approximate $0.5 billion. Our underground operations in
Indonesia are more sensitive to changes in labor costs than our open pit and
process operations. We will continue to pursue productivity initiatives to
mitigate the impact of increased labor costs. Cost estimates for Kucing Liar and
MLZ/Deep MLZ, which are not expected to begin development for several years,
have not been updated from prior studies.
Aggregate
capital costs to develop the underground ore bodies are expected to average
approximately $275 million per year through 2021.
Description
of Ore Bodies. Our
ore bodies are located within and around two main igneous intrusions, the
Grasberg monzodiorite and the Ertsberg diorite. The host rocks of these ore
bodies include both carbonate and clastic rocks that form the ridge crests and
upper flanks of the Sudirman Range, and the igneous rocks of monzonitic to
dioritic composition that intrude them. The igneous-hosted ore bodies (the
Grasberg open pit and block cave, and the Ertsberg Stockwork Zone block cave)
occur as vein stockworks and disseminations of copper sulphides, dominated by
chalcopyrite and, to a much lesser extent, bornite. The sedimentary-rock hosted
ore bodies occur as “magnetite-rich, calcium/magnesian skarn” replacements,
whose location and orientation are strongly influenced by major faults and by
the chemistry of the carbonate rocks along the margins of the
intrusions.
The
copper mineralization in these skarn deposits is also dominated by chalcopyrite,
but higher bornite concentrations are common. Moreover, gold occurs in
significant concentrations in all of the district’s ore bodies, though rarely
visible to the naked eye. These gold concentrations usually occur as inclusions
within the copper sulphide minerals, though, in some deposits, these
concentrations can also be strongly associated with pyrite.
The
following diagram indicates the relative elevations (in meters) of our reported
ore bodies.
The
following map, which encompasses an area of approximately 42 square kilometers
(approximately 16 square miles), indicates the relative positions and sizes of
our reported ore bodies and their locations.
AFRICA
We
are developing our initial project at Tenke Fungurume in the DRC. Following is a
map and description of our African operations:
Tenke
Fungurume
The Tenke Fungurume deposits are located in the
Katanga province of the DRC approximately 110 miles northwest of Lubumbashi. The
deposits are accessible by unpaved roads and by rail. We have an effective 57.75
percent interest in the concessions, and are the operator of the project. The
remaining ownership interests are held by Tenke Mining Corp.(TMC), which is
owned by Lundin Mining Corporation (24.75 percent) and La Generale des Carrieres
et des Mines, which is wholly owned by the Government
of
the DRC (17.5 percent). We are responsible for funding 70 percent of
project development costs and, at our joint venture partner’s election, we are
also responsible for financing our partner’s share of project overruns of more
than 25 percent of the feasibility study cost estimates.
In
February 2008, we received a letter from the Ministry of Mines, Government of
the Democratic Republic of Congo, seeking our comment on proposed material
modifications to our mining contract for the Tenke Fungurume concession,
including the amount of transfer payments payable to the government, the
government’s percentage ownership and involvement in the management of the mine,
regularization of certain matters under Congolese law and the implementation of
social plans. Our mining contract was negotiated transparently and approved
by the Government of the DRC following extended negotiations, and we believe it
complies with Congolese law and is enforceable without modifications. We are
currently working cooperatively with the Ministry of Mines to resolve these
matters while continuing with our project development activities.
The
Tenke Fungurume deposits are sediment-hosted copper/cobalt deposits with
leachable oxide, mixed oxide-sulfide and sulfide mineralization. The dominant
oxide minerals are malachite, pseudomalachite and heterogenite. Important
sulfide minerals consist of bornite, carrollite, chalcocite and
chalcopyrite.
Copper
and cobalt will be recovered through an agitation-leach plant capable of
processing 8,000 metric tons of ore per day. Operations are expected to begin in
2009 with average annual production of approximately 250 million pounds of
copper (approximately 144 million pounds for our share) and 18 million pounds of
cobalt (approximately 10 million pounds for our share). The current fleet
includes 28 five-cubic meter front-end loaders, 28 45-metric ton haul
trucks, surface miners, production drills, sampling machines and crawler
dozers.
Tenke
Fungurume is located in a tropical region; however, temperatures are moderated
by its higher altitudes. Weather in this region is characterized by a dry season
and a wet season, each lasting about six months, and average rainfall is 47
inches per year. The highest bench elevation is expected to be 1,480 meters
above sea level, and the ultimate pit bottom is expected to be 1,270 meters
above sea level. The Tenke Fungurume deposits are located within four
concessions totaling 394,455 acres of mining claims.
Tenke
Fungurume has entered into long-term power supply and infrastructure funding
agreements with La Societe Nationale d’Electricite (SNEL), the state-owned
electric utility company serving the region. The results of a recent water
exploration program, as well as the regional geological and hydro-geological
conditions, indicate that adequate water will be available for the expected life
of the operation.
ATLANTIC
COPPER AND PT SMELTING
Atlantic
Copper,
S.A. We own 100 percent of Atlantic Copper, a copper smelter located
in Huelva, Spain. Atlantic Copper completed the last expansion of its production
capacity in 1997 and the design capacity of its smelter is 290,000 metric tons
of copper per year and its refinery currently has a nominal capacity of 260,000
metric tons of copper per year. We have no present plans to expand Atlantic
Copper’s production capacity.
During
2007, Atlantic Copper treated 952,300 metric tons of concentrate and scrap and
produced 256,100 metric tons of new copper anodes and 243,600 metric tons of
copper cathodes. During 2006, Atlantic Copper treated 953,700 metric tons of
concentrate and scrap and produced 263,700 metric tons of new copper anodes and
235,400 metric tons of copper cathodes. In June 2007, Atlantic Copper completed
a scheduled 23-day maintenance turnaround. Major maintenance turnarounds
typically occur approximately every 12 years for Atlantic Copper, with
significantly shorter term maintenance turnarounds occurring in the interim. The
next scheduled maintenance activity at Atlantic Copper is in 2011.
Atlantic
Copper purchased approximately 43 percent of its 2007 concentrate requirements
from PT Freeport Indonesia at market prices. Atlantic Copper has experienced
no significant operating problems, and we are not aware of any potential
material environmental liabilities at Atlantic Copper.
We made no capital contributions to Atlantic Copper
from 2005 through 2007; however, we contributed
$202
million to Atlantic Copper in 2004. In addition, we loaned $190 million to
Atlantic Copper in 2004. The funds were used to improve Atlantic Copper’s
financial structure during its 2004 major maintenance turnaround and during a
period of extremely low treatment and refining charge rates. Our net investment
in Atlantic Copper through December 31, 2007, was approximately $139
million.
PT
Smelting. PT
Freeport Indonesia’s Contract of Work required us to construct or cause to be
constructed a smelter in Indonesia if we and the Indonesian government
determined that such a project would be economically viable. In 1995, following
the completion of a feasibility study, we entered into agreements relating to
the formation of PT Smelting and the construction of the copper smelter in
Gresik, Indonesia.
PT
Smelting is a joint venture among PT Freeport Indonesia, Mitsubishi Materials
Corporation, Mitsubishi Corporation and Nippon Mining & Metals Co., Ltd.,
which own 25 percent, 60.5 percent, 9.5 percent and 5 percent, respectively, of
the outstanding PT Smelting common stock. In accordance with the joint venture
agreements, PT Freeport Indonesia provides the majority of PT Smelting’s
copper concentrate requirements. In December 2003, PT Smelting’s shareholder
agreement was amended to eliminate PT Freeport Indonesia’s assignment of its
earnings in PT Smelting to support a 13 percent cumulative annual return to the
other owners for the first 20 years of operations. PT Freeport Indonesia’s total
investment in PT Smelting through December 31, 2007, was $101
million.
During
2007, PT Smelting treated 976,300 metric tons of concentrate and produced
277,100 metric tons of new copper anodes and 256,900 metric tons of copper
cathodes. During 2006, PT Smelting treated 737,500 metric tons of concentrate
and produced 201,200 metric tons of new copper anodes and 217,600 metric tons of
copper cathodes. Higher volumes in 2007, compared to 2006, primarily reflect a
22-day maintenance turnaround in the second quarter of 2006 and PT Smelting’s
temporary suspension of operations beginning in October 2006 and ending in
mid-December 2006 following an equipment failure at the oxygen plant supplying
the smelter. Major maintenance turnarounds typically occur approximately every
four years for PT Smelting, with significantly shorter term maintenance
turnarounds in the interim. We have a 25-day maintenance turnaround scheduled
for May 2008. PT Smelting’s production capacity is approximately 275,000 metric
tons. We are not aware of any potential material environmental liabilities at PT
Smelting.
PRODUCTION
DATA
COPPER, Pro
Forma
|
|
Years
Ended December 31,
|
|
(millions
of recoverable pounds)
|
|
2007a
|
|
2006a
|
|
2005a
|
|
2004a
|
|
2003a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINED COPPER (FCX’s net
interest in %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morenci
(85%)
|
|
687
|
b
|
|
693
|
b
|
|
680
|
b
|
|
715
|
b
|
|
715
|
b
|
Bagdad
(100%)
|
|
202
|
|
|
165
|
|
|
201
|
|
|
220
|
|
|
214
|
|
Sierrita
(100%)
|
|
150
|
|
|
162
|
|
|
158
|
|
|
155
|
|
|
151
|
|
Chino
(100%)
|
|
190
|
|
|
186
|
|
|
210
|
|
|
183
|
|
|
55
|
|
Tyrone
(100%)
|
|
50
|
|
|
64
|
|
|
81
|
|
|
86
|
|
|
114
|
|
Miami
(100%)
|
|
20
|
|
|
19
|
|
|
25
|
|
|
20
|
|
|
36
|
|
Tohono
(100%)
|
|
3
|
|
|
5
|
|
|
5
|
|
|
-
|
|
|
-
|
|
Safford
(100%)
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
(100%)
|
|
17
|
|
|
11
|
|
|
5
|
|
|
5
|
|
|
11
|
|
Total
North America
|
|
1,320
|
c
|
|
1,305
|
|
|
1,365
|
|
|
1,384
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cerro
Verde (53.56%)
|
|
594
|
|
|
222
|
|
|
206
|
|
|
195
|
|
|
193
|
|
Candelaria
(80%)
|
|
399
|
|
|
374
|
|
|
359
|
|
|
441
|
|
|
469
|
|
Ojos
del Salado (80%)
|
|
54
|
|
|
55
|
|
|
62
|
|
|
20
|
|
|
-
|
|
El
Abra (51%)
|
|
366
|
|
|
482
|
|
|
464
|
|
|
481
|
|
|
499
|
|
Total
South America
|
|
1,413
|
c
|
|
1,133
|
|
|
1,091
|
|
|
1,137
|
|
|
1,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grasberg
(90.64%)
|
|
1,151
|
d
|
|
1,201
|
d
|
|
1,456
|
d
|
|
997
|
d
|
|
1,292
|
d
|
Consolidated
basis
|
|
3,884
|
|
|
3,639
|
|
|
3,912
|
|
|
3,518
|
|
|
3,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
minority participants’ share
|
|
653
|
|
|
537
|
|
|
543
|
|
|
512
|
|
|
550
|
|
Net
equity interest
|
|
3,231
|
|
|
3,102
|
|
|
3,369
|
|
|
3,006
|
|
|
3,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOLD, Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(thousands
of recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINED GOLD (FCX’s net
interest in %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America (100%)
|
|
15
|
b
|
|
19
|
b
|
|
17
|
|
|
13
|
|
|
2
|
|
South
America (80%)
|
|
116
|
e
|
|
112
|
|
|
117
|
|
|
122
|
|
|
127
|
|
Indonesia
(90.64%)
|
|
2,198
|
d
|
|
1,732
|
d
|
|
2,789
|
d
|
|
1,456
|
d
|
|
2,463
|
d
|
Consolidated
basis
|
|
2,329
|
|
|
1,863
|
|
|
2,923
|
|
|
1,591
|
|
|
2,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
minority participants’ shares
|
|
229
|
|
|
184
|
|
|
284
|
|
|
160
|
|
|
256
|
|
Net
equity interest
|
|
2,100
|
|
|
1,679
|
|
|
2,639
|
|
|
1,431
|
|
|
2,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MOLYBDENUM, Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions
of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINED MOLYBDENUM (FCX’s
net interest in %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henderson
(100%)
|
|
39
|
f
|
|
37
|
|
|
32
|
|
|
28
|
|
|
22
|
|
By-product
– North America (100%)
|
|
30
|
b
|
|
31
|
b
|
|
30
|
|
|
29
|
|
|
30
|
|
By-product
– Cerro Verde (53.56%)
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consolidated
basis
|
|
70
|
|
|
68
|
|
|
62
|
|
|
57
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Includes
Phelps Dodge’s pre-acquisition results for comparative purposes
only.
|
|
Amounts
are net of Morenci’s 15 percent joint venture partner
interest.
|
|
Includes North
American copper production of 258 million pounds and South American copper
production of 259 million pounds for Phelps Dodge's pre-acquisition
results.
|
d.
|
Amounts
are net of Grasberg’s joint venture partner’s interest, which varies in
accordance with terms of the joint venture
agreement.
|
e.
|
Includes gold
production of 21 thousand ounces for Phelps Dodge's pre-acquisition
results.
|
f.
|
Includes molybdenum
production of 14 million pounds for Phelps Dodge's pre-acquistion
results.
|
SALES
DATA
|
|
Years
Ended December 31,
|
|
COPPER,
Pro Forma (millions of
recoverable pounds)
|
|
2007a
|
|
2006a
|
|
2005a
|
|
2004a
|
|
2003a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINED COPPER (FCX’s net
interest in %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morenci
(85%)
|
|
693
|
b
|
|
692
|
b
|
|
680
|
b
|
|
715
|
b
|
|
716
|
b
|
Bagdad
(100%)
|
|
200
|
|
|
165
|
|
|
209
|
|
|
224
|
|
|
222
|
|
Sierrita
(100%)
|
|
157
|
|
|
161
|
|
|
165
|
|
|
158
|
|
|
159
|
|
Chino
(100%)
|
|
186
|
|
|
186
|
|
|
209
|
|
|
183
|
|
|
52
|
|
Tyrone
(100%)
|
|
53
|
|
|
64
|
|
|
81
|
|
|
86
|
|
|
114
|
|
Miami
(100%)
|
|
24
|
|
|
19
|
|
|
29
|
|
|
22
|
|
|
40
|
|
Tohono
(100%)
|
|
3
|
|
|
5
|
|
|
5
|
|
|
-
|
|
|
-
|
|
Safford
(100%)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
(100%)
|
|
16
|
|
|
11
|
|
|
5
|
|
|
5
|
|
|
13
|
|
Total
North America
|
|
1,332
|
c
|
|
1,303
|
|
|
1,383
|
|
|
1,393
|
|
|
1,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cerro
Verde (53.56%)
|
|
587
|
|
|
214
|
|
|
205
|
|
|
196
|
|
|
191
|
|
Candelaria
(80%)
|
|
393
|
|
|
370
|
|
|
359
|
|
|
446
|
|
|
469
|
|
Ojos
del Salado (80%)
|
|
54
|
|
|
55
|
|
|
62
|
|
|
21
|
|
|
-
|
|
El
Abra (51%)
|
|
365
|
|
|
487
|
|
|
467
|
|
|
482
|
|
|
503
|
|
Total
South America
|
|
1,399
|
c
|
|
1,126
|
|
|
1,093
|
|
|
1,145
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grasberg
(90.64%)
|
|
1,131
|
d
|
|
1,201
|
d
|
|
1,457
|
d
|
|
992
|
d
|
|
1,296
|
d
|
Consolidated
basis
|
|
3,862
|
|
|
3,630
|
|
|
3,933
|
|
|
3,530
|
|
|
3,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
minority participants’ share
|
|
647
|
|
|
535
|
|
|
545
|
|
|
513
|
|
|
550
|
|
Net
equity interest
|
|
3,215
|
|
|
3,095
|
|
|
3,388
|
|
|
3,017
|
|
|
3,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
sales from mines
|
|
3,862
|
|
|
3,630
|
|
|
3,933
|
|
|
3,530
|
|
|
3,775
|
|
Purchased
copper
|
|
650
|
|
|
736
|
|
|
821
|
|
|
866
|
|
|
749
|
|
Total
consolidated sales
|
|
4,512
|
|
|
4,366
|
|
|
4,754
|
|
|
4,396
|
|
|
4,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
realized price per pound
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding
hedging
|
|
$3.28
|
|
|
$3.06
|
|
|
$1.76
|
|
|
$1.33
|
|
|
$0.82
|
|
Including
hedging
|
|
$3.23
|
e
|
|
$2.79
|
e
|
|
$1.67
|
e
|
|
$1.33
|
|
|
$0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOLD, Pro Forma (thousands of recoverable
ounces)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINED GOLD (FCX’s net
interest in %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America (100%)
|
|
21
|
b
|
|
19
|
b
|
|
18
|
|
|
12
|
|
|
7
|
|
South
America (80%)
|
|
114
|
f
|
|
111
|
|
|
117
|
|
|
122
|
|
|
127
|
|
Indonesia
(90.64%)
|
|
2,185
|
d
|
|
1,736
|
d
|
|
2,790
|
d
|
|
1,443
|
d
|
|
2,470
|
d
|
Consolidated
|
|
2,320
|
|
|
1,866
|
|
|
2,925
|
|
|
1,577
|
|
|
2,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
minority participants’ shares
|
|
228
|
|
|
185
|
|
|
285
|
|
|
159
|
|
|
257
|
|
Net
|
|
2,092
|
|
|
1,681
|
|
|
2,640
|
|
|
1,418
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
sales from mines
|
|
2,320
|
|
|
1,866
|
|
|
2,925
|
|
|
1,577
|
|
|
2,604
|
|
Purchased
gold
|
|
6
|
|
|
12
|
|
|
12
|
|
|
20
|
|
|
35
|
|
Total
consolidated sales
|
|
2,326
|
|
|
1,878
|
|
|
2,937
|
|
|
1,597
|
|
|
2,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
realized price per ounce
|
|
$681.80
|
|
|
$566.11
|
g
|
|
$453.80
|
|
|
$410.85
|
|
|
$364.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MOLYBDENUM,
Pro Forma (millions of recoverable
pounds)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINED
MOYBDENUM - Consolidated basis
|
|
69
|
h
|
|
69
|
|
|
60
|
|
|
63
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
molybdenum
|
|
9
|
|
|
8
|
|
|
13
|
|
|
13
|
|
|
8
|
|
Total
consolidated sales
|
|
78
|
|
|
77
|
|
|
73
|
|
|
76
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
realized price per pound
|
|
$25.87
|
|
|
$21.87
|
|
|
$25.89
|
|
|
$12.71
|
|
|
$5.78
|
|
a.
|
Includes
Phelps Dodge’s pre-acquisition results for comparative purposes
only. |
b.
|
Amounts
are net of Morenci’s joint venture partner’s 15 percent
interest.
|
c.
|
Includes
North American copper sales of 283 million pounds and South American
copper sales of 222 million pounds for Phelps Dodge’s pre-acquisition
results.
|
d.
|
Amounts
are net of Grasberg’s joint venture partner’s interest, which varies in
accordance with terms of the joint venture
agreement.
|
e.
|
Includes
the impact of hedging losses related to copper price protection
programs.
|
f.
|
Includes
gold sales of 18 thousand ounces for Phelps Dodge’s pre-acquisition
results.
|
g.
|
Amount
was approximately $606 per ounce before a loss on redemption of FCX’s
Gold-Denominated Preferred Stock, Series
II.
|
h.
|
Includes
molybdenum sales of 17 million pounds for Phelps Dodge’s pre-acquisition
results.
|
Ore
Reserves
Recoverable
proven and probable reserves shown below have been calculated as of December 31,
2007, in accordance with Industry Guide 7 as required by the Securities and
Exchange Act of 1934. Proven and probable reserves may not be comparable to
similar information regarding mineral reserves disclosed in accordance with the
guidance of other countries. Recoverable proven and probable reserves were
determined by the use of mapping, drilling, sampling, assaying and evaluation
methods generally applied in the mining industry, as more fully discussed below.
The term “reserve,” as used in the reserve data presented here, means that part
of a mineral deposit which can be economically and legally extracted or produced
at the time of the reserve determination. The term “proven reserves” means
reserves for which (1) quantity is computed from dimensions revealed in
outcrops, trenches, workings or drill holes; (2) grade and/or quality are
computed from the result of detailed sampling; and (3) the sites for inspection,
sampling and measurements are spaced so closely and the geologic character is
sufficiently defined that size, shape, depth and mineral content of reserves are
well established. The term “probable reserves” means reserves for which quantity
and grade are computed from information similar to that used for proven reserves
but the sites for sampling are farther apart or are otherwise less adequately
spaced. The degree of assurance, although lower than that for proven reserves,
is high enough to assume continuity between points of observation.
Our
reserve estimates are based on the latest available geological and geotechnical
studies. We conduct ongoing studies of our ore bodies to optimize economic
values and to manage risk. We revise our mine plans and estimates of recoverable
proven and probable mineral reserves as required in accordance with the latest
available studies. Estimated recoverable proven and probable reserves were
assessed using long-term average prices of $1.20 per pound for copper, $450 per
ounce for gold, $6.50 per pound for molybdenum, $7.50 per ounce for silver and
$12.00 per pound for cobalt, along with near-term price forecasts reflective of
the current price environment. The London spot metal prices for the past three
years averaged $2.65 per pound for copper and $582 per ounce for gold, and the
Metals
Week Molybdenum Dealer Oxide price averaged $28.90 per pound for
molybdenum.
|
|
Recoverable
Proven and Probable Reserves at December 31, 2007
|
|
|
|
Copper
|
|
Gold
|
|
Molybdenum
|
|
Silver
|
|
Cobalt
|
|
|
|
(billions
of lbs)
|
|
(millions
of ozs)
|
|
(billions
of lbs)
|
|
(millions
of ozs)
|
|
(billions
of lbs)
|
|
North
America
|
|
25.8
|
|
0.2
|
|
1.8
|
|
40.3
|
|
-
|
|
South
America
|
|
26.0
|
|
1.4
|
|
0.2
|
|
61.7
|
|
-
|
|
Indonesia
|
|
37.1
|
|
39.4
|
|
-
|
|
128.9
|
|
-
|
|
Africa
|
|
4.3
|
|
-
|
|
-
|
|
-
|
|
0.6
|
|
Consolidated
basisa
|
|
93.2
|
|
41.0
|
|
2.0
|
|
230.9
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
equity interestb
|
|
77.0
|
|
37.0
|
|
1.9
|
|
196.1
|
|
0.3
|
|
a.
|
Consolidated
basis reserves represent estimated metal quantities after reduction for
joint venture partner interests at the Morenci mine in North America and
at the Grasberg minerals district in
Indonesia.
|
b.
|
Net
equity interest represents our net ownership interest (i.e., estimated
consolidated reserves further reduced for minority
interests).
|
Recoverable Proven and
Probable Reserves
|
Estimated at December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Proven
Reserves
|
|
Probable
Reserves
|
|
|
|
|
|
|
Average
Ore Grade
|
|
|
|
Average
Ore Grade
|
|
|
Processing
Method
|
|
Million
metric
tons
|
|
Copper
%
|
|
Gold
g/t
|
|
Moly
%
|
|
Silver
g/t
|
|
Cobalt
%
|
|
Million
metric
tons
|
|
Copper
%
|
|
Gold
g/t
|
|
Moly
%
|
|
Silver
g/t
|
|
Cobalt
%
|
North
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morenci
|
|
Mill
|
|
224
|
|
0.53
|
|
-
|
|
0.022
|
|
-
|
|
-
|
|
11
|
|
0.55
|
|
-
|
|
0.022
|
|
-
|
|
-
|
|
|
Crushed
leach
|
|
446
|
|
0.56
|
|
-
|
|
-
|
|
-
|
|
-
|
|
23
|
|
0.52
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
ROM
leach
|
|
2,014
|
|
0.19
|
|
-
|
|
-
|
|
-
|
|
-
|
|
100
|
|
0.18
|
|
-
|
|
-
|
|
-
|
|
-
|
Bagdad
|
|
Mill
|
|
548
|
|
0.35
|
|
0.004
|
|
0.022
|
|
1.14
|
|
-
|
|
42
|
|
0.30
|
|
0.004
|
|
0.022
|
|
1.14
|
|
-
|
|
|
ROM
leach
|
|
220
|
|
0.12
|
|
-
|
|
-
|
|
-
|
|
-
|
|
18
|
|
0.12
|
|
-
|
|
-
|
|
-
|
|
-
|
Chino
|
|
Mill
|
|
44
|
|
0.65
|
|
0.034
|
|
0.018
|
|
0.48
|
|
-
|
|
12
|
|
0.57
|
|
0.034
|
|
0.010
|
|
0.48
|
|
-
|
|
|
ROM
leach
|
|
88
|
|
0.46
|
|
-
|
|
-
|
|
-
|
|
-
|
|
20
|
|
0.37
|
|
-
|
|
-
|
|
-
|
|
-
|
Cobrea
|
|
ROM
leach
|
|
74
|
|
0.41
|
|
-
|
|
-
|
|
-
|
|
-
|
|
3
|
|
0.33
|
|
-
|
|
-
|
|
-
|
|
-
|
Miami
|
|
ROM
leach
|
|
86
|
|
0.40
|
|
-
|
|
-
|
|
-
|
|
-
|
|
16
|
|
0.36
|
|
-
|
|
-
|
|
-
|
|
-
|
Safford
|
|
Crushed
leach
|
|
258
|
|
0.46
|
|
-
|
|
-
|
|
-
|
|
-
|
|
187
|
|
0.31
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
ROM
leach
|
|
34
|
|
0.22
|
|
-
|
|
-
|
|
-
|
|
-
|
|
70
|
|
0.20
|
|
-
|
|
-
|
|
-
|
|
-
|
Sierrita
|
|
Mill
|
|
984
|
|
0.26
|
|
0.003
|
|
0.030
|
|
1.03
|
|
-
|
|
69
|
|
0.23
|
|
0.003
|
|
0.025
|
|
1.03
|
|
-
|
|
|
ROM
leach
|
|
6
|
|
0.18
|
|
-
|
|
-
|
|
-
|
|
-
|
|
3
|
|
0.18
|
|
-
|
|
-
|
|
-
|
|
-
|
Tyrone
|
|
ROM
leach
|
|
150
|
|
0.34
|
|
-
|
|
-
|
|
-
|
|
-
|
|
41
|
|
0.24
|
|
-
|
|
-
|
|
-
|
|
-
|
Henderson
|
|
Mill
|
|
116
|
|
-
|
|
-
|
|
0.193
|
|
-
|
|
-
|
|
6
|
|
-
|
|
-
|
|
0.187
|
|
-
|
|
-
|
Climaxa
|
|
Mill
|
|
63
|
|
-
|
|
-
|
|
0.201
|
|
-
|
|
-
|
|
102
|
|
-
|
|
-
|
|
0.142
|
|
-
|
|
-
|
|
|
|
|
5,355
|
|
0.29
|
|
0.001
|
|
0.015
|
|
0.31
|
|
-
|
|
723
|
|
0.23
|
|
0.001
|
|
0.026
|
|
0.17
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cerro
Verde
|
|
Mill
|
|
405
|
|
0.53
|
|
-
|
|
0.016
|
|
2.00
|
|
-
|
|
1,051
|
|
0.41
|
|
-
|
|
0.013
|
|
2.00
|
|
-
|
|
|
Crushed
leach
|
|
122
|
|
0.54
|
|
-
|
|
-
|
|
-
|
|
-
|
|
130
|
|
0.41
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
ROM
leach
|
|
27
|
|
0.32
|
|
-
|
|
-
|
|
-
|
|
-
|
|
30
|
|
0.26
|
|
-
|
|
-
|
|
-
|
|
-
|
Candelaria
|
|
Mill
|
|
339
|
|
0.59
|
|
0.132
|
|
-
|
|
2.16
|
|
-
|
|
21
|
|
0.64
|
|
0.146
|
|
-
|
|
2.39
|
|
-
|
Ojos
del Salado
|
|
Mill
|
|
4
|
|
1.25
|
|
0.286
|
|
-
|
|
2.61
|
|
-
|
|
3
|
|
0.99
|
|
0.286
|
|
-
|
|
2.61
|
|
-
|
El
Abra
|
|
Crushed
leach
|
|
507
|
|
0.54
|
|
-
|
|
-
|
|
-
|
|
-
|
|
149
|
|
0.51
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
ROM
leach
|
|
318
|
|
0.31
|
|
-
|
|
-
|
|
-
|
|
-
|
|
227
|
|
0.29
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
1,722
|
|
0.50
|
|
0.027
|
|
0.004
|
|
0.90
|
|
-
|
|
1,611
|
|
0.40
|
|
0.003
|
|
0.009
|
|
1.34
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grasberg
open pit
|
|
Mill
|
|
147
|
|
1.01
|
|
1.280
|
|
-
|
|
2.54
|
|
-
|
|
286
|
|
0.84
|
|
0.830
|
|
-
|
|
2.11
|
|
-
|
DOZ/ESZ
|
|
Mill
|
|
107
|
|
0.70
|
|
0.701
|
|
-
|
|
3.40
|
|
-
|
|
177
|
|
0.62
|
|
0.711
|
|
-
|
|
2.84
|
|
-
|
Grasberg
block cavea
|
|
Mill
|
|
275
|
|
1.20
|
|
1.204
|
|
-
|
|
3.78
|
|
-
|
|
708
|
|
1.01
|
|
0.715
|
|
-
|
|
3.15
|
|
-
|
Kucing
Liara
|
|
Mill
|
|
167
|
|
1.20
|
|
1.090
|
|
-
|
|
6.45
|
|
-
|
|
401
|
|
1.17
|
|
1.038
|
|
-
|
|
5.59
|
|
-
|
MLZ/DMLZa
|
|
Mill
|
|
67
|
|
1.09
|
|
0.822
|
|
-
|
|
5.17
|
|
-
|
|
325
|
|
1.00
|
|
0.811
|
|
-
|
|
4.91
|
|
-
|
Big
Gossana
|
|
Mill
|
|
9
|
|
2.48
|
|
1.140
|
|
-
|
|
14.55
|
|
-
|
|
44
|
|
2.27
|
|
1.092
|
|
-
|
|
14.79
|
|
-
|
|
|
|
|
772
|
|
1.10
|
|
1.090
|
|
-
|
|
4.31
|
|
-
|
|
1,941
|
|
1.01
|
|
0.823
|
|
-
|
|
4.03
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenke
Fungurumea
|
|
Agitation
leach
|
|
56
|
|
2.11
|
|
-
|
|
-
|
|
-
|
|
0.357
|
|
44
|
|
2.47
|
|
-
|
|
-
|
|
-
|
|
0.301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
7,905
|
|
0.43
|
|
0.113
|
|
0.011
|
|
0.83
|
|
0.003
|
|
4,319
|
|
0.67
|
|
0.371
|
|
0.008
|
|
2.34
|
|
0.003
|
|
a. Undeveloped
reserves requiring significant capital investment to bring into
production.
|
The
reserve table above and the tables on pages 27 to 31 and 34 utilize the
following abbreviations:
·
|
g/t
– grams per metric ton
|
·
|
DOZ/ESZ
– Deep Ore Zone/Ertsberg Stockwork Zone. In prior years these ore bodies
were shown separately.
|
·
|
MLZ/DMLZ
– Mill Level Zone/Deep Mill Level Zone. In prior years these ore bodies
were shown separately.
|
Recoverable Proven and
Probable Reserves
|
Estimated at December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Ore Grade
|
|
Recoveries
|
|
|
Processing
Method
|
|
Proven
and Probable
Million
Metric
tons
|
|
Copper
%
|
|
Gold
g/t
|
|
Moly
%
|
|
Silver
g/t
|
|
Cobalt
%
|
|
Copper
%
|
|
Gold
%
|
|
Moly
%
|
|
Silver
%
|
|
Cobalt
%
|
North
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morenci
|
|
Mill
|
|
235
|
|
0.53
|
|
-
|
|
0.022
|
|
-
|
|
-
|
|
78.5
|
|
-
|
|
29.7
|
|
-
|
|
-
|
|
|
Crushed
leach
|
|
469
|
|
0.56
|
|
-
|
|
-
|
|
-
|
|
-
|
|
76.7
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
ROM
leach
|
|
2,114
|
|
0.19
|
|
-
|
|
-
|
|
-
|
|
-
|
|
41.7
|
|
-
|
|
-
|
|
-
|
|
-
|
Bagdad
|
|
Mill
|
|
590
|
|
0.35
|
|
0.004
|
|
0.022
|
|
1.14
|
|
-
|
|
84.8
|
|
60.0
|
|
72.3
|
|
70.0
|
|
-
|
|
|
ROM
leach
|
|
238
|
|
0.12
|
|
-
|
|
-
|
|
-
|
|
-
|
|
27.3
|
|
-
|
|
-
|
|
-
|
|
-
|
Chino
|
|
Mill
|
|
56
|
|
0.63
|
|
0.034
|
|
0.016
|
|
0.48
|
|
-
|
|
78.2
|
|
77.9
|
|
37.0
|
|
77.9
|
|
-
|
|
|
ROM
leach
|
|
108
|
|
0.44
|
|
-
|
|
-
|
|
-
|
|
-
|
|
61.9
|
|
-
|
|
-
|
|
-
|
|
-
|
Cobre
|
|
ROM
leach
|
|
77
|
|
0.40
|
|
-
|
|
-
|
|
-
|
|
-
|
|
66.9
|
|
-
|
|
-
|
|
-
|
|
-
|
Miami
|
|
ROM
leach
|
|
102
|
|
0.39
|
|
-
|
|
-
|
|
-
|
|
-
|
|
60.1
|
|
-
|
|
-
|
|
-
|
|
-
|
Safford
|
|
Crushed
leach
|
|
445
|
|
0.40
|
|
-
|
|
-
|
|
-
|
|
-
|
|
67.6
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
ROM
leach
|
|
104
|
|
0.21
|
|
-
|
|
-
|
|
-
|
|
-
|
|
19.6
|
|
-
|
|
-
|
|
-
|
|
-
|
Sierrita
|
|
Mill
|
|
1,053
|
|
0.26
|
|
0.003
|
|
0.030
|
|
1.03
|
|
-
|
|
85.4
|
|
60.0
|
|
84.7
|
|
70.0
|
|
-
|
|
|
ROM
leach
|
|
9
|
|
0.18
|
|
-
|
|
-
|
|
-
|
|
-
|
|
49.2
|
|
-
|
|
-
|
|
-
|
|
-
|
Tyrone
|
|
ROM
leach
|
|
191
|
|
0.32
|
|
-
|
|
-
|
|
-
|
|
-
|
|
64.6
|
|
-
|
|
-
|
|
-
|
|
-
|
Henderson
|
|
Mill
|
|
122
|
|
-
|
|
-
|
|
0.193
|
|
-
|
|
-
|
|
-
|
|
-
|
|
86.1
|
|
-
|
|
-
|
Climax
|
|
Mill
|
|
165
|
|
-
|
|
-
|
|
0.165
|
|
-
|
|
-
|
|
-
|
|
-
|
|
88.6
|
|
-
|
|
-
|
|
|
|
|
6,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cerro
Verde
|
|
Mill
|
|
1,456
|
|
0.44
|
|
-
|
|
0.014
|
|
2.00
|
|
-
|
|
85.7
|
|
-
|
|
49.1
|
|
40.9
|
|
-
|
|
|
Crushed
leach
|
|
252
|
|
0.47
|
|
-
|
|
-
|
|
-
|
|
-
|
|
79.4
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
ROM
leach
|
|
57
|
|
0.29
|
|
-
|
|
-
|
|
-
|
|
-
|
|
43.2
|
|
-
|
|
-
|
|
-
|
|
-
|
Candelaria
|
|
Mill
|
|
360
|
|
0.59
|
|
0.133
|
|
-
|
|
2.17
|
|
-
|
|
91.1
|
|
79.8
|
|
-
|
|
77.1
|
|
-
|
Ojos
del Salado
|
|
Mill
|
|
7
|
|
1.14
|
|
0.286
|
|
-
|
|
2.61
|
|
-
|
|
90.0
|
|
68.3
|
|
-
|
|
60.1
|
|
-
|
El
Abra
|
|
Crushed
leach
|
|
656
|
|
0.53
|
|
-
|
|
-
|
|
-
|
|
-
|
|
60.5
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
ROM
leach
|
|
545
|
|
0.30
|
|
-
|
|
-
|
|
-
|
|
-
|
|
31.1
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
3,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grasberg
open pit
|
|
Mill
|
|
433
|
|
0.89
|
|
0.983
|
|
-
|
|
2.25
|
|
-
|
|
83.9
|
|
82.5
|
|
-
|
|
43.3
|
|
-
|
DOZ/ESZ
|
|
Mill
|
|
284
|
|
0.65
|
|
0.707
|
|
-
|
|
3.05
|
|
-
|
|
83.8
|
|
75.6
|
|
-
|
|
55.0
|
|
-
|
Grasberg
block cave
|
|
Mill
|
|
983
|
|
1.06
|
|
0.852
|
|
-
|
|
3.33
|
|
-
|
|
85.1
|
|
68.0
|
|
-
|
|
59.6
|
|
-
|
Kucing
Liar
|
|
Mill
|
|
568
|
|
1.18
|
|
1.054
|
|
-
|
|
5.84
|
|
-
|
|
85.8
|
|
47.2
|
|
-
|
|
38.9
|
|
-
|
MLZ/DMLZ
|
|
Mill
|
|
392
|
|
1.01
|
|
0.813
|
|
-
|
|
4.95
|
|
-
|
|
84.6
|
|
75.6
|
|
-
|
|
62.5
|
|
-
|
Big
Gossan
|
|
Mill
|
|
53
|
|
2.31
|
|
1.100
|
|
-
|
|
14.75
|
|
-
|
|
90.9
|
|
67.2
|
|
-
|
|
63.3
|
|
-
|
|
|
|
|
2,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenke
Fungurume
|
|
Agitation
leach
|
|
100
|
|
2.26
|
|
-
|
|
-
|
-
|
-
|
|
0.332
|
|
87.2
|
|
-
|
|
-
|
-
|
-
|
|
80.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
12,224
|
|
0.51
|
|
0.204
|
|
0.010
|
|
1.362
|
|
0.003
|
|
69.8
|
|
66.3
|
|
64.6
|
|
56.1
|
|
80.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable Proven and
Probable Reserves
|
Estimated at December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable
Reserves
|
|
|
FCX’s
Interest
|
|
Processing
Method
|
|
Copper
billion
lbs.
|
|
Gold
million
ozs.
|
|
Moly
billion
lbs.
|
|
Silver
million
ozs.
|
|
Cobalt
billion
lbs.
|
North
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morenci
|
|
85%
|
|
Mill
|
|
2.1
|
|
-
|
|
0.1
|
|
-
|
|
-
|
|
|
|
|
Crushed
leach
|
|
4.4
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
ROM
leach
|
|
3.7
|
|
-
|
|
-
|
|
-
|
|
-
|
Bagdad
|
|
100%
|
|
Mill
|
|
3.8
|
|
0.1
|
|
0.2
|
|
15.2
|
|
-
|
|
|
|
|
ROM
leach
|
|
0.2
|
|
-
|
|
-
|
|
-
|
|
-
|
Chino
|
|
100%
|
|
Mill
|
|
0.6
|
|
-
|
|
-
|
|
0.7
|
|
-
|
|
|
|
|
ROM
leach
|
|
0.7
|
|
-
|
|
-
|
|
-
|
|
-
|
Cobre
|
|
100%
|
|
ROM
leach
|
|
0.5
|
|
-
|
|
-
|
|
-
|
|
-
|
Miami
|
|
100%
|
|
ROM
leach
|
|
0.5
|
|
-
|
|
-
|
|
-
|
|
-
|
Safford
|
|
100%
|
|
Crushed
leach
|
|
2.6
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
ROM
leach
|
|
0.1
|
|
-
|
|
-
|
|
-
|
|
-
|
Sierrita
|
|
100%
|
|
Mill
|
|
5.1
|
|
0.1
|
|
0.6
|
|
24.4
|
|
-
|
|
|
|
|
ROM
leach
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Tyrone
|
|
100%
|
|
ROM
leach
|
|
0.9
|
|
-
|
|
-
|
|
-
|
|
-
|
Henderson
|
|
100%
|
|
Mill
|
|
-
|
|
-
|
|
0.4
|
|
-
|
|
-
|
Climax
|
|
100%
|
|
Mill
|
|
-
|
|
-
|
|
0.5
|
|
-
|
|
-
|
|
|
|
|
|
|
25.2
|
|
0.2
|
|
1.8
|
|
40.3
|
|
-
|
Recoverable
metal in stockpiles
|
|
|
|
2.2
|
|
-
|
|
-
|
|
-
|
|
-
|
100%
operations
|
|
|
|
27.4
|
|
0.2
|
|
1.8
|
|
40.3
|
|
-
|
Consolidated
basisa
|
|
|
|
25.8
|
|
0.2
|
|
1.8
|
|
40.3
|
|
-
|
Net
equity interestb
|
|
|
|
25.8
|
|
0.2
|
|
1.8
|
|
40.3
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cerro
Verde
|
|
53.56%
|
|
Mill
|
|
12.1
|
|
-
|
|
0.2
|
|
38.3
|
|
-
|
|
|
|
|
Crushed
leach
|
|
2.1
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
ROM
leach
|
|
0.1
|
|
-
|
|
-
|
|
-
|
|
-
|
Candelaria
|
|
80%
|
|
Mill
|
|
4.3
|
|
1.2
|
|
-
|
|
19.4
|
|
-
|
Ojos
del Salado
|
|
80%
|
|
Mill
|
|
0.2
|
|
-
|
|
-
|
|
0.4
|
|
-
|
El
Abra
|
|
51%
|
|
Crushed
leach
|
|
4.7
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
ROM
leach
|
|
1.1
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
24.6
|
|
1.2
|
|
0.2
|
|
58.1
|
|
-
|
Recoverable
metal in stockpiles
|
|
|
|
1.4
|
|
0.2
|
|
-
|
|
3.6
|
|
-
|
100%
operations
|
|
|
|
26.0
|
|
1.4
|
|
0.2
|
|
61.7
|
|
-
|
Consolidated
basisa
|
|
|
|
26.0
|
|
1.4
|
|
0.2
|
|
61.7
|
|
-
|
Net
equity interestb
|
|
|
|
15.0
|
|
1.1
|
|
0.1
|
|
38.9
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grasberg
open pit
|
|
(c)
|
|
Mill
|
|
7.2
|
|
11.2
|
|
-
|
|
13.6
|
|
-
|
DOZ/ESZ
|
|
(c)
|
|
Mill
|
|
3.4
|
|
4.9
|
|
-
|
|
15.3
|
|
-
|
Grasberg
block cave
|
|
(c)
|
|
Mill
|
|
19.6
|
|
18.3
|
|
-
|
|
62.7
|
|
-
|
Kucing
Liar
|
|
(c)
|
|
Mill
|
|
12.7
|
|
9.1
|
|
-
|
|
41.5
|
|
-
|
MLZ/DMLZ
|
|
(c)
|
|
Mill
|
|
7.4
|
|
7.7
|
|
-
|
|
39.1
|
|
-
|
Big
Gossan
|
|
(c)
|
|
Mill
|
|
2.4
|
|
1.3
|
|
-
|
|
15.8
|
|
-
|
|
|
|
|
|
|
52.7
|
|
52.5
|
|
-
|
|
188.0
|
|
-
|
Recoverable
metal in stockpiles
|
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
100%
operations
|
|
|
|
52.7
|
|
52.5
|
|
-
|
|
188.0
|
|
-
|
Consolidated
basisa
|
|
|
|
37.1
|
|
39.4
|
|
-
|
|
128.9
|
|
-
|
Net
equity interestb
|
|
|
|
33.7
|
|
35.7
|
|
-
|
|
116.9
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenke
Fungurume
|
|
57.75%
|
|
Agitation
leach
|
4.3
|
|
-
|
|
-
|
|
-
|
|
0.6
|
100%
operations
|
|
|
|
4.3
|
|
-
|
|
-
|
|
-
|
|
0.6
|
Consolidated
basisa
|
|
|
|
4.3
|
|
-
|
|
-
|
|
-
|
|
0.6
|
Net
interestb
|
|
|
|
2.5
|
|
-
|
|
-
|
|
-
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
– 100% operations
|
|
|
|
110.4
|
|
54.1
|
|
2.0
|
|
290.0
|
|
0.6
|
TOTAL
– Consolidated basisa
|
|
|
|
93.2
|
|
41.0
|
|
2.0
|
|
230.9
|
|
0.6
|
TOTAL
– Net equity interestb
|
|
|
|
77.0
|
|
37.0
|
|
1.9
|
|
196.1
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. Consolidated
basis represents estimated metal quantities after reduction for joint
venture partner interests at the Morenci mine in North
America
|
and
at the Grasberg mining complex in Indonesia.
|
b. Net equity
interest represents our net ownership interest (i.e., estimated
consolidated reserves further reduced for minority
interests).
|
c. Our
joint venture agreement with Rio Tinto gives us, through 2021, a 60%
interest on a consolidated basis, in certain assets and future
production
|
exceeding
specified annual amounts of copper, gold and silver in Block A, and 100%
of the remaining assets and production. After 2021, we
have
|
a
60% interest in all production from Block A on a consolidated
basis.
|
In
defining our open-pit reserves, we apply an “economic cutoff grade”
strategy. The objective of this strategy is to maximize the net present value of
our operations. We use a break-even cutoff grade to define the insitu
reserves for our underground ore bodies. The break-even cutoff grade is
defined for a metric ton of ore as that equivalent copper grade, once produced
and sold, that generates sufficient revenue to cover all operating and
administrative costs associated with our production.
Our
copper mines may contain other commercially recoverable metals, such as gold,
molybdenum, silver and cobalt. We value all commercially recoverable metals in
terms of a copper equivalent percentage to determine a single break-even cutoff
grade. Copper equivalent percentage is used to express the relative value of
multi-metal ores in terms of one metal. The calculation expresses the relative
value of the ore using estimates of contained metal quantities, metals prices as
used for reserve determination, recovery rates, treatment charges and royalties.
Our molybdenum properties use a molybdenum cutoff grade. The table below shows
the break-even cutoff grade by process for each of our existing ore bodies as of
December 31, 2007:
|
|
Copper
Equivalent Cutoff Grade |
|
Moly
Cutoff Grade
|
|
|
|
|
|
Crushed
or
|
|
ROM
|
|
|
|
|
|
Mill
|
|
Agitation
Leach
|
|
Leach
|
|
Mill
|
|
North
America
|
|
|
|
|
|
|
|
|
|
|
Morenci
|
|
0.25
|
%
|
0.25
|
%
|
0.10
|
%
|
N/A
|
|
|
Bagdad
|
|
0.19
|
|
N/A
|
|
0.05
|
|
N/A
|
|
|
Chino
|
|
0.25
|
|
N/A
|
|
0.11
|
|
N/A
|
|
|
Cobre
|
|
N/A
|
|
N/A
|
|
0.17
|
|
N/A
|
|
|
Miami
|
|
N/A
|
|
N/A
|
|
0.04
|
|
N/A
|
|
|
Safford
|
|
N/A
|
|
0.12
|
|
0.08
|
|
N/A
|
|
|
Sierrita
|
|
0.24
|
|
N/A
|
|
0.04
|
|
N/A
|
|
|
Tyrone
|
|
N/A
|
|
N/A
|
|
0.05
|
|
N/A
|
|
|
Henderson
|
|
N/A
|
|
N/A
|
|
N/A
|
|
0.14
|
%
|
|
Climax
|
|
N/A
|
|
N/A
|
|
N/A
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
Cerro
Verde
|
|
0.21
|
|
0.16
|
|
0.13
|
|
N/A
|
|
|
Candelaria
|
|
0.23
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Ojos
del Salado
|
|
0.88
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
El
Abra
|
|
N/A
|
|
0.19
|
|
0.02
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
Grasberg
open pit
|
|
0.71
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
DOZ/ESZ
|
|
0.72
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Grasberg
block cave
|
|
0.66
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Kucing
Liar
|
|
0.83
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
MLZ/DMLZ
|
|
0.78
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Big
Gossan
|
|
1.42
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
|
|
|
|
|
|
|
|
|
Tenke
Fungurume
|
|
N/A
|
|
1.30
|
|
N/A
|
|
N/A
|
|
Drill
hole spacing data is used by mining professionals, such as mining engineers, in
determining the suitability of data coverage (on a relative basis) in a given
deposit type and mining method scenario so as to achieve a given level of
confidence in the resource estimate. Drill hole spacing is only one of several
criteria necessary to establish resource classification. Drilling programs are
typically designed to achieve an optimum sample spacing to support the level of
confidence in results that apply to a particular stage of development of a
mineral deposit. The following table sets forth the average drill hole spacing
for proven and probable ore reserves by process type:
|
|
|
|
|
Average
Spacing in Meters
|
|
|
|
|
|
Proven
|
|
Probable
|
|
|
Mining
Unit
|
|
Mill
|
|
Leach
|
|
Mill
|
|
Leach
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
|
|
|
|
|
|
|
|
|
Morenci
|
|
Open
Pit
|
|
86
|
|
86
|
|
122
|
|
122
|
|
Bagdad
|
|
Open
Pit
|
|
58
|
|
25
|
|
134
|
|
98
|
|
Chino
|
|
Open
Pit
|
|
43
|
|
86
|
|
86
|
|
122
|
|
Cobre
|
|
Open
Pit
|
|
46
|
|
61
|
|
61
|
|
91
|
|
Miami
|
|
Open
Pit
|
|
N/A
|
|
61
|
|
N/A
|
|
91
|
|
Safford
|
|
Open
Pit
|
|
N/A
|
|
61
|
|
N/A
|
|
122
|
|
Sierrita
|
|
Open
Pit
|
|
68
|
|
41
|
|
106
|
|
76
|
|
Tyrone
|
|
Open
Pit
|
|
N/A
|
|
86
|
|
N/A
|
|
86
|
|
Henderson
|
|
Block
Cave
|
|
38
|
|
N/A
|
|
85
|
|
N/A
|
|
Climax
|
|
Open
Pit
|
|
61
|
|
N/A
|
|
61
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
Cerro
Verde
|
|
Open
Pit
|
|
50
|
|
50
|
|
100
|
|
100
|
|
Candelaria
|
|
Open
Pit
|
|
35
|
|
N/A
|
|
70
|
|
N/A
|
|
Ojos
del Salado
|
|
Block
Cave
|
|
25
|
|
N/A
|
|
50
|
|
N/A
|
|
El
Abra
|
|
Open
Pit
|
|
N/A
|
|
75
|
|
N/A
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
Grasberg
|
|
Open
Pit
|
|
36
|
|
N/A
|
|
92
|
|
N/A
|
|
DOZ/ESZ
|
|
Block
Cave
|
|
20
|
|
N/A
|
|
50
|
|
N/A
|
|
Grasberg
|
|
Block
Cave
|
|
33
|
|
N/A
|
|
98
|
|
N/A
|
|
Kucing
Liar
|
|
Block
Cave
|
|
34
|
|
N/A
|
|
92
|
|
N/A
|
|
Mill
Level Zone
|
|
Block
Cave
|
|
19
|
|
N/A
|
|
60
|
|
N/A
|
|
Deep
Mill Level Zone
|
|
Block
Cave
|
|
21
|
|
N/A
|
|
94
|
|
N/A
|
|
Big
Gossan
|
|
Open
Stope
|
|
13
|
|
N/A
|
|
42
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
|
|
|
|
|
|
|
|
|
Tenke
Fungurume
|
|
Open
Pit
|
|
N/A
|
|
50
|
|
N/A
|
|
100
|
The
following chart illustrates our current plans for sequencing and producing the
December 31, 2007, proven and probable reserves at each of our ore bodies and
the years in which we currently expect production of each ore body to begin and
end. The chart also shows the term of PT Freeport Indonesia’s
Contract of Work. Production volumes are typically lower in the first few years
of each ore body as development activities are ongoing and as the mine ramps up
to full production. The ultimate timing of the start of production from our
undeveloped mines is dependent upon a number of factors, including the results
of our exploration and development efforts, and may vary from the dates shown
below. In addition, we develop our mine plans based on maximizing the net
present value from the ore bodies.
Mill
and Leach Stockpiles
Both
mill and leach stockpiles generally contain lower-grade ores that have been
extracted from the ore body and are available for copper recovery. For mill
stockpiles, recovery is through milling, concentrating, smelting and refining
or, alternatively, by concentrate leaching. For leach stockpiles, recovery is
through exposure to acidic solutions that dissolve contained copper and deliver
it in solution to extraction processing facilities.
Because it is generally impracticable to determine
copper contained in mill and leach stockpiles by physical count, 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, once entered into the
production process, can be extracted into copper concentrate almost
immediately.
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 significantly 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. For newly placed material on active
stockpiles, as much as 70 percent of the copper ultimately recoverable may be
extracted during the first year, and the remaining copper may be recovered over
many years.
Processes
and recovery rates are monitored continuously, and recovery rate estimates are
adjusted periodically as additional information becomes available and as related
technology changes.
Following
are our stockpiles and the estimated recoverable copper contained within those
stockpiles as of December 31, 2007:
Recoverable
Copper in Stockpiles
|
|
|
|
Millions
of Metric Tons
|
|
Average
Grade (%)
|
|
Recovery
Rate (%)
|
|
Recoverable
Copper
(Billions
of Lbs.)
|
Mill
stockpiles
|
|
|
|
|
|
|
|
|
|
Cerro
Verde
|
|
38
|
|
0.55
|
|
81.5
|
|
0.4
|
|
Candelaria
|
|
78
|
|
0.40
|
|
82.5
|
|
0.6
|
|
Subtotal
|
|
116
|
|
0.45
|
|
82.1
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Leach
stockpiles
|
|
|
|
|
|
|
|
|
|
Morenci
|
|
4,127
|
|
0.26
|
|
2.1
|
|
0.5
|
|
Bagdad
|
|
371
|
|
0.29
|
|
4.4
|
|
0.1
|
|
Chino
|
|
1,609
|
|
0.25
|
|
12.9
|
|
1.1
|
|
Miami
|
|
422
|
|
0.39
|
|
1.9
|
|
0.1
|
|
Safford
|
|
7
|
|
0.20
|
|
47.1
|
|
-
|
|
Sierrita
|
|
642
|
|
0.16
|
|
13.5
|
|
0.3
|
|
Tyrone
|
|
922
|
|
0.28
|
|
1.7
|
|
0.1
|
|
Cerro
Verde
|
|
308
|
|
0.55
|
|
2.9
|
|
0.1
|
|
El
Abra
|
|
220
|
|
0.33
|
|
19.1
|
|
0.3
|
|
Subtotal
|
|
8,628
|
|
0.27
|
|
5.1
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
Total
100% basis
|
|
|
|
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
Consolidated
basisa
|
|
|
|
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
Net
equity interestb
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
a. Consolidated
basis represents estimated metal quantities after reduction for joint
venture partner interests at the Morenci mine in North
America.
|
b. Net equity
interest represents our net ownership interest (i.e., estimated
consolidated reserves further reduced for minority
interests).
|
|
Mineralized
Material
We
hold various properties containing mineralized materials that we believe could
be brought into production should market conditions warrant. Mineralized
material is a mineralized body that has been delineated by appropriately spaced
drilling and/or underground sampling to support the reported tonnage and average
metal grades. Such a deposit may not qualify as recoverable 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. Estimated mineralized materials were assessed using
prices of $1.50 per pound of copper, $450 per ounce of gold and $10.00 per pound
of molybdenum. Permitting and significant capital expenditures would likely be
required before operations could commence at these properties. Our estimated
mineralized material as of December 31, 2007, follows:
Mineralized
Material
100%
Basis
Estimated
at December 31, 2007
|
|
|
|
|
Milling
Material
|
|
Leaching
Material
|
|
Total
Mineralized Material
|
|
|
FCX’s
Interest
|
|
Million
metric tons
|
|
Copper
%
|
|
Gold
g/t
|
|
Moly
%
|
|
Million
metric
tons
|
|
Copper
%
|
|
Million
metric tons
|
|
Copper
%
|
|
Gold
g/t
|
|
Moly
%
|
North
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sierrita
|
|
100%
|
|
2,245
|
|
0.21
|
|
-
|
|
0.02
|
|
25
|
|
0.17
|
|
2,270
|
|
0.21
|
|
-
|
|
0.02
|
Morenci
|
|
85%
|
|
336
|
|
0.36
|
|
-
|
|
0.02
|
|
1,172
|
|
0.24
|
|
1,508
|
|
0.27
|
|
-
|
|
0.004
|
Lone
Star
|
|
100%
|
|
-
|
|
|
|
-
|
|
-
|
|
1,451
|
|
0.38
|
|
1,451
|
|
0.38
|
|
-
|
|
-
|
Bagdad
|
|
100%
|
|
834
|
|
0.32
|
|
-
|
|
0.02
|
|
-
|
|
-
|
|
834
|
|
0.32
|
|
-
|
|
0.02
|
Chino
|
|
100%
|
|
232
|
|
0.58
|
|
-
|
|
0.01
|
|
402
|
|
0.30
|
|
634
|
|
0.40
|
|
-
|
|
0.004
|
Ajo
|
|
100%
|
|
352
|
|
0.41
|
|
-
|
|
0.01
|
|
-
|
|
-
|
|
352
|
|
0.41
|
|
-
|
|
0.01
|
Safford
|
|
100%
|
|
211
|
|
0.73
|
|
-
|
|
-
|
|
88
|
|
0.36
|
|
299
|
|
0.62
|
|
-
|
|
-
|
Tyrone
|
|
100%
|
|
-
|
|
-
|
|
-
|
|
-
|
|
287
|
|
0.30
|
|
287
|
|
0.30
|
|
-
|
|
-
|
Tohono
|
|
100%
|
|
135
|
|
0.70
|
|
-
|
|
-
|
|
146
|
|
0.84
|
|
281
|
|
0.77
|
|
-
|
|
-
|
Cochise/Bisbee
|
|
100%
|
|
-
|
|
-
|
|
-
|
|
-
|
|
272
|
|
0.45
|
|
272
|
|
0.45
|
|
-
|
|
-
|
Sanchez
|
|
100%
|
|
-
|
|
-
|
|
-
|
|
-
|
|
209
|
|
0.29
|
|
209
|
|
0.29
|
|
-
|
|
-
|
Miami
|
|
100%
|
|
-
|
|
-
|
|
-
|
|
-
|
|
21
|
|
0.26
|
|
21
|
|
0.26
|
|
-
|
|
-
|
Cobre
|
|
100%
|
|
3
|
|
0.94
|
|
-
|
|
-
|
|
-
|
|
-
|
|
3
|
|
0.94
|
|
-
|
|
-
|
Climax
|
|
100%
|
|
397
|
|
-
|
|
-
|
|
0.17
|
|
-
|
|
-
|
|
397
|
|
-
|
|
-
|
|
0.17
|
Henderson
|
|
100%
|
|
286
|
|
-
|
|
-
|
|
0.12
|
|
-
|
|
-
|
|
286
|
|
-
|
|
-
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
El
Abra
|
|
51%
|
|
330
|
|
0.40
|
|
-
|
|
-
|
|
497
|
|
0.43
|
|
827
|
|
0.42
|
|
-
|
|
-
|
Cerro
Verde
|
|
53.56%
|
|
392
|
|
0.35
|
|
-
|
|
0.01
|
|
30
|
|
0.31
|
|
422
|
|
0.35
|
|
-
|
|
0.01
|
Candelariaa
|
|
80%
|
|
136
|
|
0.44
|
|
0.12
|
|
-
|
|
-
|
|
-
|
|
136
|
|
0.44
|
|
0.12
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grasberg
districtb
|
|
54.38%f
|
|
2,804
|
|
0.57
|
|
0.50
|
|
-
|
|
-
|
|
-
|
|
2,804
|
|
0.57
|
|
0.50
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenke
Fungurumec
|
|
57.75%
|
|
83
|
|
2.98
|
|
-
|
|
-
|
|
44
|
|
2.49
|
|
127
|
|
2.81
|
|
-
|
|
-
|
Total
100% basis
|
|
|
|
8,776
|
|
0.41
|
|
0.16
|
|
0.02
|
|
4,644
|
|
0.37
|
|
13,420
|
|
0.39
|
|
0.11
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated basisd
|
|
|
|
7,605
|
|
0.38
|
|
0.11
|
|
0.02
|
|
4,468
|
|
0.38
|
|
12,073
|
|
0.38
|
|
0.07
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity intereste
|
|
|
|
7,041
|
|
0.37
|
|
0.11
|
|
0.03
|
|
4,192
|
|
0.36
|
|
11,233
|
|
0.36
|
|
0.07
|
|
0.02
|
|
a.
|
Candelaria
stated tonnage also includes 1.7 grams of silver per metric
ton.
|
b.
|
Grasberg
stated tonnage also includes 3.3 grams of silver per metric
ton.
|
c.
|
Tenke
Fungurume stated tonnage also includes 0.30 percent
cobalt.
|
d.
|
Consolidated
basis represents estimated mineralized material after reduction for joint
venture partner interests at the Morenci mine in North America and at the
Grasberg minerals district in
Indonesia.
|
e.
|
Net
equity interest represents our net ownership interest (i.e., estimated
mineralized material further reduced for minority
interests).
|
f.
|
FCX’s
interest in the Grasberg minerals district reflects our 60 percent joint
venture ownership, further reduced by minority
interests.
|
DEVELOPMENT
AND EXPLORATION
Development
Activities. We have significant development activities
recently completed or under way to expand our production capacity, extend our
mine lives and develop large-scale underground ore bodies. Recently
completed or current major projects include:
· the expansion of
the Cerro Verde mill, which reached capacity in the second half of
2007;
· a major new mining
complex at Safford, Arizona, currently ramping up to full
production;
· the restart of a
mill and the completion of a concentrate-leach, direct-electrowinning facility
at Morenci;
· a sulfide leach
project to extend the mine life at El Abra;
· the development of
large-scale, high-grade underground ore bodies in the Grasberg
district;
· development of the
Tenke Fungurume project in the DRC;
·
the
planned restart of our Climax molybdenum mine;
·
the
planned restart of our Miami mine; and
· incremental
expansion projects at Morenci, Bagdad, Sierrita and Cerro
Verde.
The
recently expanded mill at Cerro Verde reached design capacity of 108,000 metric
tons of ore per day in mid-2007. The expansion enables Cerro Verde to produce
approximately 650 to 700 million pounds of copper per year.
The
Safford mining complex in Arizona is substantially complete and commenced
production in late 2007. Safford will produce from two open pits and includes a
SX/EW facility. Total capital expenditures for this project approximated $675
million.
The
concentrate-leach, direct electrowinning facility at Morenci was commissioned in
third-quarter 2007, and is currently ramping up production. The project utilizes
our proprietary medium-temperature, pressure-leaching and direct-electrowinning
technology which will enhance cost savings by processing concentrate on-site
instead of shipping concentrate to smelters for treatment. In addition, the
project included the restart of a mill in the first half of 2007. Mill
throughput adds 115 million pounds of copper production per year, and is running
near capacity of 49,000 metric tons of ore per day. Total capital expenditures
for this project approximated $250 million.
At
the end of 2006, a feasibility study was completed to evaluate the development
of a large sulfide deposit at El Abra. The project would extend the mine life by
over ten years, and is expected to provide an additional 325 million pounds of
copper per year. Copper production from sulfides is expected to begin in 2010.
The project will utilize a portion of the existing facilities to process the
additional reserves. Capital investment is expected to approximate $450 million,
the majority of which will be spent between 2008 and 2011. We are currently
working with Chilean authorities on an environmental impact study related to
this project and expect to receive approval in the first half of
2008.
There
are several projects in progress throughout the Grasberg minerals district,
including developing the large-scale underground ore bodies located beneath and
adjacent to the Grasberg open pit. The DOZ expansion was completed in 2007, with
fourth-quarter production averaging 59,000 metric tons of ore per day. A further
expansion of the DOZ mine is currently under way with completion targeted for
2010. Other projects include the development of the high-grade Big Gossan mine,
expected to ramp-up to full production of 7,000 metric tons per day in late
2010, and the continued development of the Common Infrastructure project, which
will provide access to the Grasberg underground ore body, the Kucing Liar ore
body and future development of the mineralized areas below the DOZ
mine.
The
initial project at Tenke Fungurume is based on ore reserves approximating 100
million metric tons with ore grades of 2.3 percent copper and 0.3 percent
cobalt. Construction of this project is in
progress. Operations are targeted to commence during 2009, with
average annual production of approximately 250 million pounds of copper and
approximately 18 million pounds of cobalt.
We
are responsible for funding 70 percent of project development
costs. The total capital investment for this project is currently
estimated at approximately $900 million, with approximately 35 percent incurred
through December 31, 2007. Capital cost estimates will continue to be
reviewed as engineering and construction activities progress.
In
December 2007, we announced the plans to proceed with the restart of the Climax
mine, which is expected to produce approximately 30 million pounds of molybdenum
per year beginning in 2010. The project is designed to enable the consideration
of further large-scale expansion of the mine. Capital investment for this
restart is expected to approximate $500 million.
In
January 2008, we announced the restart of the Miami mine in Arizona for an
approximate five-year period. We expect production of 100 million pounds of
copper per year by 2010. Capital investment for this restart is expected to
approximate $100 million, primarily for mining equipment.
In
addition to the projects currently under way, we are continuing to evaluate
expansion opportunities associated with existing ore bodies. As an initial step,
we are pursuing incremental expansions at Morenci, Sierrita, Bagdad and Cerro
Verde. The Morenci project is expected to increase annual copper production by
100 million pounds starting in 2009. The Bagdad mill expansion is
expected to increase annual copper production by 55 million pounds starting in
2009. The Sierrita mill expansion is expected to increase annual
copper production by 25 million pounds starting in 2010, and the Cerro Verde
mill expansion is expected to increase annual copper production by 30 million
pounds. These projects will require an aggregate capital investment of
approximately $400 million. Detailed engineering for these projects is under
way.
Capital costs have been affected by the prices of input costs,
including equipment, materials and supplies and labor. We will continue to
review and update our capital cost estimates as engineering and construction
activities progress on our major projects.
Exploration
Activities. We are conducting exploration activities near our
existing mines and in other areas around the world. Aggregate exploration
expenditures in 2008 are expected to approximate $175 million, compared with
$119 million in 2007. Exploration is focused on finding large-scale copper
and copper/gold deposits in the four principal copper-producing regions of the
world: southwest U.S./Mexico, South American Cordillera, Central Africa and
Australasia, as well as in other prospective areas. This group operates in more
than 15 countries and maintains offices in Australia, Brazil, Bulgaria, Canada,
Chile, China, Central Africa, Macedonia, Mexico, Peru, Russia, Serbia, the
Philippines, the United States and Zambia.
Our
exploration efforts in North America include drilling of the Lone Star deposit
located approximately four miles from the Safford ore bodies, as well as targets
in the Morenci and Bagdad districts. We are also conducting exploration
activities near the Henderson molybdenum deposit. In South America, exploration
is ongoing in and around the Cerro Verde, Candelaria and Ojos del Salado
deposits. In Africa, we are actively pursuing targets outside of the area of
initial development at Tenke Fungurume. The number of drill rigs operating on
these and other programs near our mine sites increased from 26 at the end of
March 2007 to 55 at the end of 2007.
PT
Freeport Indonesia’s 2008 exploration efforts in Indonesia include testing
extensions of the Deep Grasberg and Kucing Liar mine complex and evaluating
targets in the area between the Ertsberg East and Grasberg mineral systems from
the new Common Infrastructure tunnels. Initial drill results from the Common
Infrastructure tunnel are positive and additional drilling is in process. We are
continuing our efforts to resume exploration activities in certain prospective
areas in Papua outside Block A (the Grasberg contract area).
Research
and Development. Following our acquisition of Phelps Dodge, we
conduct research and development programs relating to technology for exploration
for minerals, mining and recovery of metals from ores, concentrates and
solutions, smelting and refining of copper, metal processing, reclamation and
remediation, and product and engineered materials development. Expenditures for
research and
development programs, together with contributions to industry and
government-supported research programs, totaled $33 million in 2007.
SALES
AND COMPETITION
North
American Mining.
Copper. A
majority of the copper produced or purchased at our North American mining
operations is cast into rod. Rod sales, including Phelps Dodge sales volumes
prior to our acquisition, to outside wire and cable manufacturers constituted
approximately 83 percent of North American copper sales in 2007, 85 percent in
2006 and 88 percent in 2005. The remainder of our North American copper sales is
primarily in the form of copper cathode or copper concentrate. Sales of rod and
cathode principally are made directly to wire and cable fabricators and brass
mills under U.S. dollar-denominated contracts usually of one-year duration.
Cathode and rod contract prices are generally based on the prevailing COMEX
copper monthly average spot price for shipments in that period. We generally
sell our copper rod and cathode produced at our North American mining operations
at a premium over COMEX prices.
Molybdenum. Most
of our molybdenum is sold as five main product types: molybdic oxide,
ferromolybdenum, molybdenum chemicals, molybdenum disulfide and pure molybdenum
metal powder. Molybdic oxide and ferromolybdenum are used primarily
in the steel industry for corrosion and heat resistance and strengthening.
Approximately 80 percent of molybdenum production is used in this application.
Molybdenum chemicals are used in a number of diverse applications, such as
catalyst for petroleum refining, feedstock for the production of pure molybdenum
metals, lubricants and additives for water treatment. Molybdenum disulfide is
used principally in lubricant and grease applications. Pure molybdenum metal
powder products are used in a number of diverse applications, such as lighting,
electronics and specialty steel alloys.
Approximately
85 percent of our expected 2008 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
market for molybdenum is characterized by cyclical and volatile prices, little
product differentiation and strong competition. The chemical market is more
diverse and contains more specialty products and segments. In both markets,
prices are influenced by production costs of domestic and foreign competitors,
worldwide economic conditions, world and regional supply/demand balances,
inventory levels, governmental regulatory actions, currency exchange rates and
other factors. Molybdenum prices also are affected by the demand for end-use
products in, for example, the construction, transportation and durable goods
markets. A substantial portion of world molybdenum is produced as a by-product
of copper mining, which is relatively insensitive to molybdenum price levels.
By-product production was estimated at approximately 60 percent of global
molybdenum production in 2007.
South
American Mining. Production from
our South American mines is sold as copper concentrate or copper cathode under
U.S. dollar-denominated long-term contracts. A majority of our
Cerro Verde cathode production is shipped to our U.S. rod mills for processing.
The remainder of Cerro Verde’s cathode production is sold, under annual
contracts, to South American customers or to merchants on a spot basis. Cerro
Verde has committed to sell approximately 20 percent of
its annual concentrate production at market prices to Atlantic Copper. The
balance of its copper concentrate production is sold to copper smelters
primarily located in Japan and elsewhere in Asia under long-term contracts. The
Candelaria mine sells its production in the form of copper concentrate primarily
to copper smelters located in Japan and elsewhere in Asia, while production not
committed under long-term contracts is sold to other smelters or
merchants. A majority of our Ojos del Salado concentrate production is sold to
local Chilean smelters. El Abra produces copper cathodes that are sold,
primarily under annual or multi-year contracts, to Asian or European rod or
brass mill customers or to merchants.
Copper
cathode sold by our South American operations is generally sold at a premium
over LME prices, with the price based on the prevailing LME copper monthly
average spot price in the month of, or the
month following, arrival. Substantially all of our concentrate sales
are priced on the basis of the third calendar month following the month of
arrival at the buyer's facilities.
Indonesia. PT
Freeport Indonesia sells its copper concentrates, which contain significant
quantities of gold and silver, under U.S. dollar-denominated sales agreements,
mostly to companies in Asia and Europe and to international trading companies.
We sell substantially all of our budgeted production of copper concentrates
under long-term contracts with copper selling prices based on LME prices. Under
these contracts, initial billing occurs at the time of shipment and final
settlement on the copper portion is generally based on average prices for a
specified future period. PT Freeport Indonesia’s customers receive similar
pricing options to those discussed above for South American mining. Gold
generally is sold at the average London Bullion Market Association price for a
specified month near the month of shipment.
Revenues
from South American and Indonesian concentrate sales are recorded net of
royalties (see “Contracts of Work” for Indonesian sales), treatment and refining
charges (including price participation charges, if applicable, based on the
market prices of metals), and the impact of derivative financial instruments, if
any, used to hedge against risks from metals price fluctuations. We do not plan
on entering into hedging programs in the future. Moreover, because a portion of
the metals contained in copper concentrates is unrecoverable as a result of the
smelting process, our revenues from concentrate sales are also recorded net of
allowances based on the quantity and value of these unrecoverable metals. These
allowances are a negotiated term of our contracts and vary by customer.
Treatment and refining charges represent payments to smelters and refiners and
are either fixed or in certain cases vary with the price of copper. We sell a
small amount of copper concentrates in the spot market.
We
have commitments, including commitments from Atlantic Copper and PT Smelting,
for essentially all of PT Freeport Indonesia’s estimated 2008 production. PT
Freeport Indonesia has a long-term contract, which is pending approval of
the Department of Energy and Mineral Resources of the Government of Indonesia,
to provide Atlantic Copper with a quantity of copper concentrates at market
prices that currently approximates 40 percent of Atlantic Copper’s annual copper
concentrate requirements. PT Freeport Indonesia’s agreement with PT Smelting
provides, for the life of PT Freeport Indonesia’s mines, for the supply of 100
percent of the copper concentrate requirements necessary to produce 205,000
metric tons of copper (essentially the Gresik smelter’s original design
capacity) on a priority basis. In 2004, PT Smelting increased its stated
production capacity to 250,000 metric tons of copper per year. During 2006, PT
Smelting completed further expansion of its production capacity from 250,000
metric tons of copper per year to 275,000 metric tons. For the first 15 years of
PT Smelting’s commercial operations beginning December 1998, PT Freeport
Indonesia agreed that the treatment and refining charges on specified quantities
of the concentrate PT Freeport Indonesia supplies 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 3, 2004 when it declined to a minimum of $0.21 per pound. PT
Smelting’s rates for 2008 are expected to exceed the minimum $0.21 per pound. We
anticipate that PT Freeport Indonesia will sell approximately 50 to 60 percent
of its annual concentrate production to Atlantic Copper and PT Smelting. A
summary of PT Freeport Indonesia’s aggregate percentage concentrate sales to its
affiliates and to other parties for the last three years follows:
|
|
2007
|
|
2006
|
|
2005
|
PT
Smelting
|
|
39%
|
|
27%
|
|
29%
|
Atlantic
Copper
|
|
25%
|
|
23%
|
|
25%
|
Other
parties
|
|
36%
|
|
50%
|
|
46%
|
|
|
100%
|
|
100%
|
|
100%
|
|
|
|
|
|
|
|
COPPER,
GOLD AND MOLYBDENUM MARKETS
Copper. Copper
is an internationally traded commodity, and the relevant prices are determined
by the major metals exchanges – COMEX, the LME and the Shanghai Futures Exchange
(SHFE). Prices on these exchanges generally reflect the worldwide balance of
copper supply and demand.
Copper
is a critical component of the world’s infrastructure and the demand for copper
ultimately reflects the rate of underlying world economic growth, particularly
in industrial production and construction. According to Brook Hunt, a
widely-used independent metals market consultant, copper’s end-use markets (and
their estimated shares of total consumption) are:
· Construction (37
percent);
· Electrical
applications (26 percent);
· Industrial
machinery (15 percent);
· Transportation (11
percent); and
· Consumer products
(11 percent)
Since
1990, refined copper consumption has grown by an estimated compound annual
growth rate of 3.1 percent to 18.1 million tons in 2007, according to CRU, an
international metal markets consultancy. This rate of increase was slightly
higher than the growth rate of 2.9 percent for world industrial production over
the same period. Asian copper consumption, led by China, has been particularly
strong, increasing by approximately six percent annually from 1990. Asia now
represents approximately half of the world’s refined copper consumption,
compared with approximately 24 percent for Western Europe and approximately 18
percent for the Americas. From 1990 through 2007, refined copper production has
grown at an average annual rate of approximately three percent, according to
Brook Hunt.
Copper
consumption is closely associated with industrial production and, therefore,
tends to follow global economic cycles. Copper prices are volatile and cyclical.
Since 1990, the LME spot price of copper has averaged $1.24 per pound and ranged
from a high annual average price of $3.23 per pound in 2007 to a low annual
average price of $0.71 per pound in 1999 and 2002. Over the same period, the
COMEX price of copper averaged $1.25 per pound and has ranged from a high annual
average price of $3.22 per pound in 2007 to a low annual average price of $0.72
per pound in 1999 and 2002.
In
2007, the average LME price of $3.23 per pound was $0.18 above the average for
2006. Continued low global inventory levels, stronger global consumption in most
regions and unanticipated production shortfalls resulted in continued high
copper prices throughout the year. During 2007, CRU estimates global refined
copper production and copper consumption grew by approximately 4.5 percent and
4.1 percent, respectively. Consumption continued to be strong in Asia (up 6.1
percent) driven largely by China, whose copper consumption grew approximately 16
percent in 2007. European copper consumption, however, contracted by
approximately two percent. Likewise, U.S. demand for copper was down
approximately two percent as a result of slowing in the residential housing
market. Visible exchange inventories decreased by approximately 14,000 metric
tons over the prior year to approximately 236,000 metric
tons.
In
2006, the average LME price of $3.05 per pound was $1.38 above the average for
2005.
Gold. The
market for gold was strong in 2007, as a weak U.S. dollar, growing investment
demand, inflationary pressures and ongoing geo-political tensions all
contributed to strong market demand. Prices were higher in 2007 than 2006,
ranging from a low of approximately $608 per ounce to a high of approximately
$842, with the average price during the year of $696 per ounce. Prices in 2006
ranged from $521 to $725, averaging $604 per ounce, compared with an average of
$445 per ounce in 2005.
Molybdenum. In 2007,
worldwide molybdenum mine production increased by more than 10 percent from 2006
levels. Primary production in China grew by more than 20 percent in response to
increased demand in China and restart of production idled by the government in
2005. Primary production in North America declined because of unplanned
production outages. By-product production in South America and North America
grew at approximately 3 to 4 percent, which was lower than
expected, because of labor unrest, particularly in South America, and
lower ore grades following an extended period of higher ore grades.
Molybdenum
supply from China to western molybdenum markets was sharply constrained later in
the year because of new export quotas implemented by the Chinese government in
June 2007. Western roaster capacity was adequate in 2007 for processing of
concentrate supplies. Overall, the industry production to consumption demand
balance was in deficit for most of the year.
Prices
were higher in 2007 than 2006 and approached 2005’s record high levels. Prices
were driven by (1) strong stainless and alloy steel demand in the first half of
the year; (2) strong chemical demand later in 2007; and (3) constrained supply
in the U.S., Europe and Japan. Annual Metals
Week Dealer Oxide mean prices averaged $30.23 per pound in 2007, compared
with $24.75 per pound in 2006 and $31.73 per pound in 2005. Inventory
levels throughout the industry remain low. The majority of our molybdenum sales
are based on published pricing (i.e.,
Platts Metals
Week, Ryan’s
Notes or Metal
Bulletin) plus a negotiated premium. The remaining sales are priced on a
fixed basis or on a variable basis within certain ranges for periods of varying
duration.
COSTS
Energy,
including electricity, diesel fuel and natural gas, represents a significant
portion of production costs at our operations. Because energy is a significant
portion of our production costs, we could be negatively affected by future
energy availability issues or increases in energy costs.
During
2007, we realized cost increases that were the result of the overall improved
business climate. Some of these cost increases were anticipated. For example, we
realized additional compensation costs resulting from employee bonus and
variable-compensation programs that are contingent on copper price and/or our
performance. Additionally, our decision to bring back into production some of
our higher-cost properties, in response to strong demand for copper, has
increased our average cost of copper production. Other costs that have increased
include labor, taxes, freight and transportation, sulfuric acid and materials
and supplies that are manufactured from metal or fossil fuels. We anticipate
that at least a portion of these cost increases may reverse in periods of lower
metal and commodity prices.
In
addition, we own a one-third interest in the Luna power plant located near
Deming, New Mexico. Public Service Company of New Mexico (PNM), a subsidiary of
PNM Resources, and Tucson Electric Power, a subsidiary of Unisource Energy
Corporation, also own one-third interests and each co-owner is responsible for a
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
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, which utilizes natural gas, is expected to continue
to stabilize our southwest U.S. operations’ energy costs and increase the
reliability of our energy supply.
OWNERSHIP
OF PROPERTY
North
America. In the U.S., most of the land occupied by our copper
and molybdenum mines, concentrators, SX/EW facilities, smelter, refinery, rod
mills, and molybdenum roasters, processing facilities and the Climax technology
center generally is owned by, or is located on unpatented mining claims owned by
us. Certain portions of our Henderson, Miami, Bagdad, Sierrita, Tyrone, Chino
and Cobre operations are located on government-owned land and are operated under
a Mine Plan of Operations or other use permit. The Sierrita operation leases
property adjacent to its mine upon which its electrowinning tank house is
located. The lease expires in 2009 but can be extended for an additional five
years. Various federal and state permits or leases on government land are held
for purposes incidental to
mine
operations.
South
America. At the operations in South America, mine properties
and facilities are controlled through mining claims or concessions under the
general mining laws of the relevant country. The claims or concessions are owned
or controlled by the operating companies in which we or our subsidiaries have an
ownership interest. Roads, power lines and aqueducts are controlled by
easements.
Indonesia. All
of our mining operations in Indonesia are controlled through the Contract of
Work, which covers both Block A, which was first included in a 1967 Contract of
Work that was replaced by a new Contract of Work in 1991, and Block B, to which
we gained rights in 1991. The initial term of our Contract of Work expires in
December 2021, but we can extend it for two 10-year periods subject to
Indonesian government approval, which cannot be withheld or delayed
unreasonably.
Africa. At
the Tenke Fungurume operations in the DRC, mine properties and facilities are
controlled through mining concessions under general mining laws. The concessions
are owned or controlled by the operating companies in which we or our
subsidiaries have an ownership interest. See additional discussion at Tenke
Fungurume site description on page 20.
Spain. Atlantic
Copper’s smelter and refinery are located in Huelva, Spain, on land concessions
from the Huelva port authorities. The land concessions expire in 2022.
Additionally, Atlantic Copper has offices and warehouses located on similar land
concessions in Huelva, which expire in 2014.
LABOR
MATTERS
At
December 31, 2007, we employed approximately 25,400 people to sustain our global
operations. Additionally, there are approximately 9,500 contractor employees
working at our Grasberg minerals district and approximately 400 contractor
employees at Atlantic Copper. Employees represented by unions are listed below,
with the approximate number of employees represented and the expiration date of
the applicable union agreements.
Location
|
Number
of Unions
|
Number
of Union-Represented Employees
|
Expiration
Date
|
PT
Freeport Indonesia – Indonesia
|
1
|
4,260
|
October
2009
|
Tenke
Fungurume – DRC
|
2
|
1,080
|
March
2008
|
Cerro
Verde – Peru
|
1
|
684
|
December
2008
|
Candelaria
– Chile
|
2
|
484
|
October
2009
|
El
Abra – Chile
|
2
|
471
|
October
2008
|
Chino
– New Mexico
|
1
|
293
|
November
2009
|
Atlantic
Copper – Spain
|
2
|
172
|
December
2007a
|
Stowmarket
– United Kingdom
|
1
|
53
|
May
2008
|
Bayway
– New Jersey
|
1
|
52
|
April
2010
|
Rotterdam
– The Netherlands
|
2
|
50
|
March
2008
|
Aurex
– Chile
|
1
|
34
|
February
2010
|
a. The contract has been
provisionally extended and is currently being renegotiated.
FM
Services Company (FM Services), a wholly-owned subsidiary of FCX, furnishes
certain executive, administrative, financial, accounting, legal, tax and similar
services to us. As of December 31, 2007, FM Services had 141 employees. FM
Services employees also provide services to two other publicly traded
companies.
SOCIAL
DEVELOPMENT, EMPLOYMENT AND HUMAN RIGHTS
We
have a social, employment and human rights policy designed to insure we
operate in compliance with the laws in the areas of our operations, and in a
manner that respects basic human rights and the culture of the people who are
indigenous to the area. We continue to make significant expenditures on social
and cultural activities, primarily in Papua, Indonesia, and we expect to make
significant expenditures over time for similar activities in the DRC. These
activities include:
· comprehensive job
training programs;
· basic education
programs;
· public health
programs, including extensive malaria control;
· agricultural
assistance programs;
· a business
incubator program to encourage the local people to establish their own
smallscale businesses;
· cultural
preservation programs; and
· charitable
donations.
In
December 2000, we endorsed the joint U.S. State Department-British Foreign
Office Voluntary Principles on Human Rights and Security. Several major natural
resources companies and international human rights organizations participated in
developing the Voluntary Principles and have endorsed them. We participated in
developing these principles and incorporated them into our social and human
rights policy.
South America. Cerro Verde has
provided a variety of community support projects over the years. During 2006, as
a result of discussions with local mayors in the Arequipa region, Cerro Verde
agreed to design domestic water and sewage treatment plants for the benefit of
the region. These facilities are being designed in a modular fashion so that
initial installations can be readily expanded in the future. The cost associated
with the construction of these facilities is currently under review; however, we
have agreed with the local authorities that the costs associated with the first
phase of construction of the facilities (currently estimated at $80 million, $40
million for Cerro Verde's share) will be split evenly between Cerro Verde and
the local municipalities.
During
2006, the Peruvian government announced that all mining companies operating in
Peru will make annual contributions to local development funds for a five-year
period. The contribution is equal to 3.75 percent of after-tax profits, of which
2.75 percent is contributed to a local mining fund and 1.00 percent to a
regional mining fund. At December 31, 2007, Cerro Verde’s liability associated
with the local mining fund contributions totaled $49 million.
Indonesia. In
1996, PT Freeport Indonesia agreed to commit at least one percent of its
revenues to the Freeport Partnership Fund for Community Development (formerly
the Freeport Fund for Irian Jaya Development) to support village-based health,
education, economic and social development programs in its area of operations.
This commitment replaced our community development programs in which we spent a
similar amount of money each year. Our share of contributions to the Freeport
Partnership Fund for Community Development totaled $48 million in 2007, $44
million in 2006 and $36 million in 2005. Our joint venture partner, Rio Tinto,
also contributes to this fund and, including their share, the contributions
totaled $53 million in 2007, $48 million in 2006 and $42 million in
2005.
Lembaga
Pembangunan Masyarakat Amungme Kamoro (LPMAK) oversees disbursement of the
amounts we contribute to the fund. LPMAK’s board of commissioners is made up of
a leader of the Amungme people, a leader of the Kamoro people, leaders of the
three local churches, a representative of the local government and a
representative of PT Freeport Indonesia. The Amungme and Kamoro people are
original inhabitants of the land in our area of operations.
We believe that our social and economic development
programs are responsive to the issues raised by
the
local villages and people and should help us to maintain good relations with the
surrounding communities and avoid disruptions of mining operations.
Nevertheless, social and political instability in the area may adversely impact
our mining operations. See “Risk Factors.”
Africa. We
have committed to assist the communities surrounding our Tenke Fungurume
concession in the Katanga Province of the DRC. Initiatives that have commenced
over the past two years include the building of two schools and the remodeling
of a third, development of ten community water wells, construction of roads, and
agricultural support programs to local farmers. Additionally, we have committed
to contribute a portion of net sales revenue from production to a trust fund for
local development.
Security
Matters in
Indonesia. Consistent with our
Contract of Work in Indonesia and the requirement to protect our employees and
property, we have taken appropriate steps to provide a safe and secure working
environment. As part of its security program, PT Freeport Indonesia maintains
its own internal security department, which performs functions such as
protecting company facilities, monitoring the shipment of company goods through
the airport and terminal, assisting in traffic control and aiding rescue
operations. PT Freeport Indonesia’s civilian security employees (numbering
approximately 680) are unarmed and perform duties consistent with their internal
security role. PT Freeport Indonesia’s share of costs for its internal civilian
security department totaled approximately $17 million for 2007, $14 million for
2006 and $11 million for 2005. The security department has received human rights
training and each member is required to certify his or her compliance with our
human rights policy.
PT
Freeport Indonesia, and all businesses and residents of Indonesia, rely on the
Government of Indonesia for the maintenance of public order, upholding the rule
of law and the protection of personnel and property. The Grasberg mine has been
designated by the Government of Indonesia as one of Indonesia’s vital national
assets. This designation results in the military and police playing a
significant role in protecting the area of our operations. The Government of
Indonesia is responsible for employing police and military personnel and
directing their operations.
From
the outset of PT Freeport Indonesia’s operations, the government has looked to
PT Freeport Indonesia to provide logistical and infrastructure support and
assistance for these necessary services because of the limited resources of the
Indonesian government and the remote location of and lack of development in
Papua. PT Freeport Indonesia’s financial support for the Indonesian government
security institutions assigned to the operations area represents a prudent
response to its requirements to protect its workforce and property, better
ensuring that personnel are properly fed and lodged, and have the logistical
resources to patrol PT Freeport Indonesia’s roads and secure its operating area.
In addition, provision of such support and oversight is consistent with PT
Freeport Indonesia’s obligations under the Contract of Work, reflects our
philosophy of responsible corporate citizenship, and is in keeping with our
commitment to pursue practices that will promote human rights.
PT
Freeport Indonesia’s share of support costs for the government-provided
security, involving approximately 2,100 Indonesian government security personnel
currently located in the general area of our operations, was $9 million for
2007, $9 million for 2006 and $6 million for 2005. This supplemental
support consists of various infrastructure and other costs, such as food,
housing, fuel, travel, vehicle repairs, allowances to cover incidental and
administrative costs, and community assistance programs conducted by the
military and police. PT Freeport Indonesia’s capital costs for associated
infrastructure was less than $1 million for the three years ended December 31,
2007.
As
reported in January 2006, we have received and responded to requests from
governmental authorities related to PT Freeport Indonesia’s support of
Indonesian security institutions. We are cooperating fully with these
requests.
ENVIRONMENTAL
AND RECLAMATION MATTERS
Environmental
In the U.S. 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 the federal Comprehensive
Environmental Response, Compensation and Liability Act (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.
Phelps Dodge and many of its affiliates and
predecessor companies have been involved in mining, milling and manufacturing in
the U.S. for more than a century. Activities that occurred in the late
19th
century and the 20th
century prior to the advent of
modern environmental laws were not subject to environmental regulation and were
conducted before American industrial companies understood the long-term effects
of their operations on the surrounding environment. With the passage of
CERCLA in 1980, companies like Phelps Dodge became legally responsible for
environmental remediation on properties previously owned or operated by them,
irrespective of when the damage to the environment occurred or who caused
it. That liability often is shared on a joint and several basis with all
other owners and operators, meaning that each owner or operator of the property
is fully responsible for the clean-up, although in many cases some or all of the
historical owners or operators no longer exist, do not have the financial
ability to respond or cannot be found. As a result, because of our
acquisition of Phelps Dodge in 2007, many of the subsidiary companies we now own
are responsible for a wide variety of environmental remediation projects
throughout the U.S., and we expect to spend substantial sums annually for many
years to address those remediation issues. Various of our subsidiaries
previously have been advised by the U.S. Environmental Protection Agency (EPA),
the Department of the Interior, the Department of Agriculture 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 sites that have
been or are being investigated by EPA, the Department of the Interior, the
Department of Agriculture, or state agencies to determine whether releases
of hazardous substances have occurred and, if so, to develop and implement
remedial actions to address environmental concerns. As of December 31, 2007, we
had more than 100 active remediation projects in the U.S. in more than 25
states. We are also subject to claims for natural resource damages where the
release of hazardous substances is alleged to have injured natural resources.
A
number of our subsidiaries have also been advised by trustees for natural
resources that they may be liable under CERCLA or similar state laws for damages
to natural resources caused by releases of hazardous substances.
Under
applicable purchase accounting rules, we are required to allocate the purchase
price paid for Phelps Dodge in accordance with our estimate of the fair value of
all the Phelps Dodge assets and liabilities, including contingencies such as
environmental remediation obligations. That process must be completed by
the first anniversary of the acquisition, or March 19, 2008. Our revised
estimates resulted in a significant increase in our reserve for environmental
obligations at December 31, 2007. At December 31, 2007, environmental
reserves recorded in our consolidated balance sheets totaled $1.3 billion, which
include the purchase accounting adjustments to reflect the estimated fair value
of the Phelps Dodge obligations attributed to CERCLA or analogous state
programs and for estimated future costs associated with environmental matters at
closed facilities and closed portions of certain operating
facilities.
In 2005, PT Freeport Indonesia agreed to participate
in the Government of Indonesia’s PROPER (Program for Pollution Control,
Evaluation and Rating) program. In March 2006, the Indonesian Ministry of
Environment announced the preliminary results of its PROPER 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 we complete the audit process.
In
connection with obtaining our environmental approvals from the Indonesian
government, we committed to perform a one-time environmental risk assessment on
the impacts of our tailings management plan. We completed this extensive
environmental risk assessment with more than 90 scientific studies
conducted
over four years and submitted it to the Indonesian government in December 2002.
We developed the risk assessment study with input from an independent review
panel, which included representatives from the Indonesian government, academia
and non-governmental organizations. The risks that we identified during this
process were in line with our impact projections of the tailings management
program contained in our environmental approval documents.
The
cost of complying with environmental laws is a fundamental cost of our business.
In 2007, we incurred aggregate environmental capital expenditures and other
environmental costs of $320 million (including $228 million incurred since March
20, 2007, related to the acquired Phelps Dodge operations) for programs to
comply with applicable environmental laws and regulations that affect our
operations. Aggregate environmental capital expenditures totaled $63 million in
2006 and $44 million in 2005. In 2008, we expect to incur approximately $520
million of aggregate environmental capital expenditures and other environmental
costs, which are part of our overall 2008 operating budget.
Refer
to Note 15 for additional information on significant environmental
matters.
Asset
Retirement Obligations
We
recognize asset retirement obligations (AROs) as liabilities when incurred, with
the initial measurement at fair value. These liabilities are accreted to full
value over time through charges to income. Reclamation costs for future
disturbances are recorded as an ARO in the period of disturbance. Our cost
estimates are reflected on a third-party cost basis and comply with our legal
obligation to retire tangible, long-lived assets as defined by SFAS No. 143.
Refer to Note 1 for further discussion of our accounting policy for reclamation
and closure costs.
At
December 31, 2007, we had $728 million recorded for AROs in current and
long-term liabilities on the consolidated balance sheet. ARO costs may increase
or decrease significantly in the future as a result of changes in
regulations, engineering designs and technology, permit modifications or
updates, mine plans, cost of inflation 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 we elect or are
required to do so.
Legal
requirements in New Mexico, Arizona and Colorado require financial assurance to
be provided for estimated costs of reclamation and closure, including
groundwater quality protection programs. We have satisfied financial assurance
requirements by using a variety of mechanisms, such as third-party performance
guarantees, financial capability demonstrations, trust funds, surety bonds,
letters of credit and collateral. The applicable regulatory requirements provide
financial strength tests to support third-party performance guarantees and
financial capability demonstrations, which are designed to confirm a company’s
or third-party guarantor’s financial capability to fund future estimated
reclamation and closure costs. The amount of financial assurance we are required
to provide will vary with changes in laws, regulations and reclamation and
closure cost estimates. At December 31, 2007, we had trust assets totaling
$544 million that are designated for funding global reclamation and remediation
activities, of which $106 million is legally restricted to fund a portion of our
asset retirement obligations for Chino, Tyrone and Cobre as required by New
Mexico regulatory authorities.
Additionally,
in 1996, PT Freeport Indonesia began contributing to a cash fund ($10 million
balance at December 31, 2007) designed to accumulate at least $100 million by
the end of our Indonesian mining activities. We plan to use this fund, including
accrued interest, to pay mine closure and reclamation costs. Any costs in excess
of the $100 million fund would be funded by operational cash flow or other
sources.
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 regulatory flexibility to remediate at a faster pace structures that
could be readily demolished, reclamation of visibly impacted areas, and projects
in Arizona and New Mexico where we have substantial long-term closure
obligations. These costs are included in our aggregate environmental capital and
other costs reported above.
Refer
to Note 15 for additional information on asset retirement
obligations.
WATER
RIGHTS
Our
mining operations require significant quantities of water for mining, ore
processing and related support facilities. Our operations in North and South
America are in desert areas where water is scarce and competition among users
for continuing access to water is significant. Continuous production at our
mines is dependent on our ability to maintain our water rights and claims and
defeat claims adverse to our current water uses in legal
proceedings.
At
our U.S. operations, under state law, our water rights give us only the right to
use public waters for a statutorily defined beneficial use at a designated
location. In Arizona, we are a participant in two active general stream
adjudications in which for 30 years the State of Arizona has been attempting to
quantify and prioritize surface water claims in two of the state’s largest river
systems that include four of our mines (Morenci, Sierrita, Safford and Miami)
and which may also affect our Arizona mine at Bagdad. Groundwater is
not subject to adjudication in Arizona, but is subject to the doctrine of
reasonable use, which requires balancing the utility of the use against the
gravity of the harm to others who have rights in the same aquifer; however,
wells may be subject to adjudication to the extent they are found to produce
or affect surface water. In Colorado, our surface water and groundwater
rights are subject to adjudication and we are involved in legal proceedings to
resolve disputes regarding priority of administration of rights, including
priority of some of our rights for the Climax mine. Our surface water and
groundwater rights are fully licensed or have been fully adjudicated in New
Mexico.
In South
America, water for our mining operations at Candelaria and Ojos del Salado is
drawn from the Copiapo River aquifer. Because of rapid depletion of
this aquifer in recent years, ongoing studies are addressing the adequacy of
this water supply for our mining operations planned at these
sites.
Although
we believe our mining operations have sufficient water, the loss of water
rights for any of our mines, in whole or in part, or shortages of water to which
we have rights, could require us to curtail or shut down mining
operations. Additionally, we have not yet secured adequate water
rights to support all of our potential expansion projects, and our inability to
secure those rights could prevent us from pursuing some of
those opportunities. See “Risk Factors”
This
report contains “forward-looking statements” within the meaning of the federal
securities laws. Forward-looking statements are all statements other
than statements of historical facts, such as statements regarding anticipated
production volumes, unit net cash costs, sales volumes, ore grades, milling
rates, commodity prices, development and capital expenditures, mine production
and development plans, availability of power, water, labor and equipment,
environmental reclamation and closure cost and plans, environmental liabilities
and expenditures, litigation liabilities and expenses, projected debt and cash
balances, dividend payments, reserve estimates, political, economic and social
conditions in our areas of operations and exploration efforts and
results. Except for our ongoing obligations under the federal
securities laws, we do not intend, and we undertake no obligation, to update or
revise any forward-looking statements. Readers are cautioned that
forward-looking statements are not guarantees of future performance and actual
results may differ materially from those projected, anticipated or assumed in
the forward-looking statements. Important factors that could cause
our actual results to differ materially from those anticipated in the
forward-looking statements include the following:
FINANCIAL
RISKS
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 (1) adversely
affect our earnings and cash flows, (2) adversely affect our ability to repay
our debt and meet our other fixed obligations, and (3) depress the trading
prices of our common and preferred stock and of our publicly traded debt
securities. In addition, substantially all of our copper concentrate sales
contracts and some of our copper cathode sales contracts provide final pricing
in a specified future period based on LME or COMEX
prices. Accordingly, in times of falling copper prices, our revenues
during a quarter are negatively impacted from lower prices received for
contracts priced at current market rates and also from a decrease related to the
final pricing of provisionally priced contracts entered in prior
periods.
World
copper prices have historically fluctuated widely. During the three years ended
December 31, 2007, LME daily closing spot prices ranged from $1.39 to
$4.00 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 three years ended
December 31, 2007, the daily closing prices on the London spot market ranged
from $411 to $842 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;
· interest
rates;
· 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. 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 60 percent
of global molybdenum production is a by-product of copper mining, which
is relatively insensitive to molybdenum prices.
During the three years ended December 31, 2007, 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;
· inventory
levels;
· currency
exchange fluctuations, including the relative strength of the U.S. dollar;
and
· production
costs of U.S. and foreign competitors.
The
agreements governing our indebtedness contain provisions that limit our
discretion in the operation of our business and require us to meet financial
tests and other covenants. In addition, we are required to meet financial tests
showing our capability to perform required closure and remediation. The failure
to comply with such tests and covenants could have a material adverse effect on
us.
We
incurred significant debt to fund a portion of the cash consideration paid to
Phelps Dodge shareholders in our acquisition of Phelps Dodge. As of December 31,
2007, the outstanding principal amount of our indebtedness was $7.2 billion
(excluding unused availability under our revolving credit facilities of $1.4
billion after giving effect to outstanding letters of credit). 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
oursubsidiaries 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 or letters of credit 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.
In addition, most of the financial assurance for our
southwestern U.S. mines is provided by financial capability demonstrations or
guarantees, both of which require a demonstration that we meet
financial tests showing our capability to perform the required closure and
remediation or ability to back guarantees provided for our subsidiaries.
Financial capability demonstrations or guarantees have been submitted for
essentially all of the financial assurance for our Arizona mines. We maintain a
part of our financial assurance using guarantees in New Mexico. However, a
portion of our financial assurance requirements in New Mexico is supplied in
another form, such as letters of credit, real property collateral or a trust.
Our ability to satisfy financial capability demonstrations 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. If this were to occur, we may be
required to provide alternative forms of financial assurance, such as letters of
credit, surety bonds, real property collateral or a trust.
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 sufficient 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.
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 December 31, 2007, approximately 18 percent of outstanding debt 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, and 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.
Our
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 and shortages of water to which we have
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;
· accidents;
· 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;
· interruption
of energy supply;
· labor
disputes;
· inability
to hire and retain a sufficient number of skilled employees;
· inability
to obtain satisfactory insurance coverage;
· unavailability
of experienced labor, equipment and materials; and
· the failure of equipment or processes to operate in accordance with
specifications or expectations.
Continuation
of our mining production is dependent on the availability of a sufficient water
supply to support our mining operations.
Our
mining operations require significant quantities of water for mining, ore
processing and related support facilities. Our operations in North and South
America are in desert areas where water is scarce and competition amoung users
for continuing access to water is significant. Continuous production at our
mines is dependent on our ability to maintain our water rights and claims and
defeat claims adverse to our current water uses in legal proceedings. In
addition, our right to use water at our U.S. operations is subject to applicable
state laws. Although each operation currently has sufficient water claims to
cover its operational demands, we cannot predict the potential outcome of
pending or future legal proceedings on our water rights, claims and
uses. The loss of some or all water rights for any of our mines, in
whole or in part, or shortages of water to which we have rights could require us
to curtail or shut down mining production and could prevent us from pursuing
expansion opportunities.
An
interruption of energy supply could adversely affect our mining
operations.
Our
mining operations and development projects require significant energy. Our
principal energy sources are electricity, purchased petroleum products, natural
gas and coal. Our South American mining operations receive electrical power
under long-term contracts with local energy companies. Our African development
project, Tenke Fungurume, has entered into long-term power supply and
infrastructure funding agreements with the state-owned electric utility company
serving the Katanga province of the DRC. A disruption in the transmission of
energy, inadequate energy transmission infrastructure, or the termination of any
of our energy supply contracts could interrupt our energy supply and adversely
affect our operations.
Worldwide
expansion of mining activity has increased costs and created shortages of
equipment, supplies and experienced personnel. Increased production costs could
reduce our profitability and cash flow.
In
the last few years, there has been a significant increase in mining activity
worldwide to meet the demand of an expanding world economy and in response
to significant increases in prices of natural resources. The opening of new
mines and expansion of existing mines has led to increased demand for, and
increased costs and shortages of, equipment, supplies and experienced personnel.
These cost increases have significantly increased overall operating
and capital budgets of companies like ours, and continuing shortages could
affect the timing and feasibility of expansion projects.
Energy
represents a significant portion of our production costs. Our principal energy
sources are electricity, purchased petroleum products, natural gas and coal. An
inability to procure sufficient energy at reasonable prices could adversely
affect our profits, cash flow and growth opportunities. Our production costs are
also 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 mining 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 steep 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. We resumed normal production activities
in the second quarter of 2004.
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 and address any potential hazards to workers and facilities
from slides. The existing early warning system for potential
slides, based upon rainfall and other factors, has also been
expanded. However, no assurance can be given that similar events will not occur
in the future.
Development projects are inherently
risky and may require more capital than anticipated, which could adversely
affect our business. In addition, our most significant
development project, Tenke Fungurume, is located in a remote area of the
DRC.
There
are many risks and uncertainties inherent in all development projects, including
our significant future development of underground mines at the Grasberg minerals
district, our Tenke Fungurume project and ongoing projects at our North and
South American operations. The economic feasibility of development projects
is based on many factors, including the accuracy of estimated reserves,
metallurgical recoveries, capital and operating costs and future prices of the
relevant minerals. The capital expenditures and time required to develop
new mines or other projects are considerable, and changes in costs or
construction schedules can affect project economics. Thus it is possible that
actual costs and economic returns may differ materially from our
estimates.
New
development projects have no operating history upon which to base estimates of
future cash flow. These development projects also require the successful
completion of feasibility studies, acquisition of governmental permits,
acquisition of land, power and water and ensuring that appropriate community
infrastructure is developed by third parties to support such projects. It
is possible that we could fail to obtain the government approvals necessary for
the operation of a project, in which case, the project may not proceed, either
on its original timing or at all. It is not unusual for new mining operations to
experience unexpected problems during the start-up phase, resulting in delays in
producing revenue and increases in invested capital.
Our
Tenke Fungurume project is located in a remote area of the DRC and is subject to
additional challenges due to:
· severely
limited infrastructure, including road and rail access;
· limited
and possibly unreliable energy supply;
· security
risks; and
· limited
health care in an area plagued by disease and other potential endemic health
issues, including malaria.
Consequently,
our Tenke Fungurume development project may be substantially affected by factors
beyond our control, which could increase the cost of the project and adversely
affect its ultimate contribution to our operating results.
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
ongoing mining operations and exploration activities, both in the U.S. and
elsewhere, are subject to extensive laws and regulations governing exploration,
development, production, occupational health, mine safety, toxic substances,
waste disposal, protection and remediation of the environment, protection of
endangered and protected species, and other related matters. Compliance with
these laws and regulations imposes substantial costs and we expect these costs
to continue to increase in the future because of increased demand for
remediation services and shortages of equipment, supplies, labor and other
factors. The Federal Clean Air Act (CAA) has had a significant impact,
particularly on our domestic smelter and power plants. Any change in regulation
of the mining industry under the Federal Resource Conservation and Recovery Act
(RCRA) could have a significant impact, both on operational compliance and
closure costs. In addition, environmental laws and regulations may change in
ways that could adversely affect our operations or expansion
opportunities.
In
addition to compliance with environmental regulation at our operating sites, we
incur significant costs for remediating environmental conditions on properties
that have not been operated in many years.
Phelps
Dodge and many of its affiliates and predecessor companies have been involved in
mining, milling, and manufacturing in the U.S. for more than a century.
Activities that occurred in the late 19th
century and the 20th
century prior to the advent of modern environmental laws were not
subject to environmental regulation and were conducted before American
industrial companies understood the long-term effects of their operations on the
surrounding environment. With the passage of CERCLA in 1980, companies like
Phelps Dodge became legally responsible for environmental remediation on
properties previously owned or operated by them, irrespective of when the damage
to the environment occurred or who caused it. That liability is often shared on
a joint and several basis with all other owners and operators, meaning that each
owner or operator of the property is fully responsible for the clean-up,
although in many cases some or all of the other historical owners or operators
no longer exist, do not have the financial ability to respond or cannot be
found. As a result, because of our acquisition of Phelps Dodge in 2007, many of
the subsidiary companies we now own are responsible for a wide variety of
environmental remediation projects throughout the U.S., and we expect to spend
substantial sums annually for many years to address these remediation issues. We
are also subject to claims for natural resource damages where the release of
hazardous substances is alleged to have injured natural resources. As of
December 31, 2007, we had more than 100 active remediation projects in the U.S.
in more than 25 states.
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. In general, our domestic mines are required to post increasing
amounts of financial assurance as estimated costs increase to ensure the
availability of funds to meet future closure and reclamation
obligations.
Our
New Mexico financial assurance amounts at December 31, 2007, which reflected
reductions for work completed through 2006 and agreed upon by the New Mexico
Environment Department and Mining Minerals Division, totaled $463 million, up to
70 percent of which 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
December 31, 2007, we had accrued closure costs of approximately $152 million
for our Arizona operations. The amount of financial assurance currently
demonstrated for Arizona closure and reclamation activities is approximately
$147 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 or ability to back guarantees provided for our
subsidiaries. Financial capability
demonstrations or guarantees have been submitted for essentially all of the
financial assurance for our Arizona mines. We maintain a part of our financial
assurance using guarantees in New Mexico. However, a portion of our financial
assurance requirements in New Mexico is supplied in another form, such as
letters of credit, real property collateral or a trust. Our ability to satisfy
financial capability demonstrations 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. If this were to occur, we
may be required to provide alternative form of financial assurance, such as
letters of credit, surety bonds, real property collateral or a
trust.
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 letters of credit, 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.
Regulation
of greenhouse effects and climate change may adversely affect our
operations and markets.
Energy
is a significant input to our mining and processing operations. Our principal
energy sources are electricity, purchased petroleum products, natural gas and
coal. Many scientists believe that emissions from the combustion of carbon-based
fuels contribute to greenhouse effects and therefore potentially to climate
change.
A
number of governments or governmental bodies have introduced or are
contemplating regulatory changes in response to the potential impacts of climate
change. The December 1997 Kyoto Protocol established a set of greenhouse gas
emission targets for developed countries that have ratified the Protocol.
Although the Kyoto Protocol has not been ratified by the U.S., several states
have initiated legislative action on climate change. Climate change legislation
has been introduced in, but not yet passed by the U.S. Congress, which could
result in increased future energy and compliance costs. From a medium and
long-term perspective, we are likely to see an increase in costs relating to our
assets that emit significant amounts of greenhouse gases as a result of
regulatory initiatives in the countries in which we operate. These regulatory
initiatives may be either voluntary or mandatory and may impact our operations
directly or through our suppliers or customers. Assessments of the potential
impact of future climate change regulation are uncertain, given the wide scope
of potential regulatory change in countries in which we operate.
The
potential physical impacts of climate change on our operations are highly
uncertain, and would be particular to the geographic circumstances. These may
include changes in rainfall patterns, water shortages, changing sea levels,
changing storm patterns and intensities, and changing temperatures. These
effects may adversely impact the cost, production and financial performance of
our operations.
Our
operating, inactive and historical domestic mining sites and facilities may be
subject to future regulation of radioactive materials that are
commonly associated with, or result from, our mining operations.
A
number of federal and state agencies are considering new regulations to
characterize, regulate and remediate potential workplace exposures and
environmental impacts of radioactive materials commonly associated with mining
operations. For example, the EPA intends to promulgate rules to
regulate technologically enhanced naturally occurring radioactive materials
(TENORM) and their impacts at mining operations. In addition, several
states are promulgating groundwater quality compliance and remediation standards
for radioactive materials, including uranium. Radioactive materials
can be associated with copper mineral deposits. Consequently, our copper
operations may generate, concentrate or release radioactive materials that may
subject our operations to new and increased regulation. The impact of
such future regulation on our operating, closure, reclamation, and remediation
costs is uncertain.
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.
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.
INTERNATIONAL
RISKS
Our
operations outside of the United States are subject to political, social and
geographic risks of doing business in foreign countries.
We
are a global mining company with substantial assets located outside of the
United States. We conduct international mining operations in Indonesia, Chile
and Peru. We also have a significant development project in the DRC, which is
expected to begin production in 2009. Accordingly, our business may 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
foreign countries. Such risks include (1) forced modification of existing
contracts, (2) expropriation, (3) changes in a country’s laws and policies,
including those relating to labor, taxation, royalties, divestment, imports,
exports, trade regulations, currency and environmental matters, (4) political
instability and civil strife, (5) exchange controls, and (6) 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. Our insurance does not cover most
losses caused by these risks.
Because
our Grasberg mine in Papua, Indonesia remains our most significant operating
asset, 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.
Grasberg
operated at reduced mining and milling rates during a four-day period from April
18, 2007 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 its workers and Grasberg 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 37 percent of aggregate proven and probable
recoverable ore at December 31, 2007, representing approximately 43 percent
of PT Freeport Indonesia’s share of recoverable copper reserves and
approximately 57 percent of its share of recoverable gold
reserves.
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.
Any
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
because of 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.
Our
Tenke Fungurume development project is located in the DRC, and our business may
be adversely affected by political, economic and social instability in the
DRC.
Our
most significant development project, Tenke Fungurume, is located in the DRC, a
nation that since 1960 has undergone outbreaks of political violence, changes in
national leadership and financial crisis. These factors heighten the risk of
abrupt changes in the national policy towards foreign investors, which in turn
could result in unilateral modification of concessions or contracts, increased
taxation, denial of permits or permit renewals or expropriation of assets. Our
ability to continue development is currently subject to an ongoing review
of all mining contracts by the Ministry of Mines in the DRC (Ministry), the
outcome of which cannot be predicted. We received notification on February
20, 2008 that the Ministry wishes to renegotiate several material provisions of
our mining concessions. We believe that the terms of the concessions
are fair and that they were negotiated transparently and are legally binding.
However, we cannot predict whether the Government of the DRC will respect our
contract rights. Other political, economic and social risks that are outside of
our control and could adversely affect our business include:
· political
risks associated with the limited tenure of the newly elected
government;
· cancellation
or renegotiation of mining contracts by the government;
· royalty
and tax increases or claims by governmental entities, including retroactive
claims;
· security
risks due to the remote location and violence in the northeastern provinces of
theDRC;
· risk
of loss of property due to expropriation or nationalization of property;
and
· risk
of loss due to civil strife, acts of war, guerrilla activities, insurrection and
terrorism.
Consequently,
our Tenke Fungurume development project may be substantially affected by factors
beyond our control, any of which could adversely affect our financial position
or results of operations.
Terrorist
attacks throughout 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 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 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 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.
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 for the acquisition of Phelps
Dodge to the assets acquired and liabilities assumed based upon their estimated
fair values on the acquisition date of March 19, 2007. This allocation resulted
in significant increases in the carrying values of certain acquired assets,
including, based on preliminary estimates, increases of approximately $2.8
billion in metal inventories and stockpiles and approximately $16.1 billion in
property, plant and equipment. Although these increases in metal inventories and
stockpiles and property, plant and equipment do not impact our cash flows, the
increases in metal inventories and stockpiles had a significant impact to our
reported earnings in 2007, and the increases in property, plant and equipment
had a significant impact on our reported earnings in 2007, and will continue to
have an impact on reported earnings.
A
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 values
of metal and stockpile inventories and property, plant and equipment. These
charges would reduce reported earnings, but would have no effect on cash
flows.
In
addition, at December 31, 2007, the carrying value of goodwill associated with
the acquisition of Phelps Dodge totaled $6.1 billion. Absent the occurrence of
events or circumstances in an interim period that may indicate impairment, we
are required to evaluate goodwill for impairment on an annual basis. If we
conclude
that the goodwill associated with the transaction is impaired, the amount of the
impairment would be charged to our reported earnings, but would have no effect
on cash flows.
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
andto designate the rights, preferences and privileges of each
class; if issued, such preferredstock 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
forproposals 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.
Not
applicable.
We
are involved from time to time in various legal proceedings of a character
normally incident to the ordinary course of our business. We believe that
potential liability in such proceedings would not have a material adverse effect
on our financial condition or results of operations. We maintain liability
insurance
to
cover some, but not all, potential liabilities normally incident to the ordinary
course of our business as well as other insurance coverage customary in our
business, with coverage limits that we deem prudent.
Environmental
Proceedings
Pinal
Creek. The
Pinal Creek site located near Miami, Arizona, 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. (PDMI) (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 groundwater. The Consent Decree
committed the 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
CERCLA.
The
PCG members have been pursuing contribution litigation against three other
parties involved with the site. PDMI dismissed its contribution claims against
one defendant when another PCG member agreed to be responsible for any share
attributable to that defendant. PDMI 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. There are significant disagreements
among the members of the PCG regarding the allocation of the cost of
remediation, and a trial on that issue is currently scheduled to begin in
late 2008. The overall cost of the clean up is expected to be
significant.
Arizona
Notice of Violation (NOV) – Sierrita operations. In September and
October 2006, ADEQ issued two NOVs to the Phelps Dodge Sierrita, Inc. (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 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 Sierrita 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. In November
2007, Sierrita paid stipulated penalties of $140,500 to EPA and ADEQ as
a condition to a joint request to the federal court for termination of the
Consent Decree.
New
Mexico Environment Department – Chino Mines. On October 24,
2007, Chino Mines Co. (Chino) notified NMED that heavy rains during July, August
and September led to a release of diluted leach solutions through a storm water
outfall to an ephemeral stream on Chino’s property. Chino sent a
follow up notice to NMED on November 7, 2007, which identified the interim
corrective actions taken as a result of the
discharge. On February 28, 2008, Chino received a proposed
Administrative Compliance Order, which included a demand for civil penalties in
the amount of $276,600 for violation of legal requirements in connection
with Chino’s management of the solutions. Chino is preparing a response to NMED.
Asbestos
Claims
Since
approximately 1990, Phelps Dodge and various other subsidiaries have been
named as defendants in a large number of product liability or premises lawsuits
claiming injury from exposure to asbestos contained
in
electrical wire products produced or marketed many years ago, or from asbestos
at certain Phelps Dodge properties. Based on information available to us to
date, 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
Chemical Company (Columbian), formerly a subsidiary of Phelps Dodge, and
several other companies were named as defendants 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. All of these actions were
consolidated in the U.S. District Court for the District of
Massachusetts under the caption In re
Carbon Black Antitrust Litigation. On September 27, 2007,
the court entered an order approving a proposed settlement and
dismissing with prejudice all claims against Columbian and other
defendants in these actions.
Columbian
and the other defendants entered into an agreement to settle the separate
action entitled Carlisle
Companies Incorporated, et al. v. Cabot Corporation, et al., which was
filed against Columbian and other defendants on behalf of a group of
affiliated companies that opted out of the federal class action. All claims in
that action were dismissed with prejudice on October 16,
2007.
Columbian
and the other defendants have also settled state law claims filed on behalf of
purported classes of indirect purchasers of carbon black in California,
Tennessee and Kansas and six other states represented by Kansas counsel.
Similar actions filed in New Jersey and North Carolina have been
dismissed. Actions remain pending in state courts in Florida and South
Dakota. Threatened litigation in Massachusetts has not been
initiated. We retained responsibility for these claims in the
agreement pursuant to which we sold Columbian, and we have paid an aggregate of
$7 million to settle the claims referenced above. Columbian and the other
defendants are attempting to negotiate a resolution of the remaining state
lawsuits.
Water
Rights
Water
law in the Western U.S. is generally 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. Our operations in the Western U.S. require water
for mining, ore processing and related support facilities. Continuous
operation of these mines is dependent on our ability to maintain our water
rights and claims. The loss of water rights, in whole or in part,
could have a significant adverse affect on our mining operations.
Arizona
Two
water rights adjudications have been initiated in the State of Arizona in order
to quantify and prioritize all surface water claims in two of the State’s river
systems that include four of our mines: Morenci, Sierrita, Safford and Miami and
which may affect our Bagdad, Arizona mine. These adjudications have
proceeded for many years, and we cannot predict when they will be concluded, but
the loss of any water claims in these legal proceedings could have a
significant adverse affect on the operations of these
mines.
In Re
the General Adjudication of All Rights to Use Water in the Little Colorado Water
System and Sources, Apache County, Superior Court, No. 6417,
filed on or about February 17, 1978. The principal parties, in
addition to Phelps Dodge, include: the State of Arizona; the Salt
River Project; the Arizona Public Service Company; the Navajo Nation, the Hopi
Indian Tribe; the San Juan Southern Paiute Tribe; and the United States on its
own behalf, on behalf of those Indian tribes, and on behalf of the White
Mountain Apache Tribe.
In Re
The General Adjudication of All Rights to Use Water in the Gila River System and
Sources,
Maricopa
County, Superior Court, Cause Nos. W-1 (Salt), W-2 (Verde), W-3 (Upper Gila),
and W-4 (San Pedro), filed on February 17, 1978. The principal
parties, in addition to us, include: the State of Arizona; 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 behalf of the White Mountain Apache Tribe, the Fort McDowell
Mohave-Apache Indian Community, the Salt River Pima-Maricopa Indian Community,
and the Payson Community of Yavapai Apache Indians.
In
1998, we entered into a water rights settlement agreement with the Gila River
Indian Community (GRIC), which was later included in a comprehensive water
rights settlement under the Arizona Water Settlements Act of
2004. The GRIC settlement is subject to contingencies that must be
met before the agreement is fully effective, and the comprehensive settlement
has been challenged by other parties. If we are unable to resolve the
contingencies in the GRIC settlement and defeat the third-party challenges, our
water rights in the Gila River watershed could be diminished, and our operations
at Morenci, Safford, Sierrita and Miami could be adversely
affected.
Prior
to January 1, 1983, various Indian tribes filed suits in U.S. District Court in
Arizona claiming superior rights to water being used by many other water users,
including us, and claiming damages for prior use in derogation of their
allegedly superior rights. These federal proceedings have been stayed
pending the Arizona Superior Court adjudications.
United
States v. Gila Valley Irrigation District, United States District Court,
District of Arizona, was initiated in 1925 by the United States to settle
conflicting claims to water rights in portions of the Gila River
watershed. A decree settling the claims of various parties was
entered in 1935, after Phelps Dodge Morenci had been dismissed from the case,
with the Court retaining jurisdiction. In 1988, the Gila River Indian
Community intervened, challenging uses of water in the Gila River watershed,
which may impact approximately 3,000 acre-feet of water that we have the right
to divert annually from Eagle Creek, Chase Creek or the San Francisco River for
operation of our Morenci mine, pursuant to decreed rights and an agreement
between us and the Gila Valley Irrigation District. Our Morenci
operations also purchased farm lands with water rights in 1997, 1998 and 2007
that are subject to this proceeding. Impairment of our water claims
in the Gila River watershed could adversely affect the operation of our Morenci
and Safford mines.
Colorado
United
States v. Northern Colorado Water Conservancy District, et.al., United
States District Court, District of Colorado, Civil Nos. 2782, 5016 and 5017, was
initiated by the United States in 1948 to resolve water claims involving the
Bureau of Reclamation in Colorado, and was consolidated in 1955 with two state
court proceedings involving these water claims which had been removed to the
United States District Court. Principal parties include the United
States on its own behalf; the Northern Colorado Conservancy District; the
Colorado River Water Conservancy District; and the City and County of
Denver. In 1955, the Court entered the Blue River Decree, which
adjudicated the water rights for the Bureau of Reclamation’s Green Mountain
Reservoir and Denver’s Dillon Reservoir, with the Court retaining jurisdiction
to implement the Decree. In April 2007, our subsidiary, Climax
Molybdenum Company, filed a motion to intervene in the Blue River Decree to
resolve a dispute about the proper administration of water rights held by the
Climax Mine, Green Mountain Reservoir, and Dillon
Reservoir. Administration of the priorities of the water rights for
Green Mountain Reservoir and Dillon Reservoir as senior to the priorities of the
water rights for the Climax Mine could significantly affect the Climax Mine’s
right to reliably divert water needed for mine operations. Climax’s
motion to intervene asks the Court to determine that the priorities for the
Climax Mine’s water rights be administered as senior to those of Green Mountain
Reservoir and Dillon Reservoir.
Not
applicable.
Certain
information as of February 15, 2008, about our executive officers, including
their position or office with FCX, PT Freeport Indonesia and Atlantic Copper, is
set forth in the following table and accompanying text:
Name
|
|
Age
|
|
Position
or Office
|
|
|
|
|
|
James
R. Moffett
|
|
69
|
|
Chairman
of the Board of FCX. President Commissioner
|
|
|
|
|
of
PT Freeport Indonesia.
|
|
|
|
|
|
Richard
C. Adkerson
|
|
61
|
|
Director,
President and Chief Executive Officer of FCX.
|
|
|
|
|
Director
and Executive Vice President of PT Freeport Indonesia. Chairman of the
Board of Directors of Atlantic Copper.
|
|
|
|
|
|
Michael
J. Arnold
|
|
55
|
|
Executive
Vice President and Chief Administrative
|
|
|
|
|
Officer
of FCX.
|
|
|
|
|
|
Kathleen
L. Quirk
|
|
44
|
|
Executive
Vice President, Chief Financial Officer and
|
|
|
|
|
Treasurer
of FCX. Commissioner of PT Freeport Indonesia. Director of Atlantic
Copper.
|
James R.
Moffett has served as Chairman of the Board of FCX since
1992. Mr. Moffett previously served as the Chief Executive Officer of
FCX from July 1995 until December 2003. He is also President
Commissioner of PT Freeport Indonesia and Co-Chairman of the Board of McMoRan
Exploration Co. (McMoRan).
Richard C.
Adkerson has served as FCX’s President since January 1, 2008 and from
April 1997 to March 2007, Chief Executive Officer since December 2003 and a
director since October 2006. Mr. Adkerson previously served as FCX’s
Chief Financial Officer from October 2000 to December 2003. Mr.
Adkerson is also a director and Executive Vice President of PT Freeport
Indonesia, Chairman of the Board of Directors of Atlantic Copper, and
Co-Chairman of the Board of McMoRan. From November 1998 to February
2004, he also served as President and Chief Executive Officer of
McMoRan.
Michael J.
Arnold has served as the Chief
Administrative Officer of FCX since December 2003 and as Executive Vice
President of FCX since March 2007. He also served as a director and
Executive Vice President of PT Freeport Indonesia from May 1998 to March
2007.
Kathleen L.
Quirk has served as FCX’s Executive Vice President since March 2007,
Chief Financial Officer since December 2003 and Treasurer since February
2000. Ms. Quirk previously served as FCX’s Senior Vice President from
December 2003 to March 2007, as Vice President from February 1999 to December
2003 and as Assistant Treasurer from November 1997 to February
1999. Ms. Quirk has also served as a Commissioner of PT Freeport
Indonesia since April 2000, as the Senior Vice President and Treasurer of
McMoRan since April 2002 and as Vice President and Treasurer of McMoRan from
January 2000 to April 2002.
Unregistered
Sales of Equity Securities
None.
Common
Stock
Our
common shares trade on the New York Stock Exchange (NYSE) under the symbol
“FCX.” The FCX share price is reported daily in the financial press
under “FMCG” in most listings of NYSE securities. Effective March 19,
2007, our certificate of incorporation was amended to rename our Class B common
stock to Common Stock. NYSE composite tape common share price ranges during 2007
and 2006 follow:
|
|
2007
|
|
2006
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
First
Quarter
|
|
$
|
67.19
|
|
$
|
48.85
|
|
$
|
65.00
|
|
$
|
47.11
|
Second
Quarter
|
|
|
85.50
|
|
|
65.62
|
|
|
72.20
|
|
|
43.10
|
Third
Quarter
|
|
|
110.60
|
|
|
67.07
|
|
|
62.29
|
|
|
47.58
|
Fourth
Quarter
|
|
|
120.20
|
|
|
85.71
|
|
|
63.70
|
|
|
47.60
|
As
of February 15, 2008, there were approximately 19,000 holders of record of our
common stock.
Common
Stock Dividends
In
February 2003, the Board of Directors authorized the initiation of an annual
cash dividend on our common stock of $0.36 per share payable quarterly, and
authorized increases in the annual cash dividend in October 2003 to $0.80 per
share, in October 2004 to $1.00 per share and in November 2005 to $1.25 per
share. In December 2007, the Board of Directors authorized an
increase in our annual common stock dividend to $1.75 per share. Additionally,
since December 2004, we have paid eight supplemental dividends.
Below
is a summary of common stock cash dividends declared and paid during 2007 and
2006:
|
|
2007
|
|
|
Per
Share
Amount
|
|
Record
Date
|
|
Payment
Date
|
First
Quarter
|
$
|
0.3125
|
|
Jan.
16, 2007
|
|
Feb.
1, 2007
|
Second
Quarter
|
|
0.3125
|
|
Apr.
16, 2007
|
|
May
1, 2007
|
Third
Quarter
|
|
0.3125
|
|
July
16, 2007
|
|
Aug.
1, 2007
|
Fourth
Quarter
|
|
0.3125
|
|
Oct.
15, 2007
|
|
Nov.
1, 2007
|
|
|
2006
|
|
|
Per
Share
Amount
|
|
Record
Date
|
|
Payment
Date
|
First
Quarter
|
$
|
0.3125
|
|
Jan.
17, 2006
|
|
Feb.
1, 2006
|
Supplemental
dividend
|
|
0.50
|
|
Mar.
15, 2006
|
|
Mar.
31, 2006
|
Second
Quarter
|
|
0.3125
|
|
Apr.
17, 2006
|
|
May
1, 2006
|
Supplemental
dividend
|
|
0.75
|
|
June
15, 2006
|
|
June
30, 2006
|
Third
Quarter
|
|
0.3125
|
|
July
17, 2006
|
|
Aug.
1, 2006
|
Supplemental
dividend
|
|
0.75
|
|
Sept.
14, 2006
|
|
Sept.
29, 2006
|
Fourth
Quarter
|
|
0.3125
|
|
Oct.
16, 2006
|
|
Nov.
1, 2006
|
Supplemental
dividend
|
|
1.50
|
|
Dec.
14, 2006
|
|
Dec.
29, 2006
|
The declaration and payment of dividends is at the
discretion of our Board and will depend on our financial results, cash
requirements, future prospects and other factors deemed relevant by the
Board. In addition, payment of dividends on our common stock and
purchases of common stock are subject to limitations under our 6⅞% Senior Notes
and $6 billion in senior notes used to finance the acquisition of Phelps Dodge
and, in certain circumstances, our senior credit facility.
Issuer
Purchases of Equity Securities
In
December 2007, our Board of Directors approved a new open market share purchase
program for up to 20 million shares, which replaced our previous 20-million
share program. A total of eight million shares were purchased under
the previous program. The program does not have an expiration
date. No shares were purchased during the three-month period ended
December 31, 2007 under this program.
We
also purchase shares in connection with our stock incentive plans and our
non-qualified supplemental savings plan. The following table sets forth
information with respect to shares of common stock of FCX purchased by us during
the three months ended December 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
|
October
1-31, 2007
|
|
1,744
|
|
$
|
115.76
|
|
-
|
|
-
|
November
1-30, 2007
|
|
2,135
|
|
$
|
110.62
|
|
-
|
|
-
|
December
1-31, 2007
|
|
94
|
|
$
|
102.56
|
|
-
|
|
-
|
Total
|
|
3,973
|
|
$
|
112.69
|
|
-
|
|
20,000,000
|
|
|
|
|
|
|
|
|
|
|
a.
|
This
category includes shares repurchased under FCX’s applicable stock
incentive plans (Plans) and its non-qualified supplemental savings plan
(SSP). Through the Plans, FCX repurchases shares to satisfy tax
obligations on restricted stock awards and to cover the cost of option
exercises, and in the SSP repurchases shares as a result of FCX dividends
paid.
|
FREEPORT-McMoRan
COPPER & GOLD INC.
SELECTED
FINANCIAL AND OPERATING DATA
|
Years
Ended December 31,
|
|
|
2007a
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
FCX
CONSOLIDATED FINANCIAL DATA
|
(In
Millions, Except Per Share Amounts)
|
|
Revenues
|
$
|
16,939
|
b
|
$
|
5,791
|
|
$
|
4,179
|
|
$
|
2,372
|
|
$
|
2,212
|
|
Operating
income
|
|
6,555
|
b,c
|
|
2,869
|
|
|
2,177
|
|
|
704
|
d
|
|
823
|
|
Income
from continuing operations (applicable to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock)
before cumulative effect of accounting changes
|
|
2,734
|
|
|
1,396
|
|
|
935
|
|
|
157
|
|
|
170
|
|
Income
from discontinued operations, net of taxes
|
|
35
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Cumulative
effect of accounting changes, net
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(16
|
)h
|
Net
income applicable to common stock
|
|
2,769
|
b,c,e,f
|
|
1,396
|
e,f,g
|
|
935
|
e,f
|
|
157
|
d,e,f
|
|
154
|
e
|
Basic
net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
8.02
|
|
$
|
7.32
|
|
$
|
5.18
|
|
$
|
0.86
|
|
$
|
0.99
|
|
Discontinued
operations
|
|
0.10
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Basic
net income per share of common stock
|
$
|
8.12
|
|
$
|
7.32
|
|
$
|
5.18
|
|
$
|
0.86
|
|
$
|
0.99
|
|
Diluted
net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
7.41
|
|
$
|
6.63
|
|
$
|
4.67
|
|
$
|
0.85
|
|
$
|
0.97
|
|
Discontinued
operations
|
|
0.09
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Diluted
net income per share of common stock
|
$
|
7.50
|
b,c,e,f
|
$
|
6.63
|
e,f,g
|
$
|
4.67
|
e,f
|
$
|
0.85
|
d,e,f
|
$
|
0.97
|
e,h
|
Basic
average shares outstanding
|
|
341
|
|
|
191
|
|
|
180
|
|
|
182
|
|
|
156
|
|
Diluted
average shares outstanding
|
|
397
|
|
|
221
|
|
|
220
|
|
|
185
|
|
|
159
|
|
Dividends
declared per common share
|
$
|
1.375
|
|
$
|
5.0625
|
|
$
|
2.50
|
|
$
|
1.10
|
|
$
|
0.27
|
|
At
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
1,626
|
|
$
|
907
|
|
$
|
764
|
|
$
|
552
|
|
$
|
499
|
|
Property,
plant, equipment and development costs, net
|
|
25,715
|
|
|
3,099
|
|
|
3,089
|
|
|
3,199
|
|
|
3,262
|
|
Goodwill
|
|
6,105
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Total
assets
|
|
40,661
|
|
|
5,390
|
g
|
|
5,550
|
|
|
5,087
|
|
|
4,718
|
|
Long-term
debt, including current portion and short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
borrowings
|
|
7,211
|
|
|
680
|
|
|
1,256
|
|
|
1,952
|
|
|
2,228
|
|
Total
stockholders’ equity
|
|
18,234
|
|
|
2,445
|
g
|
|
1,843
|
|
|
1,164
|
|
|
776
|
|
The
selected consolidated financial data shown above is derived from our audited
consolidated financial statements. These historical results are not necessarily
indicative of results that you can expect for any future period. You should read
this data in conjunction with Management’s Discussion and Analysis of Financial
Condition and Results of Operations and our full consolidated financial
statements and notes thereto contained in this annual report.
a.
|
Includes
the results of Phelps Dodge Corporation (Phelps Dodge) beginning March 20,
2007.
|
b.
|
Includes
charges to revenues for mark-to-market accounting adjustments on the 2007
copper price protection program assumed in the acquisition of Phelps Dodge
totaling $175 million ($106 million to net income or $0.27 per
share).
|
c.
|
Includes
purchase accounting impacts of $1.3 billion ($793 million to net income or
$2.00 per share) related to the acquisition of Phelps
Dodge.
|
d.
|
Includes
a $95 million ($49 million to net income or $0.26 per share) gain on
insurance settlement related to the fourth-quarter 2003 slippage and
debris flow events at the Grasberg open pit and a $12 million ($12 million
to net income or $0.06 per share) charge related to Atlantic Copper’s
workforce reduction plan.
|
e.
|
Includes
net losses on early extinguishment of debt totaling $132 million ($0.33
per share) in 2007, $30 million ($0.14 per share) in 2006, $40 million
($0.18 per share) in 2005, $7 million ($0.04 per share) in 2004 and $32
million ($0.20 per share) in 2003.
|
f.
|
Includes
gains of $52 million ($0.13 per share) in 2007 related to sales of
marketable securities, $30 million ($0.13 per share) in 2006 related to
the disposition of land and certain royalty rights at Atlantic Copper, $5
million ($0.02 per share) in 2005 and $20 million ($0.11 per share) in
2004 from the sale of land in Arizona held by an FCX joint venture, and an
additional $7 million ($0.04 per share) in 2004 from Atlantic Copper’s
sale of its wire rod and wire
assets.
|
g.
|
Effective
January 1, 2006, we adopted Emerging Issues Task Force Issue No. 04-6,
“Accounting for Stripping Costs Incurred during Production in the Mining
Industry” (EITF 04-6), and recorded our deferred mining costs asset ($285
million) as of December 31, 2005, net of taxes, minority interest share
and inventory effects ($136 million), as a cumulative effect adjustment to
reduce beginning retained earnings. As a result of adopting EITF 04-6,
income from continuing operations before income taxes and minority
interests was $35 million lower and net income was $19 million ($0.08 per
share) lower than if we had not adopted EITF 04-6. Effective January 1,
2006, we also adopted Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R). As a result
of adopting SFAS No. 123R, income from continuing operations before income
taxes and minority interests was $28 million lower and net income was $16
million ($0.07 per share) lower than if we had not adopted SFAS No. 123R.
Results for prior years have not been
restated.
|
h.
|
Effective
January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement
Obligations,” and recorded a $9 million ($0.06 per share) cumulative
effect gain. Effective July 1, 2003, we adopted SFAS No. 150, “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and Equity,” and recorded a $25 million ($0.16 per share) cumulative
effect charge.
|
FREEPORT-McMoRan
COPPER & GOLD INC.
SELECTED
FINANCIAL AND OPERATING DATA (Continued)
|
Years
Ended December 31,
|
|
|
2007a
|
|
2006a
|
|
2005a
|
|
2004a
|
|
2003a
|
|
FCX
PRO FORMA CONSOLIDATED OPERATING DATA, Net of Joint Venture
Interests
|
|
Copper
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(millions of pounds)
|
|
3,884
|
|
|
3,639
|
|
|
3,912
|
|
|
3,518
|
|
|
3,749
|
|
Production
(thousands of metric tons)
|
|
1,762
|
|
|
1,651
|
|
|
1,774
|
|
|
1,596
|
|
|
1,701
|
|
Sales
(millions of pounds)
|
|
3,862
|
|
|
3,630
|
|
|
3,933
|
|
|
3,530
|
|
|
3,775
|
|
Sales
(thousands of metric tons)
|
|
1,752
|
|
|
1,647
|
|
|
1,784
|
|
|
1,601
|
|
|
1,712
|
|
Average
realized price per pound, excluding hedging
|
$
|
3.28
|
|
$
|
3.06
|
|
$
|
1.76
|
|
$
|
1.33
|
|
$
|
0.82
|
|
Average
realized price per pound, including hedging
|
$
|
3.23
|
b
|
$
|
2.79
|
b
|
$
|
1.67
|
b
|
$
|
1.33
|
|
$
|
0.82
|
|
Gold
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(thousands of ounces)
|
|
2,329
|
|
|
1,863
|
|
|
2,923
|
|
|
1,591
|
|
|
2,592
|
|
Sales
(thousands of ounces)
|
|
2,320
|
|
|
1,866
|
|
|
2,925
|
|
|
1,577
|
|
|
2,604
|
|
Average
realized price per ounce
|
$
|
681.80
|
|
$
|
566.11
|
c
|
$
|
453.80
|
|
$
|
410.85
|
|
$
|
364.40
|
|
Molybdenum
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(millions of pounds)
|
|
70
|
|
|
68
|
|
|
62
|
|
|
57
|
|
|
52
|
|
Sales
(millions of pounds)
|
|
69
|
|
|
69
|
|
|
60
|
|
|
63
|
|
|
54
|
|
Average
realized price per pound
|
$
|
25.87
|
|
$
|
21.87
|
|
$
|
25.89
|
|
$
|
12.71
|
|
$
|
5.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
NORTH AMERICAN MINING OPERATING DATA, Net of Joint Venture Interest (Pro
Forma)
|
|
Copper
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(millions of pounds)
|
|
1,320
|
|
|
1,305
|
|
|
1,365
|
|
|
1,384
|
|
|
1,296
|
|
Production
(thousands of metric tons)
|
|
599
|
|
|
592
|
|
|
619
|
|
|
628
|
|
|
588
|
|
Sales
(millions of pounds)
|
|
1,332
|
|
|
1,303
|
|
|
1,383
|
|
|
1,393
|
|
|
1,316
|
|
Sales
(thousands of metric tons)
|
|
604
|
|
|
591
|
|
|
627
|
|
|
632
|
|
|
597
|
|
Average
realized price per pound, excluding hedging
|
$
|
3.26
|
|
$
|
3.03
|
|
$
|
1.67
|
|
$
|
1.29
|
|
$
|
0.82
|
|
Average
realized price per pound, including hedging
|
$
|
3.12
|
b
|
$
|
2.26
|
b
|
$
|
1.49
|
b
|
$
|
1.29
|
|
$
|
0.82
|
|
Molybdenum
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(millions of pounds)
|
|
69
|
|
|
68
|
|
|
62
|
|
|
57
|
|
|
52
|
|
Sales
(millions of pounds)
|
|
69
|
|
|
69
|
|
|
60
|
|
|
63
|
|
|
54
|
|
Average
realized price per pound
|
$
|
25.87
|
|
$
|
21.87
|
|
$
|
25.89
|
|
$
|
12.71
|
|
$
|
5.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
SOUTH AMERICAN MINING OPERATING DATA (Pro Forma)
|
|
Copper
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(millions of pounds)
|
|
1,413
|
|
|
1,133
|
|
|
1,091
|
|
|
1,137
|
|
|
1,161
|
|
Production
(thousands of metric tons)
|
|
641
|
|
|
514
|
|
|
495
|
|
|
516
|
|
|
527
|
|
Sales
(millions of pounds)
|
|
1,399
|
|
|
1,126
|
|
|
1,093
|
|
|
1,145
|
|
|
1,163
|
|
Sales
(thousands of metric tons)
|
|
635
|
|
|
511
|
|
|
496
|
|
|
519
|
|
|
527
|
|
Average
realized price per pound, excluding hedging
|
$
|
3.25
|
|
$
|
3.03
|
|
$
|
1.75
|
|
$
|
1.33
|
|
$
|
0.83
|
|
Average
realized price per pound, including hedging
|
$
|
3.25
|
|
$
|
3.03
|
|
$
|
1.63
|
b
|
$
|
1.33
|
|
$
|
0.83
|
|
Gold
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(thousands of ounces)
|
|
116
|
|
|
112
|
|
|
117
|
|
|
122
|
|
|
127
|
|
Sales
(thousands of ounces)
|
|
114
|
|
|
111
|
|
|
117
|
|
|
122
|
|
|
127
|
|
Average
realized price per ounce
|
$
|
700.81
|
|
$
|
551.70
|
|
$
|
425.32
|
|
$
|
409.14
|
|
$
|
349.12
|
|
Molybdenum
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(millions of pounds)
|
|
1
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
INDONESIAN MINING OPERATING DATA, Net of Rio Tinto’s Joint Venture
Interest
|
|
Copper
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(millions of pounds)
|
|
1,151
|
|
|
1,201
|
|
|
1,456
|
|
|
997
|
|
|
1,292
|
|
Production
(thousands of metric tons)
|
|
522
|
|
|
545
|
|
|
660
|
|
|
452
|
|
|
586
|
|
Sales
(millions of pounds)
|
|
1,131
|
|
|
1,201
|
|
|
1,457
|
|
|
992
|
|
|
1,296
|
|
Sales
(thousands of metric tons)
|
|
513
|
|
|
545
|
|
|
661
|
|
|
450
|
|
|
588
|
|
Average
realized price per pound
|
$
|
3.32
|
|
$
|
3.13
|
|
$
|
1.85
|
|
$
|
1.37
|
|
$
|
0.82
|
|
Gold
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
(thousands of ounces)
|
|
2,198
|
|
|
1,732
|
|
|
2,789
|
|
|
1,456
|
|
|
2,463
|
|
Sales
(thousands of ounces)
|
|
2,185
|
|
|
1,736
|
|
|
2,790
|
|
|
1,443
|
|
|
2,470
|
|
Average
realized price per ounce
|
$
|
680.74
|
|
$
|
566.51
|
c
|
$
|
456.27
|
|
$
|
412.32
|
|
$
|
366.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
Phelps Dodge’s pre-acquisition results for comparative purposes
only.
|
b.
|
Includes
the impact of hedging losses related to copper price protection
programs.
|
c.
|
Amount
was approximately $606 per ounce before a loss resulting from the
redemption of FCX’s Gold-Denominated Preferred Stock, Series
II.
|
Table of Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
|
|
SELECTED
FINANCIAL AND OPERATING DATA (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2007
a
|
|
|
2006
a
|
|
|
2005
a
|
|
|
2004
a
|
|
|
2003
a
|
|
100%
NORTH AMERICAN MINING OPERATING DATA, Including Joint Venture
Interest
|
|
Solution
extraction/electrowinning (SX/EW) operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leach
ore placed in stockpiles (metric tons per day)
|
|
798,200
|
|
|
801,200
|
|
|
778,500
|
|
|
742,800
|
|
|
624,100
|
|
Average
copper ore grade (percent)
|
|
0.23
|
|
|
0.30
|
|
|
0.26
|
|
|
0.27
|
|
|
0.31
|
|
Copper
production (millions of recoverable pounds)
|
|
940
|
|
|
1,013
|
|
|
1,066
|
|
|
1,134
|
|
|
1,139
|
|
Mill
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ore
milled (metric tons per day)
|
|
223,800
|
|
|
199,300
|
|
|
194,800
|
|
|
166,400
|
|
|
131,100
|
|
Average
ore grade (percent):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
0.35
|
|
|
0.33
|
|
|
0.33
|
|
|
0.36
|
|
|
0.36
|
|
Molybdenum
|
|
0.02
|
|
|
0.02
|
|
|
0.03
|
|
|
0.03
|
|
|
0.04
|
|
Production
(millions of recoverable pounds):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
501
|
|
|
414
|
|
|
419
|
|
|
375
|
|
|
311
|
|
Molybdenum
(by-product)
|
|
30
|
|
|
31
|
|
|
30
|
|
|
30
|
|
|
30
|
|
Molybdenum operations
(Henderson)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ore
milled (metric tons per day)
|
|
24,000
|
|
|
22,200
|
|
|
20,300
|
|
|
16,800
|
|
|
12,600
|
|
Average
molybdenum ore grade (percent)
|
|
0.23
|
|
|
0.23
|
|
|
0.22
|
|
|
0.23
|
|
|
0.25
|
|
Molybdenum
production (millions of recoverable pounds)
|
|
39
|
|
|
37
|
|
|
32
|
|
|
27
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100%
SOUTH AMERICAN MINING OPERATING DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SX/EW
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leach
ore placed in stockpiles (metric tons per day)
|
|
289,100
|
|
|
257,400
|
|
|
264,600
|
|
|
233,600
|
|
|
252,600
|
|
Average
copper ore grade (percent)
|
|
0.43
|
|
|
0.45
|
|
|
0.46
|
|
|
0.51
|
|
|
0.51
|
|
Copper
production (millions of recoverable pounds)
|
|
569
|
|
|
695
|
|
|
670
|
|
|
676
|
|
|
692
|
|
Mill
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ore
milled (metric tons per day)
|
|
167,900
|
|
|
68,500
|
|
|
68,700
|
|
|
69,700
|
|
|
65,600
|
|
Average
copper ore grade (percent)
|
|
0.74
|
|
|
0.87
|
|
|
0.84
|
|
|
0.91
|
|
|
0.97
|
|
Production
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
844
|
|
|
438
|
|
|
421
|
|
|
462
|
|
|
469
|
|
Molybdenum
|
|
1
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100%
INDONESIAN MINING OPERATING DATA, Including Rio Tinto’s Joint Venture
Interest
|
|
Ore
milled (metric tons per day)
|
212,600
|
|
|
229,400
|
|
|
216,200
|
|
|
185,100
|
|
|
203,000
|
|
Average
ore grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
(percent)
|
0.82
|
|
|
0.85
|
|
|
1.13
|
|
|
0.87
|
|
|
1.09
|
|
Gold
(grams per metric ton)
|
1.24
|
|
|
0.85
|
|
|
1.65
|
|
|
0.88
|
|
|
1.54
|
|
Recovery
rates (percent)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
90.5
|
|
|
86.1
|
|
|
89.2
|
|
|
88.6
|
|
|
89.0
|
|
Gold
|
86.2
|
|
|
80.9
|
|
|
83.1
|
|
|
81.8
|
|
|
87.3
|
|
Production
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
(millions of pounds)
|
1,211
|
|
|
1,300
|
|
|
1,689
|
|
|
1,099
|
|
|
1,523
|
|
Gold
(thousands of ounces)
|
2,608
|
|
|
1,824
|
|
|
3,440
|
|
|
1,537
|
|
|
3,164
|
|
a.
|
Includes
Phelps Dodge’s pre-acquisition results for comparative purposes
only.
|
Our ratio
of earnings to fixed charges was as follows for the years
presented:
|
Years
Ended December 31,
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
Ratio
of earnings to fixed charges
|
9.9x
|
33.1x
|
15.9x
|
4.9x
|
4.0x
|
Ratio
of earnings to fixed charges
|
|
|
|
|
|
and
preferred stock dividends
|
6.6x
|
14.3x
|
8.2x
|
2.9x
|
3.0x
|
For the
ratio of earnings to fixed charges calculation, earnings consist of pre-tax
income from continuing operations before minority interests in consolidated
subsidiaries, income or loss from equity investees and fixed
charges. Fixed charges include interest and that portion of rent
deemed representative of interest. For the ratio of earnings to fixed
charges and preferred stock dividends calculation, we assumed that our preferred
stock dividend requirements were equal to the pre-tax earnings that would be
required to cover those dividend requirements. We computed those
pre-tax earnings using actual tax rates for each year.
FREEPORT-McMoRan
COPPER & GOLD INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
In
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, “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 on March 19, 2007. The results of operations reported and summarized
below are not necessarily indicative of future operating results. In particular,
the financial results for 2007 include the operations of Phelps Dodge from March
20, 2007, through December 31, 2007, because of the accounting treatment for the
acquisition. References to “Notes” refer to the “Notes to Consolidated Financial
Statements.” Throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations all dollar amounts included in tables are in
millions (except per share amounts) and all references to earnings or losses per
share are on a diluted basis, unless otherwise noted.
Through
our wholly owned subsidiary, Phelps Dodge, and our majority-owned subsidiary, PT
Freeport Indonesia, we are one of the world’s largest copper, gold and
molybdenum mining companies in terms of reserves and production. The Grasberg
minerals district contains the largest single recoverable copper reserve and the
largest single gold reserve of any mine in the world based on the latest
available reserve data provided by third-party industry
consultants.
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 Tenke Fungurume in the Democratic Republic of
Congo (DRC).
In North
America, we have six operating copper mines – Morenci, Bagdad, Sierrita and
Safford in Arizona and Chino and Tyrone in New Mexico, as well as one operating
molybdenum mine – Henderson in Colorado. In addition, we have announced plans to
restart the Miami copper mine in Arizona, and the Climax molybdenum mine in
Colorado. All of these mining operations are wholly owned, except for Morenci.
We record our 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.
In South
America, we have four operating copper mines – Cerro Verde in Peru, and
Candelaria, Ojos del Salado and El Abra in Chile. We own a 53.56 percent
interest in Cerro Verde, an 80 percent interest in both Candelaria and Ojos del
Salado and a 51 percent interest in El Abra. We consolidate the results of these
operations and report the minority interests.
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. 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 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 also
operate Atlantic Copper S.A. (Atlantic Copper), a wholly owned subsidiary,
located in Spain. Atlantic Copper’s operations involve the smelting and refining
of copper concentrates and the marketing of refined copper and precious metals
in slimes. Additionally, PT Freeport Indonesia owns a 25 percent interest in PT
Smelting, an Indonesian company, which operates a copper smelter and refinery in
Gresik, Indonesia.
Phelps
Dodge also had an international manufacturing division, Phelps Dodge
International Corporation (PDIC), which manufactured engineered wire and cable
products principally for the global energy sector. On October 31, 2007, FCX
completed the sale of PDIC. As a result of the sale, the operating results of
PDIC have been removed from continuing operations and reported as discontinued
operations in the consolidated statements of income for the year ended December
31, 2007. Refer to Note 4 for further discussion of discontinued
operations.
ACQUISITION
OF PHELPS DODGE
Phelps
Dodge became our wholly owned subsidiary 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, we issued 136.9 million shares and
paid $18.0 billion in cash to Phelps Dodge shareholders for total consideration
of approximately $26 billion. The estimated fair value of assets acquired and
liabilities assumed and the results of Phelps Dodge’s operations are included in
our consolidated financial statements beginning March 20, 2007.
At
December 31, 2007, the carrying value of goodwill, which is associated with our
acquisition of Phelps Dodge, totaled $6.1 billion. Goodwill represents the
excess of the purchase price over the fair value of net tangible and identified
intangible assets and is attributable to potential strategic and financial
benefits that are expected to be realized. Refer to Note 2 for further
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 approximate $26
billion purchase price, which was funded through a combination of common shares
issued, borrowings under an $11.5 billion senior credit facility, proceeds from
the offering of $6.0 billion of senior notes and available cash resources
(including cash acquired from Phelps Dodge).
In
accordance with the purchase method of accounting, the purchase price paid 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 acquisition date of March 19, 2007. Adjustments to
the estimated fair values, which were initially recorded based on preliminary
estimates, may occur until such values are finalized in first-quarter 2008. In
valuing acquired assets and assumed 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 were 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. At the acquisition date, price projections used to value the assets
acquired ranged from near-term prices of $2.98 per pound of copper and $26.20
per pound of molybdenum to long-term average prices of $1.20 per pound of copper
and $8.00 per pound of molybdenum.
The
following table summarizes the impacts of purchase accounting fair value
adjustments in 2007 and the projected 2008 impacts on production and delivery
costs and depreciation, depletion and amortization expense associated with the
increases in the carrying values of Phelps Dodge’s metal inventories (including
mill and leach stockpiles) and property, plant and equipment, and also includes
the impact associated with the amortization of intangible assets and liabilities
resulting from the acquisition. These net charges do not affect cash flows and
are subject to change as FCX finalizes the purchase price allocation in
first-quarter 2008 (refer to Note 2 for a summary of the preliminary purchase
price allocation). Additionally, inventories (including mill and leach
stockpiles) are subject to lower of cost or market assessments, and declines in
metals prices could result in future impairment charges.
|
|
|
(Projected)
|
|
|
|
2007
|
|
2008
|
|
|
Production
and delivery costs
|
$
|
737
|
|
$
|
60
|
|
|
Depreciation,
depletion and amortization
|
|
595
|
|
|
940
|
|
|
Amortization
of intangibles and other
|
|
(76
|
)
|
|
75
|
|
|
Reduction
of operating income
|
$
|
1,256
|
|
$
|
1,075
|
a
|
|
|
|
|
|
|
|
|
|
Reduction
of income from continuing operations
|
$
|
785
|
|
$
|
670
|
|
|
a.
|
The
estimated reduction in operating income for 2008 is expected to decline,
compared with 2007, primarily because of a decreased impact on production
and delivery costs from inventory valuations as the most significant
increases in inventory values were realized in 2007, partly offset by
increases in (i) depreciation, depletion and amortization reflecting a
full year impact for 2008 and higher values for acquired property, plant
and equipment resulting from revised valuations completed in
fourth-quarter 2007 and (ii) amortization of net intangibles assets in
2008, compared with the amortization of net intangible liabilities in
2007, which included the amortization of unfavorable sales contracts
(refer to Note 7).
|
COPPER,
GOLD AND MOLYBDENUM MARKETS
The
graphs below are intended to illustrate the movements in metals prices during
the periods presented. World metal prices for copper have fluctuated
significantly from 1992 through January 2008, 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 also fluctuated widely from 1998 through January 2008 from a low of
approximately $250 per ounce in 1999 to a high of over $920 per ounce at the end
of January 2008. During the period from 1998 through January 2008, Metals Week Molybdenum Dealer
Oxide prices have ranged from a low of $2.00 per pound in 1998 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 “Risk
Factors” contained in Part I, Item 1A of our Form 10-K for the year ended
December 31, 2007.
*
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 January 31, 2008. 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 December
31, 2007, remain at historically low levels, representing approximately four
days of global consumption. Disruptions associated with strikes, unrest and
other operational issues resulted in low levels of inventory throughout 2006 and
2007. In 2007, copper prices remained strong, but volatile, with LME copper
prices ranging from $2.37 per pound to $3.77 per pound during the year, and
averaging $3.23 per pound. Future copper prices may continue to be volatile and
are expected to be influenced by demand from China, economic activity in the
United States (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 and continue to pursue opportunities to expand
production. The LME spot price closed at $3.77 per pound on February 22,
2008.
Gold
prices averaged approximately $696 per ounce in 2007, with prices ranging from
approximately $608 per ounce to a high of approximately $842 per ounce. On
February 22, 2008, London gold prices closed at approximately $945 per ounce.
Gold prices continued to be supported by increased investment demand for gold,
ongoing geopolitical tensions, a weak U.S. dollar, inflationary pressures and
reduced mine supply.
Molybdenum
markets have been strong in recent years as demand has exceeded available
supplies. During 2007, the molybdenum market was generally balanced with prices
ranging from $24.30 per pound to $34.25 per pound and averaging $30.23 per
pound. The Metals Week
Molybdenum Dealer Oxide price closed at $33.25 per pound on February 18,
2008.
CRITICAL
ACCOUNTING ESTIMATES
Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
based on our consolidated financial statements, which have been prepared in
conformity with generally accepted accounting principles (GAAP) in the 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. The areas requiring the use of management’s estimates are discussed
further in Note 1 under the subheading “Use of Estimates.” Management has
reviewed the following discussion of its development and selection of critical
accounting estimates with the Audit Committee of our Board of
Directors.
Mineral
Reserves and Depreciation, Depletion and Amortization. As discussed in
Note 1, we depreciate our life-of-mine mining and milling assets and values
assigned to proven and probable reserves using the unit-of-production method
based on our estimated recoverable proven and probable copper reserves (for our
copper mines) and estimated recoverable proven and probable molybdenum reserves
(for our molybdenum mines). We have other assets that we depreciate on a
straight-line basis over their estimated useful lives. Our estimates of
recoverable proven and probable copper and molybdenum reserves and the useful
lives of our straight-line assets impact our depreciation, depletion and
amortization expense. These estimates affect the results of operations of our
operating segments.
Accounting
for depreciation, depletion and amortization represents a critical accounting
estimate because the determination of reserves involves uncertainties with
respect to the ultimate geology of our reserves and the assumptions used in
determining the economic feasibility of mining those reserves, including
estimated copper, gold and molybdenum prices and costs of conducting future
mining activities. Additionally, changes in estimated recoverable proven and
probable reserves and useful asset lives can have a material impact on net
income. We perform annual assessments of our existing assets, including a review
of asset costs and depreciable lives, in
connection
with the review of mine operating and development plans. When we determine that
assigned asset lives do not reflect the expected remaining period of benefit, we
make prospective changes to those depreciable lives.
There are
a number of uncertainties inherent in estimating quantities of reserves,
including many factors beyond our control. Ore reserve estimates are based upon
engineering evaluations of samplings of drill holes, tunnels and other
underground workings. Our estimates of recoverable proven and probable reserves
are prepared by our employees, and a majority of these estimates are reviewed
and verified by independent experts in mining, geology and reserve
determination. At December 31, 2007, consolidated recoverable reserves include
93.2 billion pounds of copper, 41.0 million ounces of gold and 2.0 billion
pounds of molybdenum. Refer to “Proven and Probable Reserves” and Note 19 for
further details of estimated recoverable reserves. These estimates involve
assumptions regarding future copper, gold and molybdenum prices, the geology of
our mines, the mining methods we use and the related costs we incur to develop
and mine our reserves. Changes in these assumptions could result in material
adjustments to our reserve estimates, which could result in changes to
depreciation, depletion and amortization expense in future periods, with
corresponding adjustments to net income. If estimated copper reserves
at our mines were 10 percent higher at December 31, 2007, based on our
current sales projections for 2008, we estimate that our annual depreciation,
depletion and amortization expense for 2008 would decrease
by $98 million ($51 to net income) and a 10 percent decrease would
increase depreciation, depletion and amoritization expense for 2008 by $118
million ($62 million to net income).
As
discussed in Note 1, we review and evaluate our long-lived assets for impairment
when events or changes in economic circumstances indicate that the related
carrying amount of such assets may not be recoverable. Our long-lived assets
include amounts assigned to proven and probable reserves totaling $13.8 billion
at December 31, 2007. Changes to our estimates of recoverable proven and
probable reserves could have an impact on our assessment of asset impairment.
Revisions to our estimates of recoverable proven and probable copper, gold and
molybdenum reserves could give rise to an impairment of our assets.
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. Mill and leach stockpiles are evaluated periodically to
ensure that they are stated at the lower of cost or market. Accounting for
recoverable copper from mill and leach stockpiles represents a critical
accounting estimate because (i) it is generally impracticable to determine
copper contained in mill and leach stockpiles by physical count, and therefore,
requires management to employ reasonable estimation methods and (ii) recovery
rates from leach stockpiles can vary significantly. 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 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, once entered into the
production process, can be extracted into copper concentrate almost
immediately.
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 significantly 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. For newly placed material on active
stockpiles, as much as 70 percent of the copper ultimately recoverable may be
extracted during the first year, and the remaining copper may be recovered over
many years.
Processes
and recovery rates are monitored continuously, and recovery rate estimates are
adjusted periodically as additional information becomes available and as related
technology changes.
At
December 31, 2007, estimated recoverable copper was 2.6 billion pounds in leach
stockpiles (with a carrying value of $1.6 billion) and 0.9 billion pounds in
mill stockpiles (with a carrying value of $254 million).
Carrying
Value of Goodwill. At December 31,
2007, the carrying value of goodwill totaled $6.1 billion, which is associated
with our acquisition of Phelps Dodge. 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. Adjustments to the recorded values of the assets acquired and
liabilities assumed in the
acquisition
of Phelps Dodge will occur until such values are finalized. Accordingly, the
allocation of goodwill to reporting units, which we have determined will include
our individual mines, will be completed when we finalize our purchase price
allocation in first-quarter 2008. Our approach to allocating goodwill includes
the identification of the reporting units we believe have contributed to the
excess purchase price and also includes consideration of the reporting unit’s
potential for future growth.
Goodwill
is required to be evaluated on at least an annual basis and at any other time if
events or circumstances indicate that such carrying amount may no longer be
recoverable. If we determine that the carrying value of a reporting unit
exceeds its fair value at the time of the evaluation the shortfall would be
charged to earnings. Our evaluations are based on business plans developed using
near-term price forecasts reflective of the current price environment and
management’s projections for long-term average metal prices.
FCX will
perform annual impairment tests of goodwill during the fourth quarter of
each year, and upon the occurrence of events or circumstances in an interim
period that may indicate impairment. Although the allocation of goodwill to
reporting units has not yet been finalized, we performed an initial impairment
evaluation in fourth-quarter 2007 based on a preliminary allocation and
concluded that there was no impairment of goodwill as of December 31,
2007.
Projected
copper prices represent the most significant assumption used in the discounted
cash flows analyses to evaluate goodwill for impairment. At the date of
acquisition of Phelps Dodge, copper price projections used to value the assets
acquired ranged from a near-term price of $2.98 per pound to a long-term average
price of $1.20 per pound. At year-end 2007, the copper price projections used to
test goodwill for impairment ranged from a near-term price of $3.03 per pound to
a long-term average price of $1.50 per pound. The LME spot price for the past
three years averaged $2.65 per pound of copper. If our estimates of future
copper prices decrease, it is likely that we would record goodwill impairment
charges in the future.
We
believe that other events that could indicate impairment of goodwill assigned to
reporting units include, but are not limited to (i) a decrease in estimated
recoverable proven and probable reserves, (ii) a significant reduction in
the estimated fair value of mine site exploration potential and (iii) any
event that might otherwise have a material adverse affect on mine site
production levels or costs. Additionally, as our mines represent depleting
assets with definite lives, absent reserve additions in excess of production or
increases in pricing, the amount of goodwill we allocate to individual reporting
units will be impaired at a future date.
Reclamation
and Closure Costs. Reclamation is an ongoing activity that occurs
throughout the life of a mine. In accordance with SFAS No. 143, “Accounting for
Asset Retirement Obligations,” we record the fair value of our estimated asset
retirement obligations (AROs) associated with tangible long-lived assets in the
period incurred. Fair value is measured as the present value of cash flow
estimates after considering inflation and then applying a market risk premium.
Our cost estimates are reflected on a third-party cost basis and comply with our
legal obligation to retire tangible, long-lived assets as defined by SFAS No.
143. These cost estimates may differ from financial assurance cost estimates for
reclamation activities because of a variety of factors, including obtaining
updated cost estimates for reclamation activities, the timing of reclamation
activities, changes in scope and the exclusion of certain costs not accounted
for under SFAS No. 143. Refer to Note 1 for further discussion of our accounting
policy for reclamation and closure costs.
Generally,
ARO activities are specified by regulations or in permits issued by the relevant
governing authority, and management judgment is required to estimate the
extent and timing of expenditures based on life-of-mine planning. Accounting for
reclamation and closure costs represents a critical accounting estimate because
(i) we will not incur most of these costs for a number of years, requiring us to
make estimates over a long period, (ii) reclamation and closure laws and
regulations could change in the future and/or circumstances affecting our
operations could change, either of which could result in significant changes to
our current plans, (iii) calculating the fair value of our AROs in accordance
with SFAS No. 143 requires management to estimate projected cash flows, make
long-term assumptions about inflation rates, determine our credit-adjusted,
risk-free interest rates and determine market risk premiums that are appropriate
for our operations and (iv) given the magnitude of our estimated reclamation and
closure costs, changes in any or all of these estimates could have a significant
impact on net income.
At least
annually, we review our ARO estimates for changes in the projected timing of
certain reclamation costs, changes in cost estimates, and additional AROs
incurred during the period. An analysis of AROs, calculated under SFAS No. 143,
follows:
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Balance
at beginning of year
|
|
$
|
30
|
|
$
|
27
|
|
$
|
23
|
|
|
Liabilities
assumed in the acquisition of Phelps Dodge
|
|
|
531
|
a
|
|
–
|
|
|
–
|
|
|
Liabilities
incurred
|
|
|
1
|
|
|
–
|
|
|
2
|
|
|
Revisions
to cash flow estimates
|
|
|
179
|
b
|
|
–
|
|
|
(1
|
)
|
|
Accretion
expense
|
|
|
27
|
|
|
3
|
|
|
3
|
|
|
Spending
|
|
|
(40
|
)
|
|
–
|
|
|
–
|
|
|
Balance
at end of year
|
|
$
|
728
|
|
$
|
30
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
The
fair value of AROs assumed in the acquisition of Phelps Dodge was
estimated based on projected cash flows, an estimated long-term annual
inflation rate of 2.4 percent, a discount rate based on FCX’s estimated
credit-adjusted, risk-free interest rate of 7.8 percent and a market risk
premium of 10 percent to reflect what a third-party might require to
assume these AROs.
|
b.
|
The
most significant revisions to cash flow estimates in 2007 were related to
changes at Chino, Tyrone and PT Freeport Indonesia. During 2007, Chino and
Tyrone each submitted updated third-party closure cost estimates to the
state of New Mexico as part of the permit renewal process. As a result, we
revised our cash flow estimates and increased our ARO by $95 million for
Chino and $45 million for Tyrone. Additional adjustments may be required
based upon the state’s review of the updated closure plans and any permit
conditions imposed by the state of New Mexico. Additionally, PT Freeport
Indonesia updated its cost estimates primarily for changes to its plans
for the treatment of acidic water, resulting in an increase of $33
million.
|
During
2008, we plan to begin discussions with the state of Arizona regarding future
reclamation and closure activities at our operating and non-operating sites,
which are likely to result in additional adjustments to our ARO
liabilities.
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. GAAP requires that liabilities for
contingencies be recorded when it is probable that a liability has been incurred
and the amount can be reasonably estimated. Refer to Note 1 for further
discussion of our accounting policy for environmental expenditures.
Accounting
for environmental obligations represents a critical accounting estimate because
changes to environmental laws and regulations and/or circumstances affecting our
operations, could result in significant changes to our estimates, which could
have a significant impact on net income. As management judgment and estimates
are required to comply with applicable U.S. GAAP guidance, on a quarterly basis,
we review changes in facts and circumstances associated with the environmental
obligations. Judgments and estimates are based upon available facts, existing
technology, presently enacted laws and regulations, remediation
experience, whether or not we are a potentially responsible party (PRP), the
ability of other PRPs to pay their allocated portions and take into
consideration reasonably possible outcomes. Our 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
December 31, 2007, environmental reserves recorded in our consolidated balance
sheets totaled approximately $1.3 billion, which reflect the estimated fair
value of the Phelps Dodge obligations for environmental liabilities
attributed to the 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 operating facilities.
A summary
of changes in our estimated environmental obligations for the year ended
December 31, 2007, follows:
Balance
at beginning of year
|
|
$
|
–
|
|
|
|
Liabilities
assumed in the acquisition of Phelps Dodge
|
|
|
1,334
|
|
|
|
Additions |
|
|
6 |
|
|
|
Reductions
|
|
|
(1
|
)
|
|
|
Spending
|
|
|
(71
|
)
|
|
|
Balance
at end of year
|
|
$
|
1,268
|
|
|
|
|
|
|
|
|
|
|
At the
acquisition date, Phelps Dodge’s historical environmental obligations of $385
million were based on accounting guidance provided by SFAS No. 5, “Accounting
for Contingencies,” and American Institute of Certified Public Accountants
Statement of Position (SOP) 96-1, “Environmental Remediation Liabilities,” which
require that an estimated loss be recorded for a loss contingency if, prior to
the issuance of the financial statements, it is probable that a liability had
been incurred and the amount of loss can be reasonably estimated. Amounts
recorded under this guidance are generally not considered fair value. FCX has an
environmental and legal group dedicated to the ongoing review and monitoring of
environmental remediation sites. At the acquisition date, the largest
environmental remediation sites assumed were undergoing studies to evaluate the
extent of the environmental damage and the available remedies. Advancement of
these studies and consideration of alternative remedies and cost sharing
arrangements resulted in our calculation of the estimated fair values being
approximately $900 million greater than the historical Phelps Dodge
estimates. In accordance with the purchase method of accounting FCX has
recorded the assumed environmental obligations at their estimated fair values of
approximately $1.3 billion. After the allocation of the purchase price
associated with the Phelps Dodge acquisition is finalized in first-quarter of
2008, future estimates of environmental obligations will be recorded in
accordance with SFAS No. 5 and SOP 96-1. Significant adjustments to these
reserves could occur in the future.
Deferred
Taxes.
In preparing our annual consolidated financial statements, 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.
At
December 31, 2007, our valuation allowances totaled $1.2 billion and covered all
of our U.S. foreign tax credit carryforwards, a portion of our foreign net
operating loss carryforwards and a portion of our U.S. state net operating loss
carryforwards. During 2007, our valuation allowances increased by $240 million
primarily because of additional valuation allowances recorded against U.S.
foreign tax credit carryforwards.
OUTLOOK
Sales in
2007 totaled 3.4 billion pounds of copper, 2.3 million ounces of gold and 52
million pounds of molybdenum, compared with 1.2 billion pounds of copper and 1.7
million ounces of gold in 2006. Sales for 2007 included sales from the Phelps
Dodge mines from March 20, 2007, through December 31, 2007, totaling 2.2 billion
pounds of copper, 0.1 million ounces of gold and 52 million pounds of
molybdenum. At the Grasberg open-pit 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. PT Freeport
Indonesia’s 2007 sales volumes were lower than 2006 sales volumes because of
mining in a relatively low-grade section of the Grasberg open pit during the
second half of 2007, partly offset by mining higher ore grade material during
the first half of 2007 and higher recovery rates. The increase in gold sales for
2007, compared to 2006, is related to higher grades and recovery rates.
Current
projected consolidated sales volumes for 2008 and projected average annual
consolidated sales volumes over the three-year period from 2008 through 2010
follow:
|
Projected
Consolidated Sales
|
|
|
|
|
Average
Annual
|
|
|
2008
|
|
2008
– 2010
|
|
Copper
(billions of recoverable pounds)
|
|
4.3
|
|
|
4.5
|
|
Gold
(millions of recoverable ounces)
|
|
1.3
|
|
|
1.9
|
|
Molybdenum
(millions of recoverable pounds)
|
|
75
|
|
|
85
|
|
Because
of mine sequencing at Grasberg and the ramp-up of production at the Safford
mine, second-half 2008 production is expected to be higher than the first half
of 2008. Approximately 56 percent of projected 2008 copper sales and 72 percent
of projected 2008 gold sales are expected in the second half of the year. The
achievement of these sales estimates will depend on the achievement of targeted
mining rates and expansion plans, the successful operation of production
facilities, the impact of weather conditions and other factors. Additionally,
sales volumes may vary from these estimates depending on the areas being mined
within the Grasberg open pit, with quarterly sales volumes expected to vary
significantly.
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 sales volumes (excluding purchased copper and molybdenum)
for the next two years and assuming an average price of $3.00 per pound of
copper, $800 per ounce of gold and $25 per pound of molybdenum, the impact on
our annual cash flow would approximate $575 million for each $0.20 per pound
change in copper prices, $50 million for each $50 per ounce change in gold
prices and $100 million for each $2 per pound change in molybdenum prices.
Additionally, the impact on our annual net income would approximate $490 million
for each $0.20 per pound change in copper prices, $45 million for each $50 per
ounce change in gold prices and $100 million for each $2 per pound change in
molybdenum prices.
CONSOLIDATED
RESULTS
|
Years
Ended December 31,
|
|
|
2007a
|
|
2006
|
|
2005
|
|
Revenues
|
$
|
16,939
|
b
|
$
|
5,791
|
c
|
$
|
4,179
|
|
Operating
income
|
|
6,555
|
b
|
|
2,869
|
c
|
|
2,177
|
|
Income
from continuing operations applicable to common stockd
|
|
2,734
|
b,e
|
|
1,396
|
c,f
|
|
935
|
g
|
Net
income applicable to common stockd
|
|
2,769
|
b,e
|
|
1,396
|
c,f
|
|
935
|
g
|
Diluted
net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
7.41
|
|
$
|
6.63
|
|
$
|
4.67
|
|
Discontinued
operations
|
|
0.09
|
|
|
–
|
|
|
–
|
|
Diluted
net income per share of common stock
|
$
|
7.50
|
b,e,h
|
$
|
6.63
|
c,f
|
$
|
4.67
|
g
|
|
|
|
|
|
|
|
|
|
|
Sales
from Mines, excluding sales of purchased metal
|
|
|
|
|
|
|
|
|
|
Copper
|
|
|
|
|
|
|
|
|
|
Consolidated
share (millions of recoverable pounds)
|
|
3,357
|
|
|
1,201
|
|
|
1,457
|
|
Average
realized price per pound
|
$
|
3.28
|
b
|
$
|
3.13
|
|
$
|
1.85
|
|
Gold
|
|
|
|
|
|
|
|
|
|
Consolidated
share (thousands of recoverable ounces)
|
|
2,298
|
|
|
1,736
|
|
|
2,790
|
|
Average
realized price per ounce
|
$
|
682.20
|
|
$
|
566.51
|
c
|
$
|
456.27
|
|
Molybdenum
|
|
|
|
|
|
|
|
|
|
Consolidated
share (millions of recoverable pounds)
|
|
52
|
|
|
N/A
|
|
|
N/A
|
|
Average
realized price per pound
|
$
|
26.81
|
|
|
N/A
|
|
|
N/A
|
|
a.
|
Includes
the operations of Phelps Dodge beginning March 20, 2007. A summary of the
key components contributing to the consolidated results for the year ended
December 31, 2007, follows:
|
|
|
|
|
|
Income
from
|
|
|
|
|
Operating
|
|
Continuing
|
|
|
Revenues
|
|
Income
|
|
Operations
|
|
FCX,
excluding Phelps Dodge
|
$
|
6,034
|
|
$
|
3,055
|
|
$
|
824
|
|
Phelps
Dodge results
|
|
10,785
|
|
|
4,756
|
|
|
2,903
|
|
Purchase
accounting impacts:
|
|
|
|
|
|
|
|
|
|
Inventories
(including mill and leach stockpiles)
|
|
–
|
|
|
(737
|
)
|
|
(464
|
)
|
Property,
plant and equipment
|
|
–
|
|
|
(595
|
)
|
|
(375
|
)
|
Intangible
assets/liabilities and other
|
|
120
|
|
|
76
|
|
|
54
|
|
Consolidated
|
$
|
16,939
|
|
$
|
6,555
|
|
$
|
2,942
|
|
b.
|
Includes
charges to revenues for mark-to-market accounting adjustments on the 2007
copper price protection program totaling $175 million ($106 million to net
income or $0.27 per share) and a reduction in average realized copper
prices of $0.05 per pound.
|
c.
|
Includes
losses on redemptions of our Gold-Denominated Preferred Stock, Series II,
and Silver-Denominated Preferred Stock totaling $82 million ($44 million
to net income or $0.20 per share). The loss on the redemption of our
Gold-Denominated Preferred Stock, Series II, also resulted in a reduction
in average realized gold prices of $39.85 per
ounce.
|
d.
|
After
dividends on preferred stock.
|
e.
|
Includes
net losses on early extinguishment of debt totaling $173 million ($132
million to net income or $0.33 per share) primarily related to premiums
paid and the accelerated recognition of deferred financing costs
associated with prepayments of
debt.
|
f.
|
Includes
losses on early extinguishment and conversion of debt totaling $32 million
($30 million to net income or $0.14 per share) primarily related to the
completion of a tender offer and privately negotiated transactions to
induce conversion of our 7% Convertible Senior Notes into FCX common stock
and open-market purchases of our 10⅛% Senior
Notes.
|
g.
|
Includes
losses on early extinguishment and conversion of debt totaling $52 million
($40 million to net income or $0.18 per share) primarily related to
open-market purchases of our 10⅛% Senior Notes and privately negotiated
transactions to induce conversion of our 7% Convertible Senior Notes into
FCX common stock.
|
h.
|
On
March 19, 2007, we issued 136.9 million common shares to acquire Phelps
Dodge. On March 28, 2007, we sold an additional 47.15 million common
shares. Common shares outstanding at December 31, 2007, totaled 382
million shares. Assuming conversion of all our convertible instruments,
total potential common shares outstanding would be 445 million shares at
December 31, 2007.
|
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 additional revenues associated
with Phelps Dodge’s operations ($10.9 billion), revenues for 2007 were
approximately four percent higher than 2006 reflecting higher copper and gold
prices, partly offset by lower copper sales volumes in 2007. Lower sales volumes
occurred primarily because PT Freeport Indonesia mined lower-grade ore during
the second half of 2007 (refer to “Indonesian Mining” for further discussion of
PT Freeport Indonesia sales volumes).
Consolidated
revenues of $5.8 billion for 2006 were approximately 39 percent higher than
consolidated revenues for 2005 reflecting substantially higher copper and gold
prices in 2006, partly offset by lower PT Freeport Indonesia sales volumes. PT
Freeport Indonesia mined lower-grade ore and reported lower production and sales
volumes in 2006, compared with 2005 (refer to “Indonesian Mining” for further
discussion of PT Freeport Indonesia sales volumes).
Approximately
two-thirds of our copper is sold in concentrate and cathodes and the remaining
one-third is sold primarily as rod (principally from our North America
operations). Substantially all of our concentrate sales contracts and some of
our cathode sales contracts provide final copper pricing in a specified future
period (generally one to
four
months from the shipment date) based on quoted LME or COMEX prices. We
ultimately receive market prices based on prices in the specified future period;
however, the accounting rules applied to these sales result in changes recorded
to revenues until the specified future period. We record revenues and invoice
customers at the time of shipment based on then-current LME or COMEX prices,
which results in an embedded derivative on our provisional priced concentrate
and cathode sales that is adjusted to fair value through earnings each period
until the date of final pricing. To the extent final prices are higher or lower
than what was recorded on a provisional basis, an increase or decrease to
revenues is recorded each reporting period until the date of final pricing.
Accordingly, in times of rising copper prices, our revenues during a quarter
benefit from higher prices received for contracts priced at current market rates
and also from an increase related to the final pricing of provisionally priced
contracts entered into in prior periods; in times of falling copper prices, the
opposite occurs. Consolidated revenues for 2007 include net additions for
adjustments to the fair value of embedded copper derivatives in concentrate and
cathode sales contracts of $115 million (net of an adjustment of $43 million
related to the final pricing of sales entered into in the prior year), compared
with net additions of $158 million in 2006 (including an adjustment of $132
million related to the final pricing of sales entered into in the prior year)
and $176 million in 2005 (including an adjustment of $10 million related to the
final pricing of sales entered into in the prior year).
At
December 31, 2007, our copper sales included 402 million pounds of copper (net
of minority interests) priced at an average of $3.02 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 December 31, 2007, price would impact our 2008
consolidated revenues by $27 million ($14 million to 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. Also, in
connection with the acquisition of Phelps Dodge, FCX assumed the 2007 copper
price protection program, which resulted in charges to revenues totaling $175
million ($106 million to net income or $0.27 per share) from March 20, 2007,
through December 31, 2007. In January 2008, we paid $598 million to settle the
2007 copper price protection program, which matured on December 31, 2007. FCX
does not currently intend to enter into similar hedging programs in the future.
Refer to “Hedging Activities” and Note 17 for further discussion of the 2007
copper price protection program.
In
February 2006, we redeemed our Gold-Denominated Preferred Stock, Series II,
which resulted in a charge to revenues of $69 million ($37 million to net income
or $0.17 per share); and in August 2006, the final scheduled redemption of our
Silver-Denominated Preferred Stock resulted in a charge to revenues of $13
million ($7 million to net income or $0.03 per share).
Production
and Delivery Costs
Excluding
amounts associated with the Phelps Dodge operations ($6.0 billion, which
included $781 million related to purchase accounting impacts for higher values
of metal inventories and stockpiles and also the amortization of intangible
assets acquired in the acquisition), production and delivery costs for 2007
increased by $21 million compared with 2006. This increase primarily reflects
higher production costs at PT Freeport Indonesia resulting from higher energy
costs and costs of other consumables. Also impacting production and delivery
costs in 2007 were higher costs of concentrate purchases at Atlantic Copper
reflecting higher copper and gold prices.
Production
and delivery costs for 2006 were $887 million higher than 2005 primarily because
of higher costs of concentrate purchases at Atlantic Copper caused by rising
metals prices and partly because of higher production costs at PT Freeport
Indonesia primarily resulting from higher energy and other input costs.
Additionally, the adoption of Emerging Issues Task Force Issue No. 04-6,
“Accounting for Stripping Costs Incurred during Production in the Mining
Industry” (EITF 04-6) also resulted in higher 2006 costs (refer to “New
Accounting Standards” and Note 1 for further discussion of EITF
04-6).
Energy Costs. Energy,
including electricity, diesel fuel, coal and natural gas, is a significant
portion of our production costs, representing approximately 20 percent of
production costs for our North American, South American and Indonesian mining
operations in 2007. Because energy is a significant portion of our production
costs, we could be negatively impacted by future energy availability issues
and/or increases in energy prices.
In
addition, 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. Costs
have been affected by the prices of commodity input costs, equipment consumed or
used in our operations and labor costs. Our cost structure in certain of our
North American operations is higher than that of some mines located outside the
U.S. primarily because of lower ore grades, higher labor costs and, in some
cases, stricter regulatory requirements.
Additionally,
we are developing large-scale underground operations in Indonesia that are more
sensitive to labor costs than our large-scale open pit and process operations.
Increasing labor costs without corresponding productivity gains will adversely
impact our current and future underground development and
operations.
Depreciation,
Depletion and Amortization
Excluding
amounts associated with the Phelps Dodge operations ($1.0 billion, which
included $595 million related to purchase accounting impacts for the increase in
the carrying value of acquired property, plant and equipment), depreciation,
depletion and amortization expense for 2007 increased $17 million compared with
2006 primarily because of higher unit-of-production rates for the Grasberg
open-pit mine resulting from changes in reserve estimates.
Depreciation,
depletion and amortization expense for 2006 was $23 million lower than 2005
primarily because of lower copper sales volumes at PT Freeport Indonesia during
2006, which resulted in lower expense under the unit-of-production
method.
Projected depreciation, depletion and amortization expense for 2008,
including the impacts of purchase accounting fair value adjustments, is expected
to approximate $1.9 billion, compared with $1.2 billion for 2007, primarily
because of higher projected copper sales volumes for 2008, as well as the
incremental amounts associated with a full year of expense for the acquired
Phelps Dodge operations.
Exploration
and Research Expenses
Consolidated
exploration and research expenses totaled $145 million for 2007, $12 million for
2006 and $9 million for 2005. The increase in expenditures for 2007 primarily
reflects $127 million of exploration and research expenses associated with our
acquired operations, including $94 million for exploration efforts in North
America, South American and Africa. Refer to “Exploration Activities” for
further discussion.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative expenses totaled $466 million for 2007, $157
million for 2006 and $104 million for 2005. The increase of $309 million in
2007, compared with 2006, primarily reflects the additional amounts associated
with Phelps Dodge ($272 million) and higher stock-based compensation costs ($39
million) primarily related to second-quarter 2007 stock option
grants.
The
increase of $53 million in 2006, compared with 2005, primarily reflected higher
incentive compensation costs associated with stronger financial performance,
higher stock-based compensation following adoption of SFAS No. 123 (revised
2004), “Share-Based Payment” (SFAS 123R) on January 1, 2006 (refer to “New
Accounting Standards” and Note 1 for further discussion), and higher legal
fees.
Interest
Expense, Net
Total
consolidated interest expense (before capitalization) totaled $660 million in
2007, $87 million in 2006 and $136 million in 2005. The $573 million increase in
interest expense in 2007, compared with 2006, primarily relates to the debt
incurred in connection with the acquisition of Phelps Dodge. Refer to Note 11
and “Capital Resources and Liquidity – Financing Activities” for further
discussion of the debt incurred in connection with the acquisition.
The $49
million decrease in interest expense in 2006, compared with 2005, is primarily
because of significant debt reductions during 2005 and 2006, including
redemptions of mandatorily redeemable preferred stock.
Capitalized
interest totaled $147 million in 2007, $11 million in 2006 and $4 million in
2005. The significant increase in capitalized interest in 2007 primarily relates
to the development projects at Safford and Tenke Fungurume.
Losses
on Early Extinguishment and Conversion of Debt, Net
During
2007, we recorded net charges totaling $173 million ($132 million to net income
or $0.33 per share) for early extinguishment of debt primarily related to the
accelerated recognition of deferred financing costs associated with early
repayment of amounts under the $11.5 billion senior credit facility. Also
included is $17 million ($10 million to net income or $0.02 per share) related
to premiums paid and the accelerated recognition of deferred financing costs
associated with the May 2007 redemption of our 10⅛% Senior Notes.
During
2006, we recorded net charges totaling $32 million ($30 million to net income or
$0.14 per share) for early extinguishment and conversion of debt primarily
associated with the completion of a tender offer and privately negotiated
transactions to induce conversion of our 7% Convertible Senior Notes into FCX
common stock, and also included charges associated with open-market purchases of
our 10⅛% Senior Notes.
During
2005, net losses on early extinguishment and conversion of debt totaled $52
million ($40 million to net income or $0.18 per share) primarily related to
open-market purchases of our 10⅛% Senior Notes and privately negotiated
transactions to induce conversion of our 7% Convertible Senior Notes into FCX
common stock.
Gains
on Sales of Assets
Gains on
sales of assets totaled $85 million ($52 million to net income or $0.13 per
share) in 2007 primarily associated with sales of marketable securities. During
2006, gains on sales of assets totaled $31 million ($30 million to net income or
$0.13 per share) primarily associated with the disposition of land and certain
royalty rights at Atlantic Copper. During 2005, gains on sales of assets totaled
$7 million ($5 million to net income or $0.02 per share) related to the sale of
land held by a joint venture in which we own a 50 percent interest.
Other
Income, Net
Other
income, net, totaled $157 million in 2007, compared with $28 million in 2006 and
2005. The $129 million increase in 2007, compared with 2006, primarily relates
to higher interest income totaling $141 million in 2007, $31 million in 2006 and
$17 million in 2005. The increases in interest income primarily relate to higher
cash balances and interest rates.
Provision
for Income Taxes
Our 2007
income tax provision from continuing operations resulted from taxes on
international operations ($2.2 billion) and U.S. taxes ($215 million). The
difference between FCX’s consolidated effective income tax rate of approximately
39 percent for 2007 and the U.S. federal statutory rate of 35 percent primarily
was attributable to (i) withholding taxes related to earnings from Indonesian
and South American mining operations, (ii) a U.S. foreign tax credit limitation
and (iii) an adjustment associated with the reversal of the Phelps Dodge APB
Opinion No. 23, “Accounting for Income Taxes – Special Areas,” indefinite
reinvestment assertion on certain earnings in South America, partly offset by a
U.S. benefit for percentage depletion and an international tax rate
differential. For 2008, we expect a consolidated effective tax rate of
approximately 34 percent. The lower projected consolidated effective tax rate
for 2008 primarily relates to the expected geographic sources of pre-tax
income.
A summary
of the approximate amounts in the calculation of our consolidated provision for
income taxes for 2007 follows:
|
|
|
Effective
|
|
Provision
for
|
|
|
Incomea
|
|
Tax
Rate
|
|
Income
Tax
|
|
North
America
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interests
|
$
|
1,875
|
|
|
30%
|
|
$
|
568
|
|
Purchase
accounting adjustments
|
|
(895
|
)
|
|
39%
|
|
|
(353
|
)
|
Subtotal
|
|
980
|
|
|
|
|
|
215
|
|
South
America
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interests
|
|
2,623
|
|
|
33%
|
|
|
868
|
|
Purchase
accounting adjustments
|
|
(369
|
)
|
|
34%
|
|
|
(126
|
)
|
Subtotal
|
|
2,254
|
|
|
|
|
|
742
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interests
|
|
2,878
|
|
|
46%
|
|
|
1,326
|
|
Other
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interests
|
|
21
|
|
|
29%
|
|
|
6
|
|
Adjustmentb
|
|
N/A
|
|
|
N/A
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
totals
|
$
|
6,133
|
|
|
39%
|
|
$
|
2,400
|
|
a.
|
Represents
income from continuing
operations.
|
b.
|
Represents
an adjustment for a one-time charge associated with the reversal of the
Phelps Dodge APB Opinion No. 23 indefinite reinvestment assertion on
certain earnings in South America. This adjustment was fully offset by a
reduction in minority interests’ share of net
income.
|
FCX’s
income tax provision for 2006 ($1.2 billion) and for 2005 ($915 million)
primarily reflected taxes on PT Freeport Indonesia’s earnings. The difference
between FCX’s effective income tax rate of approximately 43 percent for 2006 and
45 percent for 2005 and PT Freeport Indonesia’s Contract of Work rate of 35
percent primarily was attributable to withholding taxes related to earnings from
Indonesian mining operations and income taxes incurred by PT Indocopper
Investama.
A summary
of the approximate amounts in the calculation of our consolidated provision for
income taxes for 2006 and 2005 follows:
|
Years
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
Indonesian
mining operating incomea
|
$
|
2,809
|
|
$
|
2,321
|
|
Indonesian
mining interest expense, net
|
|
(20
|
)
|
|
(22
|
)
|
Intercompany
operating profit recognized (deferred)
|
|
32
|
|
|
(145
|
)
|
Income
before taxes
|
|
2,821
|
|
|
2,154
|
|
Indonesian
mining Contract of Work rate
|
|
35
|
%
|
|
35
|
%
|
Indonesian
mining income taxes
|
|
987
|
|
|
754
|
|
|
|
|
|
|
|
|
Indonesian
mining net income
|
|
1,834
|
|
|
1,400
|
|
Withholding
tax on FCX’s equity share
|
|
9.064
|
%
|
|
9.064
|
%
|
Withholding
taxes
|
|
166
|
|
|
127
|
|
|
|
|
|
|
|
|
PT
Indocopper Investama corporate income taxes
|
|
48
|
|
|
37
|
|
Other,
net
|
|
–
|
|
|
(3
|
)
|
FCX
consolidated provision for income taxes
|
$
|
1,201
|
|
$
|
915
|
|
|
|
|
|
|
|
|
FCX
consolidated effective tax rate
|
|
43
|
%
|
|
45
|
%
|
|
|
|
|
|
|
|
a.
|
Excludes
charges for the in-the-money value of FCX stock option exercises, which
are eliminated in consolidation, totaling $88 million in 2006 and $64
million in 2005.
|
Refer to
Note 14 for further discussion of income taxes.
Minority
Interests in Net Income of Consolidated Subsidiaries
Minority
interests in net income of consolidated subsidiaries totaled $791 million in
2007, $168 million in 2006 and $127 million in 2005. The increase of $623
million in 2007, compared with 2006, was attributable to amounts associated with
our South American mining operations ($603 million) and an increase related to
higher earnings at PT Freeport Indonesia ($20 million). The increase of $41
million in 2006, compared with 2005, primarily was because of higher earnings at
PT Freeport Indonesia.
RESULTS
OF OPERATIONS
Following
the acquisition of Phelps Dodge, our business consists of three primary
operating divisions – North American mining, South American mining and
Indonesian mining. Refer to “Mining Operations” for further discussion of the
operations associated with these divisions. A summary of revenues by division
for 2007, 2006 and 2005, follows:
|
Years
Ended December 31,
|
|
|
|
2007a
|
|
2006
|
|
2005
|
|
|
North
American miningb:
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customers
|
$
|
8,641
|
c
|
$
|
–
|
|
$
|
–
|
|
|
Intersegment
|
|
9
|
|
|
–
|
|
|
–
|
|
|
|
|
8,650
|
|
|
–
|
|
|
–
|
|
|
South
American miningd:
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customers
|
|
2,265
|
|
|
–
|
|
|
–
|
|
|
Intersegment
|
|
1,580
|
|
|
–
|
|
|
–
|
|
|
|
|
3,845
|
|
|
–
|
|
|
–
|
|
|
Indonesian
mining:
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customers
|
|
3,640
|
|
|
3,543
|
|
|
2,810
|
|
|
Intersegment
|
|
1,168
|
|
|
852
|
|
|
758
|
|
|
|
|
4,808
|
|
|
4,395
|
|
|
3,568
|
|
|
Atlantic
Copper smelting & refining:
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customers
|
|
2,388
|
|
|
2,242
|
|
|
1,363
|
|
|
|
|
2,388
|
|
|
2,242
|
|
|
1,363
|
|
|
Corporate,
other & eliminations:
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customers
|
|
5
|
|
|
6
|
|
|
6
|
|
|
Intersegment
|
|
(2,757
|
)
|
|
(852
|
)
|
|
(758
|
)
|
|
|
|
(2,752
|
)
|
|
(846
|
)
|
|
(752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
revenues
|
$
|
16,939
|
|
$
|
5,791
|
|
$
|
4,179
|
|
|
a.
|
Includes
the results of Phelps Dodge beginning March 20,
2007.
|
b.
|
Includes
our operating mines at Morenci, Bagdad, Sierrita, Safford, Chino and
Tyrone, and also includes our Rod and Refining and Molybdenum operations
(refer to Note 18).
|
c.
|
Includes
charges for mark-to-market accounting adjustments on the 2007 copper price
protection program totaling $175
million.
|
d.
|
Includes
our operating mines at Cerro Verde, Candelaria, Ojos del Salado and El
Abra (refer to Note 18).
|
Intersegment
sales by the Indonesian and South American mines are based on similar
arms-length transactions with third parties 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.
A summary
of operating income (loss) by operating division, which includes the results of
Phelps Dodge beginning March 20, 2007, follows:
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
North
American mining
|
$
|
1,717
|
|
$
|
–
|
|
$
|
–
|
|
|
South
American mining
|
|
2,190
|
|
|
–
|
|
|
–
|
|
|
Indonesian
mining
|
|
3,033
|
|
|
2,721
|
|
|
2,257
|
|
|
Atlantic
Copper smelting & refining
|
|
3
|
|
|
74
|
|
|
35
|
|
|
Corporate,
other & eliminations
|
|
(388
|
)
|
|
74
|
|
|
(115
|
)
|
|
Consolidated
operating income
|
$
|
6,555
|
a
|
$
|
2,869
|
|
$
|
2,177
|
|
|
a.
|
Operating
income includes purchase accounting adjustments totaling $1.3 billion in
2007, which primarily relate to the impacts of increases in the carrying
values of acquired metal inventories (including mill and leach stockpiles)
and property, plant and
equipment.
|
MINING
OPERATIONS
North
American Mining
Our North
American mining operations include copper operations from mining through rod
production, molybdenum operations from mining through conversion to chemical and
metallurgical products, and the marketing and sale of both product lines. We
have six operating copper mines in North America – Morenci, Bagdad, Sierrita,
Safford, Chino and Tyrone, and one operating molybdenum mine –
Henderson.
The North
American mining division includes one reportable copper mine (Morenci), and also
includes Rod and Refining operations and Molybdenum operations as reportable
segments. Following is further discussion of these reportable segments, as well
as other operations included in the North American mining division.
Morenci. The Morenci
open-pit mine, located in southeastern Arizona, primarily produces copper
cathodes and copper concentrates. In addition to copper, Morenci produces
molybdenum concentrates as a by-product. We own an 85 percent undivided interest
in Morenci. The remaining 15 percent is owned by Sumitomo Metal Mining Arizona,
Inc. (Sumitomo), a jointly owned subsidiary of Sumitomo Metal Mining Co., Ltd.
and Sumitomo Corporation. Each partner takes in kind its share of
production.
The
concentrate-leach, direct-electrowinning facility at Morenci is ramping up
production following commissioning in third-quarter 2007. This project uses
FCX’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
and by providing acid for leaching operations. The project also included the
restart of a mill. Mill throughput adds 115 million pounds of copper per year
and is operating near capacity of 49,000 metric tons per day. The overall
project required a total capital investment of approximately $250
million.
Rod and Refining. The
Rod and Refining segment consists of copper conversion facilities, including a
refinery, rod mills and a specialty copper products facility. This segment
processes copper produced at our North American mines and purchased copper into
copper anode, cathode, rod and custom copper shapes. At times this segment
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, who pays us for processing their material into the
specified products.
Molybdenum. The
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. The Molybdenum segment also includes a sales company that
purchases molybdenum from our Henderson mine and our North American and South
American copper mines and sells it to third parties. 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, who 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.
In
December 2007, our Board of Directors approved the restart of the Climax
molybdenum mine near Leadville, Colorado, which has been on care-and-maintenance
status since 1995. Climax is believed to be the largest, highest-grade and
lowest-cost undeveloped molybdenum ore body in the world. The initial project
involves the restart of open-pit mining and the construction of new milling
facilities. Annual production is expected to approximate 30 million pounds of
molybdenum beginning in 2010 at estimated cash costs approximating $3.50 per
pound.
Capital
cost estimates for the initial project are expected to approximate $500 million.
Orders for certain long-lead time items have been placed, and work on the
project commenced in fourth-quarter 2007. Major construction activities are
expected to begin in second-quarter 2008. The project is designed to enable the
consideration of a further large-scale expansion of the Climax mine. We plan to
evaluate a second phase of the Climax project, which could potentially double
future annual molybdenum production to approximately 60 million
pounds.
We also
plan to increase our annual molybdenum processing capacity by 20 million pounds
through the conversion of our copper concentrate leach facility at Bagdad,
Arizona, to a molybdenum concentrate leach facility by 2010.
Other North American mining
operations. Other North American mining operations include our other
southwestern U.S. copper mines – Bagdad, Sierrita, Safford, Chino, Tyrone,
Miami, Cobre, Bisbee and Tohono. In addition to copper, the Bagdad, Sierrita and
Chino mines produce molybdenum, gold and silver, and the Sierrita mine also
produces rhenium. Other North American mining operations also include the Miami
smelter (which is the most significant source of sulfuric acid for the various
North American leaching operations), a sales company (which functions as an
agent to purchase and sell copper from the North American mines and from the Rod
and Refining segment and also sells any copper not sold by our South American
mines to third parties) and other ancillary operations.
The
Safford copper mine, which began production in December 2007, will produce ore
from two open-pit mines located in southeastern Arizona and includes a solution
extraction/electrowinning facility. The Safford mine is expected to ramp-up to
full production of approximately 240 million pounds per year in the first half
of 2008. The total capital investment for this project is approximately $675
million, with over 85 percent incurred as of December 31, 2007 (including
amounts incurred prior to the acquisition of Phelps Dodge).
During
January 2008, we announced plans to restart the Miami copper mine in
Arizona for an approximate five-year period. We expect full rates of
production of approximately 100 million pounds of copper per year by 2010. The
capital investment for this project is expected to total approximately $100
million, primarily for mining equipment.
North
American mining added $8.7 billion in revenues and $1.7 billion of operating
income to our results for the period March 20, 2007, through December 31, 2007,
net of charges to revenues for mark-to-market accounting adjustments on the 2007
copper price protection program totaling $175 million. Refer to “Hedging
Activities” and Note 17 for further discussion of the 2007 copper price
protection program.
The
following discussion of our North American mining operations covers the full
twelve month periods ended December 31, 2007, 2006 and 2005, including periods
prior to our acquisition of these operations:
|
|
Years
Ended December 31,
|
|
|
North
American Mining Operating Results (Pro Forma)
|
|
2007
|
|
2006
|
|
2005
|
|
|
Consolidated
Operating Data, Net of Joint Venture Interest
|
|
|
|
|
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,320
|
|
|
1,305
|
|
|
1,365
|
|
|
Salesa
|
|
|
1,332
|
|
|
1,303
|
|
|
1,383
|
|
|
Average
realized price per pound, excluding hedging
|
|
$
|
3.26
|
|
$
|
3.03
|
|
$
|
1.67
|
|
|
Average
realized price per pound, including hedgingb
|
|
$
|
3.12
|
|
$
|
2.26
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molybdenum
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
69
|
|
|
68
|
|
|
62
|
|
|
Sales
|
|
|
69
|
|
|
69
|
|
|
60
|
|
|
Average
realized price per pound
|
|
$
|
25.87
|
|
$
|
21.87
|
|
$
|
25.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100%
Operating Data, Including Joint Venture Interest
|
|
|
|
|
|
|
|
|
|
|
|
SX/EW
operations
|
|
|
|
|
|
|
|
|
|
|
|
Leach
ore placed in stockpiles (metric tons per day)
|
|
|
798,200
|
|
|
801,200
|
|
|
778,500
|
|
|
Average
copper ore grade (percent)
|
|
|
0.23
|
|
|
0.30
|
|
|
0.26
|
|
|
Copper
production (millions of recoverable pounds)
|
|
|
940
|
|
|
1,013
|
|
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
operations
|
|
|
|
|
|
|
|
|
|
|
|
Ore
milled (metric tons per day)
|
|
|
223,800
|
|
|
199,300
|
|
|
194,800
|
|
|
Average
ore grade (percent)
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
|
0.35
|
|
|
0.33
|
|
|
0.33
|
|
|
Molybdenum
|
|
|
0.02
|
|
|
0.02
|
|
|
0.03
|
|
|
Production
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
|
501
|
|
|
414
|
|
|
419
|
|
|
Molybdenum
(by-product)
|
|
|
30
|
|
|
31
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molybdenum operations
(Henderson)
|
|
|
|
|
|
|
|
|
|
|
|
Ore
milled (metric tons per day)
|
|
|
24,000
|
|
|
22,200
|
|
|
20,300
|
|
|
Average
molybdenum ore grade (percent)
|
|
|
0.23
|
|
|
0.23
|
|
|
0.22
|
|
|
Molybdenum
production (millions of recoverable pounds)
|
|
|
39
|
|
|
37
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Excludes
sales of purchased copper.
|
b.
|
Includes
the impact of hedging losses related to copper price protection
programs.
|
2007
Compared with 2006 (Pro Forma). During 2007, average realized copper
prices, excluding hedging impacts, for the North American mining operations
improved by $0.23 per pound to an average of $3.26 per pound, compared with
$3.03 per pound in 2006. Additionally, average realized molybdenum prices
improved by $4.00 per pound to an average of $25.87 per pound in 2007, compared
with $21.87 per pound in 2006.
Consolidated
copper sales from North American operations totaled approximately 1.3 billion
pounds in both 2007 and 2006. The slight increase in North American copper sales
volumes for 2007 primarily related to higher production from mill operations
resulting from higher ore grades and the incremental production from the Morenci
mill because of a full year of concentrator activity. These increases were
partly offset by lower production from SX/EW operations resulting from lower ore
grades.
Consolidated
copper sales volumes from our North American mining operations are expected to
increase to approximately 1.6 billion pounds in 2008 primarily reflecting
additional copper production from the Safford mine.
Consolidated
molybdenum sales volumes totaled 69 million pounds in both 2007 and 2006.
Molybdenum ore grades for 2007 were similar to 2006. Consolidated molybdenum
sales volumes are expected to approximate 75 million pounds in 2008. The
increase in projected molybdenum sales for 2008 primarily reflects additional
production expected from the expanded Cerro Verde mill operations. Approximately
85 percent of our expected
2008
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
molybdenum sales company functions as an agent to purchase and sell molybdenum
from the Henderson mine as well as our North American and South American copper
mines that produce molybdenum as a by-product. We defer recognizing profits on
intercompany molybdenum sales from these operations to the molybdenum sales
company until the final sales to third parties occur. Changes in these net
deferrals resulted in reductions to operating income totaling $360 million ($220
million to net income or $0.55 per share) in 2007. Assuming average molybdenum
prices of $30 per pound for 2008, we estimate that the net change in the
deferred profits will not have a material impact on first-quarter 2008 net
income. The actual change in deferred intercompany profits may differ
substantially from this estimate because of changes in molybdenum
prices.
2006
Compared with 2005 (Pro Forma). During 2006, average realized copper
prices, excluding hedging impacts, for the North American mining operations
improved by $1.36 per
pound to an average of $3.03 per pound, compared with $1.67 per pound in 2005. Average
realized molybdenum prices decreased by $4.02 per pound to an average of $21.87
per pound in 2006 from $25.89 per pound in 2005.
Consolidated
copper sales from North American operations totaled approximately 1.3 billion
pounds in 2006, compared with 1.4 billion pounds in 2005. The reduction in sales
volumes in 2006, compared with 2005, primarily related to lower production at
Bagdad because of lower ore grades and at Chino and Tyrone because of reductions
in leached ore.
Consolidated
molybdenum sales volumes totaled 69 million pounds in 2006 and 60 million pounds
in 2005. Higher molybdenum sales volumes in 2006, compared with 2005, were
primarily because of higher process rates.
Unit Net Cash Costs (Pro
Forma). Unit net cash costs per pound of copper and molybdenum are
measures intended to provide investors with information about the
cash-generating capacity of our mining operations expressed on a basis relating
to the primary metal product for our respective operations. 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 U.S. GAAP and should not be considered in isolation or as a
substitute for measures of performance determined in accordance with U.S. GAAP.
This measure is presented by other mining companies, although our measures may
not be comparable to similarly titled measures reported by other
companies.
The
following tables summarize the pro forma unit net cash costs at the North
American copper mines for the full twelve-month periods ended December 31, 2007,
2006 and 2005. Henderson, a molybdenum mine, is not included in these tables –
see “Henderson Unit Net Cash Costs.” For a reconciliation of pro forma unit net
cash costs per pound to production and delivery costs applicable to sales
reported in FCX’s pro forma consolidated financial results, refer to “Product
Revenues and Production Costs.”
Gross Profit per Pound of
Copper and Molybdenum (Pro Forma)
Year Ended December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Molybdenum
|
a
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown below
|
$
|
3.22
|
|
$
|
3.22
|
|
$
|
29.31
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
1.43
|
|
|
1.22
|
|
|
10.58
|
|
By-product
creditsa
|
|
(0.66
|
)
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
0.09
|
|
|
0.09
|
|
|
–
|
|
Unit
net cash costs
|
|
0.86
|
|
|
1.31
|
|
|
10.58
|
|
Depreciation,
depletion and amortization
|
|
0.15
|
|
|
0.12
|
|
|
0.87
|
|
Noncash
and nonrecurring costs, net
|
|
0.02
|
|
|
0.02
|
|
|
0.03
|
|
Total
unit costs
|
|
1.03
|
|
|
1.45
|
|
|
11.48
|
|
Revenue
adjustments, primarily for pricing on prior period
|
|
|
|
|
|
|
|
|
|
open
sales and hedging
|
|
(0.10
|
)
|
|
(0.10
|
)
|
|
–
|
|
Idle
facility and other non-inventoriable costs
|
|
(0.05
|
)
|
|
(0.05
|
)
|
|
(0.02
|
)
|
Gross
profit
|
$
|
2.04
|
|
$
|
1.62
|
|
$
|
17.81
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
sales (millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
Copper
|
|
1,316
|
|
|
1,316
|
|
|
|
|
Molybdenum
|
|
|
|
|
|
|
|
30
|
|
Year Ended December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Molybdenum
|
a
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown below
|
$
|
3.19
|
|
$
|
3.19
|
|
$
|
24.85
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
1.14
|
|
|
0.93
|
|
|
9.37
|
|
By-product
creditsa
|
|
(0.60
|
)
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
0.07
|
|
|
0.06
|
|
|
–
|
|
Unit
net cash costs
|
|
0.61
|
|
|
0.99
|
|
|
9.37
|
|
Depreciation,
depletion and amortization
|
|
0.11
|
|
|
0.09
|
|
|
0.77
|
|
Noncash
and nonrecurring costs, net
|
|
0.02
|
|
|
0.02
|
|
|
0.03
|
|
Total
unit costs
|
|
0.74
|
|
|
1.10
|
|
|
10.17
|
|
Revenue
adjustments, primarily for pricing on prior period
|
|
|
|
|
|
|
|
|
|
open
sales and hedging
|
|
(0.93
|
)
|
|
(0.93
|
)
|
|
–
|
|
Idle
facility and other non-inventoriable costs
|
|
(0.03
|
)
|
|
(0.03
|
)
|
|
–
|
|
Gross
profit
|
$
|
1.49
|
|
$
|
1.13
|
|
$
|
14.68
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
sales (millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
Copper
|
|
1,292
|
|
|
1,292
|
|
|
|
|
Molybdenum
|
|
|
|
|
|
|
|
31
|
|
a.
|
Molybdenum
by-product credits reflect volumes produced at market-based pricing, and
also include tolling revenues at
Sierrita.
|
Year Ended December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
|
Method
|
|
|
Copper
|
|
|
Molybdenum
|
a
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown below
|
$
|
1.63
|
|
$
|
1.63
|
|
$
|
32.47
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
0.97
|
|
|
0.77
|
|
|
9.72
|
|
By-product
creditsa
|
|
(0.70
|
)
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
0.07
|
|
|
0.07
|
|
|
–
|
|
Unit
net cash costs
|
|
0.34
|
|
|
0.84
|
|
|
9.72
|
|
Depreciation,
depletion and amortization
|
|
0.10
|
|
|
0.08
|
|
|
1.00
|
|
Noncash
and nonrecurring costs, net
|
|
0.01
|
|
|
0.01
|
|
|
0.03
|
|
Total
unit costs
|
|
0.45
|
|
|
0.93
|
|
|
10.75
|
|
Revenue
adjustments, primarily for pricing on prior period
|
|
|
|
|
|
|
|
|
|
open
sales and hedging
|
|
(0.14
|
)
|
|
(0.14
|
)
|
|
–
|
|
Idle
facility and other non-inventoriable costs
|
|
(0.02
|
)
|
|
(0.02
|
)
|
|
–
|
|
Gross
profit
|
$
|
1.02
|
|
$
|
0.54
|
|
$
|
21.72
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
sales (millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
Copper
|
|
1,378
|
|
|
1,378
|
|
|
|
|
Molybdenum
|
|
|
|
|
|
|
|
30
|
|
a.
|
Molybdenum
by-product credits reflect volumes produced at market-based pricing and
also include tolling revenues at
Sierrita.
|
2007
Compared with 2006 (Pro Forma). The North American
mining operations have experienced production cost increases 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. Higher
unit site production and delivery costs in 2007, compared with 2006, primarily
reflected higher labor, maintenance, operating supplies and energy costs, and
also included higher costs associated with the ramp-up of the Morenci mill
operations.
Molybdenum
credits were higher in 2007, compared with 2006, reflecting higher average
molybdenum prices during 2007.
Assuming
average prices of $3.00 per pound of copper and $30 per pound of molybdenum for
2008 and achievement of current 2008 sales estimates, we estimate that the 2008
average unit net cash costs for our North American mines, including molybdenum
credits, would approximate $1.00 per pound of copper.
2006
Compared with 2005 (Pro Forma). North American mining’s unit net cash
costs for 2006 were higher than in 2005 primarily because of higher labor,
maintenance, operating supplies and other input costs mostly from the restart of
Morenci’s mill operations and because of lower molybdenum credits resulting from
lower average realized molybdenum prices.
Henderson Unit Net Cash
Costs (Pro Forma). The following table summarizes the pro forma unit net
cash costs at the Henderson mine for the full twelve-month periods ended
December 31, 2007, 2006 and 2005. For a reconciliation of pro forma unit net
cash costs per pound to production and delivery costs applicable to sales
reported in FCX’s pro forma consolidated financial results, refer to “Product
Revenues and Production Costs.”
Henderson Gross Profit per
Pound of Molybdenum (Pro Forma)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Revenues,
after adjustments shown below
|
$
|
26.10
|
|
$
|
22.14
|
|
$
|
27.63
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
4.32
|
|
|
3.71
|
|
|
3.65
|
|
|
Unit
net cash costs
|
|
4.32
|
|
|
3.71
|
|
|
3.65
|
|
|
Depreciation
and amortization
|
|
1.00
|
|
|
0.89
|
|
|
0.88
|
|
|
Noncash
and nonrecurring costs, net
|
|
0.02
|
|
|
0.02
|
|
|
0.01
|
|
|
Total
unit costs
|
|
5.34
|
|
|
4.62
|
|
|
4.54
|
|
|
Gross
profita
|
$
|
20.76
|
|
$
|
17.52
|
|
$
|
23.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
molybdenum sales (millions of recoverable pounds)
|
|
39
|
|
|
37
|
|
|
32
|
|
|
a.
|
Gross
profit reflects sales of Henderson products based on volumes produced at
market-based pricing. On a consolidated basis, the Molybdenum segment
includes profits on sales as they are made to third parties and
realizations based on actual contract
terms.
|
2007
Compared with 2006 (Pro Forma). Henderson’s higher unit
net cash costs per pound of molybdenum for 2007, compared with 2006, primarily
were associated with higher input costs, including labor, supplies and service
costs, and higher taxes. These higher costs were partly offset by lower energy
costs resulting from energy credits received in 2007.
Assuming
an average price of $30 per pound of molybdenum for 2008 and achievement of
current 2008 sales estimates, we estimate that the 2008 average unit net cash
costs for Henderson would approximate $4.50 per pound of
molybdenum.
2006
Compared with 2005 (Pro Forma). Henderson’s higher unit
net cash costs per pound of molybdenum for 2006, compared with 2005, primarily
reflected higher input costs, including labor, supplies and service costs, and
higher taxes.
South
American Mining
We have
four operating copper mines in South America – Cerro Verde in Peru, and
Candelaria, Ojos del Salado and El Abra in Chile. These operations include
open-pit and underground mining, sulfide ore concentrating, leaching and
SX/EW.
Our South
American mining operations have labor agreements covering certain employees; the
agreements at our Cerro Verde and El Abra operations expire and will be
renegotiated during 2008.
The South
American mining division includes one reportable segment (Cerro Verde).
Following is further discussion of this reportable segment, as well as other
operations included in the South American mining division.
Cerro Verde. The
Cerro Verde open-pit mine, located near Arequipa, Peru, produces copper cathodes
and copper concentrates. In addition to copper, the Cerro Verde mine produces
molybdenum and silver. We own a 53.56 percent interest in Cerro Verde. The
remaining 46.44 percent is held by SMM Cerro Verde Netherlands B.V., Compañía de
Minas Buenaventura S.A.A. and other shareholders, certain of whose shares are
publicly traded on the Lima Stock Exchange.
In
mid-2007, the recently expanded mill at Cerro Verde reached design capacity of
108,000 metric tons of ore per day and averaged 105,500 metric tons per day
during the second half of 2007. The expansion enables Cerro Verde to produce
approximately 650 million pounds of copper per year (approximately 348 million
pounds per year for our share) and approximately 8 million pounds of molybdenum
per year (approximately 4 million pounds per year for our share) for the next
several years.
Other South American 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, and SX/EW operations. In addition to
copper, the Candelaria and Ojos del Salado mines produce gold and silver. We own
an 80 percent interest in both the Candelaria and Ojos del Salado mines, and own
a 51 percent interest in the El Abra mine.
At the
end of 2006, a feasibility study was completed to evaluate the development of a
large sulfide deposit at El Abra. This project would extend the mine life by
over ten years. Initial production from the sulfides is expected to begin in
2010, and is expected to average approximately 325 million pounds of copper per
year beginning in 2012. The existing facilities at El Abra will be used to
process the additional reserves, minimizing capital spending requirements. We
estimate total capital for this project to approximate $450 million, the
majority of which will be spent between 2008 and 2011. We are currently working
with Chilean authorities on finalizing an environmental impact study associated
with this project.
South
American mining added $3.8 billion in revenues and $2.2 million of operating
income to our results for the period March 20, 2007, through December 31,
2007.
The
following discussion of our South American mining operations covers the full
twelve-month periods ended December 31, 2007, 2006 and 2005, including periods
prior to our acquisition of these operations:
|
|
Years
Ended December 31,
|
|
|
South
American Mining Operating Results (Pro Forma)
|
|
2007
|
|
2006
|
|
2005
|
|
|
Copper
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,413
|
|
|
1,133
|
|
|
1,091
|
|
|
Sales
|
|
|
1,399
|
|
|
1,126
|
|
|
1,093
|
|
|
Average
realized price per pound, excluding hedging
|
|
$
|
3.25
|
|
$
|
3.03
|
|
$
|
1.75
|
|
|
Average
realized price per pound, including hedginga
|
|
$
|
3.25
|
|
$
|
3.03
|
|
$
|
1.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
116
|
|
|
112
|
|
|
117
|
|
|
Sales
|
|
|
114
|
|
|
111
|
|
|
117
|
|
|
Average
realized price per ounce
|
|
$
|
700.81
|
|
$
|
551.70
|
|
$
|
425.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molybdenum
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1
|
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SX/EW
operations
|
|
|
|
|
|
|
|
|
|
|
|
Leach
ore placed in stockpiles (metric tons per day)
|
|
|
289,100
|
|
|
257,400
|
|
|
264,600
|
|
|
Average
copper ore grade (percent)
|
|
|
0.43
|
|
|
0.45
|
|
|
0.46
|
|
|
Copper
production (millions of recoverable pounds)
|
|
|
569
|
|
|
695
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
operations
|
|
|
|
|
|
|
|
|
|
|
|
Ore
milled (metric tons per day)
|
|
|
167,900
|
|
|
68,500
|
|
|
68,700
|
|
|
Average
copper ore grade (percent)
|
|
|
0.74
|
|
|
0.87
|
|
|
0.84
|
|
|
Production
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
|
844
|
|
|
438
|
|
|
421
|
|
|
Molybdenum
|
|
|
1
|
|
|
–
|
|
|
–
|
|
|
a.
|
Includes
the impact of hedging losses related to El Abra’s 2005 copper price
protection program.
|
2007
Compared with 2006 (Pro Forma). During 2007, average realized copper
prices for the South American mining operations improved by $0.22 per pound to
an average of $3.25 per pound, compared with $3.03 per pound in
2006.
Consolidated
copper sales from South American operations increased to approximately 1.4
billion pounds in 2007, compared with 1.1 billion pounds in 2006, primarily
reflecting higher production from Cerro Verde resulting from the new
concentrator, which reached design capacity in mid-2007. This increase was
partly offset by lower production at El Abra resulting from lower ore
grades.
Consolidated
copper sales volumes from our South American mining operations are expected to
increase to approximately 1.5 billion pounds in 2008 reflecting additional
production from the new concentrator at Cerro Verde.
2006
Compared with 2005 (Pro Forma). During 2006, average realized copper
prices for the South American mining operations improved by $1.28 per pound to
an average of $3.03 per pound, compared with $1.75 per pound in 2005, which
excluded the hedging impact related to El Abra’s 2005 copper price protection
program.
Consolidated
copper sales from South American operations totaled approximately 1.1 billion
pounds in both 2006 and 2005. The slight increase in sales for 2006 primarily
reflected an increase in production at El Abra and expanded production from the
new concentrator at Cerro Verde, which began processing sulfide ore in
fourth–quarter 2006.
Unit Net Cash Costs (Pro Forma).
Unit net cash costs per pound of copper, calculated under the 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 the primary metal product for our respective operations. 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 U.S. GAAP and should not be considered in isolation or as a
substitute for measures of performance determined in accordance with U.S. GAAP.
This measure is presented by other mining companies, although our measures may
not be comparable to similarly titled measures reported by other
companies.
The
following tables summarize the pro forma unit net cash costs at the South
American copper mines for the full twelve-month periods ended December 31, 2007,
2006 and 2005. The below tables reflect pro forma unit net cash costs per pound
of copper under the by-product and co-product methods as the South American
mines also had small amounts of gold and silver sales. For a reconciliation of
pro forma unit net cash costs per pound to production and delivery costs
applicable to sales reported in FCX’s pro forma consolidated financial results,
refer to “Product Revenues and Production Costs.”
Gross Profit per Pound of
Copper (Pro Forma)
Year Ended December
31, 2007
|
|
|
|
|
|
By-Product
|
|
Co-Product
|
|
|
Method
|
|
Method
|
|
Revenues,
after adjustments shown below
|
$
|
3.25
|
|
$
|
3.25
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
0.91
|
|
|
0.87
|
|
By-product
credits
|
|
(0.09
|
)
|
|
–
|
|
Treatment
charges
|
|
0.20
|
|
|
0.20
|
|
Unit
net cash costs
|
|
1.02
|
|
|
1.07
|
|
Depreciation,
depletion and amortization
|
|
0.14
|
|
|
0.14
|
|
Noncash
and nonrecurring costs, net
|
|
–
|
|
|
–
|
|
Total
unit costs
|
|
1.16
|
|
|
1.21
|
|
Revenue
adjustments, primarily for pricing on prior period
|
|
|
|
|
|
|
open
sales and hedging
|
|
0.01
|
|
|
0.01
|
|
Other
non-inventoriable costs
|
|
(0.02
|
)
|
|
(0.02
|
)
|
Gross
profit
|
$
|
2.08
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
Consolidated
sales
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
1,399
|
|
|
1,399
|
|
Year Ended December
31, 2006
|
|
|
|
|
|
By-Product
|
|
Co-Product
|
|
|
Method
|
|
Method
|
|
Revenues,
after adjustments shown below
|
$
|
3.14
|
|
$
|
3.14
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
0.82
|
|
|
0.79
|
|
By-product
credits
|
|
(0.08
|
)
|
|
–
|
|
Treatment
charges
|
|
0.17
|
|
|
0.17
|
|
Unit
net cash costs
|
|
0.91
|
|
|
0.96
|
|
Depreciation,
depletion and amortization
|
|
0.17
|
|
|
0.17
|
|
Noncash
and nonrecurring costs, net
|
|
–
|
|
|
–
|
|
Total
unit costs
|
|
1.08
|
|
|
1.13
|
|
Revenue
adjustments, primarily for pricing on prior period
|
|
|
|
|
|
|
open
sales and hedging
|
|
(0.02
|
)
|
|
(0.01
|
)
|
Other
non-inventoriable costs
|
|
(0.02
|
)
|
|
(0.02
|
)
|
Gross
profit
|
$
|
2.02
|
|
$
|
1.98
|
|
|
|
|
|
|
|
|
Consolidated
sales
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
1,126
|
|
|
1,126
|
|
Year Ended December
31, 2005
|
|
|
|
|
|
By-Product
|
|
Co-Product
|
|
|
Method
|
|
Method
|
|
Revenues,
after adjustments shown below
|
$
|
1.70
|
|
$
|
1.70
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
0.68
|
|
|
0.65
|
|
By-product
credits
|
|
(0.06
|
)
|
|
–
|
|
Treatment
charges
|
|
0.10
|
|
|
0.09
|
|
Unit
net cash costs
|
|
0.72
|
|
|
0.74
|
|
Depreciation,
depletion and amortization
|
|
0.17
|
|
|
0.17
|
|
Noncash
and nonrecurring costs, net
|
|
–
|
|
|
–
|
|
Total
unit costs
|
|
0.89
|
|
|
0.91
|
|
Revenue
adjustments, primarily for pricing on prior period
|
|
|
|
|
|
|
open
sales and hedging
|
|
(0.09
|
)
|
|
(0.09
|
)
|
Other
non-inventoriable costs
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Gross
profit
|
$
|
0.71
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
Consolidated
sales
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
1,093
|
|
|
1,093
|
|
2007
Compared with 2006 (Pro Forma). Because of the fixed nature of a large
portion of our South American mining costs, unit costs vary significantly from
period to period depending on volumes of copper sold during the period. The
South American mining operations have also experienced production cost increases
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. Higher unit site production and delivery costs in 2007, compared with
2006, primarily reflected higher costs at El Abra because of lower copper sales.
In addition, higher unit net cash costs reflected the impact of Cerro Verde’s
voluntary contribution programs, including the liability associated with local
mining fund contributions (refer to “Other Mining Matters” for further
discussion of the Cerro Verde local mining fund contributions). These higher
costs were partially offset by lower overall costs at Cerro Verde associated
with significantly higher production resulting from the new
concentrator.
Assuming
average prices of $3.00 per pound of copper and achievement of current 2008
sales estimates, we estimate that 2008 average unit net cash costs for our South
American mines, including gold and molybdenum credits, would approximate $1.05
per pound of copper.
2006
Compared with 2005 (Pro Forma). South American unit net cash costs for
2006 were higher than in 2005 primarily because of higher operating costs at
Candelaria and El Abra associated with maintenance, labor and
other
input costs. Additionally, higher unit net cash costs in 2006 reflected higher
smelting and refining costs at Candelaria and higher costs at Cerro Verde
associated with voluntary contribution programs.
Indonesian
Mining
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, referred to
as Block A, located in Papua, Indonesia. Under the Contract of Work, PT Freeport
Indonesia also conducts exploration activities (which had been suspended, but
resumed in 2007) in an approximate 500,000-acre area, referred to as 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 through our
wholly owned subsidiary, PT Indocopper Investama, and the Government of
Indonesia owns the remaining 9.36 percent. 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 agreed, at that
time, 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.
PT
Freeport Indonesia has a labor agreement covering its hourly paid Indonesian
employees, the key provisions of which are renegotiated biannually. In July
2007, PT Freeport Indonesia and its workers agreed to terms for a new two-year
labor agreement, which expires in September 2009. The estimated annual increase
in wages under the new labor agreement totals approximately $40 million. PT
Freeport Indonesia’s relations with the workers’ union generally have been
satisfactory.
Joint
Ventures with Rio Tinto plc (Rio Tinto). In 1996, we established joint
ventures with 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.
The joint
venture agreement provides for adjustments to the specified annual metal sharing
amounts upon the occurrence of certain events that cause an extended
interruption in production to occur, including events such as the fourth-quarter
2003 Grasberg open-pit slippage and debris flow. As a result of the Grasberg
slippage and debris flow events, the 2004 specified amounts attributable 100
percent to PT Freeport Indonesia were reduced by 172 million recoverable pounds
of copper and 272,000 recoverable ounces of gold. Pursuant to the agreements in
2005 and early 2006 with Rio Tinto, these reductions were offset by increases in
the specified amounts attributable 100 percent to PT Freeport Indonesia totaling
62 million recoverable pounds of copper and 170,000 recoverable ounces of gold
in 2005, and 110 million recoverable pounds of copper and 102,000 recoverable
ounces of gold in 2021.
The
following discussion of our Indonesian mining operations covers the years ended
December 31, 2007, 2006 and 2005.
|
|
Years
Ended December 31,
|
|
Indonesian
Mining Operating Results
|
|
2007
|
|
2006
|
|
2005
|
|
Consolidated
Operating Data, Net of Rio Tinto’s Joint Venture Interest
|
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,151
|
|
|
1,201
|
|
|
1,456
|
|
Sales
|
|
|
1,131
|
|
|
1,201
|
|
|
1,457
|
|
Average
realized price per pound
|
|
$
|
3.32
|
|
$
|
3.13
|
|
$
|
1.85
|
|
Gold
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
2,198
|
|
|
1,732
|
|
|
2,789
|
|
Sales
|
|
|
2,185
|
|
|
1,736
|
|
|
2,790
|
|
Average
realized price per ounce
|
|
$
|
680.74
|
|
$
|
566.51
|
a
|
$
|
456.27
|
|
|
|
|
|
|
|
|
|
|
|
|
100%
Operating Data, Including Rio Tinto’s Joint Venture
Interest
|
|
|
|
|
|
|
|
|
|
|
Ore
milled (metric tons per day)
|
|
|
|
|
|
|
|
|
|
|
Grasberg
open pitb
|
|
|
159,100
|
|
|
184,200
|
|
|
174,200
|
|
Deep
Ore Zone (DOZ) underground mineb
|
|
|
53,500
|
|
|
45,200
|
|
|
42,000
|
|
Total |
|
|
212,600
|
|
|
229,400
|
|
|
216,200
|
|
Average
ore grade
|
|
|
|
|
|
|
|
|
|
|
Copper
(percent)
|
|
|
0.82
|
|
|
0.85
|
|
|
1.13
|
|
Gold
(grams per metric ton)
|
|
|
1.24
|
|
|
0.85
|
|
|
1.65
|
|
Recovery
rates (percent)
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
|
90.5
|
|
|
86.1
|
|
|
89.2
|
|
Gold
|
|
|
86.2
|
|
|
80.9
|
|
|
83.1
|
|
Production
(recoverable)
|
|
|
|
|
|
|
|
|
|
|
Copper
(millions of pounds)
|
|
|
1,211
|
|
|
1,300
|
|
|
1,689
|
|
Gold
(thousands of ounces)
|
|
|
2,608
|
|
|
1,824
|
|
|
3,440
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Amount
was approximately $606 per ounce before a loss resulting from redemption
of FCX’s Gold-Denominated Preferred Stock, Series
II.
|
b. Amounts
represent the approximate average daily throughput processed at PT Freeport
Indonesia's mill facilities from each producing mine.
Indonesian
Mining Revenues. A summary of
changes in PT Freeport Indonesia’s revenues follows:
|
2007
|
|
2006
|
|
2005
|
|
PT
Freeport Indonesia revenues – prior year
|
$
|
4,395
|
|
$
|
3,568
|
|
$
|
1,747
|
|
Price
realizations:
|
|
|
|
|
|
|
|
|
|
Copper
|
|
219
|
|
|
1,531
|
|
|
706
|
|
Gold
|
|
250
|
|
|
191
|
|
|
123
|
|
Sales
volumes:
|
|
|
|
|
|
|
|
|
|
Copper
|
|
(220
|
)
|
|
(473
|
)
|
|
636
|
|
Gold
|
|
254
|
|
|
(481
|
)
|
|
555
|
|
Adjustments,
primarily for copper pricing on prior year open sales
|
|
(173
|
)
|
|
195
|
|
|
(1
|
)
|
Treatment
charges, royalties and other
|
|
83
|
|
|
(136
|
)
|
|
(198
|
)
|
PT
Freeport Indonesia revenues – current year
|
$
|
4,808
|
|
$
|
4,395
|
|
$
|
3,568
|
|
|
|
|
|
|
|
|
|
|
|
2007
Compared with 2006. During 2007, realized copper prices at PT Freeport
Indonesia improved by $0.19 per pound to an average of $3.32 per pound, compared
with $3.13 per pound in 2006. Additionally, realized gold prices improved by
$114.23 per ounce in 2007 to an average of $680.74 per ounce, compared with
$566.51 per ounce in 2006, which included a reduction of $39.85 per ounce for
revenue adjustments associated with the first-quarter 2006 redemption of our
Gold-Denominated Preferred Stock, Series II.
PT
Freeport Indonesia’s share of sales totaled 1.1 billion pounds of copper and 2.2
million ounces of gold for 2007, compared with 1.2 billion pounds of copper and
1.7 million ounces of gold for 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. Copper sales volumes
for 2007 decreased, compared to 2006, primarily because of mining in a
relatively low-grade section of the Grasberg open pit during the second half of
2007, partly offset by mining higher ore grades during the first half of 2007
and higher recovery rates. The increase in gold sales for 2007, compared to
2006, was related to higher ore grades and recovery rates.
Consolidated
sales from PT Freeport Indonesia are expected to approximate 1.2 billion pounds
of copper and 1.2 million ounces of gold in 2008. PT Freeport Indonesia expects
to continue mining in a relatively low-grade section of the Grasberg open pit in
the first half of 2008 and a higher-grade section in the second half of 2008.
Approximately 65 percent of projected 2008 copper sales and 75 percent of
projected gold sales for PT Freeport Indonesia are expected in the second half
of the year.
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.
Royalties in 2007 increased to $133 million, compared with $126 million in 2006,
primarily reflecting higher metal prices; partly offset by lower copper sales
volumes. Assuming average prices of $3.00 per pound of copper and $800 per ounce
of gold and achievement of current 2008 sales estimates for PT Freeport
Indonesia, royalty costs would total approximately $120 million ($0.10 per pound
of copper) in 2008.
PT
Freeport Indonesia provides approximately 60 percent of Atlantic Copper’s copper
concentrate requirements at market prices and nearly all of PT Smelting’s copper
concentrate requirements. 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 rate for 2007 was $0.38 per pound and is also
expected to exceed the minimum rate of $0.21 per pound in 2008.
2006
Compared with 2005. During 2006, realized copper prices at PT Freeport
Indonesia improved by $1.28 per pound to an average of $3.13 per pound, compared
with $1.85 per pound in 2005. Additionally, realized gold prices at PT Freeport
Indonesia improved by $110.24 per ounce in 2006 to an average of $566.51 per
ounce (which included a reduction of $39.85 per ounce for revenue adjustments
associated with the redemption of our Gold-Denominated Preferred Stock, Series
II), compared with $456.27 per ounce in 2005.
PT
Freeport Indonesia’s share of sales decreased to 1.2 billion pounds of copper
and 1.7 million ounces of gold for 2006, compared with 1.5 billion pounds of
copper and 2.8 million ounces of gold for 2005 primarily because of mining lower
ore grades in 2006 compared to the higher-grade material mined in
2005.
Royalties
in 2006 increased to $126 million, compared with $104 million in 2005, primarily
reflecting higher metal prices partly offset by lower sales
volumes.
Indonesian
Development Projects. During second-quarter
2007, PT Freeport Indonesia completed the expansion of the capacity of the DOZ
underground operation to allow a sustained rate of 50,000 metric tons per day.
Total cost for this expansion was $64 million, with PT Freeport Indonesia’s 60
percent share totaling $38 million. PT Freeport Indonesia’s further expansion of
the DOZ mine to 80,000 metric tons of ore per day is under way with completion
targeted by 2010. The capital cost for this further expansion is expected to
approximate $100 million, with PT Freeport Indonesia’s 60 percent share totaling
approximately $60 million. Management believes that 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 underground 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 also has advanced
development of the Grasberg spur and, as of December 31, 2007, has completed
more than 96 percent of the tunneling required to reach the Grasberg underground
ore body. PT Freeport Indonesia expects to initiate multi-year mine development
activities in the first half of 2008. To date, approximately $76 million ($56
million for PT Freeport Indonesia’s share) has been incurred for the Common
Infrastructure project. In addition, PT Freeport Indonesia’s share of capital
expenditures
totaled $58 million in 2007 for infrastructure required for development of the
underground Grasberg ore body.
The Big
Gossan underground mine is a high-grade deposit located near the existing
milling complex. 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. 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
125 million pounds of copper and 65,000 ounces of gold, with PT Freeport
Indonesia receiving 60 percent of these amounts). As a result of higher costs
and scoping changes associated with this project, we have updated our capital
cost estimate to approximately $480 million. Capital expenditures incurred to
date on this project total $184 million ($168 million for PT Freeport
Indonesia's share). Recent increases in labor costs, currency exchange
rates and other construction costs, along with changes in scope, have resulted
in spending above previous estimates.
Unit Net Cash 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 the primary metal product for our
respective operations. 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 U.S. GAAP and
should not be considered in isolation or as a substitute for measures of
performance determined in accordance with U.S. GAAP. This measure is presented
by other mining companies, although our measures may not be comparable to
similarly titled measures reported by other companies.
The
following tables summarize the unit net cash costs at our Indonesian mining
operations for the years ended December 31, 2007, 2006 and 2005. For a
reconciliation of unit net cash costs per pound to production and delivery costs
applicable to sales reported in FCX’s consolidated financial statements, refer
to “Production Revenues and Production Costs.”
Gross Profit per Pound
of Copper/per Ounce of Gold and Silver
|
|
|
|
Year Ended December
31, 2007
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
$
|
3.32
|
|
$
|
3.32
|
|
$
|
680.74
|
|
$
|
13.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
1.19
|
|
|
0.85
|
|
|
172.23
|
|
|
3.37
|
|
Gold
and silver credits
|
|
(1.36
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
0.34
|
|
|
0.24
|
|
|
49.45
|
|
|
0.97
|
|
Royalty
on metals
|
|
0.12
|
|
|
0.08
|
|
|
17.05
|
|
|
0.33
|
|
Unit
net cash costs
|
|
0.29
|
|
|
1.17
|
|
|
238.73
|
|
|
4.67
|
|
Depreciation
and amortization
|
|
0.17
|
|
|
0.12
|
|
|
25.54
|
|
|
0.50
|
|
Noncash
and nonrecurring costs, net
|
|
0.04
|
|
|
0.03
|
|
|
5.90
|
|
|
0.12
|
|
Total
unit costs
|
|
0.50
|
|
|
1.32
|
|
|
270.17
|
|
|
5.29
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales
|
|
0.03
|
|
|
0.03
|
|
|
1.07
|
|
|
0.03
|
|
PT
Smelting intercompany profit recognized
|
|
0.01
|
|
|
0.01
|
|
|
1.71
|
|
|
0.03
|
|
Gross
profit
|
$
|
2.86
|
|
$
|
2.04
|
|
$
|
413.35
|
|
$
|
8.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
1,131
|
|
|
1,131
|
|
|
|
|
|
|
|
Gold
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
2,185
|
|
|
|
|
Silver
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
3,593
|
|
Year Ended December
31, 2006
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
$
|
3.13
|
|
$
|
3.13
|
|
$
|
566.51
|
a
|
$
|
8.59
|
b
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
1.03
|
|
|
0.79
|
|
|
156.24
|
|
|
3.11
|
|
Gold
and silver credits
|
|
(0.93
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
0.40
|
|
|
0.31
|
|
|
60.41
|
|
|
1.20
|
|
Royalty
on metals
|
|
0.10
|
|
|
0.08
|
|
|
15.94
|
|
|
0.32
|
|
Unit
net cash costs
|
|
0.60
|
|
|
1.18
|
|
|
232.59
|
|
|
4.63
|
|
Depreciation
and amortization
|
|
0.15
|
|
|
0.12
|
|
|
23.25
|
|
|
0.46
|
|
Noncash
and nonrecurring costs, net
|
|
0.04
|
|
|
0.03
|
|
|
5.60
|
|
|
0.11
|
|
Total
unit costs
|
|
0.79
|
|
|
1.33
|
|
|
261.44
|
|
|
5.20
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales
|
|
0.10
|
c
|
|
0.17
|
|
|
11.53
|
|
|
0.22
|
|
PT
Smelting intercompany profit eliminated
|
|
–
|
|
|
–
|
|
|
(0.37
|
)
|
|
(0.01
|
)
|
Gross
profit
|
$
|
2.44
|
|
$
|
1.97
|
|
$
|
316.23
|
|
$
|
3.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
1,201
|
|
|
1,201
|
|
|
|
|
|
|
|
Gold
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
1,736
|
|
|
|
|
Silver
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
3,806
|
|
a.
|
Amount
was approximately $606 per ounce before a loss resulting from redemption
of our Gold-Denominated Preferred Stock, Series
II.
|
b.
|
Amount
was approximately $12 per ounce before a loss resulting from redemption of
our Silver-Denominated Preferred
Stock.
|
c.
|
Includes
a $0.06 per pound loss on the redemption of our Gold-Denominated Preferred
Stock, Series II, and a $0.01 per pound loss on the redemption of our
Silver-Denominated Preferred
Stock.
|
Year Ended December
31, 2005
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Revenues,
after adjustments shown below
|
$
|
1.85
|
|
$
|
1.85
|
|
$
|
456.27
|
|
$
|
6.36
|
a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
0.65
|
b
|
|
0.44
|
c
|
|
107.71
|
c
|
|
1.76
|
c
|
Gold
and silver credits
|
|
(0.89
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
0.24
|
|
|
0.16
|
|
|
39.75
|
|
|
0.65
|
|
Royalty
on metals
|
|
0.07
|
|
|
0.05
|
|
|
11.77
|
|
|
0.19
|
|
Unit
net cash costs
|
|
0.07
|
|
|
0.65
|
|
|
159.23
|
|
|
2.60
|
|
Depreciation
and amortization
|
|
0.14
|
|
|
0.10
|
|
|
23.79
|
|
|
0.39
|
|
Noncash
and nonrecurring costs, net
|
|
–
|
|
|
–
|
|
|
0.52
|
|
|
0.01
|
|
Total
unit costs
|
|
0.21
|
|
|
0.75
|
|
|
183.54
|
|
|
3.00
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales
|
|
0.01
|
d
|
|
0.02
|
|
|
(1.14
|
)
|
|
0.02
|
|
PT
Smelting intercompany profit eliminated
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(2.67
|
)
|
|
(0.04
|
)
|
Gross
profit
|
$
|
1.64
|
|
$
|
1.11
|
|
$
|
268.92
|
|
$
|
3.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
(millions of recoverable pounds)
|
|
1,457
|
|
|
1,457
|
|
|
|
|
|
|
|
Gold
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
2,790
|
|
|
|
|
Silver
(thousands of recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
4,735
|
|
a.
|
Amount
was approximately $7 per ounce before a loss resulting from redemption of
our Silver-Denominated Preferred
Stock.
|
b.
|
Net
of deferred mining costs of $0.05 per pound. Following the adoption of
EITF 04-6 on January 1, 2006, stripping costs are no longer deferred
(refer to Note 1 for further
discussion).
|
c.
|
Net
of deferred mining costs of $0.03 per pound of copper, $7.37 per ounce of
gold and $0.12 per ounce of silver (see note b
above).
|
d.
|
Includes
less than a $0.01 per pound loss on the redemption of our
Silver-Denominated Preferred Stock.
|
2007
Compared with 2006. Because of the fixed nature of a large portion of PT
Freeport Indonesia’s costs, unit costs vary significantly from period to period
depending on volumes of copper and gold sold during the period. Higher unit site
production and delivery costs in 2007, compared with 2006, primarily reflected
increases in production costs and lower copper sales volumes
resulting from mine sequencing in the Grasberg open pit, which resulted from
mining in a relatively low-grade section during the second half of 2007.
Offsetting these factors in the by-product calculation were higher gold
credits reflecting higher overall gold sales volumes and average realized gold
prices in 2007.
PT
Freeport Indonesia has also experienced significant increases in 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 700,000 metric tons of
coal per year. Diesel prices have almost tripled and our coal costs are
approximately 45 percent higher since the beginning of 2003. The costs of other
consumables, including steel and reagents, also have increased. Additionally, as
approximately 15 percent of PT Freeport Indonesia’s production costs are
denominated in Australian dollars, our Indonesian mining costs have been
affected by the stronger Australian dollar against the U.S. dollar (refer to
“Foreign Currency Exchange Risk” for further discussion).
Unit
treatment charges vary with the price of copper, and unit royalty costs vary
with prices of copper and gold. Market rates for treatment charges have
decreased since 2006 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
(refer to Note 16 for further discussion). 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.
As a
result of the lower copper production and sales volumes in 2007, compared with
2006, PT Freeport Indonesia’s unit depreciation rate increased in 2007. Because
certain assets are depreciated on a straight-line basis, the unit rate varies
with the level of copper production and sales. Additionally, changes to the
long-range mine plan that impacts Grasberg open-pit reserves will impact unit
rates.
Assuming
average copper prices of $3.00 per pound and average gold prices of $800 per
ounce for 2008 and achievement of current 2008 sales estimates, PT Freeport
Indonesia estimates that its annual 2008 unit net cash costs, including gold and
silver credits, would approximate $0.80 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 higher during
2008, compared with 2007, primarily because of lower projected gold sales
volumes.
2006
Compared with 2005. Higher unit site production and delivery costs in
2006, compared with 2005, primarily reflected lower sales volumes resulting from
mine sequencing in the Grasberg open pit, higher input costs (including energy)
and the impact of adopting EITF 04-6 (refer to “New Accounting Standards” and
Note 1 for further discussion of EITF 04-6). For 2005, unit costs benefited from
the deferral of stripping costs totaling $0.05 per pound.
Gold and
silver credits increased in 2006, compared with 2005, primarily reflecting lower
copper sales volumes and higher average realized gold prices. Additionally, PT
Freeport Indonesia had higher treatment charges in 2006, compared with 2005,
primarily because of higher market rates and higher copper prices, including the
effects of price participation under our concentrate sales agreements, and
higher royalties because of higher copper and gold prices.
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 DRC and are the operator of the project. FCX is
responsible for funding 70 percent of project development costs and, at our
joint venture partner’s election, is also responsible for financing our
partner’s share of project overruns of more than 25 percent of the feasibility
study cost estimates.
The total
capital investment for this project is currently estimated at approximately $900
million, with approximately 35 percent incurred as of December 31, 2007
(including amounts incurred prior to the acquisition of Phelps Dodge). Capital
cost estimates will continue to be reviewed as engineering and construction
activities progress.
The
initial project at Tenke Fungurume is based on initial ore reserve estimates of
approximately 100 million metric tons with ore grades of 2.3 percent copper and
0.3 percent cobalt. Operations are expected to commence during 2009, with
average annual production of approximately 250 million pounds of copper and
approximately 18 million pounds of cobalt.
In
February 2008, we received a letter from the Ministry of Mines, Government of
the DRC, seeking our comment on proposed material modifications to our mining
contract for the Tenke Fungurume concession, including the amount of transfer
payments payable to the government, the government’s percentage ownership and
involvement in the management of the mine, regularization of certain matters
under Congolese law and the implementation of social plans. Our mining contract
was negotiated transparently and approved by the Government of the DRC
following extended negotiations, and we believe it complies with Congolese law
and is enforceable without modifications. We are currently working
cooperatively with the Ministry of Mines to resolve these matters while
contining with our project development activities.
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 has provided a variety of community support projects over the years.
During 2006, as a result of discussions with local mayors in the Arequipa
region, Cerro Verde agreed to design domestic water and sewage treatment plants
for the benefit of the region. These facilities are being designed in a modular
fashion so that initial installations can be readily expanded in the future. The
cost associated with the construction of these facilities is currently under
review; however, the costs associated with the first phase of construction of
the facilities will be split evenly between Cerro Verde and the local
municipalities and is currently estimated at $80 million ($40 million for Cerro
Verde’s share, which has been recorded as a current liability in our
consolidated balance sheets).
During
2006, the Peruvian government announced that all mining companies operating in
Peru will make annual contributions to local development funds for a five-year
period. The contribution is equal to 3.75 percent of after-tax profits, of which
2.75 percent is contributed to a local mining fund and 1.00 percent to a
regional mining fund. As the contribution program was being established, Cerro
Verde negotiated an agreement that allowed a credit against contributions to the
local mining fund for Cerro Verde’s contributions made to the Arequipa region
for construction of local water and sewage treatment facilities. During
third-quarter 2007, the agreement with the government was modified to exclude
this credit. Accordingly, we recorded a $33 million charge to production and
delivery costs in third-quarter 2007, which included the additional liability
associated with the local mining fund contributions. At December 31, 2007, Cerro
Verde’s liability associated with the local mining fund contributions totaled
$49 million, which is recorded as a current liability in our consolidated
balance sheets.
PROVEN
AND PROBABLE RESERVES
Recoverable
proven and probable reserves are estimated metal quantities from which we expect
to be paid after application of estimated metallurgical recovery rates and
smelter recovery rates, where applicable. Recoverable reserves are that part of
a mineral deposit which we estimate can be economically and legally extracted or
produced at the time of the reserve determination. FCX’s estimated consolidated
recoverable reserves include 93.2 billion pounds of copper, 41.0 million ounces
of gold, 2.0 billion pounds of molybdenum, 230.9 million ounces of silver and
0.6 billion pounds of cobalt. Estimated recoverable reserves were assessed using
long-term average prices of $1.20 per pound for copper, $450 per ounce for gold
and $6.50 per pound for molybdenum, compared with our 2006 assumptions of $1.00
per pound for copper and $400 per ounce for gold, and Phelps Dodge’s 2006
assumptions of $1.05 per pound for copper and $5.00 per pound for molybdenum.
The London spot metal prices for the past three years averaged $2.65 per pound
for copper and $582 per ounce for gold, and the Metals Week Molybdenum Dealer
Oxide price averaged $28.90 per pound for molybdenum.
Following
provides a summary, by geographic region, of our estimated recoverable proven
and probable copper, gold and molybdenum reserves at December 31,
2007:
|
Copper
|
|
Gold
|
|
Molybdenum
|
|
|
(billion
|
|
(million
|
|
(billion
|
|
|
|
pounds)
|
|
ounces)
|
|
pounds)
|
|
|
North
America
|
25.8
|
|
0.2
|
|
1.8
|
|
|
South
America
|
26.0
|
|
1.4
|
|
0.2
|
|
|
Indonesia
|
37.1
|
|
39.4
|
|
–
|
|
|
Africa
|
4.3
|
|
–
|
|
–
|
|
|
Consolidated
basisa
|
93.2
|
|
41.0
|
|
2.0
|
|
|
Net
equity interestb
|
77.0
|
|
37.0
|
|
1.9
|
|
|
a.
|
Consolidated
basis reserves represent estimated metal quantities after reductions for
joint venture partner interests at the Morenci mine in North America and
at the Grasberg mining complex in
Indonesia.
|
b.
|
Net
equity interest represents our net ownership interest (i.e., estimated
consolidated reserves further reduced for minority
interests).
|
Net
additions to recoverable copper reserves totaled approximately 2.3 billion
pounds at our North American mines and approximately 1.8 billion pounds at our
South American mines primarily because of higher price assumptions, partly
offset by increased costs. These additions were partly offset by reductions of
approximately 0.7 billion pounds at our Indonesian mining operations primarily
because the Dom ore body was reclassified as mineralized material following
an updated risk assessment of the Dom's proximity to the mill complex and
updates to the long-term mine plans for the underground ore body. Following
provides a rollforward of the changes in our estimated recoverable proven and
probable copper, gold and molybdenum reserves for 2007:
|
Copper
|
|
Gold
|
|
Molybdenum
|
|
|
(billion
|
|
(million
|
|
(billion
|
|
|
|
pounds)
|
|
ounces)
|
|
pounds)
|
|
|
Reserves
at December 31, 2006a
|
93.6
|
|
42.5
|
|
2.0
|
|
|
Net
additions/revisions
|
3.5
|
|
0.8
|
|
0.1
|
|
|
Production
|
(3.9)
|
|
(2.3)
|
|
(0.1)
|
|
|
Reserves
at December 31, 2007
|
93.2
|
|
41.0
|
|
2.0
|
|
|
a.
|
Includes
Phelps Dodge reserves prior to the
acquisition.
|
Refer to
Note 19 for further details of estimated recoverable reserves.
EXPLORATION
ACTIVITIES
We are
conducting exploration activities near our existing mines and in other high
potential areas around the world. Aggregate exploration expenditures in 2007
totaled $119 million, and are expected to approximate $175 million in
2008.
Our
exploration efforts in North America include drilling of the Lone Star deposit
located approximately four miles from the ore body within the Safford district,
as well as targets in the Morenci and Bagdad districts, and near the Henderson
molybdenum ore body. In South America, exploration is ongoing in and around the
Cerro Verde, Candelaria and Ojos del Salado deposits. In Africa, we are actively
pursuing targets outside of the area of initial development at Tenke Fungurume.
The number of drill rigs operating on these and other programs near our mine
sites has increased from 26 at the end of March 2007 to 55 at year end
2007.
PT
Freeport Indonesia’s exploration efforts in Indonesia include testing extensions
of the Deep Grasberg and Kucing Liar mine complex and evaluating targets in the
area between the Ertsberg East and Grasberg mineral systems from the new Common
Infrastructure tunnels. Initial drill results from the Common Infrastructure
tunnel are positive and additional drilling is in process. We continue efforts
to resume exploration activities in certain prospective areas in Papua, outside
Block A (the Grasberg contract area).
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. 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
significantly affected by changes in treatment and refining charges because
these operations are fully integrated.
Atlantic
Copper has a labor contract covering certain employees, which expired in
December 2007. The contract has been provisionally extended and is currently
being renegotiated.
The
following discussion of Atlantic Copper’s operations covers the years ended
December 31, 2007, 2006 and 2005:
|
|
Years
Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Gross
profit
|
|
$
|
23
|
|
$
|
90
|
|
$
|
46
|
Add
depreciation and amortization expense
|
|
|
36
|
|
|
33
|
|
|
29
|
Other
|
|
|
1
|
|
|
–
|
|
|
3
|
Cash
margin
|
|
$
|
60
|
|
$
|
123
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
3
|
|
$
|
74
|
|
$
|
35
|
Concentrate
and scrap treated (thousands of metric tons)
|
|
|
952
|
|
|
954
|
|
|
975
|
Anodes
production (millions of pounds)
|
|
|
565
|
|
|
581
|
|
|
627
|
Treatment
rates per pound
|
|
$
|
0.27
|
|
$
|
0.33
|
|
$
|
0.23
|
Cathodes
sales (millions of pounds)
|
|
|
555
|
|
|
529
|
|
|
549
|
Gold
sales in anodes and slimes (thousands of ounces)
|
|
|
663
|
|
|
667
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
2007
Compared with 2006. In June 2007, Atlantic Copper successfully completed
a scheduled 23-day maintenance turnaround, which had a $26 million impact on
production and delivery costs in 2007, including the impact of lower volumes.
Major maintenance turnarounds typically occur every 12 years for Atlantic
Copper, with significantly shorter term maintenance turnarounds in the interim.
The next maintenance activity at Atlantic Copper is scheduled for
2011.
Atlantic
Copper’s operating cash margin was $60 million in 2007, compared with $123
million in 2006, and operating income was $3 million in 2007, compared with $74
million in 2006. The reduction in Atlantic Copper’s operating cash margin and
operating income in 2007 reflected (i) the impact of the scheduled maintenance
turnaround completed in June 2007, (ii) lower treatment rates and (iii) higher
operating costs resulting from a stronger Euro and increased energy
costs.
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 $0.27 per pound in 2007, compared with $0.33 per pound
for 2006. Market treatment rates have been volatile in recent years. After
experiencing increases in prior years, rates began declining in 2006 as a result
of limited concentrate availability. Assuming average copper prices of $3.00 per
pound for 2008, we expect these rates to average approximately $0.19 per pound
in 2008.
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 an addition
to operating income totaling $15 million ($8 million to net income or $0.02 per
share) in 2007, compared with $32 million ($17 million to net income or $0.08
per share) in 2006. At December 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 interests
totaled $93 million. Assuming average copper prices of $3.00 per pound and gold
prices of $800 per ounce for 2008 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 $40 million in first-quarter 2008. 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.
2006
Compared with 2005. Atlantic Copper’s operating cash margin was $123
million in 2006, compared with $78 million in 2005, and operating income was $74
million in 2006, compared with $35 million in 2005. The positive results in 2006
primarily reflected higher treatment charges, partially offset by higher unit
costs.
Atlantic
Copper’s treatment charges averaged $0.33 per pound in 2006, compared with $0.23
per pound in 2005, reflecting higher market rates and price participation under
the terms of Atlantic Copper’s concentrate purchase and sales
agreements.
DISCONTINUED
OPERATIONS
On
October 31, 2007, we completed the sale of PDIC, our international wire and
cable business, for $735 million. Income from discontinued operations totaled
$35 million in 2007, after taxes and transaction costs related to
the
sale. The
transaction generated after-tax proceeds of approximately $650 million (net
proceeds of $597 million after taxes, transaction-related costs and PDIC cash).
As a result of the sale, the operating results of PDIC have been removed from
continuing operations and reported as discontinued operations in the
consolidated statements of income. Although not separately identified in the
consolidated statements of cash flows, operating cash flows from discontinued
operations for the period March 20, 2007, through December 31, 2007, totaled $48
million. The absence of PDIC cash flows is not expected to have a material
impact on operating results or cash flows in future periods.
Refer to
Note 4 for further discussion of discontinued operations.
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 during 2008 significantly greater than our budgeted
capital expenditures, scheduled debt maturities, minority interest
distributions, dividends and other cash requirements.
Following
the significant increase in our debt associated with the acquisition of Phelps
Dodge, we placed a high priority on debt reduction and achieved meaningful debt
reductions since the acquisition. During 2007, we fully repaid the original
$10.0 billion in term loan borrowings under the $11.5 billion senior credit
facility using a combination of equity proceeds and internally generated cash
flows (refer to “Financing Activities” for further discussion).
Cash
and Cash Equivalents
At
December 31, 2007, we had consolidated cash and cash equivalents of $1.6
billion. The following table reflects the U.S. and international components of
consolidated cash and cash equivalents for the years ended December 31, 2007 and
2006 (in billions):
|
December
31,
|
|
|
2007
|
|
2006
|
|
Cash
from U.S. operations
|
$
|
0.1
|
|
$
|
–
|
|
Cash
from international operations
|
|
1.5
|
|
|
0.9
|
|
Total
consolidated cash and cash equivalents
|
|
1.6
|
|
|
0.9
|
|
Less:
minority interests’ share
|
|
(0.3
|
)
|
|
–
|
|
Cash,
net of minority interests’ share
|
|
1.3
|
|
|
0.9
|
|
Withholding
taxes if distributeda
|
|
(0.2
|
)
|
|
(0.1
|
)
|
Net
cash available to FCX
|
$
|
1.1
|
|
$
|
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.
|
Operating
Activities
We
generated operating cash flows totaling $6.2 billion for 2007, including $1.1
billion from working capital sources, compared with $1.9 billion for 2006, net
of $114 million used for working capital. Operating cash flows for 2007 included
$4.1 billion of additional cash flows from Phelps Dodge’s operations beginning
March 20, 2007, and also benefited from higher metals prices.
Net cash
provided by operating activities totaled $1.9 billion for 2006, net of $114
million used for working capital, compared with $1.6 billion for 2005, including
$179 million from working capital sources. Operating cash flows for 2006
benefited from higher net income primarily associated with higher metals
prices.
Operating
activities are expected to generate positive cash flows for the foreseeable
future based on anticipated operating results and metal prices. Based on
estimated sales volumes for 2008 (refer to “Outlook”) and assuming average
prices of $3.00 per pound of copper, $800 per ounce of gold and $30 per pound of
molybdenum for 2008, operating cash flows would approximate $5 billion, which is
net of approximately $800 million for working capital uses, including the $598
million payment made in January 2008 to settle the 2007 copper price protection
program. In the first half of 2008, we will use a portion of our $1.5
billion revolving credit facilities primarily because
of
significant working capital requirements, which we expect to repay in the second
half of 2008. Using flat pricing assumptions for the year, second-half 2008
operating cash flows would be significantly higher than the first
half.
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 $1.8 billion for 2007,
compared with $251 million for 2006 and $143 million for 2005. The increase in
capital expenditures for 2007, compared with 2006 and 2005, primarily resulted
from the addition of Phelps Dodge capital spending beginning March 20, 2007. For
the period March 20, 2007, through December 31, 2007, capital expenditures from
Phelps Dodge’s operations totaled $1.3 billion, including $345 million
associated with the Safford project in Arizona and $218 million associated with
the Tenke Fungurume project in the DRC. Also included in capital expenditures
for 2007 was $101 million for development expenditures at Big Gossan and $58
million for infrastructure required for the development of the underground
Grasberg ore body.
During
2006, capital expenditures in Indonesia included $56 million for Big Gossan, $23
million for the Grasberg underground ore body, $17 million for the DOZ expansion
and $9 million for the Common Infrastructure project. During 2005, capital
expenditures included $19 million for the Common Infrastructure project and $16
million for the DOZ expansion.
Capital
expenditures, including $1.3 billion for major projects, are expected to
approximate $2.4 billion for 2008, and average $1.8 billion per year over the
next three years. Following is a summary of expected capital expenditures in
2008 associated with major projects:
Tenke
Fungurume mine development
|
$
|
500
|
|
|
Climax
molybdenum mine restart
|
|
250
|
|
|
Incremental
expansionsa
|
|
185
|
|
|
Big
Gossan mine development
|
|
160
|
|
|
El
Abra sulfide mine
|
|
70
|
|
|
Other
major projects
|
|
135
|
|
|
|
$
|
1,300
|
|
|
a.
|
We
are continuing to evaluate expansion opportunities associated with
existing ore bodies. As an initial step, we are pursuing incremental
expansions at Morenci, Sierrita, Bagdad and Cerro Verde. The projects will
require a capital investment of approximately $400 million and are
expected to provide incremental production ramping up to over 200 million
pounds of copper and 7 million pounds of molybdenum by 2011. Detailed
engineering for these projects is under
way.
|
Capital
costs have been affected by the prices of input costs, including energy,
equipment, materials and supplies, and labor. We will continue to update
our capital cost estimates as engineering and construction activities progress
on our major projects.
During
2007, we received net proceeds of $597 million associated with the sale of PDIC
(refer to Note 4 for further discussion), and also received proceeds from the
sales of assets totaling $260 million primarily related to sales of marketable
securities.
Financing
Activities
At
December 31, 2007, we had $7.2 billion in debt, including $6.0 billion in
acquisition debt, $0.8 billion of debt assumed in the Phelps Dodge acquisition
and $0.4 billion of previously existing debt. In connection with financing the
acquisition of Phelps Dodge, we used $2.5 billion of available cash (including
cash acquired from Phelps Dodge) and funded the remainder with term loan
borrowings totaling $10.0 billion under a new $11.5 billion senior credit
facility and from the offering of $6.0 billion in senior notes (which generated
net proceeds of $5.9 billion).
Following
the close of the acquisition and in accordance with our plan to reduce debt,
during 2007, we fully repaid the $10.0 billion in term loans (including
incremental borrowings and payments of approximately $2.5 billion) using a
combination of equity proceeds and internally generated cash flows. The equity
transactions included the sale of 47.15 million shares of common stock at $61.25
per share for net proceeds of $2.8 billion and 28.75 million shares
of 6¾% Mandatory Convertible Preferred Stock for net proceeds of $2.8
billion. In addition to repaying the term loans, we had net repayments of other
debt totaling $325 million in 2007.
During
2006, we had a net reduction to debt of $576 million, including the following
transactions:
·
|
$317
million for the completion of a tender offer and privately negotiated
transactions to induce conversion of our 7% Convertible Senior Notes into
FCX common stock.
|
·
|
$167
million for the mandatory redemption of our Gold-Denominated Preferred
Stock, Series II.
|
·
|
$13
million for the final mandatory redemption of our Silver-Denominated
Preferred Stock.
|
·
|
$11
million for open-market purchases of our 10⅛% Senior
Notes.
|
During
2005, we had a net reduction to debt of $696 million, including the following
transactions:
·
|
$251
million for privately negotiated transactions to induce conversion of a
portion of our 7% Convertible Senior Notes into FCX common
stock.
|
·
|
$231
million for open-market purchases, including (i) $216 million of our 10⅛%
Senior Notes, (ii) $11 million of our 7.50% Senior Notes and (iii) $4
million of our 7.20% Senior Notes.
|
·
|
$187
million to prepay certain bank
debt.
|
·
|
The
partial mandatory redemption of $13 million of our Silver-Denominated
Preferred Stock.
|
Following
the debt repayments during 2007, we have $31 million in debt maturities for 2008
and $212 million for the three-year period of 2009 through 2011.
In
February 2008, we purchased, in an open market transaction, $33 million of
the 9.5% Senior Notes for $46 million, which will result in a net charge of $6
million ($5 million to net income) in first-quarter 2008.
We have
$1.5 billion in revolving credit facilities due in March 2012. The revolving
credit facilities are composed of (i) a $1.0 billion revolving credit facility
available to FCX and (ii) a $0.5 billion revolving credit facility available to
both FCX and PT Freeport Indonesia. The facility available to FCX and PT
Freeport Indonesia represents an amendment to the FCX and PT Freeport Indonesia
revolver that was scheduled to mature in 2009. Effective February 19, 2008,
interest on the revolving credit facilities accrues at the London Interbank
Offered Rate (LIBOR) plus 0.75 percent, subject to an increase or decrease in
the interest rate margin based on the credit ratings assigned by Standard and
Poor’s Rating Services and Moody’s Investor Services. At December 31, 2007, no
amounts were outstanding under the revolving credit facilities; however, we have
drawn on these facilities in 2008 to cover certain working capital requirements,
which we expect to repay in the second half of 2008. At February 22, 2008, we
had $471 million of borrowings and $62 million of letters of credit issued under
the facilities, resulting in total availability of $967 million under the
facilities.
In
December 2007, our Board of Directors approved a new open market share purchase
program for up to 20 million shares. As of February 22, 2008, no shares have
been purchased under this program. The timing of future purchases of our common
stock is dependent on many factors, including the price of our common shares,
our operating results, cash flows and financial position, copper, gold and
molybdenum prices, and general economic and market conditions. This program
replaces our previous open market share purchase program that was approved in
2003 for up to 20 million shares and under which we acquired 2.0 million shares
for $100 million ($49.94 per share average) in 2006 and 2.4 million shares for
$80 million ($33.83 per share average) in 2005.
In
February 2003, our Board of Directors authorized an annual cash dividend on our
common stock of $0.36 per share, and authorized increases in the annual cash
dividend in October 2003 to $0.80 per share, in October 2004 to $1.00 per share
and in November 2005 to $1.25 per share. In December 2007, our Board of
Directors increased our annual cash dividend on our common stock to its current
rate of $1.75 per share, which is declared and paid at a quarterly rate of
$0.4375 per share beginning in February 2008.
Additionally,
since December 2004, we have paid eight supplemental dividends totaling $995
million ($5.25 per share). In 2007, common stock dividends paid totaled $421
million ($1.25 per share). In 2006, common stock dividends paid totaled $916
million ($4.75 per share), including four supplemental dividends totaling $678
million ($3.50 per share). In 2005, common stock dividends paid totaled $453
million ($2.50 per share), including three supplemental dividends totaling $272
million ($1.50 per share).
Based on
outstanding common shares on December 31, 2007, our annual common stock dividend
totals approximately $670 million. On December 27, 2007, FCX declared a regular
quarterly dividend, which was paid on February 1, 2008, to common shareholders
of record at the close of business on January 15, 2008. 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 and possible payment
of additional future supplemental cash dividends will be dependent upon our
financial results, cash requirements, future prospects and other factors deemed
relevant by our Board of Directors.
In 2007,
preferred stock dividends paid totaled $175 million representing dividends on
our 5½% Convertible Perpetual Preferred Stock and 6¾% Mandatory Convertible
Preferred Stock. In both 2006 and 2005, preferred stock dividends totaled
approximately $61 million representing dividends on our 5½% Convertible
Perpetual Preferred Stock.
Each
share of our 5½% Convertible Perpetual Preferred Stock was initially convertible
into 18.8019 shares of our common stock. 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 February 1, 2008, each share of preferred
stock is now convertible into 21.2924 shares of FCX common stock, or an
aggregate of approximately 23.4 million shares of FCX common stock. Beginning
March 30, 2009, we may redeem shares of the 5½% Convertible Perpetual Preferred
Stock by paying cash, our common stock or any combination thereof for $1,000 per
share plus unpaid dividends, but only if our common stock has exceeded 130
percent of the conversion price for at least 20 trading days within a period of
30 consecutive trading days immediately preceding the notice of redemption. On
December 27, 2007, FCX declared a regular quarterly dividend of $13.75 per share
of FCX’s 5½% Convertible Perpetual Preferred Stock, which was paid on February
1, 2008, to shareholders of record at the close of business on January 15,
2008.
In March
2007, we sold 28.75 million shares of 6¾% Mandatory Convertible Preferred Stock,
which will automatically convert on May 1, 2010, into between approximately 39
million and 47 million shares of FCX common stock. The conversion rate is
adjustable upon the occurrence of certain events, including any quarter that our
common stock dividend exceeds $0.3125 per share. However, adjustments that do
not exceed one percent are carried forward and must be made no later than August
of each year. For this reason, no adjustment was required to be made as a result
of the quarterly common stock dividend paid on February 1, 2008. Holders may
elect to convert at any time prior to May 1, 2010, at a conversion rate equal to
1.3605 shares of common stock for each share of 6¾% Mandatory Convertible
Preferred Stock. On December 27, 2007, FCX declared a regular quarterly dividend
of $1.6875 per share of FCX’s 6¾% Mandatory Convertible Preferred Stock, which
was paid on February 1, 2008, to shareholders of record at the close of business
on January 15, 2008.
Annual
preferred stock dividends on our 5½% Convertible Perpetual Preferred Stock and
6¾% Mandatory Convertible Preferred Stock total approximately $255
million.
Cash
dividends paid to minority interests in 2007 totaled $967 million reflecting
dividends paid to the minority interest owners of PT Freeport Indonesia and our
South America mines, including $288 million for the minority partners’ share of
the dividend paid by Cerro Verde in December 2007. Cash dividends of $161
million in 2006 and $125 million in 2005 primarily reflect dividends paid to the
minority interest owners of PT Freeport Indonesia.
We have
restricted payment covenants in our $1.5 billion senior revolving credit
facilities and the $6.0 billion in senior notes used to finance the acquisition
of Phelps Dodge, and also in our 6⅞% Senior Notes. The amount available for
dividend payments, purchases of our common stock and other restricted payments
as of December 31, 2007, was approximately $5.1 billion under the $1.5 billion
senior revolving credit facilities, approximately $8.4 billion under the $6.0
billion in senior notes and approximately $7.4 billion under the 6⅞% Senior
Notes.
DEBT
MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS
Below is
a summary of our total debt maturities at December 31, 2007:
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
Equipment
loans and other
|
|
$
|
31
|
|
$
|
49
|
|
$
|
22
|
|
$
|
22
|
|
$
|
74
|
|
$
|
85
|
Senior
Notes
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
119
|
|
|
–
|
|
|
6,809
|
|
|
$
|
31
|
|
$
|
49
|
|
$
|
22
|
|
$
|
141
|
|
$
|
74
|
|
$
|
6,894
|
In
addition to debt maturities shown above, we have other contractual obligations,
which we expect to fund with projected operating cash flows, available credit
facilities or future financing transactions, if necessary. A summary of these
various obligations at December 31, 2007, follows:
|
|
|
Less
Than
|
|
Years
|
|
Years
|
|
|
|
Total
|
|
1
Year
|
|
2 -
3
|
|
4 -
5
|
|
Thereafter
|
Scheduled
interest payment obligationsa
|
$
|
5,399
|
|
$
|
580
|
|
$
|
1,158
|
|
$
|
1,138
|
|
$
|
2,523
|
Reclamation
and environmental obligationsb |
|
8,826
|
|
|
249 |
|
|
533 |
|
|
421 |
|
|
7,623 |
Take-or-pay
contractsc
|
|
2,286
|
|
|
1,536
|
|
|
542
|
|
|
184
|
|
|
24
|
Operating
lease obligations
|
|
103
|
|
|
26
|
|
|
45
|
|
|
30
|
|
|
2
|
Atlantic
Copper obligation to insurance companyd
|
|
95
|
|
|
11
|
|
|
21
|
|
|
21
|
|
|
42
|
PT
Freeport Indonesia mine closure and reclamation funde
|
|
19
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
16
|
Total
contractual cash obligationsf
|
$
|
16,728
|
|
$
|
2,403
|
|
$
|
2,300
|
|
$
|
1,795
|
|
$
|
10,230
|
a.
|
Scheduled
interest payment obligations were calculated using stated coupon rates for
fixed-rate debt and interest rates applicable at December 31, 2007, for
variable-rate debt.
|
b.
|
Represents
estimated cash payments, on an escalated basis, associated
with reclamation and environmental activities. The timing and the
amount of these payments could change as a result of changes in regulatory
requirements, changes in scope and costs of reclamation activities and as
actual spending occurs. Refer to Note 15 for additional discussion
of environmental and reclamation
matters.
|
c.
|
Represents
contractual obligations for purchases of goods or services that are
defined by us as agreements that are enforceable and legally binding and
that specify all significant terms. Take-or-pay contracts primarily
comprise the procurement of copper concentrates and cathodes ($1.7
billion) and transportation ($270 million). Some of our take-or-pay
contracts are settled based on the prevailing market rate for the service
or commodity purchased, and in some cases, the amount of the actual
obligation may change over time because of market conditions.
Obligations for copper concentrates and cathodes provide for deliveries of
specified volumes, at market-based prices, to Atlantic Copper and the
North American mining sales company. Transportation obligations are
primarily for South American contracted ocean freight rates and for North
American natural gas
transportation.
|
d.
|
In
August 2002, Atlantic Copper complied with Spanish legislation by agreeing
to fund 7.2 million euros annually for 15 years to an approved insurance
company for an estimated 72 million euro contractual obligation to
supplement amounts paid to certain retired employees. Atlantic Copper had
$72 million recorded for this obligation at December 31,
2007.
|
e.
|
Represents
PT Freeport Indonesia’s commitments to contribute amounts to a cash fund
designed to accumulate at least $100 million by the end of our Indonesian
mining activities to pay for mine closure and
reclamation.
|
f.
|
This
table excludes certain other obligations in our consolidated balance
sheets, 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 and Financial Accounting
Standards Board (FASB) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”
(FIN 48), liabilities totaling $115 million that relate to unrecognized
tax benefits where the timing of settlement is not determinable. This
table also excludes purchase orders for the purchase of inventory and
other goods and services that represent contractual obligations, as
purchase orders typically represent authorizations to purchase rather than
binding agreements.
|
In addition to the debt maturities
and other contractual obligations shown above, we have other commitments, which
we expect to fund with projected operating cash flows, available credit
facilities or future financing transactions, if necessary. These include (i) PT
Freeport Indonesia’s commitment to provide one percent of its
annual
revenue for development of the local people in its area of operations through
the Freeport Partnership Fund for Community Development, (ii) Cerro Verde’s
local mining fund contributions equal to 3.75 percent of after-tax profits and
(iii) other commercial commitments, including standby letters of credit, surety
bonds and guarantees (refer to Notes 15 and 16 for further
discussion).
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 the 2007 zero-premium copper collars (consisting of both put and
call options) and copper put options that matured on December 31, 2007 (refer to
Note 17). These derivative instruments did not qualify for hedge accounting and
were adjusted to fair market value based on the forward price curve and implied
volatility as of the last day of the respective reporting period, with the gain
or loss recorded in revenues.
The
zero-premium copper collars covered approximately 486 million pounds of 2007
copper sales. Mark-to-market accounting adjustments on these contracts resulted
in charges to revenues totaling $175 million ($106 million to net income or
$0.27 per share) from March 20, 2007, through December 31, 2007. The 2007
zero-premium copper collar price protection program matured on December 31,
2007, and in January 2008, we paid $598 million to settle the program. We also
had in place copper put options at a strike price of $0.95 per pound for
approximately 730 million pounds of 2007 copper sales, which expired on December
31, 2007, without settlement. FCX does not currently intend to enter into
similar hedging programs in the future.
ENVIRONMENTAL
AND RECLAMATION MATTERS
Environmental
In the
U.S., 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 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.
Phelps
Dodge and many of its affiliates and predecessor companies have been involved in
mining, milling and manufacturing in the U.S. for more than a century.
Activities that occurred in the
late 19th century
and the 20th century
prior to the advent of modern environmental laws were not subject to
environmental regulation and were conducted before American industrial companies
understood the long-term effects of their operations on the surrounding
environment. With the passage of CERCLA in 1980, companies like Phelps Dodge
became legally responsible for environmental remediation on properties
previously owned or operated by them, irrespective of when the damage to the
environment occurred or who caused it. That liability is often shared on a joint
and several basis with all other owners and operators, meaning that each owner
or operator of the property is fully responsible for the clean-up, although in
many cases, some or all other historical owners or operators no longer exist, do
not have the financial ability to respond or cannot be found. As a result,
because of our acquisition of Phelps Dodge, many of the subsidiary companies we
now own are responsible for a wide variety of environmental remediation projects
throughout the U.S., and we expect to spend substantial sums annually for many
years to address those remediation issues. Various of our subsidiaries
previously have been advised by the U.S. Environmental Protection Agency, the
Department of the Interior, the Department of Agriculture 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 to determine whether
releases of hazardous substances have occurred and, if so, to develop and
implement remedial actions to address environmental concerns.
At the acquisition date, Phelps
Dodge’s historical environmental obligations of $385 million were based on
accounting guidance provided by SFAS No. 5, “Accounting for Contingencies,” and
American Institute of Certified Public Accountants Statement of Position (SOP)
96-1, “Environmental Remediation Liabilities,” which require that an estimated
loss be recorded for a loss contingency if, prior to the issuance of the
financial statements, it is probable that a liability had been incurred and the
amount of loss can be reasonably estimated. Amounts recorded under this guidance
are generally not considered fair value. FCX has an environmental and legal
group dedicated to the ongoing review and monitoring of environmental
remediation sites. At the acquisition date, the largest environmental
remediation sites assumed were undergoing studies to evaluate the extent of the
environmental
damage
and the available remedies. Advancement of these studies and consideration
of alternative remedies and cost sharing arrangements resulted in our
calculation of the estimated fair values being approximately $900 million
greater than the historical Phelps Dodge estimates. In accordance with the
purchase method of accounting we have recorded the assumed environmental
obligations at their estimated fair values of approximately $1.3 billion.
Significant work is expected to be completed in the next several years to
remediate these sites. After the allocation of the purchase price
associated with the Phelps Dodge acquisition is finalized in first-quarter of
2008, future estimates of environmental obligations will be recorded in
accordance with SFAS No. 5 and SOP 96-1. Significant adjustments to these
reserves could occur in the future.
In 2005,
PT Freeport Indonesia agreed to participate in the Government of Indonesia’s
PROPER program. In March 2006, the Indonesian Ministry of Environment announced
the preliminary results of its PROPER 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 we complete the audit process.
In
connection with obtaining our environmental approvals from the Indonesian
government, we committed to perform a one-time environmental risk assessment on
the impacts of our tailings management plan. We completed this extensive
environmental risk assessment with more than 90 scientific studies conducted
over four years and submitted it to the Indonesian government in December 2002.
We developed the risk assessment study with input from an independent review
panel, which included representatives from the Indonesian government, academia
and non-governmental organizations. The risks that we identified during this
process were in line with our impact projections of the tailings management
program contained in our environmental approval documents.
The cost
of complying with environmental laws is a fundamental cost of our business. In
2007, we incurred aggregate environmental capital expenditures and other
environmental costs (including our joint venture partners’ shares) of $320
million, including $228 million incurred since March 20, 2007, related to the
acquired Phelps Dodge operations, for programs to comply with applicable
environmental laws and regulations that affect our operations. Aggregate
environmental capital expenditures and other environmental costs totaled $63
million in 2006 and $44 million in 2005. In 2008, we expect to incur
approximately $520 million of aggregate environmental capital expenditures and
other environmental costs, which are part of our overall 2008 operating budget.
The increase in projected 2008 amounts, compared with 2007, primarily relates to
ongoing environmental compliance and related capital costs, plus increased
expenditures on accelerated reclamation and remediation activities.
Refer to
Note 15 for additional information on significant environmental
matters.
Asset
Retirement Obligations
We
recognize asset retirement obligations (AROs) as liabilities when incurred, with
the initial measurement at fair value. These liabilities are accreted to full
value over time through charges to income. Reclamation costs for future
disturbances are recorded as an ARO in the period of disturbance. Our cost
estimates are reflected on a third-party cost basis and comply with our legal
obligation to retire tangible, long-lived assets as defined by SFAS No. 143.
Refer to Note 1 for further discussion of our accounting policy for reclamation
and closure costs.
At
December 31, 2007, we had $728 million recorded for AROs in current and
long-term liabilities on the consolidated balance sheets. ARO costs may increase
or decrease significantly in the future as a result of changes in regulations,
engineering designs and technology, permit modifications or updates, mine plans,
cost of inflation 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 required, or if they are determined to be
economically beneficial.
Legal
requirements in New Mexico, Arizona and Colorado’s require financial assurance
to be provided for the estimated costs of reclamation and closure, including
groundwater quality protection programs. We have satisfied financial
assurance requirements by using a variety of mechanisms, such as
third-party performance guarantees, financial capability demonstrations, trust
funds, surety bonds, letters of credit and collateral. The applicable regulatory
requirements provide financial strength tests to support third-party performance
guarantees and financial capability demonstrations, which are designed to
confirm a company’s or third-party guarantor’s financial capability to fund
future estimated reclamation and closure costs. The amount of financial
assurance FCX is required to provide will vary with changes in laws, regulations
and reclamation and closure cost estimates. At December 31, 2007, we had trust
assets totaling $544 million that are designated for funding global reclamation
and
remediation activities, of which $106 million is legally restricted to fund a
portion of our AROs for Chino, Tyrone and Cobre as required by New Mexico
regulatory authorities.
Additionally,
in 1996, PT Freeport Indonesia began contributing to a cash fund ($10 million
balance at December 31, 2007) designed to accumulate at least $100 million
(including interest) by the end of our Indonesian mining activities. We plan to
use this fund, including accrued interest, to pay mine closure and reclamation
costs. Any costs in excess of the $100 million fund would be funded by
operational cash flow or other sources.
Refer to
Note 15 for additional information on asset retirement obligations.
DISCLOSURES
ABOUT MARKET RISKS
Commodity
Price Risk
Our
consolidated revenues include (i) PT Freeport Indonesia’s sale of copper
concentrates, which also contain significant quantities of gold and silver, (ii)
Atlantic Copper’s sale of copper anodes, copper cathodes and gold in anodes and
slimes, and, (iii) beginning March 20, 2007, the sale of copper, gold,
molybdenum and other metals and metal-related products by Phelps Dodge.
Consolidated revenues, net income and cash flows vary significantly with
fluctuations in the market prices of copper, gold and molybdenum, sales volumes
and other factors. Based on projected sales volumes (excluding purchased copper
and molybdenum) for the next two years and assuming an average price of $3.00
per pound of copper, $800 per ounce of gold and $25 per pound of molybdenum, the
impact on our annual cash flow would approximate $575 million for each $0.20 per
pound change in copper prices, $50 million for each $50 per ounce change in gold
prices and $100 million for each $2 per pound change in molybdenum prices.
Additionally, the impact on our annual net income would approximate $490 million
for each $0.20 per pound change in copper prices, $45 million for each $50 per
ounce change in gold prices and $100 million for each $2 per pound change in
molybdenum prices.
Approximately
two-thirds of our copper is sold in concentrate and cathodes and the remaining
one-third is sold primarily as rod (principally from our North American
operations). Substantially all of our concentrate sales contracts and some of
our cathode sales contracts provide final copper pricing in a specified future
period (generally one to four months from the shipment date) based on quoted LME
or COMEX prices. We ultimately receive market prices based on prices in the
specified future period; however, the accounting rules applied to these sales
result in changes recorded to revenues until the specified future period. We
record revenues and invoice customers at the time of shipment based on
then-current LME or COMEX prices, which results in an embedded derivative on our
provisional priced concentrate and cathode sales that are adjusted to fair value
through earnings each period until the date of final pricing. To the extent
final prices are higher or lower than what was recorded on a provisional basis,
an increase or decrease to revenues is recorded each reporting period until
the
date of final pricing. Accordingly, in times of rising copper prices, our
revenues during a quarter will benefit from higher prices received for contracts
priced at current market rates and also from an increase related to the final
pricing of provisionally priced contracts entered into in prior periods; in
times of falling copper prices, the opposite occurs. Consolidated revenues for
2007 include net additions for adjustments to the fair value of embedded copper
derivatives in concentrate and cathode sales contracts of $115 million (net
of an adjustment of $43 million related to the final pricing of sales
entered into in the prior year), compared with net additions of $158 million in
2006 (including an adjustment of $132 million related to the final pricing of
sales entered into in the prior year) and $176 million in 2005 (including an
adjustment of $10 million related to the final pricing of sales entered into in
the prior year).
At
December 31, 2007, we had provisionally priced copper sales totaling 402 million
pounds (net of minority interests) recorded at an average price of $3.02 per
pound, subject to final pricing over the next several months. We estimate that
each $0.05 change in the price realized from the December 31, 2007, pricing
would have an approximate $27 million impact on our 2008 consolidated revenues
($14 million impact to consolidated 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. In
connection with the acquisition of Phelps Dodge, we assumed the 2007 copper
price protection program,
which matured on December 31, 2007, and settled in January 2008 (refer to
“Hedging Activities” and Note 17 for further discussion). FCX does not currently
intend to enter into similar hedging programs in the
future.
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 Indonesian rupiah, Australian dollars, Chilean
pesos, Peruvian nuevo 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.
PT
Freeport Indonesia’s labor costs are mostly rupiah denominated. One U.S. dollar
was equivalent to 9,390 rupiah at December 31, 2007, 8,989 rupiah at December
31, 2006, and 9,825 rupiah at December 31, 2005. Based on estimated annual
payments of 2.1 trillion rupiah for operating costs and an exchange rate of
9,390 rupiah to one U.S. dollar, a one-thousand-rupiah increase in the exchange
rate would result in an approximate $22 million decrease in aggregate annual
operating costs; and a one-thousand-rupiah decrease in the exchange rate would
result in an approximate $27 million increase in annual operating
costs.
Approximately
15 percent of PT Freeport Indonesia’s projected purchases of materials, supplies
and services for 2008 are denominated in Australian dollars. One Australian
dollar was equivalent to $0.88 at December 31, 2007, $0.79 at December 31, 2006,
and $0.73 at December 31, 2005. Based on estimated annual payments of 270
million Australian dollars and an exchange rate of $0.88 to one Australian
dollar, a $0.01 increase or decrease in the exchange rate would result in an
approximate $3 million change in 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. One euro was equivalent to
$1.47 at December 31, 2007, $1.32 at December 31, 2006, and $1.18 at December
31, 2005. Based on estimated annual payments of approximately 100 million euros
and an exchange rate of $1.47 to one euro, a $0.05 increase or decrease in the
exchange rate would result in an approximate $5 million change in annual
operating costs.
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 498
Chilean pesos and 3.05 Peruvian nuevo soles at December 31, 2007, 532 Chilean
pesos and 3.20 Peruvian nuevo soles at December 31, 2006, and 514 Chilean pesos
and 3.43 Peruvian nuevo soles at December 31, 2005. Based on estimated annual
payments of 215 billion Chilean pesos for operating costs and an exchange rate
of 498 Chilean pesos to one U.S. dollar, a ten-peso increase or decrease in the
exchange rate would result in an approximate $9 million change in aggregate
annual operating costs. Based on estimated annual payments of 425 million
Peruvian nuevo soles for operating costs and an exchange rate of 3.05 Peruvian
nuevo soles to one U.S. dollar, a 0.10 nuevo sol increase or decrease in the
exchange rate would result in an approximate $5 million change in aggregate
annual operating costs.
Interest
Rate Risk
At
December 31, 2007, we had total debt of $7.2 billion, of which approximately 18
percent was variable-rate debt with interest rates based on LIBOR or the Euro
Interbank Offered Rate (EURIBOR). The table below presents average interest
rates for our scheduled maturities of principal for our outstanding debt and the
related fair values at December 31, 2007:
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Fair
Value
|
|
Fixed-rate
debt
|
$
|
–
|
|
$
|
–
|
|
$
|
–
|
|
$
|
119
|
|
$
|
–
|
|
$
|
5,809
|
|
$
|
6,373
|
|
Average
interest rate
|
|
–
|
|
|
–
|
|
|
–
|
|
|
8.7
|
%
|
|
–
|
|
|
8.2
|
%
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate
debt
|
$
|
31
|
|
$
|
49
|
|
$
|
22
|
|
$
|
22
|
|
$
|
74
|
|
$
|
1,085
|
|
$
|
1,222
|
|
Average
interest rate
|
|
6.8
|
%
|
|
5.3
|
%
|
|
6.9
|
%
|
|
7.3
|
%
|
|
6.1
|
%
|
|
7.9
|
%
|
|
7.6
|
%
|
NEW
ACCOUNTING STANDARDS
Fair
Value Measurements. In September 2006, the
FASB issued SFAS No. 157, “Fair Value Measurements,” which provides enhanced
guidance for using fair value to measure assets and liabilities. SFAS No. 157
does not require any new fair value measurements under U.S. GAAP; rather this
statement establishes a common definition of fair value, provides a framework
for measuring fair value under U.S. GAAP and expands disclosure requirements
about fair value measurements. On February 12, 2008, the FASB issued FSP FAS
157-2, which delays the effective date of SFAS No. 157 for nonfinancial assets
or liabilities that are not required or permitted to be measured at fair value
on a recurring basis to fiscal years beginning after November 15, 2008, and
interim periods within those years. We are currently evaluating the impact, if
any, the adoption of SFAS No. 157 will have on our financial reporting and
disclosures.
Fair
Value Option for Financial Assets and Liabilities. In February 2007, the
FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Liabilities – Including an amendment of FASB Statement No. 115,” which permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007. We do
not believe the adoption of SFAS No. 159 will have a material impact on our
financial reporting and disclosures.
Business
Combinations. In December 2007, the
FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No.
141R). Under SFAS No. 141R, all business combinations will be accounted for
under the acquisition method. SFAS No. 141R makes certain other changes to the
accounting for business combinations, with the most significant changes as
follows: (i) whether all or a partial interest is acquired, the acquirer will
recognize the full value of assets acquired, liabilities assumed and
noncontrolling interests; (ii) direct costs of a business combination will be
charged to expense if they are not associated with issuing debt or equity
securities; (iii) any contingent consideration will be recognized and measured
at fair value on the acquisition date, with subsequent changes to the fair value
recognized in earnings; and (iv) equity issued in consideration for a business
combination will be measured at fair value as of the acquisition date. SFAS No.
141R applies prospectively to business combinations for which the acquisition
date is on or after fiscal years beginning after December 15, 2008. Early
adoption is prohibited.
Noncontrolling
Interests in Consolidated Financial Statements. In December 2007, the
FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51,” which clarifies that noncontrolling
interests (minority interests) are to be treated as a separate component of
equity and any changes in the ownership interest (in which control is retained)
are to be accounted for as capital transactions. However, a change in ownership
of a consolidated subsidiary that results in a loss of control would be
considered a significant event that triggers gain or loss recognition, with the
establishment of a new fair value basis in any remaining ownership interests.
SFAS No. 160 also provides additional disclosure requirements for each reporting
period. SFAS No. 160 applies to fiscal years beginning on or after December 15,
2008, with early adoption prohibited. This statement is required to be adopted
prospectively, except for the following provisions, which are expected to be
applied retrospectively: (i) the reclassification of noncontrolling interests to
equity in the consolidated balance sheets and (ii) the adjustment to
consolidated net income to include net income attributable to both the
controlling and noncontrolling interests.
PRODUCT
REVENUES AND PRODUCTION COSTS
Unit net
cash cost per pound of copper and molybdenum are measures intended to provide
investors with information about the cash-generating capacity of our mining
operations expressed on a basis relating to the primary metal product for the
respective operations. 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 U.S. GAAP and
should not be considered in isolation or as a substitute for measures of
performance determined in accordance with U.S. GAAP. This measure is presented
by other 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 (i) the majority of our revenues are copper
revenues, (ii) we mine ore, which contains copper, gold, molybdenum and other
metals, (iii) it is not possible to specifically assign all of our costs to
revenues from the copper, gold, and molybdenum and other metals we produce, (iv)
it is the method used to compare mining operations in certain industry
publications and (v) 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, impacts of purchase accounting fair value adjustments 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 financial results.
North American Mining
Product Revenues and Production Costs (Pro Forma)
Year Ended December
31, 2007
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Molybdenum
|
a
|
Other
|
b
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
4,242
|
|
$
|
4,242
|
|
$
|
866
|
|
$
|
60
|
|
|
5,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
1,883
|
|
|
1,609
|
|
|
312
|
|
|
23
|
|
|
1,944
|
|
By-product
creditsa
|
|
(865
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
119
|
|
|
116
|
|
|
–
|
|
|
3
|
|
|
119
|
|
Net
cash costs
|
|
1,137
|
|
|
1,725
|
|
|
312
|
|
|
26
|
|
|
2,063
|
|
Depreciation,
depletion and amortization
|
|
192
|
|
|
165
|
|
|
26
|
|
|
1
|
|
|
192
|
|
Noncash
and nonrecurring costs, net
|
|
22
|
|
|
21
|
|
|
1
|
|
|
–
|
|
|
22
|
|
Total
costs
|
|
1,351
|
|
|
1,911
|
|
|
339
|
|
|
27
|
|
|
2,277
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging
|
|
(139
|
)
|
|
(139
|
)
|
|
–
|
|
|
–
|
|
|
(139
|
)
|
Idle
facility and other non-inventoriable costs
|
|
(65
|
)
|
|
(64
|
)
|
|
(1
|
)
|
|
–
|
|
|
(65
|
)
|
Gross
profit
|
$
|
2,687
|
|
$
|
2,128
|
|
$
|
526
|
|
$
|
33
|
|
$
|
2,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
Depletion
and
|
|
|
|
|
|
|
|
|
Revenues
|
|
and
Delivery
|
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
5,168
|
|
$
|
1,944
|
|
$
|
192
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
22
|
|
|
N/A
|
|
|
|
|
|
|
|
Treatment
charges per above
|
|
N/A
|
|
|
119
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging per above
|
|
(139
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Purchase
accounting impact
|
|
120
|
|
|
851
|
|
|
762
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
14,084
|
|
|
6,874
|
|
|
556
|
|
|
|
|
|
|
|
As
reported in FCX’s pro forma consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
results
|
$
|
19,233
|
|
$
|
9,810
|
|
$
|
1,510
|
|
|
|
|
|
|
|
a.
|
Molybdenum
by-product credits reflect volumes produced at market-based pricing and
also include tolling revenues at
Sierrita.
|
b.
|
Includes
gold and silver product revenues and production
costs.
|
Year Ended December
31, 2006
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Molybdenum
|
a
|
Other
|
b
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
4,121
|
|
$
|
4,121
|
|
$
|
772
|
|
$
|
44
|
|
$
|
4,937
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
1,472
|
|
|
1,199
|
|
|
291
|
|
|
25
|
|
|
1,515
|
|
By-product
creditsa
|
|
(773
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
87
|
|
|
83
|
|
|
–
|
|
|
4
|
|
|
87
|
|
Net
cash costs
|
|
786
|
|
|
1,282
|
|
|
291
|
|
|
29
|
|
|
1,602
|
|
Depreciation,
depletion and amortization
|
|
147
|
|
|
122
|
|
|
23
|
|
|
2
|
|
|
147
|
|
Noncash
and nonrecurring costs, net
|
|
20
|
|
|
19
|
|
|
1
|
|
|
–
|
|
|
20
|
|
Total
costs
|
|
953
|
|
|
1,423
|
|
|
315
|
|
|
31
|
|
|
1,769
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging
|
|
(1,205
|
)
|
|
(1,205
|
)
|
|
–
|
|
|
–
|
|
|
(1,205
|
)
|
Idle
facility and other non-inventoriable costs
|
|
(36
|
)
|
|
(36
|
)
|
|
–
|
|
|
–
|
|
|
(36
|
)
|
Gross
profit
|
$
|
1,927
|
|
$
|
1,457
|
|
$
|
457
|
|
$
|
13
|
|
$
|
1,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depletion
and
|
|
|
|
|
|
|
|
|
Revenues
|
|
and
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
4,937
|
|
$
|
1,515
|
|
$
|
147
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
20
|
|
|
N/A
|
|
|
|
|
|
|
|
Treatment
charges per above
|
|
N/A
|
|
|
87
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging per above
|
|
(1,205
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Purchase
accounting impact
|
|
120
|
|
|
1,526
|
|
|
722
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
12,801
|
|
|
6,652
|
|
|
515
|
|
|
|
|
|
|
|
As
reported in FCX’s pro forma consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
statements
|
$
|
16,653
|
|
$
|
9,880
|
|
$
|
1,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Molybdenum
by-product credits reflect volumes produced at market-based pricing and
also include tolling revenues at
Sierrita.
|
b.
|
Includes
gold and silver product revenues and production
costs.
|
Year Ended December
31, 2005
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Molybdenum
|
a
|
Other
|
b
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
2,247
|
|
$
|
2,247
|
|
$
|
978
|
|
$
|
26
|
|
$
|
3,251
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
1,330
|
|
|
1,061
|
|
|
293
|
|
|
15
|
|
|
1,369
|
|
By-product
creditsa
|
|
(965
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
92
|
|
|
90
|
|
|
–
|
|
|
2
|
|
|
92
|
|
Net
cash costs
|
|
457
|
|
|
1,151
|
|
|
293
|
|
|
17
|
|
|
1,461
|
|
Depreciation,
depletion and amortization
|
|
143
|
|
|
112
|
|
|
30
|
|
|
1
|
|
|
143
|
|
Noncash
and nonrecurring costs, net
|
|
16
|
|
|
15
|
|
|
1
|
|
|
–
|
|
|
16
|
|
Total
costs
|
|
616
|
|
|
1,278
|
|
|
324
|
|
|
18
|
|
|
1,620
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging
|
|
(187
|
)
|
|
(187
|
)
|
|
–
|
|
|
–
|
|
|
(187
|
)
|
Idle
facility and other non-inventoriable costs
|
|
(34
|
)
|
|
(34
|
)
|
|
–
|
|
|
–
|
|
|
(34
|
)
|
Gross
profit
|
$
|
1,410
|
|
$
|
748
|
|
$
|
654
|
|
$
|
8
|
|
$
|
1,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depletion
and
|
|
|
|
|
|
|
|
|
Revenues
|
|
and
Delivery
|
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
3,251
|
|
$
|
1,369
|
|
$
|
143
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
16
|
|
|
N/A
|
|
|
|
|
|
|
|
Treatment
charges per above
|
|
N/A
|
|
|
92
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging per above
|
|
(187
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Eliminations
and other
|
|
5,223
|
|
|
3,805
|
|
|
299
|
|
|
|
|
|
|
|
As
reported in Phelps Dodge consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
statementsc
|
$
|
8,287
|
|
$
|
5,282
|
|
$
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Molybdenum
by-product credits reflect volumes produced at market-based pricing and
also include tolling revenues at
Sierrita.
|
b.
|
Includes
gold and silver product revenues and production
costs.
|
c.
|
Obtained
from the Phelps Dodge Form 10-K for the year ended December 31,
2005.
|
Henderson Product Revenues
and Production Costs (Pro Forma)
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Revenues
|
$
|
1,029
|
|
$
|
820
|
|
$
|
890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
171
|
|
|
137
|
|
|
118
|
|
|
Net
cash costs
|
|
171
|
|
|
137
|
|
|
118
|
|
|
Depreciation
and amortization
|
|
39
|
|
|
33
|
|
|
28
|
|
|
Noncash
and nonrecurring costs, net
|
|
1
|
|
|
1
|
|
|
–
|
|
|
Total
costs
|
|
211
|
|
|
171
|
|
|
146
|
|
|
Gross
profita
|
$
|
818
|
|
$
|
649
|
|
$
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
Production
|
|
Depletion
and
|
|
|
|
Revenues
|
|
and
Delivery
|
|
Amortization
|
|
|
Year Ended December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
1,029
|
|
$
|
171
|
|
$
|
39
|
|
|
Purchase
accounting impact
|
|
120
|
|
|
851
|
|
|
762
|
|
|
Eliminations
and other
|
|
18,084
|
|
|
8,788
|
|
|
709
|
|
|
As
reported in FCX’s pro forma consolidated financial results
|
$
|
19,233
|
|
$
|
9,810
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
820
|
|
$
|
137
|
|
$
|
33
|
|
|
Purchase
accounting impact
|
|
120
|
|
|
1,526
|
|
|
722
|
|
|
Eliminations
and other
|
|
15,713
|
|
|
8,137
|
|
|
629
|
|
|
As
reported in FCX’s pro forma consolidated financial results
|
$
|
16,653
|
|
$
|
9,880
|
|
$
|
1,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
890
|
|
$
|
118
|
|
$
|
28
|
|
|
Eliminations
and other
|
|
7,397
|
|
|
5,164
|
|
|
414
|
|
|
As
reported in Phelps Dodge consolidated financial resultsb
|
$
|
8,287
|
|
$
|
5,282
|
|
$
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Gross
profit reflects sales of Henderson products based on volumes produced at
market-based pricing. On a consolidated basis, the Molybdenum segment
includes profits on sales as they are made to third parties and
realizations based on actual contract
terms.
|
b.
|
Obtained
from the Phelps Dodge Form 10-K for the year ended December 31,
2005.
|
South American Mining
Product Revenues and Production Costs (Pro Forma)
Year Ended December
31, 2007
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Other
a
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
4,552
|
|
$
|
4,552
|
|
$
|
140
|
|
$
|
4,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
1,268
|
|
|
1,221
|
|
|
61
|
|
|
1,282
|
|
By-product
credits
|
|
(126
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
286
|
|
|
278
|
|
|
8
|
|
|
286
|
|
Net
cash costs
|
|
1,428
|
|
|
1,499
|
|
|
69
|
|
|
1,568
|
|
Depreciation,
depletion and amortization
|
|
200
|
|
|
196
|
|
|
4
|
|
|
200
|
|
Noncash
and nonrecurring costs, net
|
|
3
|
|
|
3
|
|
|
–
|
|
|
3
|
|
Total
costs
|
|
1,631
|
|
|
1,698
|
|
|
73
|
|
|
1,771
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging
|
|
18
|
|
|
19
|
|
|
(1
|
)
|
|
18
|
|
Other
non-inventoriable costs
|
|
(34
|
)
|
|
(32
|
)
|
|
(2
|
)
|
|
(34
|
)
|
Gross
profit
|
$
|
2,905
|
|
$
|
2,841
|
|
$
|
64
|
|
$
|
2,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
|
|
Production
|
|
Depletion
and
|
|
|
|
|
|
Revenues
|
|
and
Delivery
|
|
Amortization
|
|
|
|
|
Totals
presented above
|
$
|
4,692
|
|
$
|
1,282
|
|
$
|
200
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
3
|
|
|
N/A
|
|
|
|
|
Less:
Treatment charges per above
|
|
(286
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging per above
|
|
18
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
Purchased
metal
|
|
218
|
|
|
218
|
|
|
N/A
|
|
|
|
|
Purchase
accounting impact
|
|
120
|
|
|
851
|
|
|
762
|
|
|
|
|
Eliminations
and other
|
|
14,471
|
|
|
7,456
|
|
|
548
|
|
|
|
|
As
reported in FCX’s pro forma consolidated financial results
|
$
|
19,233
|
|
$
|
9,810
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
gold, silver and molybdenum product revenues and production
costs.
|
Year Ended December
31, 2006
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Other
a
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
3,530
|
|
$
|
3,530
|
|
$
|
91
|
|
$
|
3,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
918
|
|
|
891
|
|
|
27
|
|
|
918
|
|
By-product
credits
|
|
(91
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
198
|
|
|
192
|
|
|
6
|
|
|
198
|
|
Net
cash costs
|
|
1,025
|
|
|
1,083
|
|
|
33
|
|
|
1,116
|
|
Depreciation,
depletion and amortization
|
|
193
|
|
|
190
|
|
|
3
|
|
|
193
|
|
Noncash
and nonrecurring costs, net
|
|
2
|
|
|
2
|
|
|
–
|
|
|
2
|
|
Total
costs
|
|
1,220
|
|
|
1,275
|
|
|
36
|
|
|
1,311
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging
|
|
(18
|
)
|
|
(9
|
)
|
|
(9
|
)
|
|
(18
|
)
|
Other
non-inventoriable costs
|
|
(22
|
)
|
|
(21
|
)
|
|
(1
|
)
|
|
(22
|
)
|
Gross
profit
|
$
|
2,270
|
|
$
|
2,225
|
|
$
|
45
|
|
$
|
2,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
|
|
Production
|
|
Depletion
and
|
|
|
|
|
|
Revenues
|
|
and
Delivery
|
|
Amortization
|
|
|
|
|
Totals
presented above
|
$
|
3,621
|
|
$
|
918
|
|
$
|
193
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
2
|
|
|
N/A
|
|
|
|
|
Less:
Treatment charges per above
|
|
(198
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging per above
|
|
(18
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
Purchased
metal
|
|
213
|
|
|
213
|
|
|
N/A
|
|
|
|
|
Purchase
accounting impact
|
|
120
|
|
|
1,526
|
|
|
722
|
|
|
|
|
Eliminations
and other
|
|
12,915
|
|
|
7,141
|
|
|
469
|
|
|
|
|
As
reported in FCX’s pro forma consolidated financial results
|
$
|
16,653
|
|
$
|
9,880
|
|
$
|
1,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
gold and silver product revenues and production
costs.
|
Year Ended December
31, 2005
|
|
|
|
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Other
a
|
|
Total
|
|
Revenues,
after adjustments shown below
|
$
|
1,862
|
|
$
|
1,862
|
|
$
|
62
|
|
$
|
1,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash and
|
|
|
|
|
|
|
|
|
|
|
|
|
nonrecurring
costs shown below
|
|
743
|
|
|
717
|
|
|
26
|
|
|
743
|
|
By-product
credits
|
|
(62
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
104
|
|
|
96
|
|
|
8
|
|
|
104
|
|
Net
cash costs
|
|
785
|
|
|
813
|
|
|
34
|
|
|
847
|
|
Depreciation,
depletion and amortization
|
|
187
|
|
|
184
|
|
|
3
|
|
|
187
|
|
Noncash
and nonrecurring costs, net
|
|
2
|
|
|
2
|
|
|
–
|
|
|
2
|
|
Total
costs
|
|
974
|
|
|
999
|
|
|
37
|
|
|
1,036
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging
|
|
(105
|
)
|
|
(101
|
)
|
|
(4
|
)
|
|
(105
|
)
|
Other
non-inventoriable costs
|
|
(10
|
)
|
|
(9
|
)
|
|
(1
|
)
|
|
(10
|
)
|
Gross
profit
|
$
|
773
|
|
$
|
753
|
|
$
|
20
|
|
$
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
|
|
Production
|
|
Depletion
and
|
|
|
|
|
|
Revenues
|
|
and
Delivery
|
|
Amortization
|
|
|
|
|
Totals
presented above
|
$
|
1,924
|
|
$
|
743
|
|
$
|
187
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
2
|
|
|
N/A
|
|
|
|
|
Less:
Treatment charges per above
|
|
(104
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging per above
|
|
(105
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
Purchased
metal
|
|
144
|
|
|
144
|
|
|
N/A
|
|
|
|
|
Eliminations
and other
|
|
6,428
|
|
|
4,393
|
|
|
255
|
|
|
|
|
As
reported in Phelps Dodge consolidated financial resultsb
|
$
|
8,287
|
|
$
|
5,282
|
|
$
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
gold and silver product revenues and production
costs.
|
b.
|
Obtained
from the Phelps Dodge Form 10-K for the year ended December 31,
2005.
|
Indonesian Mining Product
Revenues and Production Costs
Year Ended December
31, 2007
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown below
|
$
|
3,777
|
|
$
|
3,777
|
|
$
|
1,490
|
|
$
|
48
|
|
$
|
5,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
1,342
|
|
|
954
|
|
|
376
|
|
|
12
|
|
|
1,342
|
|
Gold
and silver credits
|
|
(1,538
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
385
|
|
|
274
|
|
|
108
|
|
|
3
|
|
|
385
|
|
Royalty
on metals
|
|
133
|
|
|
94
|
|
|
38
|
|
|
1
|
|
|
133
|
|
Net
cash costs
|
|
322
|
|
|
1,322
|
|
|
522
|
|
|
16
|
|
|
1,860
|
|
Depreciation
and amortization
|
|
199
|
|
|
141
|
|
|
56
|
|
|
2
|
|
|
199
|
|
Noncash
and nonrecurring costs, net
|
|
46
|
|
|
33
|
|
|
12
|
|
|
1
|
|
|
46
|
|
Total
costs
|
|
567
|
|
|
1,496
|
|
|
590
|
|
|
19
|
|
|
2,105
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales
|
|
11
|
|
|
11
|
|
|
–
|
|
|
–
|
|
|
11
|
|
PT
Smelting intercompany profit recognized
|
|
13
|
|
|
10
|
|
|
3
|
|
|
–
|
|
|
13
|
|
Gross
profit
|
$
|
3,234
|
|
$
|
2,302
|
|
$
|
903
|
|
$
|
29
|
|
$
|
3,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depletion
and
|
|
|
|
|
|
|
|
|
Revenues
|
|
and
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
5,315
|
|
$
|
1,342
|
|
$
|
199
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
46
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(385
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Royalty per above
|
|
(133
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales per above
|
|
11
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Total
Indonesian mining operations
|
|
4,808
|
|
|
1,388
|
|
|
199
|
|
|
|
|
|
|
|
North
American mining operations
|
|
8,650
|
|
|
6,292
|
|
|
611
|
|
|
|
|
|
|
|
South
American mining operations
|
|
3,845
|
|
|
1,278
|
|
|
377
|
|
|
|
|
|
|
|
Atlantic
Copper smelting & refining
|
|
2,388
|
|
|
2,329
|
|
|
36
|
|
|
|
|
|
|
|
Corporate,
other & eliminations
|
|
(2,752
|
)
|
|
(2,760
|
)
|
|
23
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated financial statements
|
$
|
16,939
|
|
$
|
8,527
|
|
$
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, 2006
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown below
|
$
|
3,764
|
|
$
|
3,764
|
|
$
|
1,072
|
|
$
|
47
|
|
$
|
4,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
1,235
|
|
|
952
|
|
|
271
|
|
|
12
|
|
|
1,235
|
|
Gold
and silver credits
|
|
(1,119
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
477
|
|
|
368
|
|
|
104
|
|
|
5
|
|
|
477
|
|
Royalty
on metals
|
|
126
|
|
|
97
|
|
|
28
|
|
|
1
|
|
|
126
|
|
Net
cash costs
|
|
719
|
|
|
1,417
|
|
|
403
|
|
|
18
|
|
|
1,838
|
|
Depreciation
and amortization
|
|
184
|
|
|
142
|
|
|
40
|
|
|
2
|
|
|
184
|
|
Noncash
and nonrecurring costs, net
|
|
44
|
|
|
34
|
|
|
10
|
|
|
–
|
|
|
44
|
|
Total
costs
|
|
947
|
|
|
1,593
|
|
|
453
|
|
|
20
|
|
|
2,066
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and gold/silver hedging
|
|
115
|
a
|
|
197
|
|
|
(69
|
)
|
|
(13
|
)
|
|
115
|
|
PT
Smelting intercompany profit elimination
|
|
(3
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
–
|
|
|
(3
|
)
|
Gross
profit
|
$
|
2,929
|
|
$
|
2,366
|
|
$
|
549
|
|
$
|
14
|
|
$
|
2,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depletion
and
|
|
|
|
|
|
|
|
|
Revenues
|
|
and
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
4,883
|
|
$
|
1,235
|
|
$
|
184
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
44
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(477
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Royalty per above
|
|
(126
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging per above
|
|
115
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Total
Indonesian mining operations
|
|
4,395
|
|
|
1,279
|
|
|
184
|
|
|
|
|
|
|
|
Atlantic
Copper smelting & refining
|
|
2,242
|
|
|
2,119
|
|
|
33
|
|
|
|
|
|
|
|
Corporation,
other & eliminations
|
|
(846
|
)
|
|
(873
|
)
|
|
11
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated financial statements
|
$
|
5,791
|
|
$
|
2,525
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
a $69 million loss on the redemption of FCX’s Gold-Denominated Preferred
Stock, Series II, and a $13 million loss on the redemption of FCX’s
Silver-Denominated Preferred Stock.
|
Year Ended December
31, 2005
|
|
|
|
|
|
By-Product
|
|
Co-Product
Method
|
|
|
Method
|
|
Copper
|
|
Gold
|
|
Silver
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
after adjustments shown below
|
$
|
2,707
|
|
$
|
2,707
|
|
$
|
1,270
|
|
$
|
35
|
|
$
|
4,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
production and delivery, before net noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nonrecurring costs shown below
|
|
949
|
a
|
|
641
|
b
|
|
300
|
b
|
|
8
|
c
|
|
949
|
|
Gold
and silver credits
|
|
(1,305
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Treatment
charges
|
|
350
|
|
|
236
|
|
|
111
|
|
|
3
|
|
|
350
|
|
Royalty
on metals
|
|
104
|
|
|
70
|
|
|
33
|
|
|
1
|
|
|
104
|
|
Net
cash costs
|
|
98
|
|
|
947
|
|
|
444
|
|
|
12
|
|
|
1,403
|
|
Depreciation
and amortization
|
|
210
|
|
|
142
|
|
|
66
|
|
|
2
|
|
|
210
|
|
Noncash
and nonrecurring costs, net
|
|
5
|
|
|
3
|
|
|
2
|
|
|
–
|
|
|
5
|
|
Total
costs
|
|
313
|
|
|
1,092
|
|
|
512
|
|
|
14
|
|
|
1,618
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and silver hedging
|
|
10
|
c
|
|
15
|
|
|
–
|
|
|
(5
|
)
|
|
10
|
|
PT
Smelting intercompany profit elimination
|
|
(23
|
)
|
|
(16
|
)
|
|
(7
|
)
|
|
–
|
|
|
(23
|
)
|
Gross
profit
|
$
|
2,381
|
|
$
|
1,614
|
|
$
|
751
|
|
$
|
16
|
|
$
|
2,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to Amounts Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
Depletion
and
|
|
|
|
|
|
|
|
|
Revenues
|
|
and
Delivery
|
|
Amortization
|
|
|
|
|
|
|
|
Totals
presented above
|
$
|
4,012
|
|
$
|
949
|
|
$
|
210
|
|
|
|
|
|
|
|
Net
noncash and nonrecurring costs per above
|
|
N/A
|
|
|
5
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Treatment charges per above
|
|
(350
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Less:
Royalty per above
|
|
(104
|
)
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Revenue
adjustments, primarily for pricing on prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
open sales and hedging per above
|
|
10
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
Total
Indonesian mining operations
|
|
3,568
|
|
|
954
|
|
|
210
|
|
|
|
|
|
|
|
Atlantic
Copper smelting & refining
|
|
1,363
|
|
|
1,288
|
|
|
29
|
|
|
|
|
|
|
|
Corporation,
other & eliminations
|
|
(752
|
)
|
|
(604
|
)
|
|
12
|
|
|
|
|
|
|
|
As
reported in FCX’s consolidated financial statements
|
$
|
4,179
|
|
$
|
1,638
|
|
$
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Net
of deferred mining costs totaling $65 million. Following the adoption of
EITF 04-6 on January 1, 2006, stripping costs are no longer deferred
(refer to Note 1 and “New Accounting Standards” for further
discussion).
|
b.
|
Net
of deferred mining costs totaling $44 million for copper, $21 million for
gold and $1 million for silver (see note a
above).
|
c.
|
Includes
a $5 million loss on the redemption of our Silver-Denominated Preferred
Stock.
|
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 and 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, the impact of copper, gold and molybdenum price changes, the
impact of changes in deferred intercompany profits on earnings, treatment charge
rates, exploration efforts and results, dividend payments, liquidity and other
financial commitments. We caution readers that these statements are not
guarantees of future performance, and our actual results may differ materially
from those projected, anticipated or assumed in the forward-looking statements.
Important factors that can cause our actual results to differ materially from
those anticipated in the 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 our Form 10-K for the year ended
December 31, 2007.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan
COPPER & GOLD INC.
We have
audited the accompanying consolidated balance sheets of Freeport-McMoRan Copper
& Gold Inc. as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Freeport-McMoRan
Copper & Gold Inc. at December 31, 2007 and 2006, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” and
effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” and effective
January 1, 2006, the Company adopted Emerging Issues Task Force Issue No. 04-6,
“Accounting for Stripping Costs Incurred during Production in the Mining
Industry”, and effective December 31, 2006, the Company adopted SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans – an amendment of FASB Statements No. 87, 88, 106 and 132R.”
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Freeport-McMoRan Copper & Gold Inc.’s
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 29, 2008, expressed an unqualified opinion thereon.
/s/Ernst
& Young LLP
Phoenix,
Arizona
February
29, 2008
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Freeport-McMoRan
Copper & Gold Inc.’s (the Company’s) management is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) under the Securities Exchange Act of 1934 as a process designed by, or
under the supervision of, the Company’s principal executive and principal
financial officers and effected by the Company’s Board of Directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the Company’s
assets;
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management, including our principal executive officer and principal financial
officer, assessed the effectiveness of our internal control over financial
reporting as of the end of the fiscal year covered by this annual report on Form
10-K. In making this assessment, our management used the criteria set forth in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our management’s
assessment, management concluded that, as of December 31, 2007, our Company’s
internal control over financial reporting is effective based on the COSO
criteria.
Ernst
& Young LLP, an independent registered public accounting firm, who audited
the Company’s consolidated financial statements included in this Form 10-K, has
issued an attestation report on the Company’s internal control over financial
reporting, which is included herein.
/s/
Richard C. Adkerson
|
|
/s/
Kathleen L. Quirk
|
Richard
C. Adkerson
|
|
Kathleen
L. Quirk
|
President
and Chief Executive Officer
|
|
Executive
Vice President,
|
|
|
Chief
Financial Officer and Treasurer
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan
COPPER & GOLD INC.
We have
audited Freeport-McMoRan Copper & Gold Inc.’s internal control over
financial reporting as of December 31, 2007, based on criteria established
in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Freeport-McMoRan Copper &
Gold Inc.’s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may be
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Freeport-McMoRan Copper & Gold Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of
Freeport-McMoRan Copper & Gold Inc. as of December 31, 2007 and 2006, and
the related consolidated statements of income, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2007, and our
report dated February 29, 2008 expressed an unqualified opinion
thereon.
/s/Ernst
& Young LLP
Phoenix,
Arizona
February
29, 2008
FREEPORT-McMoRan
COPPER & GOLD INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
Years
Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In
Millions, Except Per Share Amounts)
|
|
Revenues
|
$
|
16,939
|
|
$
|
5,791
|
|
$
|
4,179
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
Production
and delivery
|
|
8,527
|
|
|
2,525
|
|
|
1,638
|
|
Depreciation,
depletion and amortization
|
|
1,246
|
|
|
228
|
|
|
251
|
|
Total
cost of sales
|
|
9,773
|
|
|
2,753
|
|
|
1,889
|
|
Exploration
and research expenses
|
|
145
|
|
|
12
|
|
|
9
|
|
Selling,
general and administrative expenses
|
|
466
|
|
|
157
|
|
|
104
|
|
Total
costs and expenses
|
|
10,384
|
|
|
2,922
|
|
|
2,002
|
|
Operating
income
|
|
6,555
|
|
|
2,869
|
|
|
2,177
|
|
Interest
expense, net
|
|
(513
|
)
|
|
(76
|
)
|
|
(132
|
)
|
Losses
on early extinguishment and conversion of debt, net
|
|
(173
|
)
|
|
(32
|
)
|
|
(52
|
)
|
Gains
on sales of assets
|
|
85
|
|
|
31
|
|
|
7
|
|
Other
income, net
|
|
157
|
|
|
28
|
|
|
28
|
|
Equity
in affiliated companies’ net earnings
|
|
22
|
|
|
6
|
|
|
9
|
|
Income
from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
and
minority interests
|
|
6,133
|
|
|
2,826
|
|
|
2,037
|
|
Provision
for income taxes
|
|
(2,400
|
)
|
|
(1,201
|
)
|
|
(915
|
)
|
Minority
interests in net income of consolidated subsidiaries
|
|
(791
|
)
|
|
(168
|
)
|
|
(127
|
)
|
Income
from continuing operations
|
|
2,942
|
|
|
1,457
|
|
|
995
|
|
Income
from discontinued operations, net of taxes
|
|
35
|
|
|
–
|
|
|
–
|
|
Net
income
|
|
2,977
|
|
|
1,457
|
|
|
995
|
|
Preferred
dividends
|
|
(208
|
)
|
|
(61
|
)
|
|
(60
|
)
|
Net
income applicable to common stock
|
$
|
2,769
|
|
$
|
1,396
|
|
$
|
935
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
8.02
|
|
$
|
7.32
|
|
$
|
5.18
|
|
Discontinued
operations
|
|
0.10
|
|
|
–
|
|
|
–
|
|
Basic
net income per share of common stock
|
$
|
8.12
|
|
$
|
7.32
|
|
$
|
5.18
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
7.41
|
|
$
|
6.63
|
|
$
|
4.67
|
|
Discontinued
operations
|
|
0.09
|
|
|
–
|
|
|
–
|
|
Diluted
net income per share of common stock
|
$
|
7.50
|
|
$
|
6.63
|
|
$
|
4.67
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
341
|
|
|
191
|
|
|
180
|
|
Diluted
|
|
397
|
|
|
221
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share of common stock
|
$
|
1.375
|
|
$
|
5.0625
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these financial statements.
FREEPORT-McMoRan
COPPER & GOLD INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In
Millions)
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,977
|
|
$
|
1,457
|
|
$
|
995
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
1,264
|
|
|
228
|
|
|
251
|
|
Minority
interests in net income of consolidated subsidiaries
|
|
|
802
|
|
|
168
|
|
|
127
|
|
Noncash
compensation and benefits
|
|
|
214
|
|
|
85
|
|
|
29
|
|
Unrealized
losses on copper price protection program
|
|
|
175
|
|
|
–
|
|
|
–
|
|
Losses
on early extinguishment and conversion of debt, net
|
|
|
173
|
|
|
32
|
|
|
52
|
|
Deferred
income taxes
|
|
|
(288
|
)
|
|
16
|
|
|
(32
|
)
|
Gains
on sales of assets
|
|
|
(85
|
)
|
|
(31
|
)
|
|
(7
|
)
|
Other,
net
|
|
|
(65
|
)
|
|
25
|
|
|
(42
|
)
|
(Increases)
decreases in working capital, excluding amounts
|
|
|
|
|
|
|
|
|
|
|
acquired
from Phelps Dodge:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
428
|
|
|
196
|
|
|
(253
|
)
|
Inventories
|
|
|
272
|
|
|
(146
|
)
|
|
(108
|
)
|
Prepaid
expenses and other
|
|
|
21
|
|
|
(27
|
)
|
|
–
|
|
Accounts
payable and accrued liabilities
|
|
|
313
|
|
|
15
|
|
|
282
|
|
Accrued
income taxes
|
|
|
24
|
|
|
(152
|
)
|
|
258
|
|
Net
cash provided by operating activities
|
|
|
6,225
|
|
|
1,866
|
|
|
1,552
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Phelps Dodge, net of cash acquired
|
|
|
(13,910
|
)
|
|
(5
|
)
|
|
–
|
|
Phelps
Dodge capital expenditures
|
|
|
(1,333
|
)
|
|
–
|
|
|
–
|
|
PT
Freeport Indonesia capital expenditures
|
|
|
(368
|
)
|
|
(234
|
)
|
|
(129
|
)
|
Other
capital expenditures
|
|
|
(54
|
)
|
|
(17
|
)
|
|
(14
|
)
|
Net
proceeds from the sale of Phelps Dodge International
Corporation
|
|
|
597
|
|
|
–
|
|
|
–
|
|
Proceeds
from the sales of assets
|
|
|
260
|
|
|
34
|
|
|
7
|
|
Other,
net
|
|
|
(53
|
)
|
|
(2
|
)
|
|
2
|
|
Net
cash used in investing activities
|
|
|
(14,861
|
)
|
|
(224
|
)
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from term loans under bank credit facility
|
|
|
12,450
|
|
|
–
|
|
|
–
|
|
Repayments
of term loans under bank credit facility
|
|
|
(12,450
|
)
|
|
–
|
|
|
–
|
|
Net
proceeds from sales of senior notes
|
|
|
5,880
|
|
|
–
|
|
|
–
|
|
Net
proceeds from sale of common stock
|
|
|
2,816
|
|
|
–
|
|
|
–
|
|
Net
proceeds from sale of 6¾% Mandatory Convertible Preferred
Stock
|
|
|
2,803
|
|
|
–
|
|
|
–
|
|
Proceeds
from other debt
|
|
|
744
|
|
|
103
|
|
|
66
|
|
Repayments
of other debt and redemption of preferred stock
|
|
|
(1,069
|
)
|
|
(394
|
)
|
|
(559
|
)
|
Purchases
of FCX common shares
|
|
|
–
|
|
|
(100
|
)
|
|
(80
|
)
|
Cash
dividends paid:
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
(421
|
)
|
|
(916
|
)
|
|
(453
|
)
|
Preferred
stock
|
|
|
(175
|
)
|
|
(61
|
)
|
|
(60
|
)
|
Minority
interests
|
|
|
(967
|
)
|
|
(161
|
)
|
|
(125
|
)
|
Net
(payments for) proceeds from exercised stock options
|
|
|
(14
|
)
|
|
15
|
|
|
5
|
|
Excess
tax benefit from exercised stock options
|
|
|
16
|
|
|
21
|
|
|
–
|
|
Bank
credit facilities fees and other, net
|
|
|
(258
|
)
|
|
(6
|
)
|
|
–
|
|
Net
cash provided by (used in) financing activities
|
|
|
9,355
|
|
|
(1,499
|
)
|
|
(1,206
|
)
|
Net
increase in cash and cash equivalents
|
|
|
719
|
|
|
143
|
|
|
212
|
|
Cash
and cash equivalents at beginning of year
|
|
|
907
|
|
|
764
|
|
|
552
|
|
Cash
and cash equivalents at end of year
|
|
$
|
1,626
|
|
$
|
907
|
|
$
|
764
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
504
|
|
$
|
80
|
|
$
|
140
|
|
Income
taxes paid
|
|
$
|
2,660
|
|
$
|
1,288
|
|
$
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these financial statements.
FREEPORT-McMoRan
COPPER & GOLD INC.
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
Millions, Except Par Values)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,626
|
|
|
$
|
907
|
|
Trade
accounts receivable
|
|
|
1,099
|
|
|
|
420
|
|
Other
accounts receivable
|
|
|
196
|
|
|
|
66
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Product
|
|
|
1,360
|
|
|
|
384
|
|
Materials
and supplies, net
|
|
|
818
|
|
|
|
340
|
|
Mill
and leach stockpiles
|
|
|
707
|
|
|
|
–
|
|
Prepaid
expenses and other current assets
|
|
|
97
|
|
|
|
34
|
|
Total
current assets
|
|
|
5,903
|
|
|
|
2,151
|
|
Property,
plant, equipment and development costs, net
|
|
|
25,715
|
|
|
|
3,099
|
|
Goodwill
|
|
|
6,105
|
|
|
|
–
|
|
Long-term
mill and leach stockpiles
|
|
|
1,106
|
|
|
|
–
|
|
Trust
assets
|
|
|
606
|
|
|
|
–
|
|
Intangible
assets, net
|
|
|
472
|
|
|
|
–
|
|
Other
assets and deferred charges
|
|
|
754
|
|
|
|
140
|
|
Total
assets
|
|
$
|
40,661
|
|
|
$
|
5,390
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
2,345
|
|
|
$
|
776
|
|
Copper
price protection program
|
|
|
598
|
|
|
|
–
|
|
Accrued
income taxes
|
|
|
420
|
|
|
|
165
|
|
Dividends
payable
|
|
|
212
|
|
|
|
13
|
|
Current
portion of reclamation and environmental obligations
|
|
|
263
|
|
|
|
–
|
|
Current
portion of long-term debt and short-term borrowings
|
|
|
31
|
|
|
|
19
|
|
Total
current liabilities
|
|
|
3,869
|
|
|
|
973
|
|
Long-term
debt, less current portion:
|
|
|
|
|
|
|
|
|
Senior
notes
|
|
|
6,928
|
|
|
|
620
|
|
Project
financing, equipment loans and other
|
|
|
252
|
|
|
|
41
|
|
Total
long-term debt, less current portion
|
|
|
7,180
|
|
|
|
661
|
|
Deferred
income taxes
|
|
|
7,300
|
|
|
|
800
|
|
Reclamation
and environmental obligations, less current portion
|
|
|
1,733
|
|
|
|
30
|
|
Other
liabilities
|
|
|
1,106
|
|
|
|
268
|
|
Total
liabilities
|
|
|
21,188
|
|
|
|
2,732
|
|
Minority
interests in consolidated subsidiaries
|
|
|
1,239
|
|
|
|
213
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
5½%
Convertible Perpetual Preferred Stock, 1 shares issued and
outstanding
|
|
|
1,100
|
|
|
|
1,100
|
|
6¾%
Mandatory Convertible Preferred Stock, 29 shares issued and
outstanding
|
|
|
2,875
|
|
|
|
–
|
|
Common
stock, par value $0.10, 497 shares and 310 shares issued,
respectively
|
|
|
50
|
|
|
|
31
|
|
Capital
in excess of par value
|
|
|
13,407
|
|
|
|
2,668
|
|
Retained
earnings
|
|
|
3,601
|
|
|
|
1,415
|
|
Accumulated
other comprehensive income (loss)
|
|
|
42
|
|
|
|
(20
|
)
|
Common
stock held in treasury – 114 shares and 113 shares, at cost,
respectively
|
|
|
(2,841
|
)
|
|
|
(2,749
|
)
|
Total
stockholders’ equity
|
|
|
18,234
|
|
|
|
2,445
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
40,661
|
|
|
$
|
5,390
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these financial statements.
FREEPORT-McMoRan
COPPER & GOLD INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
Convertible
Perpetual
|
|
Mandatory
Convertible
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
Preferred
Stock
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
Held
in Treasury
|
|
|
|
|
|
|
Number
|
|
|
|
Number
|
|
|
|
Number
|
|
|
|
Capital
in
|
|
|
|
Other
|
|
Number
|
|
|
|
|
|
|
|
|
of
|
|
At
Par
|
|
of
|
|
At
Par
|
|
of
|
|
At
Par
|
|
Excess
of
|
|
Retained
|
|
Comprehensive
|
|
of
|
|
At
|
|
Stockholders’
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Par
Value
|
|
Earnings
|
|
Income
(Loss)
|
|
Shares
|
|
Cost
|
|
Equity
|
|
|
|
(In
Millions)
|
|
Balance
at January 1, 2005
|
|
1
|
|
$
|
1,100
|
|
|
-
|
|
$
|
-
|
|
|
285
|
|
$
|
29
|
|
$
|
1,853
|
|
$
|
605
|
|
$
|
11
|
|
|
106
|
|
$
|
(2,434
|
)
|
$
|
1,164
|
|
Conversions
of 7% Convertible Senior Notes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8
|
|
|
1
|
|
|
246
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
247
|
|
Exercised
stock options, issued restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
and other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
95
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
95
|
|
Tax
benefit for stock option exercises
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18
|
|
Tender
of shares for exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restricted stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
(82
|
)
|
|
(82
|
)
|
Shares
purchased
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
(80
|
)
|
|
(80
|
)
|
Dividends
on common stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(454
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(454
|
)
|
Dividends
on preferred stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(60
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(60
|
)
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
995
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
995
|
|
Other
comprehensive income (loss),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized derivatives’ fair value
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Reclassification
to earnings
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
995
|
|
Balance
at December 31, 2005
|
|
1
|
|
$
|
1,100
|
|
|
-
|
|
$
|
-
|
|
|
297
|
|
$
|
30
|
|
$
|
2,212
|
|
$
|
1,086
|
|
$
|
11
|
|
|
110
|
|
$
|
(2,596
|
)
|
$
|
1,843
|
|
Conversions
of 7% Convertible Senior Notes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10
|
|
|
1
|
|
|
311
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
312
|
|
Exercised
stock options, issued restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
and other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
-
|
|
|
93
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
93
|
|
Stock-based
compensation costs
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28
|
|
Tax
benefit for stock option exercises
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24
|
|
Tender
of shares for exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restricted stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
(53
|
)
|
|
(53
|
)
|
Shares
purchased
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
(100
|
)
|
|
(100
|
)
|
Cumulative
effect adjustment to initially
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
apply
EITF 04-6
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(149
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(149
|
)
|
Dividends
on common stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(918
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(918
|
)
|
Dividends
on preferred stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(61
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(61
|
)
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,457
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,457
|
|
Other
comprehensive income (loss),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized derivatives’ fair value
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(9
|
)
|
|
-
|
|
|
-
|
|
|
(9
|
)
|
Reclassification
to earnings
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
4
|
|
Other
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5
|
)
|
|
-
|
|
|
-
|
|
|
(5
|
)
|
Total
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,452
|
|
Adjustment
for adoption of SFAS No. 158
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(26
|
)
|
|
-
|
|
|
-
|
|
|
(26
|
)
|
Balance
at December 31, 2006
|
|
1
|
|
$
|
1,100
|
|
|
-
|
|
$
|
-
|
|
|
310
|
|
$
|
31
|
|
$
|
2,668
|
|
$
|
1,415
|
|
$
|
(20
|
)
|
|
113
|
|
$
|
(2,749
|
)
|
$
|
2,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FREEPORT-McMoRan
COPPER & GOLD INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(continued)
|
|
Convertible
Perpetual
|
|
Mandatory
Convertible
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
Preferred
Stock
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
Held
in Treasury
|
|
|
|
|
|
|
Number
|
|
|
|
Number
|
|
|
|
Number
|
|
|
|
Capital
in
|
|
|
|
Other
|
|
Number
|
|
|
|
|
|
|
|
|
of
|
|
At
Par
|
|
of
|
|
At
Par
|
|
of
|
|
At
Par
|
|
Excess
of
|
|
Retained
|
|
Comprehensive
|
|
of
|
|
At
|
|
Stockholders’
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Par
Value
|
|
Earnings
|
|
Income
(Loss)
|
|
Shares
|
|
Cost
|
|
Equity
|
|
|
|
(In
Millions)
|
|
Balance
at December 31, 2006
|
|
1
|
|
$
|
1,100
|
|
|
-
|
|
$
|
-
|
|
|
310
|
|
$
|
31
|
|
$
|
2,668
|
|
$
|
1,415
|
|
$
|
(20
|
)
|
|
113
|
|
$
|
(2,749
|
)
|
$
|
2,445
|
|
Sale
of 6¾% Mandatory Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
-
|
|
|
-
|
|
|
29
|
|
|
2,875
|
|
|
-
|
|
|
-
|
|
|
(72
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,803
|
|
Common
stock issued to acquire Phelps Dodge
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
137
|
|
|
14
|
|
|
7,767
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,781
|
|
Sale
of common stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
47
|
|
|
5
|
|
|
2,811
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,816
|
|
Conversions
of 7% Convertible Senior Notes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6
|
|
Exercised
stock options, issued restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
and other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
-
|
|
|
131
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
131
|
|
Stock-based
compensation costs
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
86
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
86
|
|
Tax
benefit for stock option exercises
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10
|
|
Tender
of shares for exercised stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
and restricted stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
(92
|
)
|
|
(92
|
)
|
Cumulative
effect adjustment to initially
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
apply
FIN 48
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
Dividends
on common stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(587
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(587
|
)
|
Dividends
on preferred stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(208
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(208
|
)
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,977
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,977
|
|
Other
comprehensive income (loss),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on securities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
-
|
|
|
-
|
|
|
2
|
|
Translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3
|
)
|
|
-
|
|
|
-
|
|
|
(3
|
)
|
Change
in unrealized derivatives’ fair value
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3
|
)
|
|
-
|
|
|
-
|
|
|
(3
|
)
|
Reclassification
to earnings
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7
|
|
|
-
|
|
|
-
|
|
|
7
|
|
Defined
benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain during period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
53
|
|
|
-
|
|
|
-
|
|
|
53
|
|
Amortization
of unrecognized amounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6
|
|
|
-
|
|
|
-
|
|
|
6
|
|
Other
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
62
|
|
|
-
|
|
|
-
|
|
|
62
|
|
Total
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,039
|
|
Balance
at December 31, 2007
|
|
1
|
|
$
|
1,100
|
|
|
29
|
|
$
|
2,875
|
|
|
497
|
|
$
|
50
|
|
$
|
13,407
|
|
$
|
3,601
|
|
$
|
42
|
|
|
114
|
|
$
|
(2,841
|
)
|
$
|
18,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these financial statements.
FREEPORT-McMoRan
COPPER & GOLD INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in tables stated in millions, except per share amounts)
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation. The consolidated financial statements of
Freeport-McMoRan Copper & Gold Inc. (FCX) include the accounts of those
subsidiaries where FCX directly or indirectly has more than 50 percent of the
voting rights and has the right to control significant management decisions. The
most significant entities that FCX consolidates include its 90.64 percent-owned
subsidiary PT Freeport Indonesia and its wholly owned subsidiaries, Phelps Dodge
Corporation (Phelps Dodge) and Atlantic Copper, S.A. (Atlantic Copper). FCX
acquired Phelps Dodge on March 19, 2007. FCX’s results of operations
include Phelps Dodge’s results beginning March 20, 2007 (see Note 2). FCX’s
unincorporated joint ventures with Rio Tinto plc (Rio Tinto) and Sumitomo Metal
Mining Arizona, Inc. (Sumitomo) are reflected using the proportionate
consolidation method (see Note 3). All significant intercompany transactions
have been eliminated.
Investments
in unconsolidated companies owned 20 percent or more are recorded using the
equity method. Investments in companies owned less than 20 percent, and for
which FCX does not exercise significant influence, are carried at
cost.
Use of
Estimates. The preparation of FCX’s financial statements in
conformity with accounting principles generally accepted in the United States
(U.S.) requires management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes. The more
significant areas requiring the use of management estimates include fair values
of assets acquired and liabilities assumed in the acquisition of Phelps Dodge;
mineral reserve estimation; useful asset lives for depreciation, depletion and
amortization; reclamation and closure costs; environmental obligations;
estimates of recoverable copper in mill and leach stockpiles; pension,
postretirement, postemployment and other employee benefits; deferred taxes and
valuation allowances; reserves for contingencies and litigation; future cash
flows associated with assets; and the estimated average ratio of overburden
removed to ore mined over the life of the open-pit mine (through December 31,
2005). Actual results could differ from those estimates.
Foreign Currencies. For
foreign subsidiaries whose functional currency is the local currency, assets and
liabilities 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
foreign subsidiaries whose functional currency is the U.S. dollar, 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 account balances are included in operating results, as are gains and losses
from foreign currency transactions.
Cash
Equivalents. Highly liquid investments purchased with
maturities of three months or less are considered cash equivalents.
Inventories. As
shown in Note 5, the largest components in inventories include finished goods
(concentrates and cathodes) at mining operations, concentrates and
work-in-process at Atlantic Copper’s smelting and refining operations, and
materials and supplies inventories. Inventories of materials and supplies, as
well as salable products, are stated at the lower of weighted average cost or
market. Costs of finished goods and work-in-process (i.e., not materials and
supplies) inventories include labor and benefits, supplies, energy,
depreciation, depletion, amortization, site overhead costs, and other necessary
costs associated with the extraction and processing of ore, including, depending
on the process, mining, haulage, milling, concentrating, smelting, leaching,
solution extraction, refining, roasting and chemical processing. General and
administrative costs for corporate offices are not included in inventory
costs.
Work-in-Process. In-process
inventories represent materials that are currently in the process of being
converted to a salable product. Conversion processes for mining operations vary
depending on the nature of the copper ore and the specific mining operation. For
sulfide ores, processing includes milling and concentrating and results in the
production of copper and molybdenum concentrates or, alternatively, copper
cathode by concentrate leaching. For oxide ores and certain secondary sulfide
ores, processing includes leaching of stockpiles, solution extraction and
electrowinning and results in the production of copper cathodes. In-process
material is measured based on assays of the material included in these processes
and
projected
recoveries. In-process inventories are valued based on the costs incurred to
various points in the process, including depreciation relating to associated
process facilities. For Atlantic Copper, in-process inventories represent copper
concentrates at various stages of conversion into anodes and cathodes. Atlantic
Copper’s in-process inventories are valued at the weighted average cost of the
material fed to the smelting and refining process plus in-process conversion
costs.
Finished Goods. Finished
goods include salable products (e.g., copper and molybdenum
concentrates, copper anodes, copper cathodes, copper rod, copper wire,
molybdenum oxide, high-purity molybdenum chemicals and other metallurgical
products). Finished goods are valued based on the weighted average cost of
source material plus applicable conversion costs relating to associated process
facilities.
In
November 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs, an amendment
of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies that abnormal amounts of idle
facility expense, freight handling costs and wasted materials (spoilage) should
be recognized as current-period charges and requires the allocation of fixed
production overheads to inventory based on the normal capacity of the production
facilities. FCX adopted SFAS No. 151 on January 1, 2006, which did not have a
material impact on its accounting for inventory costs.
Mill and Leach
Stockpiles. Mill and leach stockpiles are stated at the lower
of weighted average cost or market.
Both mill
and leach stockpiles generally contain lower-grade ores that have been extracted
from the ore body and are available for copper recovery. For mill stockpiles,
recovery is through milling, concentrating, smelting and refining or,
alternatively, by concentrate leaching. For leach stockpiles, recovery is
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 includes mining and haulage costs incurred to deliver ore
to stockpiles, depreciation, depletion, amortization and site overhead
costs.
Because
it is generally impracticable to determine copper contained in mill and leach
stockpiles by physical count, 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 grade of the 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, once entered into the
production process, can be produced into copper concentrate almost
immediately.
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 significantly 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. For newly placed material on active
stockpiles, as much as 70 percent of the copper ultimately recoverable may be
extracted during the first year, and the remaining copper may be recovered over
many years.
Processes
and recovery rates are monitored continuously, and recovery rate estimates are
adjusted periodically as additional information becomes available and as related
technology changes.
Property, Plant, Equipment and
Development Costs. Property, plant, equipment and development
costs are carried at cost. Mineral exploration costs, as well as drilling and
other costs incurred for the purpose of converting mineral resources to proven
and probable reserves or identifying new mineral resources at development or
production stage properties, are charged to expense as incurred. Development
costs are capitalized beginning after proven and probable reserves have been
established. Development costs include costs incurred resulting from mine
pre-production activities undertaken to gain access to proven and probable
reserves including shafts, adits, drifts, ramps, permanent excavations,
infrastructure and removal of overburden. Additionally, interest expense
allocable to the cost of developing mining properties and to constructing new
facilities is capitalized until assets are ready for their intended
use.
Expenditures
for replacements and improvements are capitalized. Costs related to periodic
scheduled maintenance (i.e., turnarounds) are
expensed as incurred. Depreciation for mining and milling
life-of-mine
assets,
infrastructure and other common costs is determined using the unit-of-production
method based on total estimated recoverable proven and probable copper reserves
(for primarily copper mines) and proven and probable molybdenum reserves (for
primarily molybdenum mines). Development costs and acquisition costs for proven
and probable reserves that relate to a specific ore body are depreciated using
the unit-of-production method based on estimated recoverable proven and probable
reserves for the ore body benefited. Depreciation, depletion and amortization
using the unit-of-production method is recorded upon extraction of the
recoverable copper or molybdenum from the ore body, at which time it is
allocated to inventory cost and then included as a component of cost of goods
sold. Other assets are depreciated on a straight-line basis over estimated
useful lives of up to 30 years for buildings, three to 25 years for machinery
and equipment, and three to 20 years for mobile equipment.
Included
in property, plant, equipment and development costs is value beyond proven and
probable reserves (VBPP) resulting from FCX’s acquisition of Phelps
Dodge. The concept of VBPP is described in FASB Emerging Issues 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 and equipment
includes VBPP attributable to (i) mineralized material, which includes
measured and indicated amounts, that FCX believes could be brought into
production with the establishment or modification of required permits and should
market conditions and technical assessments warrant, (ii) inferred mineral
resources and (iii) exploration potential.
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 minerals. Such a deposit does 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. Inferred mineral resources is that part of a mineral
resource for which the overall tonnages, grades and mineral contents can be
estimated with a reasonable level of confidence based on geological evidence and
apparent geological and grade continuity after applying economic parameters. An
inferred mineral resource has a lower level of confidence than that applying to
an indicated mineral resource. Exploration potential is the estimated value of
potential mineral deposits that FCX has the legal right to access. The value
assigned to exploration potential was determined by interpreting the known
exploration information and exploration results, including geological data
and/or geological information, that were available as of the acquisition
date.
Carrying
amounts assigned to VBPP are not charged to expense until the VBPP becomes
associated with additional proven and probable reserves and they are produced or
the VBPP is determined to be impaired. Additions to proven and probable reserves
for properties with VBPP will carry with them the value assigned to VBPP at the
date FCX acquired Phelps Dodge.
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. FCX uses a discounted cash
flow model to determine if the carrying value of the reporting unit, including
goodwill, is less than the fair value of the reporting unit. FCX’s approach
to allocating goodwill includes the identification of the reporting units it
believes have contributed to the excess purchase price and also includes
consideration of the reporting unit’s potential for future growth.
Intangible Assets and Liabilities. FCX recorded
intangible assets and liabilities as a result of the acquisition of Phelps
Dodge. Indefinite lived intangibles primarily include water rights. Definite
lived intangibles include favorable and unfavorable contracts (primarily related
to molybdenum sales contracts, treatment and refining contract rates, power
contracts and tire contracts), royalty payments, patents and process technology.
The fair value of identifiable intangible assets was estimated based principally
upon comparable market transactions and discounted future cash flow projections.
The ranges for estimated useful lives are one to 10 years for molybdenum sales,
treatment and refining, power and tire contracts; one to 12 years for royalty
payments; and principally 10 to 20 years for patents and process technology. All
intangible assets and liabilities are subject to impairment testing at least
annually unless events or changes in circumstances indicate that the related
carrying amounts may not be recoverable.
Asset
Impairment. FCX reviews and evaluates its long-lived assets
for impairment when events or changes in circumstances indicate that the related
carrying amounts may not be recoverable, while goodwill and intangible assets
and liabilities are evaluated at least annually. An impairment loss is measured
as the amount by which asset carrying value exceeds its fair value. Fair value
is generally determined using valuation techniques such as estimated future cash
flows. An impairment is considered to exist if total
estimated
future cash flows on an undiscounted basis are less than the carrying amount of
the asset. An impairment loss is measured and recorded based on discounted
estimated future cash flows. Future cash flows for mining assets
include estimates of recoverable pounds of copper and molybdenum and recoverable
ounces of gold, metal prices (considering current and historical prices, price
trends and related factors), production rates and costs, capital and reclamation
costs as appropriate, all based on current life-of-mine engineering plans.
Future cash flows for Atlantic Copper’s smelting assets include estimates of
treatment and refining rates (considering current and historical prices, price
trends and related factors), production rates and costs, capital, reclamation
and environmental costs as appropriate, all based on operating projections.
Assumptions underlying future cash flow estimates are subject to risks and
uncertainties. No impairment losses were recorded during the periods
presented.
Deferred Mining
Costs. In accordance with EITF Issue No. 04-6, “Accounting for
Stripping Costs Incurred during Production in the Mining Industry” (EITF 04-6),
stripping costs (i.e.,
the costs of removing overburden and waste material to access mineral deposits)
incurred during the production phase of a mine are considered variable
production costs and are included as a component of inventory produced during
the period in which stripping costs are incurred. Major development
expenditures, including stripping costs to prepare unique and identifiable areas
outside the current mining area for future production that are considered to be
pre-production mine development, are capitalized and amortized on the
unit-of-production method based on estimated recoverable proven and probable
reserves for the ore body benefited. However, where a second or subsequent pit
is considered to be a continuation of existing mining activities, stripping
costs are accounted for as current production cost and a component of the
associated inventory.
Prior to
the adoption of EITF 04-6, FCX applied the deferred mining cost method in
accounting for its post-production stripping costs, which FCX refers to as
overburden removal costs. The deferred mining cost method was used by some
companies in the metals mining industry; however, industry practice varied. The
deferred mining cost method matches the cost of production with the sale of the
related metal from the open pit by assigning each metric ton of ore removed an
equivalent amount of overburden tonnage, thereby averaging overburden removal
costs over the life of the mine. The mining cost capitalized in inventory and
the amounts charged to cost of goods sold do not represent the actual costs
incurred to mine the ore in any given period. Upon adoption of EITF 04-6 on
January 1, 2006, FCX recorded its deferred mining costs asset ($285 million) as
of December 31, 2005, net of taxes, minority interest share and inventory
effects ($136 million), as a cumulative effect adjustment to reduce beginning
retained earnings. In addition, stripping costs incurred in 2006 and later
periods are recorded in accordance with EITF 04-6. As a result of adopting EITF
04-6, FCX’s income from continuing operations before income taxes and minority
interests for the year ended December 31, 2006, was $35 million lower and net
income was $19 million ($0.10 per basic share and $0.08 per diluted share) lower
than if it had not adopted EITF 04-6 and continued to defer stripping costs.
Adoption of the new guidance had no impact on FCX’s cash flows. The pro forma
impact of applying EITF 04-6 would be to reduce net income by $35 million or
$0.16 per diluted share for the year ended December 31, 2005.
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 that were recorded at estimated fair values (see
Note 15), 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 American Institute of
Certified Public Accountants Statement of Position (SOP) 96-1, “Environmental
Remediation Liabilities,” are included as part of the estimated
liability.
Asset Retirement
Obligations. In accordance with SFAS No. 143, “Accounting for
Asset Retirement Obligations,” FCX records the fair value of estimated asset
retirement obligations (AROs) associated with tangible long-lived assets in the
period incurred. Retirement obligations associated with long-lived assets
included within the scope of SFAS No. 143 are those for which there is a legal
obligation to settle under existing or enacted law, statute, written or oral
contract or by legal construction. These liabilities are accreted to full value
over time through charges to income. In addition, asset retirement costs (ARCs)
are capitalized as part of the related asset’s carrying value and are
depreciated (primarily on a unit-of-production basis) over the asset’s
respective useful life. Reclamation costs for future disturbances are recognized
as an ARO and as a related ARC in the period of the disturbance. FCX’s AROs
consist primarily of costs associated with mine reclamation and closure
activities. These activities, which are site specific, generally include costs
for earthwork, revegetation, water treatment and demolition (see Note
15).
Income Taxes. FCX
accounts for income taxes pursuant to SFAS No. 109, “Accounting for Income
Taxes.” Deferred income taxes are provided to reflect the future tax
consequences of differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements (see Note 14). 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. The effect on deferred
income 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.
On
January 1, 2007, FCX adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (FIN 48), 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 of FIN 48, FCX recorded a cumulative effect adjustment of $4 million to
increase beginning retained earnings. Following adoption of FIN 48 related to
amounts accrued for unrecognized tax benefits, FCX includes accrued interest in
interest expense and accrued penalties in other income and expenses rather than
in its provision for income taxes. FCX had previously included interest and
penalties in its provision for income taxes.
Derivative
Instruments. At times, FCX and its subsidiaries have entered
into derivative contracts to manage certain risks resulting from fluctuations in
commodity prices (primarily copper and gold), foreign currency exchange rates
and interest rates by creating offsetting market exposures. FCX accounts for
derivatives pursuant to SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” SFAS No. 133, as subsequently amended, established
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The accounting for changes in the fair value of a derivative
instrument depends on the intended use of the derivative and the resulting
designation. See Note 17 for a summary of FCX’s outstanding derivative
instruments at December 31, 2007, and a discussion of FCX’s risk management
strategies for those designated as hedges.
FCX
elected to continue its historical accounting for its mandatorily redeemable
preferred stock indexed to commodities under the provisions of SFAS No. 133,
which allow such instruments issued before January 1, 1998, to be excluded from
those instruments required to be adjusted for changes in their fair values.
Mandatorily redeemable preferred stock indexed to commodities was treated as a
hedge of future production and was carried at its original issue value. As
redemption payments occurred, differences between the carrying value and the
payments were recorded as adjustments to revenues. In 2006, FCX made the final
redemptions of its preferred stock indexed to commodities. Under SFAS No. 150,
“Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity,” FCX classified its mandatorily redeemable preferred
stock as debt. Dividend payments on FCX’s mandatorily redeemable preferred stock
were classified as interest expense (see Notes 11 and 17).
Revenue
Recognition. FCX sells its products pursuant to sales
contracts entered into with its customers. Revenue for all FCX’s products is
recognized when title and risk of loss pass to the customer and when
collectibility is reasonably assured. The passing of title and risk of loss to
the customer is based on terms of the sales contract, generally upon shipment or
delivery of product.
Revenues
from FCX’s concentrate and cathodes sales are recorded based on either 100
percent of a provisional sales price or a final sales price calculated in
accordance with the terms specified in the relevant sales contract. Revenues
from concentrate sales are recorded net of treatment and all refining charges
(including price participation, if applicable, as discussed below) and the
impact of derivative contracts, including the impact of redemptions of FCX’s
mandatorily redeemable preferred stock indexed to
commodities
and the copper collars acquired from Phelps Dodge (see Notes 11 and 17).
Moreover, because a portion of the metals contained in copper concentrates is
unrecoverable as a result of the smelting process, FCX’s revenues from
concentrate sales are also recorded net of allowances based on the quantity and
value of these unrecoverable metals. These allowances are a negotiated term of
FCX’s contracts and vary by customer. Treatment and refining charges represent
payments or price adjustments to smelters and refiners and are either fixed or
in certain cases vary with the price of copper (referred to as price
participation).
Under the
long-established structure of sales agreements prevalent in the industry, copper
contained in concentrates and cathodes is generally provisionally priced at the
time of shipment. The provisional prices are finalized in a specified future
period (generally one to four months from the shipment date) based on the quoted
London Metal Exchange (LME) or the New York Commodity Exchange (COMEX) prices.
The sales subject to final pricing are generally settled in a subsequent month
or quarter. FCX’s concentrate and cathode sales agreements do not allow for net
settlement and always result in physical delivery. Final delivery to customers
can take up to 60 days.
Under
SFAS No. 133, FCX’s sales based on a provisional sales price contain an embedded
derivative (i.e., a
pricing mechanism that is finalized after the time of delivery) that is required
to be bifurcated from the host contract. The host contract is the sale of the
metals contained in the concentrates or cathodes at the then-current LME or
COMEX price. FCX applies the normal purchase and sale exception allowed by SFAS
No. 133 to the host contract in its concentrate or cathode sales agreements
because the sales always result in physical delivery. Under SFAS No. 133, as
amended, the embedded derivative does not qualify for hedge accounting.
Therefore, the embedded derivative on these provisional sales is adjusted to
fair value through earnings each period until the date of final pricing. At
December 31, 2007, revenues based on provisional sales prices totaled $1.4
billion. At December 31, 2007, FCX had outstanding provisionally priced sales of
402 million pounds of copper (net of minority interests), priced at an average
of $3.02 per pound, subject to final pricing. Final prices on these sales will
be established over the first several months of 2008 pursuant to terms of sales
contracts. During 2007, 2006 and 2005, the maximum net price adjustment to
copper revenues after initial recognition was 17 percent.
Gold
sales are priced according to individual contract terms, generally the average
London Bullion Market Association price for a specified month near the month of
shipment.
More than
70 percent of FCX’s molybdenum sales were priced based on prices published in
Platts Metals Week,
Ryan’s Notes or Metal Bulletin, plus
premiums. The majority of these sales use the average of the previous month.
FCX’s remaining molybdenum sales generally have pricing that is either based on
a fixed price or adjusts within certain price ranges.
PT
Freeport Indonesia sales are subject to certain royalties, which are recorded as
a reduction to revenues (see Note 16 for further discussion).
Stock-Based
Compensation. As of December 31, 2007, FCX has five
stock-based employee compensation plans and one stock-based director
compensation plan. Prior to January 1, 2006, FCX accounted for options granted
under all of its plans under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
to Employees,” and related interpretations, as permitted by SFAS No. 123,
“Accounting for Stock-Based Compensation.” APB Opinion No. 25 required
compensation cost for stock options to be recognized based on the difference on
the date of grant, if any, between the quoted market price of the stock and the
amount an employee must pay to acquire the stock (i.e., the intrinsic value).
Because all FCX’s plans require that the option exercise price be at least the
market price on the date of grant, FCX recognized no compensation cost on the
grant or exercise of its employees’ options through December 31, 2005. Prior to
2007, the market price was defined as the average of the high and low price of
FCX common stock on the date of grant. Effective January 2007, in response to
new Securities and Exchange Commission disclosure rules, the plans were amended
to define the market price for future grants as the closing price of FCX common
stock on the date of grant. Other awards under the plans did result in
compensation costs being recognized in earnings based on the projected intrinsic
value for restricted stock units to be granted in lieu of cash compensation, the
intrinsic value on the date of grant for other restricted stock units and the
intrinsic value on the reporting or exercise date for cash-settled stock
appreciation rights (SARs).
Effective
January 1, 2006, FCX adopted the fair value recognition provisions of SFAS No.
123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), using the modified
prospective transition method. Under that transition method, compensation cost
recognized in 2007 and 2006 includes: (i) compensation costs for
all
stock
option awards granted to employees prior to but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and (ii) compensation costs for all stock
option awards granted subsequent to January 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of SFAS No. 123R. In
addition, other stock-based awards charged to expense under SFAS No. 123
continue to be charged to expense under SFAS No. 123R. These include restricted
stock units and SARs. Results for 2005 have not been restated. FCX has elected
to recognize compensation costs for awards that vest over several years on a
straight-line basis over the vesting period. FCX’s stock option awards provide
for employees to receive the next year’s vesting after an employee retires. For
awards granted after January 1, 2006, to retirement-eligible employees, FCX
records one year of amortization of the awards’ value on the date of grant.
Certain restricted stock units are performance-based awards with accelerated
vesting upon retirement. Therefore, in accordance with SFAS No. 123R and
consistent with prior years’ accounting, FCX recognizes the compensation cost
for restricted stock units granted to retirement-eligible employees in the
period during which the employee performs the service related to the grant. The
services may be performed in the calendar year preceding the date of grant. In
addition, prior to adoption of SFAS No. 123R, FCX recognized forfeitures as they
occurred in its SFAS No. 123 pro forma disclosures. Beginning January 1, 2006,
FCX includes estimated forfeitures in its compensation cost and updates the
estimated forfeiture rate through the final vesting date of the
awards.
The
following table illustrates the effect on net income and earnings per common
share for the year ended December 31, 2005, if FCX had applied the fair value
recognition provisions of SFAS No. 123 to stock-based awards granted under FCX’s
stock-based compensation plans:
Net
income applicable to common stock, as reported
|
|
|
|
|
$
|
935
|
|
Add: Stock-based
employee compensation expense
|
|
|
|
|
|
|
|
included
in reported net income for stock option
|
|
|
|
|
|
|
|
conversions,
SARs and restricted stock units,
|
|
|
|
|
|
|
|
net
of taxes and minority interests
|
|
|
|
|
|
13
|
|
Deduct: Total
stock-based employee compensation
|
|
|
|
|
|
|
|
expense
determined under fair value-based method
|
|
|
|
|
|
|
|
for
all awards, net of taxes and minority interests
|
|
|
|
|
|
(26
|
)
|
Pro
forma net income applicable to common stock
|
|
|
|
|
$
|
922
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
– as reported
|
|
|
|
|
$
|
5.18
|
|
Basic
– pro forma
|
|
|
|
|
$
|
5.12
|
|
|
|
|
|
|
|
|
|
Diluted
– as reported
|
|
|
|
|
$
|
4.67
|
|
Diluted
– pro forma
|
|
|
|
|
$
|
4.64
|
|
|
|
|
|
|
|
|
|
For the
pro forma computations, the values of option grants were calculated on the dates
of grant using the Black-Scholes-Merton option pricing model and amortized to
expense on a straight-line basis over the options’ vesting periods. No other
discounts or restrictions related to vesting or the likelihood of vesting of
stock options were applied. The following table summarizes the calculated
average fair values and weighted-average assumptions used to determine the fair
value of FCX’s stock option grants under SFAS No. 123 during the year ended
December 31, 2005.
Fair
value per stock option
|
|
|
|
$
|
13.97
|
|
Risk-free
interest rate
|
|
|
|
|
3.9
|
%
|
Expected
volatility rate
|
|
|
|
|
46
|
%
|
Expected
life of options (in years)
|
|
|
|
|
6
|
|
Assumed
annual dividend
|
|
|
|
$
|
1.00
|
|
Earnings Per
Share. 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 for the
years ended December 31, 2007, 2006 and 2005:
|
|
2007
|
|
2006
|
|
2005
|
|
Income
from continuing operations
|
|
$
|
2,942
|
|
$
|
1,457
|
|
$
|
995
|
|
Preferred
dividends
|
|
|
(208
|
)
|
|
(61
|
)
|
|
(60
|
)
|
Income
from continuing operations applicable
|
|
|
|
|
|
|
|
|
|
|
to
common stock
|
|
|
2,734
|
|
|
1,396
|
|
|
935
|
|
Plus
income impact of assumed conversion of:
|
|
|
|
|
|
|
|
|
|
|
6¾%
Mandatory Convertible Preferred Stock
|
|
|
147
|
|
|
–
|
|
|
–
|
|
5½%
Convertible Perpetual Preferred Stock
|
|
|
61
|
|
|
61
|
|
|
60
|
|
7%
Convertible Senior Notes
|
|
|
–
|
|
|
12
|
|
|
35
|
|
Diluted
net income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
applicable
to common stock
|
|
|
2,942
|
|
|
1,469
|
|
|
1,030
|
|
Income
from discontinued operations
|
|
|
35
|
|
|
–
|
|
|
–
|
|
Diluted
net income applicable to common shares
|
|
$
|
2,977
|
|
$
|
1,469
|
|
$
|
1,030
|
|
Weighted-average
common shares outstanding
|
|
|
341
|
|
|
191
|
|
|
180
|
|
Add
shares issuable upon conversion, exercise
|
|
|
|
|
|
|
|
|
|
|
or
vesting of:
|
|
|
|
|
|
|
|
|
|
|
6¾%
Mandatory Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
(see
Note 13)
|
|
|
30
|
|
|
–
|
|
|
–
|
|
5½%
Convertible Perpetual Preferred Stock (see Note 13)
|
|
|
23
|
|
|
22
|
|
|
21
|
|
7%
Convertible Senior Notes (see Note 11)
|
|
|
–
|
|
|
7
|
|
|
17
|
|
Dilutive
stock options (see Note 13)
|
|
|
2
|
|
|
1
|
|
|
2
|
|
Restricted
stock (see Note 13)
|
|
|
1
|
|
|
–
|
|
|
–
|
|
Weighted-average
common shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
purposes
of calculating diluted net income per share
|
|
|
397
|
|
|
221
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
7.41
|
|
$
|
6.63
|
|
$
|
4.67
|
|
Discontinued
operations
|
|
|
0.09
|
|
|
–
|
|
|
–
|
|
Diluted
net income per share of common stock
|
|
$
|
7.50
|
|
$
|
6.63
|
|
$
|
4.67
|
|
|
|
|
|
|
|
|
|
|
|
|
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. No amounts were excluded for 2007.
Excluded amounts in 2006 and 2005 were approximately one million stock options
with weighted-average exercise prices of $63.77 in 2006 and $36.99 in
2005.
New Accounting
Standards. Fair Value Measurements. In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 does not require any new fair value measurements under
U.S. generally accepted accounting principles (GAAP); rather this statement
establishes a common definition of fair value, provides a framework for
measuring fair value under U.S. GAAP and expands disclosure requirements about
fair value measurements. On February 12, 2008, the FASB issued FSP FAS 157-2,
which delays the effective date of SFAS No. 157 for nonfinancial assets or
liabilities that are not required or permitted to be measured at fair value on a
recurring basis to fiscal years beginning after November 15, 2008, and interim
periods within those years. FCX is currently evaluating the impact, if any, the
adoption of SFAS No. 157 will have on its financial reporting and
disclosures.
Fair Value Option for Financial
Assets and Liabilities. In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Liabilities – Including an
amendment of FASB No. 115,” which permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. FCX does not believe adoption of
SFAS No. 159 will have a material impact on its financial reporting and
disclosures.
Business Combinations. In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS No. 141R). Under SFAS No. 141R, all business combinations
will be accounted for under the acquisition method, and the new standard makes
certain other changes to the accounting for business combinations, of which the
most significant are as follows: (i) whether all or a partial interest is
acquired, the acquirer will recognize the full value of assets acquired,
liabilities assumed and noncontrolling interests; (ii) direct costs of a
business combination will be charged to expense if they are not associated with
issuing debt or equity securities; (iii) any contingent consideration will
be recognized and measured at fair value on the acquisition date, with
subsequent changes to the fair value recognized in earnings; and (iv) equity
issued in consideration for a business combination will be measured at fair
value as of the acquisition date. SFAS No. 141R applies prospectively to
business combinations for which the acquisition date is on or after fiscal years
beginning after December 15, 2008. Early adoption is prohibited.
Noncontrolling Interests in
Consolidated Financial Statements. In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an
amendment of ARB No. 51,” which clarifies that noncontrolling interests
(minority interests) are to be treated as a separate component of equity and any
changes in the ownership interest (in which control is retained) are to be
accounted for as capital transactions. However, a change in ownership of a
consolidated subsidiary that results in a loss of control is considered a
significant event that triggers gain or loss recognition, with the establishment
of a new fair value basis in any remaining ownership interests. SFAS No. 160
also provides additional disclosure requirements for each reporting period. SFAS
No. 160 applies to fiscal years beginning on or after December 15, 2008, with
early adoption prohibited. This statement is required to be adopted
prospectively, except for the following provisions, which are expected to be
applied retrospectively: (i) the reclassification of noncontrolling interests to
equity in the consolidated balance sheets and (ii) the adjustment to
consolidated net income to include net income attributable to both the
controlling and noncontrolling interests.
Reclassifications. For
comparative purposes, primarily because of the acquisition of Phelps Dodge,
certain prior year amounts have been reclassified to conform with the current
year presentation.
NOTE
2. ACQUISITION OF PHELPS DODGE
On March
19, 2007, FCX 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 Tenke Fungurume in the Democratic Republic of
Congo (DRC).
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 SFAS
No. 141, with FCX as the accounting acquirer.
The
initial estimates of the 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.
The
following table summarizes the $25.8 billion purchase price, which was funded
through a combination of common shares issued, borrowings under an $11.5 billion
senior credit facility, proceeds from the offering of $6.0 billion of senior
notes (see Note 11 for further discussion) and available cash
resources:
Phelps
Dodge common stock outstanding and issuable at March 19, 2007 (in
millions)
|
|
204.3
|
|
Exchange
offer ratio per share of FCX common stock for each Phelps Dodge common
share
|
|
0.67
|
|
Shares
of FCX common stock issued (in millions)
|
|
136.9
|
|
|
|
|
|
Cash
consideration of $88.00 for each Phelps Dodge common share
|
$
|
17,979
|
a
|
Fair
value of FCX common stock issued
|
|
7,781
|
b
|
Transaction
and change of control costs and related employee benefits
|
|
136
|
|
Release
of FCX deferred tax asset valuation allowances
|
|
(92
|
)c
|
Total
purchase price
|
$
|
25,804
|
|
|
|
|
|
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 was 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.
|
c.
|
FCX
determined that, as a result of the acquisition of Phelps Dodge, it will
be able to realize certain U.S. tax credits for which it had previously
not recognized any benefit. Recognition of these tax credits resulted in a
$92 million reduction to the purchase
price.
|
In
accordance with the purchase method of accounting, the purchase price paid 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. FCX is continuing
to value all assets acquired and liabilities assumed, and there could be
additional adjustments to the estimated fair values until all valuation work is
finalized in the first quarter of 2008. In valuing acquired assets and assumed
liabilities, fair values were based on, but not limited to: quoted market
prices, where available; the intent of FCX with respect to whether the assets
purchased were 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 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 and equipment; and
goodwill. At the date of acquisition of Phelps Dodge, copper price projections
used to value the assets acquired ranged from a near-term price of $2.98 per
pound for copper and $26.20 per pound for molybdenum to a long-term average
price of $1.20 per pound for copper and $8.00 per pound for
molybdenum.
A current
summary of the purchase price allocation as of March 19, 2007, follows (in
billions):
|
Phelps
|
|
|
|
Preliminary
|
|
|
Dodge
|
|
|
|
Purchase
|
|
|
Historical
|
|
Fair
Value
|
|
Price
|
|
|
Balances
|
|
Adjustments
|
|
Allocation
|
|
Cash
and cash equivalents
|
$
|
4.2
|
|
$
|
–
|
|
$
|
4.2
|
|
Inventories,
including mill and leach stockpiles
|
|
0.9
|
|
|
2.8
|
|
|
3.7
|
|
Property,
plant and equipmenta
|
|
6.0
|
|
|
16.1
|
|
|
22.1
|
|
Other
assets
|
|
3.1
|
|
|
0.2
|
|
|
3.3
|
|
Allocation
to goodwillb
|
|
–
|
|
|
6.3
|
|
|
6.3
|
c
|
Total
assets
|
|
14.2
|
|
|
25.4
|
|
|
39.6
|
|
Deferred
income taxes (current and long-term)d
|
|
(0.7
|
)
|
|
(6.3
|
)
|
|
(7.0
|
)
|
Other
liabilities
|
|
(4.1
|
)
|
|
(1.5
|
)
|
|
(5.6
|
)
|
Minority
interests
|
|
(1.2
|
)
|
|
–
|
|
|
(1.2
|
)
|
Total
|
$
|
8.2
|
|
$
|
17.6
|
|
$
|
25.8
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Includes
amounts for proven and probable reserves and values of VBPP (see Note
1).
|
b.
|
None
of the $6.3 billion of goodwill is deductible for tax
purposes.
|
c.
|
Includes
$160 million of goodwill associated with Phelps Dodge International
Corporation (PDIC). PDIC was sold in the fourth quarter of 2007 (see
Note 4).
|
d.
|
Deferred
income taxes have been recognized based on the difference between the tax
basis and the estimated fair values assigned to net
assets.
|
Prior to
the end of the first quarter of 2008, 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.
Goodwill,
which arose with FCX’s acquisition of Phelps Dodge, is attributed to 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
93.2 billion pounds of copper, 41.0 million ounces of gold and 2.0 billion
pounds of molybdenum as of December 31, 2007 (see Note 19). Additionally,
the combined company has rights to significant mineralized material that
could add to reserves.
|
·
|
The
combined company has exploration rights with significant potential in
copper regions around the world.
|
Unaudited Pro Forma Financial
Information. The following unaudited pro forma financial
information assumes that FCX acquired Phelps Dodge effective January 1, 2007,
for the 2007 period, and effective January 1, 2006, for the 2006 period. The
most significant adjustments relate to the purchase accounting impacts of
increases in the carrying values of acquired metal inventories (including mill
and leach stockpiles) and property, plant and equipment using March 19, 2007,
metal prices and assumptions:
|
Historical
|
|
|
|
|
|
|
|
|
|
Phelps
|
|
Pro
Forma
|
|
Pro
Forma
|
|
|
FCX
|
|
Dodgea
|
|
Adjustments
|
|
Consolidated
|
|
Year Ended December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
16,939
|
|
$
|
2,294
|
|
$
|
–
|
|
$
|
19,233
|
b
|
Operating
income
|
|
6,555
|
|
|
793
|
|
|
(105
|
)
|
|
7,243
|
b,c
|
Income
from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes and minority interests
|
|
6,133
|
|
|
837
|
|
|
(173
|
)
|
|
6,797
|
b,c,d,e,f
|
Income
from continuing operations applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stock
|
|
2,734
|
|
|
493
|
|
|
(166
|
)
|
|
3,061
|
b,c,d,e,f
|
Diluted
income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share of common stock
|
|
7.41
|
|
|
N/A
|
|
|
N/A
|
|
|
7.41
|
b,c,d,e,f
|
Diluted
weighted average shares outstanding
|
|
397
|
|
|
N/A
|
|
|
N/A
|
|
|
448
|
h
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
5,791
|
|
$
|
10,742
|
|
$
|
120
|
|
$
|
16,653
|
b,g
|
Operating
income
|
|
2,869
|
|
|
4,158
|
|
|
(2,077
|
)
|
|
4,950
|
b,c,g
|
Income
from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes and minority interests
|
|
2,826
|
|
|
4,766
|
|
|
(2,847
|
)
|
|
4,745
|
b,c,e,g
|
Income
from continuing operations applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stock
|
|
1,396
|
|
|
3,000
|
|
|
(2,199
|
)
|
|
2,197
|
b,c,e,g
|
Diluted
income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share of common stock
|
|
6.63
|
|
|
14.74
|
|
|
N/A
|
|
|
5.54
|
b,c,e,g
|
Diluted
weighted average shares outstanding
|
|
221
|
|
|
204
|
|
|
N/A
|
|
|
445
|
h
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
For
the year ended December 31, 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 information.
|
Additionally,
for comparative purposes the historical Phelps Dodge financial information for
the year ended December 31, 2006, represents results from continuing operations,
and therefore, excludes the results of PDIC (i.e., discontinued
operations).
b.
|
Includes
charges to revenues for mark-to-market accounting adjustments on copper
price protection programs totaling $195 million ($119 million to net
income or $0.27 per share) for 2007 and $1.2 billion ($915 million to net
income or $2.06 per share) for 2006. Also includes credits for
amortization of acquired intangible liabilities totaling $120 million ($76
million to net income or $0.17 per share) in each
year.
|
c.
|
Includes
charges associated with the impacts of the increases in the carrying
values of acquired metal inventories (including mill and leach stockpiles)
and property, plant and equipment, and also includes the amortization of
intangible assets and liabilities resulting from the acquisition
totaling $1.6 billion ($1.0 billion to net income or $2.25 per share) for
2007 and $2.2 billion ($1.4 billion to net income or $3.13 per share) for
2006.
|
d.
|
Excludes
net losses on early extinguishment of debt totaling $88 million ($69
million to net income or $0.15 per share) for financing transactions
related to the acquisition of Phelps
Dodge.
|
e.
|
Includes
net interest expense associated with debt issued in connection with the
acquisition of Phelps Dodge totaling $580 million ($452 million to net
income or $1.01 per share) for 2007 and $775 million ($698 million to net
income or $1.57 per share) for
2006.
|
f.
|
Includes
gains primarily on the sales of marketable securities totaling $85 million
($52 million to net income or $0.12 per
share).
|
g.
|
Includes
charges to revenues totaling $82 million ($44 million to net income or
$0.10 per share) associated with the redemption of FCX’s Gold-Denominated
Preferred Stock, Series II and Silver-Denominated Preferred
Stock.
|
h.
|
Estimated
pro forma diluted weighted average shares outstanding for the years ended
December 31, 2007 and 2006, follow (in
millions):
|
|
|
2007
|
|
2006
|
|
|
Average
number of basic shares of FCX common stock
|
|
|
|
|
|
|
outstanding
prior to the acquisition of Phelps Dodge
|
|
198
|
|
191
|
|
|
Shares
of FCX common stock issued in the acquisition
|
|
137
|
|
137
|
|
|
Sale
of FCX shares
|
|
47
|
|
47
|
|
|
Mandatory
Convertible Preferred Stock*
|
|
39
|
|
39
|
|
|
Other
dilutive securities
|
|
27
|
|
31
|
|
|
Pro
forma average number of common shares outstanding
|
|
448
|
|
445
|
|
|
|
|
|
|
|
|
|
|
*
|
See
Note 13 for additional information.
|
The above
unaudited pro forma consolidated financial 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.
NOTE
3. OWNERSHIP IN SUBSIDIARIES, JOINT VENTURES AND INVESTMENT IN PT
SMELTING
Ownership in
Subsidiaries. On March 19, 2007, Phelps Dodge became a wholly
owned subsidiary of FCX. Phelps Dodge is a fully integrated producer of copper
and molybdenum, with mines in North America and South America, copper and
molybdenum conversion facilities, and several development projects, including
Tenke Fungurume in the DRC. At December 31, 2007, Phelps Dodge’s major operating
copper mines in North America were Morenci, Bagdad, Sierrita and Safford located
in Arizona, and Chino and Tyrone located in New Mexico. FCX has an 85 percent
interest in Morenci (see “Joint Ventures – Sumitomo”) and owns 100 percent of
the other North America mines. At December 31, 2007, operating copper mines in
South America were Candelaria (80 percent owned), Ojos del Salado (80 percent
owned) and El Abra (51 percent owned) located in Chile, and Cerro Verde (53.56
percent owned) located in Peru. Phelps Dodge also owns the Henderson and Climax
molybdenum mines located in Colorado. The Henderson mine is currently operating,
and the Climax mine is scheduled for restart in 2010. In addition to copper and
molybdenum, certain mines produce other minerals as by-products, such as gold,
silver and rhenium. At December 31, 2007, Phelps Dodge’s net assets totaled
$28.0 billion and its retained earnings totaled $2.2 billion. As of December 31,
2007, FCX had no loans outstanding to Phelps Dodge.
FCX owns
an effective 57.75 percent interest (through its ownership in Phelps Dodge) in
Tenke Fungurume Mining, S.A.R.L. (Tenke Fungurume), a company incorporated under
the laws of the DRC. The remaining ownership interests are held by Tenke Mining
Corp. (TMC), which is owned by Lundin Mining Corporation (24.75 percent) and La
Générale des Carrières et des Mines (Gécamines), which is wholly owned by the
Government of the DRC (17.5 percent). FCX is responsible for 70 percent of
project development costs and, at its joint venture partner’s election, FCX is
also responsible for financing its partner’s share of project overruns of more
than 25 percent of the feasibility study cost estimates. Gécamines has an
undilutable carried interest and is not responsible for funding any project
costs. In accordance with the terms of the agreement, Gécamines will receive
asset transfer payments totaling $100 million, $65 million of which has already
been paid and the remainder of which will be paid over a period of approximately
three years. Tenke Fungurume will produce copper and cobalt and is expected to
commence mining operations in 2009.
In
February 2008, FCX received a letter from the Ministry of Mines, Government of
the DRC, seeking FCX’s comment on proposed material modifications to its mining
contract for the Tenke Fungurume concession,
including
the amount of transfer payments payable to the government, the government’s
percentage ownership and involvement in the management of the mine,
regularization of certain matters under Congolese law and the implementation of
social plans. FCX’s mining contract was negotiated transparently and approved by
the Government of the DRC following extended negotiations, and FCX believes it
complies with Congolese law and is enforceable without modifications. FCX is
currently working cooperatively with the Ministry of Mines to resolve these
matters while continuing with its project development activities.
FCX’s
direct ownership in PT Freeport Indonesia totaled 81.28 percent at December 31,
2007 and 2006. PT Indocopper Investama, an Indonesian company, owns 9.36 percent
of PT Freeport Indonesia and FCX owns 100 percent of PT Indocopper Investama. In
July 2004, FCX received a request from the Indonesian Department of Energy and
Mineral Resources that it 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 the
operations, FCX agreed, at the time, to consider a potential sale of an interest
in PT Indocopper Investama at fair market value. Neither its Contract of Work
nor Indonesian law requires FCX to divest any portion of its ownership in PT
Freeport Indonesia or PT Indocopper Investama. At December 31, 2007, PT Freeport
Indonesia’s net assets totaled $2.0 billion and its retained earnings totaled
$1.8 billion. As of December 31, 2007, FCX had no outstanding loans to PT
Freeport Indonesia. Substantially all of PT Freeport Indonesia’s assets are
located in Indonesia. During 2007, the Indonesian economy posted economic gains
and reported reduced inflation rates. Indonesia continues to face political,
economic and social uncertainties, including separatist movements and civil and
religious strife in a number of provinces.
FCX owns
100 percent of the outstanding Atlantic Copper common stock. At December 31,
2007, Atlantic Copper’s net assets totaled $154 million and retained earnings
totaled a negative $234 million. FCX had a $190 million loan outstanding to
Atlantic Copper, and Atlantic Copper’s debt under financing arrangements that
are guaranteed by FCX totaled $56 million at December 31, 2007. Under the terms
of its concentrate sales agreements with Atlantic Copper, PT Freeport Indonesia
had outstanding trade receivables from Atlantic Copper totaling $172 million at
December 31, 2007.
In July
2003, FCX acquired the 85.71 percent ownership interest in PT Puncakjaya Power
(Puncakjaya Power) owned by affiliates of Duke Energy Corporation for $68
million cash, net of $10 million of cash acquired. Puncakjaya Power is the owner
of assets supplying power to PT Freeport Indonesia’s operations, including the
3x65 megawatt coal-fired power facilities. PT Freeport Indonesia purchases power
from Puncakjaya Power under infrastructure asset financing arrangements. In
March 2005, FCX prepaid $187 million of bank debt associated with Puncakjaya
Power’s operations. At December 31, 2007, FCX had a $70 million loan outstanding
to Puncakjaya Power, PT Freeport Indonesia had infrastructure asset financing
obligations payable to Puncakjaya Power totaling $162 million and Puncakjaya
Power had a receivable from PT Freeport Indonesia for $212 million, including
Rio Tinto’s share. FCX consolidates PT Freeport Indonesia and Puncakjaya Power.
FCX’s consolidated balance sheets reflect receivables of $46 million ($9 million
in other accounts receivable and $37 million in long-term assets) at December
31, 2007, and $55 million ($9 million in other accounts receivable and $46
million in long-term assets) at December 31, 2006, for Rio Tinto’s share of
Puncakjaya Power’s receivable as provided for in FCX’s joint venture agreement
with Rio Tinto.
Joint Ventures. FCX
has the following unincorporated joint ventures with third parties.
Rio Tinto. In March 2004, FCX
purchased Rio Tinto’s 23.9 million shares of FCX common stock for $882 million
(approximately $36.85 per share) with a portion of the proceeds from the sale of
the 5½% Convertible Perpetual Preferred Stock (see Note 13). Rio Tinto acquired
these shares from FCX’s former parent company in 1995 in connection with the
spin-off of FCX as an independent company. FCX and Rio Tinto have established
certain unincorporated joint ventures which were not impacted by FCX’s purchase
of its shares from Rio Tinto. Under the joint venture arrangements, Rio Tinto
has a 40 percent interest in PT Freeport Indonesia’s Contract of Work and the
option to participate in 40 percent of any other future exploration projects in
Papua, Indonesia. Under the arrangements, Rio Tinto funded $100 million in 1996
for approved exploration costs in the areas covered by Contracts of Work held by
FCX subsidiaries. Agreed-upon exploration costs in the joint venture areas are
shared 60 percent by FCX and 40 percent by Rio Tinto.
Pursuant
to the joint venture agreement, Rio Tinto has a 40 percent interest in certain
assets and future production exceeding specified annual amounts of copper, gold
and silver through 2021 in Block A of PT Freeport Indonesia’s Contract of Work,
and, after 2021, a 40 percent interest in all production from Block A. All of PT
Freeport Indonesia’s proven and probable reserves and its mining operations are
located in the
Block A
area. Operating, nonexpansion capital and administrative costs are shared
proportionately between PT Freeport Indonesia and Rio Tinto based on the ratio
of (i) the incremental revenues from production from PT Freeport Indonesia’s
most recent expansion completed in 1998 to (ii) total revenues from production
from Block A, including production from PT Freeport Indonesia’s previously
existing reserves. PT Freeport Indonesia will continue to receive 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.
The joint
venture agreement provides for adjustments to the specified annual amounts of
copper, gold and silver attributable 100 percent to PT Freeport Indonesia upon
the occurrence of certain events which cause an extended interruption in
production to occur, including events such as the fourth-quarter 2003 Grasberg
open-pit slippage and debris flow. As a result of the Grasberg slippage and
debris flow events, the 2004 specified amounts attributable 100 percent to PT
Freeport Indonesia were reduced by 172 million recoverable pounds for copper and
272,000 recoverable ounces for gold. Pursuant to agreements in 2005 and early
2006 with Rio Tinto, these reductions were partially offset by increases in the
specified amounts attributable 100 percent to PT Freeport Indonesia totaling 62
million recoverable pounds for copper and 170,000 recoverable ounces for gold in
2005, and 110 million recoverable pounds for copper and 102,000 recoverable
ounces for gold in 2021. The payable to Rio Tinto for its share of joint venture
cash flows totaled $68 million at December 31, 2007, and $69 million at December
31, 2006.
Sumitomo. FCX owns an 85
percent undivided interest in Morenci via an unincorporated joint venture. The
remaining 15 percent is owned by Sumitomo, a jointly owned subsidiary of
Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation. Each partner takes in
kind its share of Morenci’s production. During the period March 20, 2007 to
December 31, 2007, Phelps Dodge purchased 87 million pounds of Morenci’s copper
cathode from Sumitomo for $299 million. FCX had a $10 million net payable to
Sumitomo at December 31, 2007.
Investment in PT
Smelting. PT Smelting, an Indonesian company, operates a
smelter/refinery in Gresik, Indonesia. During 2006, PT Smelting completed an
expansion of its production capacity to 275,000 metric tons of copper per year
from 250,000 metric tons. PT Freeport Indonesia, Mitsubishi Materials
Corporation (Mitsubishi Materials), Mitsubishi Corporation (Mitsubishi) and
Nippon Mining & Metals Co., Ltd. (Nippon) own 25 percent, 60.5 percent, 9.5
percent, and 5 percent, respectively, of the outstanding PT Smelting common
stock. PT Freeport Indonesia provides nearly all of PT Smelting’s copper
concentrate requirements. Under the PT Smelting contract, for the first 15 years
of PT Smelting’s commercial 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 ($0.21 per pound after
March 2004), subject to renegotiation in 2008. The rate was approximately $0.38
per pound during 2007. PT Smelting had project-specific debt, nonrecourse to PT
Freeport Indonesia, totaling $219 million at December 31, 2007 and $262 million
at December 31, 2006.
NOTE
4. DISCONTINUED OPERATIONS
On
October 31, 2007, FCX sold its international wire and cable
business, PDIC, for $735 million, which resulted in a net loss of $14
million ($9 million to net income) for transaction-related costs. The
transaction generated after-tax proceeds of approximately $650 million (net
proceeds of $597 million after taxes, transaction related costs and PDIC
cash).
As a
result of the sale, the operating results of PDIC have been removed from
continuing operations and reported as discontinued operations in the
consolidated statements of income. Selected financial information that has been
reported as discontinued operations for the period March 20, 2007, through
December 31, 2007, follows:
|
|
|
|
|
Revenues
|
|
$
|
937
|
|
Operating
income
|
|
|
78
|
|
Provision
for income taxes
|
|
|
(24
|
)
|
Income
from discontinued operations
|
|
|
35
|
|
Cash
flows from discontinued operations for the year ended December 31, 2007, have
not been separately identified in the consolidated statements of cash
flows.
NOTE
5. INVENTORIES, AND MILL AND LEACH STOCKPILES
The
components of inventories follow:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Mining
Operations:
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1
|
|
$
|
–
|
|
Work-in-process
|
|
|
71
|
|
|
11
|
|
Finished
goodsa
|
|
|
898
|
|
|
4
|
|
Atlantic
Copper:
|
|
|
|
|
|
|
|
Raw
materials (concentrates)
|
|
|
164
|
|
|
189
|
|
Work-in-process
|
|
|
220
|
|
|
168
|
|
Finished
goods
|
|
|
6
|
|
|
12
|
|
Total
product inventories
|
|
|
1,360
|
|
|
384
|
|
Total
materials and supplies, netb
|
|
|
818
|
|
|
340
|
|
Total
inventories
|
|
$
|
2,178
|
|
$
|
724
|
|
|
|
|
|
|
|
|
|
a.
|
Primarily
includes concentrates and cathodes.
|
b.
|
Materials
and supplies inventory is net of obsolescence reserves totaling $16
million at both December 31, 2007, and December 31,
2006.
|
FCX
acquired mill and leach stockpiles in the Phelps Dodge acquisition. The
following is a detail of mill and leach stockpiles as of December 31,
2007:
|
North
|
|
South
|
|
|
|
|
|
America
|
|
America
|
|
Total
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Mill
stockpiles
|
$
|
–
|
|
$
|
6
|
|
$
|
66
|
|
Leach
stockpiles
|
|
630
|
|
|
71
|
|
|
7011
|
|
Total
current mill and leach stockpiles
|
$
|
630
|
|
$
|
77
|
|
$
|
7077
|
|
|
|
|
|
|
|
|
|
|
|
Long-terma:
|
|
|
|
|
|
|
|
|
|
Mill
stockpiles
|
$
|
–
|
|
$
|
248
|
|
$
|
2488
|
|
Leach
stockpiles
|
|
685
|
|
|
173
|
|
|
8588
|
|
Total
long-term mill and leach stockpiles
|
$
|
685
|
|
$
|
421
|
|
$
|
1,1066
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Materials
in stockpiles not expected to be recovered within the next 12
months.
|
NOTE
6. PROPERTY, PLANT, EQUIPMENT AND DEVELOPMENT COSTS, NET
The
components of net property, plant, equipment and development costs
follow:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Proven
and probable reserves
|
|
$
|
13,797
|
|
$
|
–
|
|
VBPP
|
|
|
2,103
|
|
|
–
|
|
Development
and other
|
|
|
2,516
|
|
|
1,538
|
|
Buildings
and infrastructure
|
|
|
2,300
|
|
|
1,501
|
|
Machinery
and equipment
|
|
|
6,023
|
|
|
2,261
|
|
Mobile
equipment
|
|
|
2,106
|
|
|
757
|
|
Construction
in progress
|
|
|
1,197
|
|
|
162
|
|
Property,
plant, equipment and development costs
|
|
|
30,042
|
|
|
6,219
|
|
Accumulated
depreciation, depletion and amortization
|
|
|
(4,327
|
)
|
|
(3,120
|
)
|
Property,
plant, equipment and development costs, net
|
|
$
|
25,715
|
|
$
|
3,099
|
|
|
|
|
|
|
|
|
|
FCX
recorded $2,196 million for VBPP in connection with the Phelps Dodge acquisition
and transferred $93 million to proven and probable reserves during
2007.
FCX’s
capitalized interest totaled $147 million in 2007, $11 million in 2006 and $4
million in 2005. Capitalized interest in 2007 primarily related to development
projects at Safford and Tenke Fungurume.
NOTE
7. GOODWILL, AND INTANGIBLE ASSETS AND LIABILITIES
Goodwill. Changes
in the carrying amount of goodwill for the year ended December 31, 2007,
follows:
At
January 1, 2007
|
|
$
|
–
|
|
Acquisition
of Phelps Dodge
|
|
|
6,265
|
|
Additionsa
|
|
|
21
|
|
Disposal
of PDIC (see Note 4)
|
|
|
(181
|
)
|
At
December 31, 2007
|
|
$
|
6,105
|
|
|
|
|
|
|
a.
|
In
2007, FCX acquired minority shareholders’ interests in several of its
subsidiaries, which were subsequently included in the sale of
PDIC.
|
FCX
recorded goodwill in connection with the Phelps Dodge acquisition. This amount
represents the excess of the purchase price over the fair value of assets
acquired and liabilities assumed and is subject to adjustment as FCX finalizes
its analysis of these fair values in the first quarter of 2008. 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. Adjustments to the recorded values of the assets
acquired and liabilities assumed in the acquisition of Phelps Dodge may occur
until such values are finalized. Accordingly, the allocation of goodwill to
reporting units, which FCX has determined will include its individual mines,
will be completed when FCX finalizes the purchase price allocation in the first
quarter of 2008.
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. Although the allocation of
goodwill to reporting units has not yet been finalized, FCX performed an initial
impairment evaluation in the fourth quarter of 2007 based on a preliminary
allocation and concluded that there was no impairment of goodwill as of December
31, 2007.
Intangible Assets and
Liabilities. Intangible assets (included in other
assets) and intangible liabilities (included in other liabilities – see
Note 10) at December 31, 2007, which were acquired in connection with the
acquisition of Phelps Dodge, follow:
|
Gross
|
|
|
|
|
Net
|
|
|
Carrying
|
|
Accumulated
|
|
Book
|
|
|
Value
|
|
Amortization
|
|
Value
|
|
Water
rights
|
$
|
220
|
|
$
|
(1
|
)
|
$
|
2195
|
|
Power
contracts
|
|
169
|
|
|
(38
|
)
|
|
1311
|
|
Patents
and process technology
|
|
48
|
|
|
(2
|
)
|
|
466
|
|
Royalty
payments
|
|
39
|
|
|
(2
|
)
|
|
377
|
|
Tire
contracts
|
|
39
|
|
|
(4
|
)
|
|
355
|
|
Other
intangibles
|
|
4
|
|
|
–
|
|
|
44
|
|
Total
intangible assets
|
$
|
519
|
|
$
|
(47
|
)
|
$
|
4722
|
|
|
|
|
|
|
|
|
|
|
|
Treatment
and refining terms in
|
|
|
|
|
|
|
|
|
|
sales
contracts
|
$
|
(52
|
)
|
$
|
9
|
|
$
|
(433
|
)
|
Molybdenum
sales contracts
|
|
(115
|
)
|
|
111
|
|
|
(44
|
)
|
Total
intangible liabilities
|
$
|
(167
|
)
|
$
|
120
|
|
$
|
(477
|
)
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets recognized in production and delivery costs was $47 million
in 2007, and amortization of intangible liabilities recognized in revenues
totaled $120 million in 2007. The estimated net amortization expense for the
next five years totals $53 million in 2008, $26 million in 2009, $27 million in
2010, $25 million in 2011 and $31 million in 2012.
NOTE
8. TRUST ASSETS
The
following is a detail of trust assets at December 31, 2007, which were acquired
in connection with the acquisition of Phelps Dodge:
Global
reclamation and remediation
|
$
|
544
|
a
|
Rabbi
trust
|
|
23
|
|
Change
of control
|
|
21
|
|
Non-qualified
retirement benefits
|
|
18
|
|
Total
trust assets
|
$
|
606
|
|
a.
|
Includes
$106 million of legally restricted funds for AROs at the Chino, Tyrone and
Cobre mines (see Note 15).
|
NOTE
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The
following provides additional information regarding accounts payable and accrued
liabilities.
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Accounts
payable
|
|
$
|
1,195
|
|
$
|
320
|
|
Salaries,
wages and other compensation
|
|
|
278
|
|
|
80
|
|
Current
deferred tax liability
|
|
|
171
|
|
|
–
|
|
Accrued
interest
|
|
|
144
|
|
|
22
|
|
Community
development contributions
|
|
|
118
|
|
|
–
|
|
Pension,
postretirement, postemployment and other
|
|
|
|
|
|
|
|
employee
benefitsa
|
|
|
108
|
|
|
8
|
|
Other
|
|
|
331
|
|
|
346
|
|
Total
accounts payable and accrued liabilities
|
|
$
|
2,345
|
|
$
|
776
|
|
|
|
|
|
|
|
|
|
a.
|
See
Note 10 for long-term portion and Note 12 for further
discussion.
|
NOTE
10. OTHER LIABILITIES
The
following provides additional information regarding other
liabilities.
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Pension,
postretirement, postemployment and other
|
|
|
|
|
|
|
|
employment
benefits and long-term incentive
|
|
|
|
|
|
|
|
compensationa
|
|
$
|
644
|
|
$
|
168
|
|
Reserve
for uncertain tax benefits
|
|
|
115
|
|
|
–
|
|
Accrued
long-term tax liability
|
|
|
80
|
|
|
–
|
|
Atlantic
Copper contractual obligation to
|
|
|
|
|
|
|
|
insurance
company (see Note 12)
|
|
|
72
|
|
|
70
|
|
Other
|
|
|
195
|
|
|
30
|
|
Total
other liabilities
|
|
$
|
1,106
|
|
$
|
268
|
|
|
|
|
|
|
|
|
|
a.
|
See
Note 9 for short-term portion and Note 12 for further
discussion.
|
NOTE
11. LONG-TERM DEBT
The
following is a detail of long-term debt:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Senior
Credit Facility
|
|
$
|
–
|
|
$
|
–
|
|
Senior
Notes:
|
|
|
|
|
|
|
|
8.375%
Senior Notes due 2017
|
|
|
3,500
|
|
|
–
|
|
8.25%
Senior Notes due 2015
|
|
|
1,500
|
|
|
–
|
|
Senior
floating rate notes due 2015
|
|
|
1,000
|
|
|
–
|
|
6⅞%
Senior Notes due 2014
|
|
|
340
|
|
|
340
|
|
9½%
Senior Notes due 2031
|
|
|
239
|
|
|
–
|
|
8¾%
Senior Notes due 2011
|
|
|
118
|
|
|
–
|
|
6⅛%
Senior Notes due 2034
|
|
|
115
|
|
|
–
|
|
7⅛%
Debentures due 2027
|
|
|
115
|
|
|
–
|
|
7%
Convertible Senior Notes due 2011
|
|
|
1
|
|
|
7
|
|
10⅛%
Senior Notes due 2010
|
|
|
–
|
|
|
273
|
|
Other
(including equipment capital leases and
|
|
|
|
|
|
|
|
short-term
borrowings)
|
|
|
283
|
|
|
60
|
|
Total
debt
|
|
|
7,211
|
|
|
680
|
|
Less
current portion of long-term debt and
|
|
|
|
|
|
|
|
short-term
borrowings
|
|
|
(31
|
)
|
|
(19
|
)
|
Long-term
debt
|
|
$
|
7,180
|
|
$
|
661
|
|
|
|
|
|
|
|
|
|
Senior Credit
Facility. In connection with financing FCX’s acquisition of
Phelps Dodge, FCX used proceeds from its borrowings under its $11.5 billion
senior credit facility. At the close of the Phelps Dodge acquisition, the senior
credit facility consisted of a $2.5 billion senior term loan due March 2012, a
$7.5 billion Tranche B term loan due March 2014 and $1.5 billion in revolving
credit facilities due March 2012, with no amounts drawn on the revolving credit
facilities. The revolving credit facilities are composed of (i) a $1.0 billion
revolving credit facility available to FCX and (ii) a $0.5 billion revolving
credit facility available to both FCX and PT Freeport Indonesia. The $0.5
billion revolving credit facility represents an amendment to the FCX and PT
Freeport Indonesia revolver that was scheduled to mature in 2009. FCX used
proceeds from equity offerings, operating cash flows and asset sales to prepay
the $10 billion of term loans by December 31, 2007.
Interest
on the revolving credit facilities is based on the London Interbank Offered Rate
(LIBOR) plus 0.75 percent, subject to an increase or decrease in the interest
rate margin based on the credit ratings assigned by Standard and Poor’s Rating
Services and Moody’s Investor Services. At December 31, 2007, no amounts were
outstanding under the revolving credit facilities.
The
senior credit facility also contains covenants, including limitations on
indebtedness, liens, asset sales, restricted payments 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 credit 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.
During
2007, FCX recorded net charges totaling $154 million ($120 million to net income
or $0.30 per diluted share) for early extinguishment of debt related to the
accelerated recognition of deferred financing costs associated with the
repayment of amounts under the senior credit facility.
Senior Notes. In
March 2007, in connection with financing FCX’s acquisition of Phelps Dodge, FCX
sold $3.5 billion of 8.375% Senior Notes due April 2017, $1.5 billion of 8.25%
Senior Notes due April 2015 and $1.0 billion of senior floating notes due April
2015 for total net proceeds of $5.9 billion. Interest on the senior notes is
payable semiannually on April 1 and October 1. Interest on the senior floating
rate notes due April 2015 accrues at six-month LIBOR plus 3.25 percent. The
weighted-average interest rate on these senior
floating
rate notes was 7.85 percent at December 31, 2007. These notes are redeemable in
whole or in part, at the option of FCX, at make-whole redemption prices prior to
the redemption dates, and afterwards at stated redemption prices. The terms of
the agreements allow for optional make-whole redemptions prior to April 1, 2009,
for the senior floating rate notes; April 1, 2011, for the 8.25% Senior Notes;
and April 1, 2012, for the 8.375% Senior Notes. The indenture governing the
notes contains restrictions on incurring debt, creating liens, selling assets,
making restricted payments and entering into certain transactions with
affiliates.
In
February 2004, FCX sold $350 million of 6⅞% Senior Notes due February 2014 for
net proceeds of $344 million. Interest on the notes is payable semiannually on
February 1 and August 1. These notes are redeemable in whole or in part, at the
option of FCX, at a make-whole redemption price prior to February 1, 2009, and
afterwards at stated redemption prices. During 2004, FCX purchased in open
market transactions $10 million of its 6⅞% Senior Notes. The indenture
governing the notes contains certain restrictions on incurring debt, creating
liens, selling assets, making restricted payments and entering into certain
transactions with affiliates. At the time of the Phelps Dodge acquisition,
the 6⅞% Senior Notes received the benefit of the same guarantees and subsidiary
pledges provided under the FCX senior credit facility. This security could be
released under certain circumstances involving changes in FCX’s capital
structure.
The 9½%
Senior Notes due June 2031 and the 8¾% Senior Notes due June 2011 bear
interest payable semi-annually on June 1 and December 1. These notes are
redeemable in whole or in part, at the option of FCX, at a make-whole redemption
price. In March 2007, in connection with the acquisition of Phelps Dodge, FCX
assumed these senior notes with a stated value of $306 million, which was
increased by $54 million to reflect the fair market value of these obligations
at the acquisition date. The increase in value will be amortized over the term
of the notes and recorded as a reduction of interest expense. At December 31,
2007, the principal amount of the 9½% Senior Notes was $194 million and the 8¾%
Senior Notes was $108 million. In February 2008, FCX purchased in an open market
transaction $33 million of the 9½% Senior Notes for $46 million, which will
result in a net charge of $6 million ($5 million to net income) in the
first quarter of 2008.
The 6⅛%
Senior Notes due March 2034 bear interest payable semi-annually on March 15 and
September 15. These notes are redeemable in whole or in part, at the option of
FCX, at a make-whole redemption price. In March 2007, in connection with
the acquisition of Phelps Dodge, FCX assumed these senior notes with a stated
value of $150 million, which was reduced by $11 million to reflect the fair
market value of these obligations at the acquisition date. The decrease in value
will be amortized over the term of the notes and recorded as additional interest
expense. During 2007, FCX purchased in an open market transaction $26 million of
these notes and recorded charges of $2 million ($2 million to net income or less
than $0.01 per diluted share) as a result of this transaction. At December
31, 2007, the principal amount of these senior notes was $124
million.
The 7⅛%
Debentures due November 2027 bear interest payable semi-annually on May 1 and
November 1. The debentures are redeemable in whole or in part, at the option of
FCX, at a make-whole redemption price. In March 2007, in connection with
the acquisition of Phelps Dodge, FCX assumed these debentures with a stated and
fair value of $115 million. At December 31, 2007, the principal amount of these
debentures was $115 million.
In
February 2003, FCX sold $575 million of 7% Convertible Senior Notes due February
2011 for net proceeds of $559 million. Interest on the notes is payable
semiannually on March 1 and September 1. The notes were initially convertible,
at the option of the holder, at any time on or prior to maturity into shares of
FCX’s common stock at a conversion price of $30.87 per share, which was equal to
a conversion rate of approximately 32.39 shares of common stock per $1,000
principal amount of notes. The conversion rate is adjustable when dividends over
a twelve-month period exceed a certain threshold. As a result of FCX’s
cumulative twelve-month dividends through February 2007, the conversion price
was adjusted to $30.16 per share, which is equal to a conversion rate of
approximately 33.16 shares of common stock per $1,000 principal amount of notes.
No further adjustments to the conversion price have been required since that
time. In 2005, FCX privately negotiated transactions to induce conversion of
$251 million of these notes into 8.1 million shares of FCX common
stock, which resulted in a 2005 net charge of $25 million ($23 million
to net income or $0.11 per diluted share). In 2006, FCX completed a tender offer
and privately negotiated transactions to induce conversions of $317 million of
these notes into 10.3 million shares of FCX common stock, which resulted in
a 2006 net charge of $31 million ($30 million to net income or $0.13 per diluted
share). In 2007, $6 million of these notes were converted into 0.2 million
shares of FCX common stock and the balance at December 31, 2007, was $1
million.
In
January 2003, FCX sold $500 million of 10⅛% Senior Notes due 2010 for net
proceeds of $487 million. In 2005, FCX purchased in open market transactions
$216 million of these notes and recorded transaction-related charges of $27
million ($17 million to net income or $0.08 per diluted share). In 2006, FCX
purchased in an open market transaction $11 million of these notes and recorded
transaction-related charges of $1 million ($1 million to net income or less than
$0.01 per diluted share). During 2007, FCX purchased in an open market
transaction the remaining $273 million of these notes and recorded
transaction-related charges of $17 million ($10 million to net income or $0.02
per diluted share).
All of
FCX’s senior notes are unsecured, except for the 6⅞% Senior Notes.
Redeemable Preferred
Stock. As discussed in Note 1, pursuant to SFAS No. 150,
mandatorily redeemable preferred stock is classified as debt.
At
December 31, 2005, FCX had outstanding 4.3 million depositary shares
representing 215,279 shares of its Gold-Denominated Preferred Stock, Series II
totaling $167 million. Each depositary share had a cumulative quarterly cash
dividend equal to the value of 0.0008125 ounce of gold and was redeemed in
February 2006 for the cash value of 0.1 ounce of gold ($236 million). The
mandatory redemption resulted in a $167 million decrease in debt and a loss
recognized in 2006 revenues of $69 million ($37 million to net income or $0.17
per diluted share).
At
December 31, 2005, FCX had outstanding 4.8 million depositary shares
representing 14,875 shares of its Silver-Denominated Preferred Stock totaling
$13 million. Each depositary share had a cumulative quarterly cash dividend
equal to the value of 0.0051563 ounce of silver. On August 1, 2006, FCX funded
the last of eight scheduled annual redemption payments on its Silver-Denominated
Preferred Stock for $26 million, resulting in a $13 million decrease in debt.
The mandatory redemptions also resulted in losses recognized in revenues
totaling $13 million in 2006 and $5 million in 2005.
Restrictive
Covenants. The senior credit facility, the $6.0 billion of
senior notes used to finance the acquisition of Phelps Dodge and the 6⅞% Senior
Notes contain covenants that limit FCX’s ability to make certain payments. These
restrictions vary among the instruments, but generally limit FCX’s ability to
pay certain dividends on common and preferred stock, repurchase or redeem common
and preferred equity, prepay subordinated debt and make certain investments. At
December 31, 2007, the most restrictive of these covenants allowed for such
payments up to a limit of $5.1 billion.
Maturities. Maturities of
debt instruments based on the amounts and terms outstanding at December 31,
2007, total $31 million in 2008, $49 million in 2009, $22 million in 2010, $141
million in 2011, $74 million in 2012 and $6,894 million thereafter.
NOTE
12. EMPLOYEE BENEFITS
Pension
Plans. Following is a discussion of FCX’s pension
plans.
Phelps Dodge Plans. As a
result of the acquisition of Phelps Dodge, FCX acquired trusteed,
non-contributory pension plans covering substantially all of Phelps Dodge’s U.S.
employees and some employees of its international subsidiaries. The applicable
Phelps Dodge plan design determines the manner in which benefits are calculated
for any particular group of employees. For 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. Non-bargained Phelps Dodge
employees hired after December 31, 2006, are not eligible to participate in the
Phelps Dodge U.S. pension plan.
FCX’s
funding policy for these plans provides that contributions to pension trusts
shall be at least equal to the minimum funding requirements of the Employee
Retirement Income Security Act of 1974, as amended, for U.S. plans; or, in the
case of international plans, the minimum legal requirements that may be
applicable in the various countries. Additional contributions also may be made
from time to time. At the date of acquisition, Phelps Dodge had plans where the
plan assets exceeded the benefit obligations (overfunded plans) and plans where
the benefit obligations exceeded the plan assets (underfunded
plans).
FCX’s
policy for determining asset-mix targets for the Phelps Dodge Corporation
Defined Benefit Master Trust (Master Trust) includes the periodic development of
asset/liability studies to determine expected long-term rates of return and
expected risk for various investment portfolios. Management considers these
studies in the formal establishment of asset-mix targets that are reviewed by
FCX’s trust investment committee. The
expected
rate of return on plan assets is evaluated at least annually, taking into
consideration its asset allocation, historical returns on the types of assets
held in the Master Trust, and the current economic environment. For U.S. plans,
the determination of the expected long-term rate of return on plan assets is
based on expected future performance of the plan asset mix and active plan asset
management. Based on these factors, FCX expects the pension assets will earn an
average of 8.5 percent per annum during the 10 years beginning January 1, 2008,
with a standard deviation of 8.9 percent. The 8.5 percent estimation was based
on a passive return on a compound basis of 8.0 percent and a premium for active
management of 0.5 percent reflecting the target asset allocation and current
investment array. On an arithmetic average basis, the passive return would have
been 8.4 percent with a premium for active management of 0.5
percent.
For
estimation purposes, FCX assumes the long-term asset mix for these plans
generally will be consistent with the current mix. Changes in the asset mix
could impact the amount of recorded pension income or expense, the funded status
of the plans and the need for future cash contributions. A lower-than-expected
return on assets also would decrease plan assets and increase the amount of
recorded pension expense (or decrease recorded pension income) in future years.
When calculating the expected return on plan assets, FCX uses the market value
of assets.
Among the
assumptions used to estimate the benefit obligation is a discount rate used to
calculate the present value of expected future benefit payments for service to
date. The discount rate assumption for FCX’s U.S. plans is designed to reflect
yields on high-quality, fixed-income investments for a given duration. The
determination of the discount rate for these plans is based on expected future
benefit payments for service to date together with the Citibank Pension Discount
Curve. Changes in this assumption are reflected in FCX’s benefit obligation and,
therefore, in the liabilities and income or expense that is
recorded.
Other FCX Plans. During 2000, FCX and
FM Services Company, FCX’s wholly owned subsidiary, elected to terminate their
defined benefit pension plans covering substantially all U.S. and certain
overseas expatriate employees and replace these plans with defined contribution
programs, as further discussed below. All participants’ account balances in the
defined benefit plans were fully vested on June 30, 2000, and interest credits
continue to accrue under the plans until the assets are finally liquidated. The
final distribution of benefits will occur once approved by the Internal Revenue
Service. The plans’ investment portfolios were liquidated and invested in
primarily short duration fixed-income securities in the fourth quarter of 2000
to reduce exposure to equity market volatility and then to cash and bank
deposits in late 2006 in anticipation of liquidating the plans. Included in the
FCX plan assets shown in the table below is $13 million related to these two
plans, and the unfunded liability totaled $8 million at December 31,
2007.
In
February 2004, FCX established an unfunded Supplemental Executive Retirement
Plan (SERP) for its two most senior executive officers. The SERP provides for
retirement benefits payable in the form of a joint and survivor annuity or an
equivalent lump sum. The annuity will equal a percentage of the executive’s
highest average compensation for any consecutive three-year period during the
five years immediately preceding the earlier of the executive’s retirement or
completion of 25 years of credited service. The SERP benefit will be reduced by
the value of all benefits due under FCX’s cash-balance pension plan and under
other benefit plans sponsored by FCX or its predecessor employer. FCX also has
an unfunded pension plan for its directors and an excess benefits plan for its
executives.
PT Freeport Indonesia Plan.
PT Freeport Indonesia has a defined benefit pension plan denominated in
Indonesian rupiah covering substantially all of its Indonesian national
employees. PT Freeport Indonesia funds the plan and invests the assets in
accordance with Indonesian pension guidelines. The pension obligation was valued
at an exchange rate of 9,390 rupiah to one U.S. dollar on December 31, 2007, and
8,989 rupiah to one U.S. dollar on December 31, 2006. Indonesian labor laws
enacted in 2003 require that companies provide a minimum level of benefits to
employees upon employment termination based on the reason for termination and
the employee’s years of service. PT Freeport Indonesia’s pension benefit
disclosures include benefits related to this law. PT Freeport Indonesia’s
expected rate of return on plan assets is evaluated at least annually, taking
into consideration its historical yield and the long range estimated return for
the plan based on the asset mix.
Atlantic Copper Plan.
Atlantic Copper has a contractual obligation denominated in euros to supplement
amounts paid to certain retired Spanish national employees. As required by
Spanish law, beginning in August 2002, Atlantic Copper began funding 7.2 million
euros ($11 million based on a December 31, 2007, exchange rate of $1.47 per
euro) annually for 15 years to an approved insurance company for its estimated
72 million euro contractual obligation to the retired employees. The insurance
company invests the plan assets in
accordance
with Spanish regulations, and Atlantic Copper has no control over these
investments. Atlantic Copper is amortizing the unrecognized net actuarial loss
over the remaining nine-year funding period.
Plan Information. FCX uses a
measurement date of December 31 for its plans. In some plans, the plan assets
exceed the accumulated benefit obligations, while in the remainder, the
accumulated benefit obligations exceed the plan assets. The following table
presents the projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for those plans where the accumulated benefit
obligations exceed the plan assets:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Projected
benefit obligation
|
|
$
|
230
|
|
$
|
187
|
|
Accumulated
benefit obligation
|
|
|
259
|
|
|
166
|
|
Fair
value of plan assets
|
|
|
66
|
|
|
57
|
|
|
|
|
|
|
|
|
|
Information
as of December 31, 2007 and 2006, on the FCX (including Phelps Dodge’s plans as
of December 31, 2007; FCX’s SERP, director and excess benefits plans; and FM
Services Company’s plans), PT Freeport Indonesia and Atlantic Copper plans
follows:
|
|
|
PT
Freeport
|
|
|
|
|
|
FCX
|
|
Indonesia
|
|
Atlantic
Copper
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
$
|
50
|
|
$
|
50
|
|
$
|
54
|
|
$
|
40
|
|
$
|
83
|
|
$
|
76
|
|
|
Acquisition
of Phelps Dodge
|
|
1,370
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Service
cost
|
|
24
|
|
|
–
|
|
|
5
|
|
|
4
|
|
|
–
|
|
|
–
|
|
|
Interest
cost
|
|
62
|
|
|
2
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
Actuarial
(gains) losses
|
|
(78
|
)
|
|
–
|
|
|
7
|
|
|
5
|
|
|
–
|
|
|
–
|
|
|
Divestitures
|
|
(5
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Foreign
exchange loss (gain)
|
|
2
|
|
|
–
|
|
|
(3
|
)
|
|
4
|
|
|
8
|
|
|
10
|
|
|
Benefits
paid
|
|
(83
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
(4
|
)
|
|
(9
|
)
|
|
(8
|
)
|
|
Benefit
obligation at end of year
|
|
1,342
|
|
|
50
|
|
|
65
|
|
|
54
|
|
|
87
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning
of year
|
|
13
|
|
|
15
|
|
|
30
|
|
|
22
|
|
|
14
|
|
|
12
|
|
|
Acquisition
of Phelps Dodge
|
|
1,374
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Actual
return on plan assets
|
|
113
|
|
|
–
|
|
|
4
|
|
|
3
|
|
|
–
|
|
|
–
|
|
|
Employer
contributionsa
|
|
24
|
|
|
–
|
|
|
8
|
|
|
7
|
|
|
10
|
|
|
10
|
|
|
Foreign
exchange gain (loss)
|
|
1
|
|
|
–
|
|
|
(1
|
)
|
|
2
|
|
|
–
|
|
|
–
|
|
|
Benefits
paid
|
|
(83
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
(4
|
)
|
|
(9
|
)
|
|
(8
|
)
|
|
Fair
value of plan assets at end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
year
|
|
1,442
|
|
|
13
|
|
|
38
|
|
|
30
|
|
|
15
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
$
|
100
|
|
$
|
(37
|
)
|
$
|
(27
|
)
|
$
|
(24
|
)
|
$
|
(72
|
)
|
$
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
$
|
1,252
|
|
$
|
50
|
|
$
|
39
|
|
$
|
33
|
|
$
|
87
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
to determine benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations
(percent):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
6.30
|
b
|
|
4.00
|
c
|
|
10.25
|
|
|
10.50
|
|
|
6.77
|
|
|
6.77
|
|
Rate
of compensation increase
|
|
4.25
|
b
|
|
N/A
|
c
|
|
8.00
|
|
|
9.00
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet classification of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
funded
status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets and deferred charges
|
$
|
195
|
|
$
|
–
|
|
$
|
–
|
|
$
|
–
|
|
$
|
–
|
|
$
|
–
|
|
Accounts
payable and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued
liabilities
|
|
(7
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
–
|
|
|
–
|
|
Other
liabilities
|
|
(88
|
)
|
|
(36
|
)
|
|
(26
|
)
|
|
(23
|
)
|
|
(72
|
)
|
|
(69
|
)
|
Total
|
$
|
100
|
|
$
|
(37
|
)
|
$
|
(27
|
)
|
$
|
(24
|
)
|
$
|
(72
|
)
|
$
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Employer
contributions for 2008 are expected to approximate $7 million for the FCX
plans, $10 million for the PT Freeport Indonesia plan (based on a December
31, 2007, exchange rate of 9,390 Indonesian rupiah to one U.S. dollar) and
$11 million for the Atlantic Copper plan (based on a December 31, 2007,
exchange rate of $1.47 per euro).
|
b.
|
As
discussed above, FCX and FM Services Company elected to terminate their
defined benefit pension plans and ceased accruing benefits on June 30,
2000. The discount rate shown only relates to the Phelps Dodge and the
excess benefit plans. The discount rate for the SERP plan was 4.0 percent.
The rate of compensation increase shown only relates to the Phelps Dodge
plans.
|
c.
|
The
assumptions shown only relate to the
SERP.
|
The
weighted-average assumptions used to determine net periodic benefit cost and the
components of net periodic benefit cost for FCX’s pension plans (including
Phelps Dodge’s plans for the period March 20, 2007, through December 31, 2007;
FCX’s SERP, director and excess benefits plans; and FM Services Company’s plans)
for the years ended December 31, 2007, 2006 and 2005, follow:
|
2007
|
|
2006
|
|
2005
|
|
Weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
|
|
|
|
|
|
|
FCX
SERP
|
|
4.00
|
%
|
|
6.00
|
%
|
|
6.00
|
%
|
Phelps
Dodge plans
|
|
5.78
|
%
|
|
N/A
|
|
|
N/A
|
|
Expected
return on plan assetsa
|
|
8.50
|
%
|
|
N/A
|
|
|
N/A
|
|
Rate
of compensation increasea
|
|
4.25
|
%
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
24
|
|
$
|
–
|
|
$
|
1
|
|
Interest
cost
|
|
62
|
|
|
2
|
|
|
3
|
|
Expected
return on plan assets
|
|
(90
|
)
|
|
–
|
|
|
(1
|
)
|
Amortization
of prior service cost
|
|
4
|
|
|
4
|
|
|
4
|
|
Net
periodic benefit cost
|
$
|
–
|
|
$
|
6
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
The
assumptions shown only relate to the Phelps Dodge
plans.
|
The
weighted-average assumptions used to determine net periodic benefit cost and the
components of net periodic benefit cost for PT Freeport Indonesia’s and Atlantic
Copper’s pension plans for the years ended December 31, 2007, 2006 and 2005,
follow:
|
PT
Freeport Indonesia
|
|
|
2007
|
|
2006
|
|
2005
|
|
Weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
10.50
|
%
|
|
12.00
|
%
|
|
12.00
|
%
|
Expected
return on plan assets
|
|
10.00
|
%
|
|
10.00
|
%
|
|
10.00
|
%
|
Rate
of compensation increase
|
|
9.00
|
%
|
|
10.00
|
%
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
5
|
|
$
|
4
|
|
$
|
3
|
|
Interest
cost
|
|
5
|
|
|
5
|
|
|
3
|
|
Expected
return on plan assets
|
|
(3
|
)
|
|
(3
|
)
|
|
(1
|
)
|
Amortization
of prior service cost
|
|
1
|
|
|
1
|
|
|
1
|
|
Amortization
of net actuarial loss
|
|
1
|
|
|
1
|
|
|
1
|
|
Net
periodic benefit cost
|
$
|
9
|
|
$
|
8
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlantic
Copper
|
|
|
2007
|
|
2006
|
|
2005
|
|
Weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
6.77
|
%
|
|
6.77
|
%
|
|
6.77
|
%
|
Expected
return on plan assets
|
|
–
|
|
|
–
|
|
|
–
|
|
Rate
of compensation increase
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
$
|
5
|
|
$
|
5
|
|
$
|
5
|
|
Amortization
of net actuarial loss
|
|
–
|
|
|
1
|
|
|
1
|
|
Net
periodic benefit cost
|
$
|
5
|
|
$
|
6
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
Included
in accumulated other comprehensive income (loss) at December 31, 2007, are the
following amounts that have not been recognized in net periodic pension cost:
unrecognized prior service costs of $9 million ($7 million net of tax and
minority interest share) and unrecognized actuarial gains of $75 million ($44
million net of tax and minority interest share). The amounts expected to be
recognized in net periodic pension cost for 2008 are $5 million ($3 million net
of tax and minority interest share) for prior service costs and $2 million ($2
million net of tax and minority interest share) for actuarial
losses.
FCX does
not expect to have any plan assets returned to it in 2008. The pension plan
weighted-average asset allocations for the FCX and PT Freeport Indonesia plans
at December 31, 2007 and 2006, follow:
|
FCX
|
|
PT
Freeport Indonesia
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Equity
securities
|
55
|
%
|
–
|
|
19
|
%
|
–
|
|
Fixed
income
|
35
|
|
100
|
%
|
74
|
|
100
|
%
|
Real
estate
|
7
|
|
–
|
|
–
|
|
–
|
|
Other
|
3
|
|
–
|
|
7
|
|
–
|
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The FCX
and FM Services Company pension plans were terminated in 2000 as discussed
above. Therefore, $13 million of the plan assets at December 31, 2007, will be
liquidated and any unfunded benefits will be paid after Internal Revenue Service
approval. The expected benefit payments for FCX’s (including Phelps Dodge’s
plans, and FCX’s SERP, director and excess benefits plans) and PT Freeport
Indonesia’s pension plans follow.
|
|
|
|
PT
Freeport
|
|
|
FCX
|
|
Indonesiaa
|
|
2008
|
$
|
79
|
|
$
|
2
|
|
2009
|
|
94
|
|
|
10
|
|
2010
|
|
78
|
|
|
8
|
|
2011
|
|
80
|
|
|
7
|
|
2012
|
|
110
|
|
|
8
|
|
2013
through 2017
|
|
461
|
|
|
50
|
|
|
|
|
|
|
|
|
a.
|
Based
on a December 31, 2007, exchange rate of 9,390 Indonesian rupiah to one
U.S. dollar.
|
Atlantic
Copper’s plan is administered by a third-party insurance company, and Atlantic
Copper is not provided asset allocations or benefit payment
projections.
Postretirement and Other
Benefits. FCX also provides postretirement medical and life
insurance benefits for certain U.S employees and, in some cases, employees of
certain 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 service.
As a
result of the acquisition of Phelps Dodge, FCX acquired postretirement
obligations with a fair value of $82 million (representing a benefit obligation
of $255 million less the fair value of plan assets of $173 million). Plan assets
for these plans consist of two Voluntary Employees’ Beneficiary Association
(VEBA) trusts. One trust is dedicated to funding postretirement medical
obligations and the other to funding postretirement life
insurance
obligations for eligible U.S. retirees of Phelps Dodge. At December 31, 2007,
assets of the VEBA trusts were 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.
The
expected rate of return on plan assets for FCX’s postretirement medical and life
insurance benefit plans and the discount rate were determined on the same basis
as FCX’s pension plans.
Information
for the years ended December 31, 2007 and 2006, on the postretirement benefit
plans follows:
|
2007
|
|
2006
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
$
|
4
|
|
$
|
5
|
|
Acquisition
of Phelps Dodge
|
|
255
|
|
|
–
|
|
Service
cost
|
|
1
|
|
|
–
|
|
Interest
cost
|
|
11
|
|
|
–
|
|
Actuarial
losses (gains)
|
|
8
|
|
|
(1
|
)
|
Benefits
paid, net of employee contributions
|
|
(23
|
)
|
|
–
|
|
Benefit
obligation at end of year
|
|
256
|
|
|
4
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
–
|
|
|
–
|
|
Acquisition
of Phelps Dodge
|
|
173
|
|
|
–
|
|
Actual
return on plans assets
|
|
5
|
|
|
–
|
|
Employer
contributionsa
|
|
2
|
|
|
–
|
|
Benefits
paid
|
|
(30
|
)
|
|
–
|
|
Fair
value of plan assets at end of year
|
|
150
|
|
|
–
|
|
|
|
|
|
|
|
|
Funded
status
|
$
|
(106
|
)
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
Discount
rate assumption (percent)
|
|
6.00
|
|
|
5.75
|
|
|
|
|
|
|
|
|
Balance
sheet classification of funded status:
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
(2
|
)
|
$
|
–
|
|
Other
liabilities
|
|
(104
|
)
|
|
(4
|
)
|
Total
|
$
|
(106
|
)
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
a.
|
Employer
contributions for 2008 are expected to approximate $2
million.
|
Expected
benefit payments for these plans total $28 million for 2008, $27 million for
2009, $26 million for 2010, $25 million for 2011, $24 million for 2012, and $100
million for 2013 through 2017.
The
weighted-average assumptions used to determine net periodic benefit cost and the
components of net periodic benefit cost for FCX’s postretirement benefits for
the year ended December 31, 2007, follow:
Weighted-average
assumptionsa:
|
|
|
|
Discount
rate – medical retiree
|
|
5.62
|
%
|
Discount
rate – life retiree
|
|
5.66
|
%
|
Expected
return on plan assets – medical retiree
|
|
3.70
|
%
|
Expected
return on plan assets – life retiree
|
|
4.50
|
%
|
|
|
|
|
Service
cost
|
$
|
1
|
|
Interest
cost
|
|
11
|
|
Expected
return on plan assets
|
|
(5
|
)
|
Net
periodic benefit cost
|
$
|
7
|
|
|
|
|
|
a.
|
The
assumptions shown only relate to the Phelps Dodge
plans.
|
FCX’s
postretirement net periodic benefit costs were less than half a million for 2006
and 2005.
Included
in accumulated other comprehensive income (loss) at December 31, 2007, are
the following amounts that have not been recognized in net periodic benefit
cost: unrecognized prior service credits of $1 million ($1 million net of tax
and minority interest share) and unrecognized actuarial losses of $8 million ($5
million net of tax and minority interest share). The amount expected to be
recognized in net periodic benefit cost for 2008 is less than half a million for
prior service credits and actuarial losses.
The
assumed medical-care trend rates at December 31, 2007 and 2006,
follow:
|
2007
|
|
2006
|
|
Medical-care
cost trend rate assumed for
|
|
|
|
|
|
|
the
next year
|
|
9
|
%
|
|
10
|
%
|
Rate
to which the cost trend rate is assumed
|
|
|
|
|
|
|
to
decline (the ultimate trend rate)
|
|
5
|
%
|
|
5
|
%
|
Year
that the rate reaches the ultimate trend rate
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Assumed
medical-care cost trend rates have a significant effect on the amounts reported
for postretirement medical benefits. The effect of a one percent increase or
decrease in the medical-care cost trend rates assumed for postretirement medical
benefits would result in increases or decreases of approximately $1 million in
the aggregate service and interest cost components and approximately $9 million
in the postretirement benefit obligation.
As a
result of the Phelps Dodge acquisition, FCX has a number of postemployment plans
covering severance, long-term disability income, continuation of health and life
insurance coverage for disabled employees or other welfare benefits. At December
31, 2007, the accumulated postemployment benefit consisted of a current portion
of $6 million (included in accounts payable and accrued liabilities) and a
long-term portion of $43 million (included in other liabilities).
FCX also
sponsors savings plans for the majority of its U.S. employees. The plans allow
employees to contribute a portion of their pre-tax and/or after-tax income in
accordance with specified guidelines. These savings plans are principally
qualified 401(k) plans for all U.S. salaried and non-bargained hourly employees.
In these plans, participants exercise control and direct the investment of their
contributions and account balances among a broad range of investment options.
FCX matches a percentage of employee pre-tax deferral contributions up to
certain limits, which varies by plan. In addition, the Phelps Dodge principal
savings plan includes a profit sharing feature for its non-bargained
employees.
During
2000, FCX and FM Services Company enhanced their primary savings plan for
substantially all their employees following their decision to terminate their
defined benefit pension plans. Subsequent to the enhancement, FCX and FM
Services Company contribute amounts to individual accounts totaling either 4
percent or 10 percent of each employee’s pay, depending on a combination of each
employee’s age and years of service as of June 30, 2000. For employees whose
eligible compensation exceeds certain levels, FCX provides an unfunded defined
contribution plan. The balance of this liability totaled $32 million on December
31, 2007, and $24 million on December 31, 2006.
As a
result of the acquisition of Phelps Dodge, FCX also has a defined contribution
plan for eligible Phelps Dodge employees hired on or after January 1, 2007.
Under this plan, FCX contributes amounts to individual accounts depending on a
combination of each employee’s annual salary and years of service.
The costs
charged to operations for FCX’s, FM Services Company’s, and Phelps Dodge’s
employee savings plans and defined contribution plans totaled $43 million in
2007, $7 million in 2006 and $5 million in 2005.
FCX has
other employee benefit plans, certain of which are related to FCX’s performance,
which costs are recognized currently in selling, general and administrative
expenses.
NOTE
13. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Common Stock. FCX
has 750 million authorized shares of capital stock consisting of 700 million
shares of common stock and 50 million shares of preferred stock. At the 2002
annual stockholder meeting, FCX’s stockholders approved the conversion of each
outstanding share of Class A common stock into one share of Class B common
stock, and in July 2007, stockholders approved removing “Class B” from the name
of FCX’s common stock. FCX now has only one class of common stock.
In
December 2007, FCX’s Board of Directors approved a new open market share
purchase program for up to 20 million shares, which replaced FCX’s previous
program. As of February 22, 2008, no shares have been purchased under this
program. Under the previous 20 million share purchase program, FCX acquired 2.0
million shares for $100 million ($49.94 per share average) in 2006 and 2.4
million shares for $80 million ($33.83 per share average) in 2005. The timing of
future purchases of FCX’s common stock is dependent upon a number of factors
including the price of FCX’s common shares, FCX’s cash flow and financial
position, copper, molybdenum and gold prices and general economic and market
conditions.
Preferred Stock. On
March 28, 2007, FCX 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. The 6¾% Mandatory Convertible Preferred Stock will
automatically convert on May 1, 2010, 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 or other certain events. 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. Also the conversion rate is adjustable in any quarter that FCX’s common
stock dividend exceeds $0.3125 per share. However, adjustments that do not
exceed one percent are carried forward and must be made no later than August of
each year. Prior to May 1, 2010, holders may convert their 6¾% Mandatory
Convertible Preferred Stock at a conversion rate of 1.3605, equivalent to a
conversion price of approximately $73.50 per common share. Dividends are payable
quarterly on February 1, May 1, August 1 and November 1.
In March
2004, FCX sold 1.1 million shares of 5½% Convertible Perpetual Preferred Stock
for net proceeds of $1.1 billion. Each share of preferred stock was initially
convertible into 18.8019 shares of FCX common stock, equivalent to a conversion
price of approximately $53.19 per common share. The conversion rate is
adjustable upon the occurrence of certain events, including any quarter that
FCX’s common stock dividend exceeds $0.20 per share. As a result of the
quarterly and supplemental common stock dividends paid through February 1, 2008,
each share of preferred stock is now convertible into 21.2924 shares of FCX
common stock, equivalent to a conversion price of approximately $46.97 per
common share. Beginning March 30, 2009, FCX may redeem shares of the preferred
stock by paying cash, FCX common stock or any combination thereof for $1,000 per
share plus unpaid dividends, but only if FCX’s common stock price has exceeded
130 percent of the conversion price for at least 20 trading days within a period
of 30 consecutive trading days immediately preceding the notice of redemption.
FCX used a portion of the proceeds from the sale to purchase 23.9 million shares
of FCX common stock owned by Rio Tinto for $882 million (approximately $36.85
per share) and used the remainder for general corporate purposes. Rio Tinto no
longer owns an equity interest in FCX; however, it is still PT Freeport
Indonesia’s joint venture partner (see Note 3).
Stock Award
Plans. FCX currently has six stock-based compensation plans,
including two Phelps Dodge plans resulting from the acquisition, all of which
are stockholder approved. As of December 31, 2007, only four of the plans, which
are discussed below, have awards available for grant.
FCX’s
1999 Stock Incentive Plan (the 1999 Plan) and 2003 Stock Incentive Plan (the
2003 Plan) provide for the issuance of stock options, SARs, restricted stock
units and other stock-based awards. Each plan allows FCX to grant awards for up
to 8 million common shares to eligible participants. In May 2004, FCX’s
stockholders approved the 2004 Director Compensation Plan (the 2004 Plan). The
2004 Plan authorizes awards of options and restricted stock units for up to 1
million shares of common stock and the one-time grant of 66,882 SARs. In May
2006, FCX’s stockholders approved the 2006 Stock Incentive Plan (the 2006 Plan),
and in July 2007, FCX’s stockholders approved amendments to the plan primarily
to increase the number of shares. The 2006 Plan provides for the issuance of
stock options, SARs, restricted stock units and other stock-based awards for up
to 37 million common shares to eligible participants.
Stock
options granted under all of the plans generally expire 10 years after the date
of grant and vest in 25 percent annual increments beginning one year from the
date of grant. Restricted stock units vest at equal increments over three or
five years beginning one year from the date of grant. The plans and award
agreements provide that participants will receive the following year’s vesting
after retirement, except for the restricted stock units with five year vesting
that do not allow acceleration because of retirement, and provide for
accelerated vesting if there is a change in control (as defined in the plans).
As of December 31, 2007, there were 31.3 million shares under the 2006 Plan, 0.3
million shares under the 2004 Plan, 0.1 million shares under the 2003 Plan and
less than 6,000 shares under the 1999 Plan available for the grant of new
awards.
FCX also
has a restricted stock program that allows FCX senior executives to elect to
receive restricted stock units under each of the employee plans in lieu of all
or part of their cash incentive compensation. These restricted stock unit grants
vest over three years, may be subject to a performance measure, and are valued
on the date of grant at 50 percent above the cash incentive compensation that
the employee elects to replace. Dividends on restricted stock units accrue and
are subject to the award’s vesting. Stock option and SAR awards do not receive
dividends.
In
connection with the Phelps Dodge acquisition, former Phelps Dodge stock options
and restricted stock awards were converted into 806,595 FCX stock options and
87,391 FCX restricted stock awards, which retain the terms by which they were
originally granted under Phelps Dodge’s plans. The stock options carry a maximum
term of 10 years with 672,134 stock options vested upon acquisition of Phelps
Dodge and 134,461 stock options that vest ratably over a three-year period or
the period until the participant becomes retirement-eligible, whichever is
shorter. Restricted stock awards generally become fully vested in five years,
with a majority of these shares having graded-vesting features in which 25
percent of the shares will vest on the third and fourth anniversaries of the
award with the remaining 50 percent in the fifth year. The fair value of the
restricted stock awards was determined based on the quoted market price at the
time of the acquisition. FCX uses the graded-vesting method to amortize the fair
value of the restricted stock awards, and for retirement-eligible participants,
amortization is accelerated.
Stock-Based Compensation
Cost. Compensation cost charged against earnings for stock-based awards
is shown below for the years ended December 31, 2007, 2006 and 2005. FCX did not
capitalize any stock-based compensation costs during the years ended December
31, 2007, 2006 and 2005.
|
|
2007
|
|
2006
|
|
2005
|
|
Stock
options awarded to employees (including directors)
|
|
$
|
71
|
|
$
|
28
|
|
$
|
2
|
|
Stock
options awarded to nonemployees
|
|
|
5
|
|
|
3
|
|
|
1
|
|
Restricted
stock units in lieu of cash awards
|
|
|
67
|
|
|
23
|
|
|
18
|
|
Restricted
stock awards to employees
|
|
|
6
|
|
|
–
|
|
|
–
|
|
Restricted
stock units awarded to directors
|
|
|
3
|
|
|
1
|
|
|
–
|
|
Stock
appreciation rights
|
|
|
7
|
|
|
1
|
|
|
2
|
|
Total
stock-based compensation costa
|
|
|
159
|
|
|
56
|
|
|
23
|
|
Tax
benefit
|
|
|
(62
|
)
|
|
(20
|
)
|
|
(7
|
)
|
Minority
interest share
|
|
|
(4
|
)
|
|
(3
|
)
|
|
(1
|
)
|
Impact
on net income
|
|
$
|
93
|
|
$
|
33
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Amounts
are before Rio Tinto’s share of the cost of employee exercises of
in-the-money stock options, which decreased consolidated selling, general
and administrative expenses by $4 million in 2007, $7 million in 2006 and
$9 million in 2005.
|
Options and SARs. A summary
of options outstanding as of December 31, 2007, including 90,145 SARs, and
changes during the year ended December 31, 2007, follow:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
Aggregate
|
|
|
Number
of
|
|
Average
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Option
Price
|
|
Term
(years)
|
|
Value
|
|
Balance
at January 1
|
5,801,716
|
|
$
|
39.70
|
|
|
|
|
|
|
Granted
|
6,641,500
|
|
|
69.89
|
|
|
|
|
|
|
Conversion
of Phelps Dodge options
|
806,595
|
|
|
28.38
|
|
|
|
|
|
|
Exercised
|
(2,276,391
|
)
|
|
34.45
|
|
|
|
|
|
|
Expired/Forfeited
|
(213,622
|
)
|
|
59.29
|
|
|
|
|
|
|
Balance
at December 31
|
10,759,798
|
|
|
58.17
|
|
8.4
|
|
$
|
476
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable at December 31
|
1,008,152
|
|
|
29.57
|
|
5.8
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
Summaries
of options outstanding, including SARs, and changes during the years ended
December 31, 2006 and 2005, follow:
|
|
2006
|
|
2005
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Number
|
|
Average
|
|
Number
|
|
Average
|
|
|
|
of
|
|
Option
|
|
of
|
|
Option
|
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Balance
at January 1
|
|
7,355,612
|
|
$
|
31.43
|
|
6,866,805
|
|
$
|
23.20
|
|
Granted
|
|
1,126,250
|
|
|
62.88
|
|
4,490,750
|
|
|
37.03
|
|
Exercised
|
|
(2,614,273
|
)
|
|
26.51
|
|
(3,838,554
|
)
|
|
23.24
|
|
Expired/Forfeited
|
|
(65,873
|
)
|
|
39.12
|
|
(163,389
|
)
|
|
31.51
|
|
Balance
at December 31
|
|
5,801,716
|
|
|
39.70
|
|
7,355,612
|
|
|
31.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option valuation model. Expected volatility is based on
implied volatilities from traded options on FCX’s stock and historical
volatility of FCX’s stock. FCX uses historical data to estimate future option
exercises, forfeitures and expected life of the options. When appropriate,
separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected dividend rate is
calculated as the annual dividend (excludes supplemental dividends) at the date
of grant divided by the average stock price for the one-year period preceding
the grant date. The risk-free interest rate is based on Federal Reserve rates in
effect for bonds with maturity dates equal to the expected term of the option at
the grant date. The weighted-average assumptions used to value stock option
awards during the years ended December 31, 2007 and 2006, are noted in the
following table.
|
|
2007
|
|
|
2006
|
|
Expected
volatility
|
|
37.3
|
%
|
|
37.7
|
%
|
Expected
life of options (in years)
|
|
4.25
|
|
|
4.0
|
|
Expected
dividend rate
|
|
2.2
|
%
|
|
2.9
|
%
|
Risk-free
interest rate
|
|
4.6
|
%
|
|
4.4
|
%
|
The
weighted-average grant-date fair value of options granted was $21.33 per option
during 2007 and $17.67 per option during 2006. The total intrinsic value of
options exercised was $96 million during 2007 and 2006. The total fair value of
options vested was $29 million during 2007 and $30 million during 2006. As of
December 31, 2007, FCX had $112 million of total unrecognized compensation cost
related to unvested stock options expected to be recognized over a
weighted-average period of 1.2 years.
The
following table includes amounts related to exercises of stock options and SARs
and vesting of restricted stock units and restricted stock awards during the
years ended December 31, 2007 and 2006:
|
|
2007
|
|
|
2006
|
|
FCX
shares tendered to pay the exercise price
|
|
|
|
|
|
|
and/or
the minimum required taxesa
|
|
1,389,845
|
|
|
809,926
|
|
Cash
received from stock option exercises
|
$
|
54
|
|
$
|
37
|
|
Actual
tax benefit realized for tax deductions
|
|
138
|
|
|
31
|
|
Amounts
FCX paid for employee taxes
|
|
68
|
|
|
22
|
|
Amounts
FCX paid for exercised SARs
|
|
5
|
|
|
2
|
|
|
|
|
|
|
|
|
a.
|
Under
terms of the related plans, upon exercise of stock options and vesting of
restricted stock units and restricted stock awards, employees may tender
FCX shares to FCX to pay the exercise price and/or the minimum required
taxes.
|
Restricted Stock Units. As
discussed above, FCX has a restricted stock program that allows FCX senior
executives to elect to receive restricted stock units in lieu of all or part of
their annual cash incentive compensation. The annual cash incentive is a
function of FCX’s consolidated operating cash flows for the preceding year.
Awards of these restricted stock units to the FCX executive officers are
considered performance-based awards. To compensate for certain restrictions and
the risk of forfeiture, the restricted stock units are awarded at a 50 percent
premium to the market value on the date of grant. The awards vest ratably over
three years, may be subject to achievement of certain performance measures, and
vesting accelerates upon retirement. For retirement-eligible executives, the
fair value of the restricted stock units is estimated based on projected
operating cash flows for the year and is charged to expense ratably over the
year the cash flows are generated.
In
addition to the restricted stock units granted in lieu of cash incentive
compensation, FCX also grants restricted stock units that vest in equal
increments over three or five years beginning one year from the date of grant.
Participants will receive the following year’s vesting after retirement (except
for the restricted stock units with five year vesting that do not allow
acceleration because of retirement), and the restricted stock units will vest if
there is a change in control (as defined in the plans).
FCX
grants restricted stock units to its directors under the 2004 Plan. The
restricted stock units vest over four years. The fair value of the restricted
stock units is amortized over the four-year vesting period or the period until
the director becomes retirement-eligible, whichever is shorter. Upon a
director’s retirement, all unvested restricted stock units immediately vest. For
retirement-eligible directors, the fair value of restricted stock units is
recognized on the date of grant.
A summary
of outstanding unvested restricted stock units as of December 31, 2007, and
activity during the year ended December 31, 2007, is presented
below:
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number
of
|
|
Remaining
|
|
Aggregate
|
|
|
Restricted
|
|
Contractual
|
|
Intrinsic
|
|
|
Stock
Units
|
|
Term
(years)
|
|
Value
|
|
Balance
at January 1
|
531,573
|
|
|
|
|
|
|
Granted
|
491,901
|
|
|
|
|
|
|
Vested
|
(227,101
|
)
|
|
|
|
|
|
Forfeited
|
–
|
|
|
|
|
|
|
Balance
at December 31
|
796,373
|
|
1.7
|
|
$
|
82
|
|
|
|
|
|
|
|
|
|
The
grant-date fair value of restricted stock units granted to FCX senior executives
during the year ended December 31, 2007, was $25 million. Because this is a
performance-based award and the requisite service period under SFAS No. 123R is
considered to be the calendar year prior to the grant date, the entire value of
this award on the date of grant was charged to expense during the calendar year
prior to the date of grant.
The total
grant-date fair value of restricted stock units granted to FCX directors and
non-executive employees during the year ended December 31, 2007, was $4 million.
The total intrinsic value of these restricted stock units vesting during the
year ended December 31, 2007, was $1 million. As of December 31, 2007, FCX had
$2
million of total unrecognized compensation cost related to unvested restricted
stock units expected to be recognized over a weighted-average period of 1.2
years.
Restricted Stock Awards. As
discussed above, FCX has restricted stock awards that were issued in connection
with the Phelps Dodge acquisition. A summary of outstanding restricted stock
awards as of December 31, 2007, and activity during the year ended December 31,
2007, is presented below:
Acquisition
of Phelps Dodge on March 19, 2007
|
|
87,391
|
|
Vested
|
|
(35,623
|
)
|
Forfeited
|
|
(2,527
|
)
|
Outstanding
at December 31, 2007
|
|
49,241
|
|
|
|
|
|
The total
grant-date fair value of restricted stock awards was $5 million at the
acquisition date. The total fair value of shares released or vested during 2007
was $2 million. As of December 31, 2007, FCX had $6 million of total
unrecognized compensation cost, including the cash portion resulting from the
conversion of restricted stock awards at the acquisition date, related to
unvested restricted stock awards expected to be recognized over a
weighted-average period of 2.9 years.
NOTE
14. INCOME TAXES
Geographic
sources of income from continuing operations before income taxes and minority
interests in consolidated subsidiaries for the years ended December 31, 2007,
2006 and 2005, consist of the following:
|
|
2007
|
|
2006
|
|
2005
|
|
United
States
|
|
$
|
980
|
|
$
|
25
|
|
$
|
(134
|
)
|
Foreign
|
|
|
5,153
|
|
|
2,801
|
|
|
2,171
|
|
Total
|
|
$
|
6,133
|
|
$
|
2,826
|
|
$
|
2,037
|
|
|
|
|
|
|
|
|
|
|
|
|
The
provision for income taxes from continuing operations for the years ended
December 31, 2007, 2006 and 2005, consists of the following:
|
|
2007
|
|
2006
|
|
2005
|
|
Current
income taxes:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
458
|
|
$
|
–
|
|
$
|
2
|
|
State
|
|
|
72
|
|
|
–
|
|
|
–
|
|
Foreign
|
|
|
1,942
|
|
|
1,035
|
|
|
831
|
|
Total
current
|
|
|
2,472
|
|
|
1,035
|
|
|
833
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes (benefits):
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(295
|
)
|
|
–
|
|
|
–
|
|
State
|
|
|
(20
|
)
|
|
–
|
|
|
–
|
|
Foreign
|
|
|
243
|
|
|
166
|
|
|
82
|
|
Total
deferred
|
|
|
(72
|
)
|
|
166
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
2,400
|
|
$
|
1,201
|
|
$
|
915
|
|
|
|
|
|
|
|
|
|
|
|
|
A
reconciliation of the U.S. federal statutory tax rate to FCX’s effective income
tax rate for the years ended December 31, 2007, 2006 and 2005,
follows:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
U.S.
federal statutory tax rate
|
|
$
|
2,147
|
|
35
|
%
|
$
|
989
|
|
35
|
%
|
$
|
713
|
|
35
|
%
|
Foreign
withholding tax
|
|
|
371
|
|
6
|
|
|
168
|
|
6
|
|
|
135
|
|
7
|
|
Foreign
tax credit limitation
|
|
|
125
|
|
2
|
|
|
–
|
|
–
|
|
|
–
|
|
–
|
|
Reversal
of APB Opinion No. 23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assertion
|
|
|
111
|
|
2
|
|
|
–
|
|
–
|
|
|
–
|
|
–
|
|
Percentage
depletion
|
|
|
(284
|
)
|
(5
|
)
|
|
–
|
|
–
|
|
|
–
|
|
–
|
|
International
tax rate differential
|
|
|
(184
|
)
|
(3
|
)
|
|
48
|
|
2
|
|
|
37
|
|
2
|
|
Other
items, net
|
|
|
114
|
|
2
|
|
|
(4
|
)
|
–
|
|
|
30
|
|
1
|
|
Provision
for income taxes
|
|
$
|
2,400
|
|
39
|
%
|
$
|
1,201
|
|
43
|
%
|
$
|
915
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FCX paid
federal, state, local and foreign income taxes totaling $2,660 million in 2007,
$1,288 million in 2006 and $670 million in 2005. FCX received refunds of
federal, state, local and foreign income taxes of $123 million in 2007, $1
million in 2006 and $1 million in 2005.
The
components of deferred taxes follow:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Foreign
tax credits
|
|
$
|
1,004
|
|
$
|
745
|
|
Net
operating loss carryforwards
|
|
|
164
|
|
|
90
|
|
Minimum
tax credits
|
|
|
323
|
|
|
90
|
|
Accrued
expenses
|
|
|
812
|
|
|
–
|
|
Intercompany
profit elimination
|
|
|
65
|
|
|
71
|
|
Deferred
compensation
|
|
|
45
|
|
|
43
|
|
Postretirement
benefits
|
|
|
35
|
|
|
–
|
|
Other
|
|
|
77
|
|
|
–
|
|
Deferred
tax assets
|
|
|
2,525
|
|
|
1,039
|
|
Valuation
allowances
|
|
|
(1,165
|
)
|
|
(925
|
)
|
Net
deferred tax assets
|
|
|
1,360
|
|
|
114
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Property,
plant, equipment and development costs
|
|
|
(7,441
|
)
|
|
(723
|
)
|
Undistributed
earnings
|
|
|
(603
|
)
|
|
(184
|
)
|
Inventory
|
|
|
(458
|
)
|
|
–
|
|
Employee
benefit plans
|
|
|
(75
|
)
|
|
–
|
|
Other
|
|
|
(142
|
)
|
|
(7
|
)
|
Total
deferred tax liabilities
|
|
|
(8,719
|
)
|
|
(914
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$
|
(7,359
|
)
|
$
|
(800
|
)
|
|
|
|
|
|
|
|
|
At
December 31, 2007, FCX had U.S. foreign tax credit carryforwards from continuing
operations of $1.0 billion that will expire between 2009 and 2017. In addition,
FCX had U.S. minimum tax credits carryforwards from continuing operations of
$323 million. These credits can be carried forward indefinitely, but may be used
only to the extent that regular tax exceeds the alternative minimum tax in any
given year.
At
December 31, 2007, FCX had Spanish net operating loss carryforwards from
continuing operations of $387 million that expire through the year 2022. FCX
also has Peruvian net operating loss carryforwards from continuing operations of
$32 million that expire in 2008. In addition, FCX has U.S. state net operating
loss carryforwards from continuing operations of $514 million that expire
between 2008 and 2028.
On the
basis of available information at December 31, 2007, FCX has provided valuation
allowances for certain of its deferred tax assets where FCX believes it is
likely that the related tax benefits will not be
realized.
At December 31, 2007, valuation allowances totaled $1.2 billion and covered all
of FCX’s U.S. foreign tax credit carryforwards, a portion of its foreign net
operating loss carryforwards and a portion of its U.S. state net operating loss
carryforwards. At December 31, 2006, valuation allowances totaled $925 million
and covered all of FCX’s U.S. foreign tax credit carryforwards, all of its U.S.
minimum tax credits carryforwards and all of its foreign net operating loss
carryforwards. The $240 million increase in the valuation allowance during 2007
was primarily because of additional valuation allowances recorded against U.S
foreign tax credit carryforwards.
Income
taxes are provided on the earnings of FCX’s material foreign subsidiaries under
the assumption that these earnings will be distributed. FCX has not provided for
other differences between the book and tax carrying amounts of these investments
as FCX considers its ownership position to be permanent in duration and
quantification of the related deferred tax liability is not
practicable.
A summary
of the activities associated with FCX’s FIN 48 reserve for unrecognized tax
benefits, interest and penalties follows:
|
|
Unrecognized
|
|
|
|
|
|
|
|
|
|
Tax
Benefits
|
|
Interest
|
|
Penalties
|
|
Balance
at January 1, 2007
|
|
$
|
41
|
|
$
|
11
|
|
$
|
–
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Phelps Dodge
|
|
|
169
|
|
|
7
|
|
|
2
|
|
Prior
year tax positions
|
|
|
9
|
|
|
*
|
|
|
*
|
|
Current
year tax positions
|
|
|
38
|
|
|
*
|
|
|
*
|
|
Associated
with interest and penalties
|
|
|
–
|
|
|
6
|
|
|
–
|
|
Decreases:
|
|
|
|
|
|
|
|
|
|
|
Prior
year tax positions
|
|
|
(53
|
)
|
|
*
|
|
|
*
|
|
Lapse
of statue of limitations
|
|
|
(2
|
)
|
|
*
|
|
|
*
|
|
Associated
with interest and penalties
|
|
|
–
|
|
|
(5
|
)
|
|
(2
|
)
|
Balance
at December 31, 2007
|
|
$
|
202
|
|
$
|
19
|
|
$
|
–
|
|
The
reserve for unrecognized tax benefits of $202 million at December 31, 2007,
includes $138 million ($125 million net of income tax benefits) that, if
recognized, would reduce FCX’s provision for income taxes.
Changes
in the reserve for unrecognized tax benefits associated with current year tax
positions were primarily related to uncertain tax filing requirements associated
with FCX’s acquisition of Phelps Dodge and uncertainties associated with FCX’s
cost recovery methods. Changes in the reserve for unrecognized tax benefits
associated with prior year tax positions were primarily related to the
disposition of subsidiaries and refinement of estimated information to
actual.
It is
reasonably possible that FCX will experience a $25 million to $35 million
decrease in its reserve for unrecognized tax benefits within the next twelve
months. FCX would experience this decrease in relation to uncertainties
associated with its cost recovery methods if a settlement is reached with taxing
authorities.
FCX or
its subsidiaries file income tax returns in the U.S. federal jurisdiction and
various state and foreign jurisdictions. The tax years for FCX and its
significant subsidiaries that remain subject to examination are as
follows:
Jurisdiction
|
Years Under
Examination
|
Additional Open
Years
|
U.S.
Federal
|
2003-2005
|
2006,
2007
|
Indonesia
|
2005,
2006
|
2003,
2004, 2007
|
Peru
|
2003
|
2002,
2004-2007
|
Chile
|
–
|
2006-2007
|
Arizona
|
–
|
2003-2007
|
New
Mexico
|
–
|
2004-2007
|
NOTE
15. CONTINGENCIES
Environmental. FCX
incurred aggregate environmental capital expenditures and other environmental
costs, including joint venture partners’ share, totaling $320 million in 2007,
$63 million in 2006 and $44 million in 2005.
FCX
subsidiaries that operate in the U.S. are subject to various 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 subsidiaries that operate in the U.S. also are subject to
potential liabilities arising under 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. With the passage of CERCLA in 1980,
companies like Phelps Dodge became legally responsible for environmental
remediation on properties previously owned or operated by them, irrespective of
when the damage to the environment occurred or who caused it. That
liability often is shared on a joint and several basis with all other owners and
operators, meaning that each owner or operator of the property is fully
responsible for the clean-up, although in many cases some or all of the other
historical owners or operators no longer exist, do not have the financial
ability to respond or cannot be found. As a result, because of FCX’s
acquisition of Phelps Dodge in 2007, many of the subsidiary companies FCX now
owns are responsible for a wide variety of environmental remediation projects
throughout the U.S. FCX expects to spend substantial sums annually for many
years to address those remediation issues. Certain FCX subsidiaries have been
advised by the U.S. Environmental Protection Agency (EPA), the Department of the
Interior, the Department of Agriculture 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 to determine whether releases of hazardous substances
have occurred and, if so, to develop and implement remedial actions to address
environmental concerns. As of December 31, 2007, FCX had more than 100 active
remediation projects in the U.S. in more than 25 states. FCX is also subject to
claims for natural resource damages where the release of hazardous substances is
alleged to have injured natural resources.
A summary
of changes in environmental obligations for the year ended December 31, 2007,
follows:
Balance
at beginning of year
|
$
|
–
|
|
Liabilities
assumed in the acquisition of Phelps Dodge
|
|
1,334
|
|
Additions |
|
6 |
|
Reductions
|
|
(1
|
)
|
Spending
|
|
(71
|
)
|
Balance
at end of year
|
|
1,268
|
|
Less
current portion
|
|
(166
|
)
|
Long-term
portion
|
$
|
1,102
|
|
|
|
|
|
As a
result of the acquisition of Phelps Dodge, FCX was required to record Phelps
Dodge’s environmental obligations at fair value on the acquisition date in
accordance with SFAS No. 141. At the acquisition date, Phelps Dodge’s
historical environmental obligations of $385 million, before purchase accounting
adjustments to fair value, were based on accounting guidance provided by SFAS
No. 5, “Accounting for Contingencies,” and SOP 96-1, which require that an
estimated loss be recorded for a loss contingency if, prior to the issuance of
the financial statements, it is probable that a liability had been incurred and
the loss can be reasonably estimated. Amounts recorded under this guidance are
generally not considered fair value. FCX has an environmental and legal group
dedicated to the ongoing review and monitoring of environmental remediation
sites. At the acquisition date, the largest environmental remediation sites were
undergoing studies to evaluate the extent of the environmental damage and the
available remedies. Advancement of these studies and consideration of
alternative remedies and cost sharing arrangements resulted in FCX’s calculation
of the estimated fair values being approximately $900 million greater than the
historical Phelps Dodge estimates. As a result, the fair value of the
environmental obligations was estimated to be $1.3 billion. After FCX finalizes
the allocation of fair values associated with the acquisition of Phelps Dodge in
the first quarter of 2008,
future estimates of environmental obligations will be recorded in accordance
with SFAS No. 5 and SOP 96-1. Significant adjustments to these reserves could
occur in the future.
FCX
believes that there may be other potential claims for recovery from other third
parties, including the U.S. government and other PRPs. These potential
recoveries are not recognized unless realization is considered
probable.
At
December 31, 2007, the most significant environmental obligations are associated
with the Pinal Creek site, several historical smelter sites principally located
in Arizona, Kansas and Oklahoma, and uranium mining sites in the western U.S.
The recorded environmental reserves for these sites totaled $880 million at
December 31, 2007. A discussion of these sites follows.
Pinal Creek. The Pinal
Creek site located near Miami, Arizona, 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. (Miami), 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 groundwater. The Consent Decree committed the 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.
The PCG
members have been pursuing contribution litigation against three other parties
involved with the site. Miami dismissed its contribution claims against one
defendant when another PCG member agreed to be responsible for any share
attributable to that defendant. Miami 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. There are significant disagreements
among the members of the PCG regarding the allocation of the cost of
remediation, and a trial on that issue is currently scheduled to begin in late
2008. The overall cost of the clean up is expected to be significant.
Historical Smelter Sites.
Phelps Dodge and its predecessors at various times owned or operated historical
copper and zinc smelters in several states, including Arizona, Kansas and
Oklahoma. For some of these smelter sites, certain FCX subsidiaries have been
advised by EPA or state agencies that they may be liable for costs of
investigating and, if appropriate, remediating environmental conditions. At
other sites, certain FCX subsidiaries have entered into state voluntary
remediation programs to investigate and, if appropriate, remediate site
conditions. The historical smelter sites are in various stages of assessment,
with the current most significant individual site being the one located in
Blackwell, Oklahoma.
From 1916
to 1974, Blackwell Zinc Company, Inc. (BZC), currently a subsidiary of FCX,
owned and operated a zinc smelter in Blackwell, Oklahoma. In 1974, the smelter
was demolished and the property deeded to the City of Blackwell. Pursuant to an
administrative order with the State of Oklahoma (the State), BZC undertook
remedial actions in Blackwell in 1996 and 1997, including sampling residential
and commercial properties, and removing soils on properties that were found to
have metal concentrations above state-established cleanup standards. From 1997
to 2003, BZC investigated the nature and extent of groundwater contamination
potentially attributable to the former smelter and evaluated options for
remedying such contamination. In 2003, the State adopted a cleanup plan
requiring the installation of a groundwater extraction and treatment system and
the closure of domestic groundwater wells within the groundwater plume area. BZC
is prepared to install the groundwater extraction and treatment system as soon
as access to necessary municipal property is secured.
In the
fall of 2006, some Blackwell residents began to engage legal counsel to evaluate
property damage and personal injury claims related to alleged exposure to
contaminants potentially associated with former zinc smelter operations. While
no suit has been filed, counsel for prospective plaintiffs has stated publicly
that a suit will be filed in the near future.
In April
2007, FCX, on behalf of BZC, commenced a voluntary community outreach program
inviting property owners in and around Blackwell to have their properties
sampled for the presence of smelter-related contaminants, and agreed to
remediate properties whose soils are found to have metal concentrations above
state-established cleanup standards. Owners of about 2,200 properties requested
sampling, representing approximately 50 percent of all eligible properties. In
January 2008, FCX renewed its outreach program in an effort to obtain permission
to sample a larger percentage of properties. All of these soil sampling and
remediation activities are being coordinated with, and supervised by, the
State.
Uranium Mining
Sites. During a period between 1940 and the early 1970s, certain
Phelps Dodge predecessor entities were involved in uranium exploration and
mining in the western U.S. Similar exploration and mining activities by other
companies have caused environmental impacts that have warranted remediation, and
EPA and local authorities are currently evaluating the need for significant
clean-up activities in the region. To date, Phelps Dodge has undertaken
remediation at a limited number of sites associated with these predecessor
entities. Phelps Dodge recognized the existence of a potential liability for
these activities and had environmental reserves for six former uranium sites. An
initiative to gather additional information about sites in the region is
ongoing. FCX utilized the results of Phelps Dodge’s remediation experience, in
combination with historical and updated information gathered to date, to
initially estimate its fair value of uranium-related liabilities at December 31,
2007.
Asset Retirement Obligations
(AROs). FCX’s ARO cost estimates are reflected on a third-party cost
basis and comply with FCX’s legal obligation to retire tangible, long-lived
assets as defined by SFAS No. 143.
Information
on FCX’s AROs for the years ended December 31, 2007, 2006 and 2005,
follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Balance
at beginning of year
|
|
$
|
30
|
|
$
|
27
|
|
$
|
23
|
|
Liabilities
assumed in the acquisition of Phelps Dodge
|
|
|
531
|
a
|
|
–
|
|
|
–
|
|
Liabilities
incurred
|
|
|
1
|
|
|
–
|
|
|
2
|
|
Revisions
to cash flow estimates
|
|
|
179
|
|
|
–
|
|
|
(1
|
)
|
Accretion
expense
|
|
|
27
|
|
|
3
|
|
|
3
|
|
Spending
|
|
|
(40
|
)
|
|
–
|
|
|
–
|
|
Balance
at end of year
|
|
|
728
|
|
|
30
|
|
|
27
|
|
Less
current portion
|
|
|
(97
|
)
|
|
–
|
|
|
–
|
|
Long-term
portion
|
|
$
|
631
|
|
$
|
30
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
The
fair value of AROs assumed in the acquisition of Phelps Dodge was
estimated based on projected cash flows, an estimated long-term annual
inflation rate of 2.4 percent, a discount rate based on FCX’s estimated
credit-adjusted, risk-free interest rate of 7.8 percent and a market risk
premium of 10 percent to reflect what a third-party might require to
assume these AROs.
|
ARO costs
may increase or decrease significantly in the future as a result of changes in
regulations, engineering designs and technology, permit modifications or
updates, mine plans, cost of inflation 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 required, or if
they are determined to be economically beneficial.
The most
significant revisions to cash flow estimates in 2007 were related to changes at
Chino, Tyrone and PT Freeport Indonesia. During 2007, Chino and Tyrone each
submitted updated third-party closure cost estimates to the state of New Mexico
as part of the permit renewal process. As a result, FCX revised its cash flow
estimates and increased its ARO by $95 million for Chino and $45 million for
Tyrone. Additional adjustments may be required based upon the state’s review of
the updated closure plans and any permit conditions
imposed by the state of New Mexico. Additionally, PT Freeport Indonesia updated
its cost estimates primarily for changes to its plans for the treatment of
acidic water, resulting in an increase of $33 million.
Legal
requirements in New Mexico, Arizona and Colorado require financial assurance to
be provided for the estimated costs of reclamation and closure, including
groundwater quality protection programs. FCX has satisfied financial assurance
requirements by using a variety of mechanisms, such as third-party performance
guarantees, financial capability demonstrations, trust funds, surety bonds,
letters of credit and collateral. The applicable regulatory requirements provide
financial strength tests to support third-party performance
guarantees
and financial capability demonstrations, which are designed to confirm a
company’s or third-party guarantor’s financial capability to fund future
estimated reclamation and closure costs. The amount of financial assurance FCX
is required to provide will vary with changes in laws, regulations and
reclamation and closure cost estimates. At December 31, 2007, FCX had trust
assets totaling $544 million, acquired through its acquisition of Phelps Dodge,
that are designated for funding global reclamation and remediation activities,
of which $106 million is legally restricted to fund a portion of its AROs for
Chino, Tyrone and Cobre as required by New Mexico regulatory
authorities.
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 the 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 cessation of mining operations at all or a
portion of the mines. At December 31, 2007, FCX had accrued reclamation and
closure costs of $434 million for its New Mexico operations.
Arizona Environmental and
Reclamation Programs. FCX’s Arizona properties are subject to regulatory
oversight and compliance in several areas. The Arizona Department of
Environmental Quality (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
require 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 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. During 2008, FCX plans to begin
discussions with the state of Arizona regarding options for future reclamation
and closure activities at its operating and non-operating sites, which are
likely to result in additional adjustments to FCX’s ARO liabilities. At December
31, 2007, FCX had accrued reclamation and closure costs of $152 million for its
Arizona operations.
PT Freeport Indonesia Reclamation
and Closure Programs. The ultimate amount of reclamation and closure
costs to be incurred at PT Freeport Indonesia’s operations will be determined
based on applicable laws and regulations and PT Freeport Indonesia’s assessment
of appropriate remedial activities in the circumstances, after consultation with
governmental authorities, affected local residents and other affected parties
and cannot currently be projected with precision. Estimates of the ultimate
reclamation and closure costs PT Freeport Indonesia will incur in the future
involve complex issues requiring integrated assessments over a period of
many years and are subject to revision over time as more complete studies are
performed. Some reclamation costs will be incurred during mining activities,
while most closure costs and the remaining reclamation costs will be incurred at
the end of mining activities, which are currently estimated to continue for more
than 33 years. At December 31, 2007, PT Freeport Indonesia had accrued
reclamation and closure costs of $67 million.
In 1996,
PT Freeport Indonesia began contributing to a cash fund ($10 million balance at
December 31, 2007) designed to accumulate at least $100 million (including
interest) by the end of its Indonesian mining activities. PT Freeport Indonesia
plans to use this fund, including accrued interest, to pay the
above-
mentioned
mine closure and reclamation costs. Any costs in excess of the $100 million fund
would be funded by operational cash flow or other sources.
Litigation. FCX is
subject to legal proceedings claims and liabilities that arise in the normal
course of business. FCX believes the amount of the ultimate liability with
respect to those 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.
Since
approximately 1990, Phelps Dodge or its subsidiaries have been named as a
defendant in 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.
Letters of Credit and Surety
Bonds. Standby letters of credit totaled $74 million at
December 31, 2007, primarily for reclamation, environmental obligations and
workers’ compensation insurance programs. In addition, FCX had surety bonds
totaling $91 million at December 31, 2007, associated with reclamation and
closure ($66 million – see discussion above), self-insurance bonds primarily for
workers’ compensation ($21 million) and miscellaneous bonds ($4
million).
Insurance. FCX
purchases a variety of insurance products to mitigate potential losses. The
various insurance products typically have specified deductible amounts, or
self-insured retentions, and policy limits. In 2007, FCX renewed its property
insurance coverage, which included the acquired Phelps Dodge mining operations.
FCX generally is self-insured for U.S. workers’ compensation, but purchases
excess insurance up to statutory limits. An actuarial analysis is performed
twice a year for various FCX casualty programs, including workers’ compensation,
to estimate required insurance reserves. Insurance reserves totaled $54 million
at December 31, 2007, which consisted of a current portion of $10 million
(included in accounts payable and accrued liabilities) and a long-term portion
of $44 million (included in other liabilities).
NOTE
16. COMMITMENTS AND GUARANTEES
Operating
leases. FCX leases various types of properties, including
offices and equipment. A summary of future minimum rentals under these
non-cancelable leases at December 31, 2007, follows:
|
|
|
2008
|
$
|
26
|
|
2009
|
|
25
|
|
2010
|
|
20
|
|
2011
|
|
16
|
|
2012
|
|
14
|
|
After
2012
|
|
2
|
|
Total
payments
|
$
|
103
|
|
|
|
|
|
Minimum
payments under operating leases have not been reduced by aggregate minimum
sublease rentals, which are minimal.
Certain
of FCX’s mineral leases require minimum annual royalty payments, and others
provide for royalties based on production. At December 31, 2007, FCX’s aggregate
minimum future payments under these non-cancelable mineral leases totaled $2
million per year for 2008, 2009 and 2010, $1 million per year for 2011 and 2012,
and $8 million after 2012.
A summary
of rent and royalty expenses for the years ended December 31, 2007, 2006 and
2005, follows:
|
2007
|
|
2006
|
|
2005
|
|
Rent
expense
|
$
|
54
|
|
$
|
10
|
|
$
|
9
|
|
Royalty
expense
|
|
2
|
|
|
–
|
|
|
–
|
|
|
$
|
56
|
|
$
|
10
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
obligations. Based on applicable prices at December 31, 2007,
FCX has unconditional purchase obligations of $2.3 billion, primarily comprising
the procurement of copper concentrates and cathodes ($1.7 billion) and
transportation ($270 million) that are essential to its operations worldwide.
Some of FCX’s unconditional purchase obligations are settled based on the
prevailing market rate for the service or commodity purchased. In some cases,
the amount of the actual obligation may change over time because of market
conditions. Obligations for copper concentrate and cathode provide for
deliveries of specified volumes, at market-based prices, to Atlantic Copper and
Phelps Dodge’s sales company. Transportation obligations are primarily for Cerro
Verde and Candelaria contracted ocean freight rates and for North American
natural gas transportation.
FCX’s
future commitments total $1.5 billion in 2008, $344 million in 2009, $198
million in 2010, $157 million in 2011, $27 million in 2012 and $24 million
thereafter. During 2007, 2006 and 2005, FCX fulfilled its minimum contractual
purchase obligations or negotiated settlements in those situations in which it
terminated an agreement containing an unconditional obligation.
Contract of
Work. FCX is entitled to mine in Indonesia under the “Contract
of Work” between PT Freeport Indonesia and the Government of Indonesia. The
original Contract of Work was entered into in 1967 and was replaced with a new
Contract of Work in 1991. The initial term of the current Contract of Work
expires in 2021, but can be extended by PT Freeport Indonesia for two 10-year
periods, subject to Indonesian government approval, which cannot be withheld or
delayed unreasonably. Given the importance of contracts of work under the
Indonesian legal system and PT Freeport Indonesia’s approximately 40 years of
working with the Indonesian government, which included entering into the
Contract of Work in 1991 well before the expiration of the 1967 Contract of
Work, PT Freeport Indonesia fully expects that the government will approve the
extensions as long as it continues to comply with the terms of the Contract of
Work.
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.
A large
part of the mineral royalties under Government of Indonesia regulations is
designated to the provinces from which the minerals are extracted. In connection
with its 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. 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. The
additional royalty for copper equals the Contract of Work royalty rate, and for
gold and silver equals twice the Contract of Work royalty rates. Therefore, 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.
The
combined royalties, including the additional royalties, which became effective
January 1, 1999, totaled $133 million in 2007, $126 million in 2006 and $104
million in 2005. PT Freeport Indonesia records these royalty payments as a
reduction to revenues.
Social and Economic Development
Programs. FCX has a comprehensive social, employment and human
rights policy to ensure that its operations are conducted in a manner respecting
basic human rights, the laws and regulations of the host country, and the
culture of the people who are indigenous to the areas in which FCX
operates.
In 1996,
PT Freeport Indonesia established the Freeport Partnership Fund for Community
Development, which was previously called the Freeport Fund for Irian Jaya
Development, through which PT Freeport Indonesia has made available funding and
expertise to support the economic and social development of the area. PT
Freeport Indonesia has committed to provide one percent of its annual revenue
for the development
of the
local people through the Freeport Partnership Fund for Community Development. PT
Freeport Indonesia charged $48 million in 2007, $44 million in 2006 and $36
million in 2005 to production costs for this commitment.
FCX’s
Cerro Verde copper mine had previously agreed to conduct and fund technical
studies for the construction of water and sewage treatment facilities in
Arequipa, Peru, and to fund 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 current liability.
During
2006, the Peruvian government announced that all mining companies operating in
Peru will make annual contributions to local development funds for a five-year
period. The contribution is equal to 3.75 percent of after-tax profits, of which
2.75 percent is contributed to a local mining fund and 1.00 percent to a
regional mining fund. At December 31, 2007, Cerro Verde’s liability associated
with the local mining fund contributions totaled $49 million, which is recorded
as a current liability.
Guarantees. FCX provides
certain financial guarantees (including 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 Sumitomo, which includes a put and 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 purchase Sumitomo’s share of the venture. Based on calculations defined in
the venture agreement, at December 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 approximately $190 million. At December
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, 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 these 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.
NOTE
17. FINANCIAL INSTRUMENTS
FCX and
its subsidiaries do not purchase, hold or sell derivative financial instruments
unless there is an existing asset or obligation or if FCX anticipates a future
activity that is likely to occur and will result in exposure to market risks.
FCX does not enter into any derivative financial instruments for speculative
purposes. FCX and its subsidiaries have entered into derivative financial
instruments in limited instances to achieve specific objectives. These
objectives principally relate to managing risks associated with commodity price,
foreign currency and interest rate risks. The fair values of
FCX’s financial derivative instruments are based on derivative pricing
models or widely published market closing prices. A recap of gains (losses)
charged to income from continuing operations before income taxes and minority
interests for derivative financial instruments, including embedded derivatives,
for the years ended December 31, 2007, 2006 and 2005, follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Commodity
contracts:
|
|
|
|
|
|
|
|
|
|
|
Phelps
Dodge’s zero-premium copper collarsa
|
|
$
|
(175
|
)
|
$
|
–
|
|
$
|
–
|
|
Embedded
derivatives in provisional sales contractsa
|
|
|
115
|
|
|
158
|
|
|
176
|
|
Forward
copper contractsb
|
|
|
(44
|
)
|
|
47
|
|
|
29
|
|
Copper
futures and swap contractsb
|
|
|
(38
|
)
|
|
–
|
|
|
–
|
|
Gold-Denominated
Preferred Stock, Series IIa
|
|
|
–
|
|
|
(69
|
)
|
|
–
|
|
Silver-Denominated
Preferred Stocka
|
|
|
–
|
|
|
(13
|
)
|
|
(5
|
)
|
Foreign
currency exchange contractsb
|
|
|
–
|
|
|
7
|
|
|
1
|
|
a.
|
Amounts
recorded in revenues.
|
b.
|
Amounts
recorded in cost of sales.
|
Summarized
below are financial instruments whose carrying amounts are not equal to their
fair value and unsettled derivative financial instruments at December 31, 2007
and 2006:
|
2007
|
|
2006
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Commodity
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Phelps
Dodge’s zero-premium copper
|
|
|
|
|
|
|
|
|
|
|
|
|
collars
in net liability position
|
$
|
(598
|
)
|
$
|
(598
|
)
|
$
|
–
|
|
$
|
–
|
|
Embedded
derivatives in provisional sales
|
|
|
|
|
|
|
|
|
|
|
|
|
contracts
in net liability position
|
|
(136
|
)
|
|
(136
|
)
|
|
(127
|
)
|
|
(127
|
)
|
Copper
forward contracts in net liability
|
|
|
|
|
|
|
|
|
|
|
|
|
position
|
|
(4
|
)
|
|
(4
|
)
|
|
(5
|
)
|
|
(5
|
)
|
Copper
futures and swap contracts in net
|
|
|
|
|
|
|
|
|
|
|
|
|
liability
position
|
|
(9
|
)
|
|
(9
|
)
|
|
–
|
|
|
–
|
|
Long-term
debt (including amounts due within one year)
|
|
(7,211
|
)
|
|
(7,595
|
)
|
|
(680
|
)
|
|
(710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
Contracts. From time to time, FCX has entered into forward,
futures, swaps and option contracts to hedge the market risk associated with
fluctuations in the prices of commodities it sells. The primary objective of
these contracts has been to set a minimum price, and the secondary objective is
to retain market upside, if available at a reasonable cost. As of December 31,
2007, FCX had no price protection contracts relating to its mine production. A
summary of these derivative contracts and programs follows.
As a
result of the acquisition of Phelps Dodge, FCX assumed Phelps Dodge’s 2007
copper price protection program ($423 million obligation at acquisition date),
which consisted of zero-premium copper collars (consisting of both put and call
options) for 486 million pounds of copper capped at $2.00 per pound and copper
put options for 730 million pounds with a floor price of $0.95 per pound. The
zero-premium copper collars consisted of the simultaneous purchase of a monthly
or annual put option and the sale of an annual call option. The put option
portion of these protection contracts effectively ensured a minimum price per
pound while the call option portion established a maximum price per pound. At
December 31, 2007, the copper put options expired without settlement, and FCX
paid $598 million in January 2008 to settle the copper call options. FCX does
not currently intend to enter into similar hedging programs in the
future.
As
described in Note 1 under “Revenue Recognition,” a portion of FCX’s copper
concentrate and cathode sales agreements provides for provisional billings
primarily based on LME or COMEX prices at the time of shipment as specified in
the contract. FCX applies the normal purchase and sale exception under SFAS No.
133, as amended, to the host sales agreements since the contracts do not allow
for net settlement and always result in physical delivery. Under SFAS No. 133,
as amended, sales made on a provisional sales price contain an embedded
derivative (i.e., the
price settlement mechanism that is settled after the time of delivery) that is
required to be bifurcated from the host contract. The host contract is the sale
of the metals contained in the concentrates or cathodes at the then-current LME
or COMEX price. The embedded derivative, which does not qualify for hedge
accounting under SFAS No. 133, as amended, is marked-to-market through earnings
each period. Mark-to-market price fluctuations recorded through the settlement
date are reflected in revenues. At December 31, 2007, FCX had embedded
derivatives on 402 million pounds of copper (net of minority interests), with
maturities through May 2008.
Atlantic
Copper enters into forward copper contracts designed to hedge its copper price
risk whenever its physical purchases and sales pricing periods do not match.
Although these contracts are intended to hedge against changes in copper prices,
these contracts do not meet all of the criteria to qualify under SFAS No. 133,
as amended, as a hedge transaction, therefore, mark-to-market hedging gains or
losses are recorded to cost of sales. At December 31, 2007, Atlantic Copper held
forward copper purchase contracts for 28 million pounds at an average price of
$3.00 per pound, with maturities through February 2008.
Some of
FCX’s U.S. copper rod customers request a fixed market price instead of the
COMEX average price in the month of shipment. FCX hedges this price exposure in
a manner that allows it to receive the COMEX average price in the month of
shipment while the customers pay the fixed price they requested. FCX
accomplishes this by entering into copper futures and swap contracts and then
liquidating the copper futures contracts and settling the copper swap contracts
during the month of shipment, which generally results in FCX receiving the COMEX
average price in the month of shipment. These transactions do not meet all of
the criteria under SFAS No. 133, as amended, to qualify as a hedge transaction.
Gains and losses for these transactions are recorded to revenues. At December
31, 2007, FCX held copper futures and swap contracts for 89 million pounds at an
average price of $3.14 per pound, with maturities through December
2009.
In 2006,
FCX redeemed its gold-denominated and silver-denominated preferred stock that
had dividends and redemption amounts determined by commodity
prices.
Foreign Currency Exchange
Contracts. As a global company, FCX transacts business in many
countries and in many currencies. Foreign currency transactions of FCX’s
international subsidiaries increase its risks because exchange rates can change
between the time agreements are made and the time foreign currency transactions
are settled. FCX may hedge or protect its international subsidiaries’ foreign
currency transactions from time to time by entering into forward exchange
contracts to lock in or minimize the effects of fluctuations in exchange rates.
FCX had no outstanding foreign currency exchange contracts at December 31,
2007.
Interest Rate Swap
Contracts. From time to time, FCX or its subsidiaries may
enter into interest rate swaps to manage its exposure to interest rate changes
on a portion of its debt. Floating-rate debt exposes FCX to increasing costs
from rising interest rates. FCX may enter into interest rate swap contracts to
lock in an interest rate considered to be favorable in order to protect
against its exposure to variability in future interest payments attributable to
increases in interest rates of the designated floating-rate debt. FCX had
no outstanding interest rate swap contracts at December 31, 2007.
Credit Risk. FCX is
exposed to credit loss when financial institutions with which FCX has entered
into derivative transactions (commodity, foreign exchange and interest rate
swaps) are unable to pay. To minimize the risk of such losses, FCX uses highly
rated financial institutions that meet certain requirements. FCX also
periodically reviews the creditworthiness of these institutions to ensure that
they are maintaining their ratings. FCX does not anticipate that any of the
financial institutions FCX deals with will default on their obligations. As of
December 31, 2007, FCX did not have any significant credit exposure associated
with derivative transactions.
Other Financial
Instruments. The methods and assumptions FCX used to estimate
the fair value of each group of financial instruments for which it can
reasonably determine a value are as follows:
Cash and Cash Equivalents.
The financial statement amount is a reasonable estimate of the fair value
because of the short maturity of these instruments.
Trust Assets. The fair value
of trust assets is based on quoted market prices.
Long-Term Debt. The fair
value of substantially all of FCX’s long-term debt is estimated based on the
quoted market prices.
NOTE
18. BUSINESS SEGMENTS
With the
acquisition of Phelps Dodge, FCX has adopted a regional approach to the
management of its mining operations. FCX has organized its mining operations
geographically into three primary operating divisions – North American mining,
South American mining and Indonesian mining. Notwithstanding this geographic
structure, FCX internally reports information on a mine by mine basis.
Therefore, in accordance with SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” FCX concluded that its
operating
segments include individual mines. FCX has revised its segment disclosures for
the years ended December 31, 2006 and 2005, to conform with current year
presentation.
Further
discussion of the reportable segments included in FCX’s operating divisions, as
well as FCX’s other reportable segment – Atlantic Copper Smelting &
Refining, follows.
North American
Mining. North American mining operations are comprised of
copper operations from mining through copper rod production, molybdenum
operations from mining through conversion to chemical and metallurgical
products, and the marketing and sale of both product lines. FCX has six
operating copper mines in North America – Morenci, Bagdad, Sierrita, Safford,
Chino and Tyrone, and one operating molybdenum mine – Henderson. The North
American mining division includes one reportable copper mine (Morenci), and also
includes Rod and Refining operations and Molybdenum operations as reportable
segments.
Morenci. The Morenci open-pit
mine, located in southeastern Arizona, primarily produces copper cathodes and
copper concentrates. In addition to copper, the Morenci mine produces molybdenum
concentrates as a by-product.
Rod and Refining. The Rod and
Refining segment consists of copper conversion facilities, including a refinery,
rod mills and a specialty copper products facility. This segment processes
copper produced at the North American mines and purchased copper into copper
anode, cathode, rod and custom copper shapes. At times this segment 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, who pays FCX for processing its material into the specified
products.
Molybdenum. The 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. This segment also purchases molybdenum, produced as a by-product, from
FCX’s North American and South American copper mines and sells it to third
parties. 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, who 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.
The
Henderson underground mine produces high-purity, chemical-grade molybdenum
concentrates, which are further processed into value-added molybdenum chemical
products.
In
December 2007, FCX’s Board of Directors approved the restart of the Climax
molybdenum mine near Leadville, Colorado, which has been on care-and-maintenance
status since 1995. Climax is believed to be the largest, highest-grade and
lowest-cost undeveloped molybdenum ore body in the world. The initial project
involves the restart of open-pit mining and the construction of new milling
facilities.
Other North American Mining
Operations. Other North American mining operations, which are not
considered reportable segments, include FCX’s other southwestern U.S. copper
mines – Bagdad, Sierrita, Safford, Chino, Tyrone, Miami, Cobre, Bisbee and
Tohono. In addition to copper, the Bagdad, Sierrita and Chino mines produce
molybdenum, gold and silver, and the Sierrita mine also produces rhenium. Other
North American mining operations also include the Miami smelter (which is the
most significant source of sulfuric acid for the various North American leaching
operations), a sales company (which functions as an agent to purchase and sell
copper from the North American mines and the Rod and Refining segment and also
purchases and sells any copper not sold by the South American mines to third
parties) and other ancillary operations.
South American
Mining. FCX has four operating 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. The South American mining
division includes one reportable copper mine (Cerro Verde).
Cerro Verde. The Cerro Verde
open-pit copper mine, located near Arequipa, Peru, produces copper cathodes and
copper concentrates. In addition to copper, the Cerro Verde mine produces
molybdenum and silver. FCX owns a 53.56 percent interest in Cerro Verde. The
remaining 46.44 percent is held by SMM Cerro Verde Netherlands B.V., Compañía de
Minas Buenaventura S.A.A. and other shareholders, certain of whose shares are
publicly traded on the Lima Stock Exchange.
Other South American Mining
Operations. Other South American mining operations, which are not
considered 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, and other ancillary operations. In addition to copper, the
Candelaria and Ojos del Salado mines produce gold and silver. FCX owns an 80
percent interest in both the Candelaria and Ojos del Salado mines, and owns a 51
percent interest in the El Abra mine.
Indonesian
Mining. Indonesian mining includes PT Freeport Indonesia’s
Grasberg copper and gold mining operations and Puncakjaya Power’s
power-generating operations (after eliminations with PT Freeport
Indonesia).
FCX owns
90.64 percent of PT Freeport Indonesia, including 9.36 percent owned through PT
Indocopper Investama, and the remaining 9.36 percent is owned by the Government
of Indonesia. In 1996, FCX established an unincorporated joint venture with Rio
Tinto, which 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.
After 2021, Rio Tinto will have a 40 percent interest in all production from
Block A.
Atlantic Copper Smelting &
Refining. Atlantic Copper, FCX’s wholly owned smelting unit in
Spain, smelts and refines copper concentrates and markets refined copper and
precious metals in slimes.
Other. Intersegment sales by
the Indonesian and South American mines are based on similar arms-length
transactions with third parties 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.
FCX
allocates certain operating costs, expenses and capital to the operating
divisions and individual segments. However, not all costs and expenses
applicable to a mine or operation are allocated. All federal and state income
taxes are recorded and managed at the corporate level with the exception of
foreign income taxes, which are generally recorded and managed at the applicable
mine or operation. Accordingly, the following segment information reflects
management determinations that may not be indicative of what the actual
financial performance of each operating division or segment would be if it was
an independent entity.
FCX
revenues attributable to the products it produces for the years ended December
31, 2007, 2006 and 2005, follow:
|
2007
|
|
2006
|
|
2005
|
|
Refined
copper products
|
$
|
8,918
|
|
$
|
1,865
|
|
$
|
1,128
|
|
Copper
in concentratesa
|
|
4,541
|
|
|
2,721
|
|
|
1,868
|
|
Molybdenum
|
|
1,703
|
|
|
–
|
|
|
–
|
|
Gold
|
|
1,664
|
|
|
1,155
|
|
|
1,247
|
|
Otherb
|
|
113
|
|
|
50
|
|
|
(64
|
)
|
Total
|
$
|
16,939
|
|
$
|
5,791
|
|
$
|
4,179
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Amounts
are net of treatment and refining charges totaling $502 million for 2007,
$388 million for 2006 and $277 million for
2005.
|
b.
|
Amounts
are net of royalty charges totaling $133 million in 2007, $126 million in
2006 and $104 million in 2005. Also includes $(41) million in 2007, $139
million in 2006 and $9 million in 2005 for adjustments to prior year sales
and pre-acquisition sales in 2007 subject to final
pricing.
|
Information
concerning financial data by geographic area and business segments for the years
ended December 31, 2007, 2006 and 2005, is presented in the following
tables.
Geographic
Area
|
2007
|
|
2006
|
|
2005
|
|
Revenuesa:
|
|
|
|
|
|
|
|
|
|
United
States
|
$
|
6,480
|
|
$
|
76
|
|
$
|
95
|
|
Japan
|
|
2,479
|
|
|
1,242
|
|
|
805
|
|
Indonesia
|
|
2,105
|
|
|
1,202
|
|
|
1,008
|
|
Spain
|
|
1,773
|
|
|
1,380
|
|
|
783
|
|
United
Kingdom
|
|
661
|
|
|
126
|
|
|
72
|
|
Chile
|
|
627
|
|
|
–
|
|
|
–
|
|
China
|
|
400
|
|
|
120
|
|
|
41
|
|
Mexico
|
|
356
|
|
|
133
|
|
|
–
|
|
India
|
|
319
|
|
|
387
|
|
|
241
|
|
Philippines
|
|
314
|
|
|
86
|
|
|
137
|
|
Korea
|
|
266
|
|
|
377
|
|
|
289
|
|
Others
|
|
1,159
|
|
|
662
|
|
|
708
|
|
Total
|
$
|
16,939
|
|
$
|
5,791
|
|
$
|
4,179
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived
assetsb:
|
|
|
|
|
|
|
|
|
|
United
States
|
$
|
16,954
|
|
$
|
41
|
|
$
|
53
|
|
Peru |
|
3,242 |
|
|
– |
|
|
– |
|
Indonesia
|
|
3,126
|
|
|
2,933
|
|
|
3,191
|
|
Chile
|
|
2,882
|
|
|
–
|
|
|
–
|
|
Africa
|
|
1,506
|
|
|
–
|
|
|
–
|
|
Spain
|
|
274
|
|
|
265
|
|
|
284
|
|
Others
|
|
84
|
|
|
–
|
|
|
–
|
|
Total
|
$
|
28,068
|
|
$
|
3,239
|
|
$
|
3,528
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Revenues
are attributed to countries based on the location of the
customer.
|
b.
|
Long-lived
assets exclude deferred tax assets, goodwill and intangible
assets.
|
Business
Segments
|
North
America
|
|
South
America
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Other
|
|
Total
|
|
|
|
Atlantic
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
North
|
|
|
|
South
|
|
South
|
|
|
|
Copper
|
|
Other
&
|
|
|
|
|
|
|
|
Rod
&
|
|
Molyb-
|
|
American
|
|
American
|
|
Cerro
|
|
American
|
|
American
|
|
|
|
Smelting
|
|
Elimi-
|
|
FCX
|
|
Year
Ended December 31, 2007
|
Morenci
|
|
Refining
|
|
denum
|
|
Mining
|
|
Mining
|
|
Verde
|
|
Mining
|
|
Mining
|
|
Grasberg
|
|
&
Refining
|
|
nations
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customersb
|
$
|
68
|
|
$
|
5,108
|
|
$
|
1,746
|
|
$
|
1,719
|
|
$
|
8,641
|
|
$
|
744
|
|
$
|
1,521
|
|
$
|
2,265
|
|
$
|
3,640
|
a
|
$
|
2,388
|
|
$
|
5
|
|
$
|
16,939
|
|
Intersegment
|
|
1,709
|
|
32
|
|
–
|
|
(1,732
|
)
|
9
|
|
855
|
|
725
|
|
1,580
|
|
1,168
|
|
–
|
|
(2,757
|
)
|
–
|
|
Production
and deliveryb
|
|
991
|
|
5,119
|
|
1,287
|
|
(1,105
|
)
|
6,292
|
|
483
|
|
795
|
|
1,278
|
|
1,388
|
|
2,329
|
|
(2,760
|
)
|
8,527
|
|
Depreciation,
depletion and amortizationb
|
|
239
|
|
7
|
|
94
|
|
271
|
|
611
|
|
129
|
|
248
|
|
377
|
|
199
|
|
36
|
|
23
|
|
1,246
|
|
Exploration
and research expenses
|
|
–
|
|
–
|
|
2
|
|
8
|
|
10
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
135
|
|
145
|
|
Selling,
general and administrative expenses
|
|
–
|
|
–
|
|
10
|
|
10
|
|
20
|
|
–
|
|
–
|
|
–
|
|
188
|
|
20
|
|
238
|
|
466
|
|
Operating
incomeb
|
|
547
|
|
14
|
|
353
|
|
803
|
|
1,717
|
|
987
|
|
1,203
|
|
2,190
|
|
3,033
|
|
3
|
|
(388
|
)
|
6,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
–
|
|
4
|
|
–
|
|
–
|
|
4
|
|
9
|
|
(2
|
)
|
7
|
|
12
|
|
26
|
|
464
|
|
513
|
|
Provision
for income taxes
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
485
|
|
368
|
|
853
|
|
1,326
|
|
–
|
|
221
|
|
2,400
|
|
Total
assets at December 31, 2007
|
|
5,015
|
|
438
|
|
3,522
|
|
10,272
|
|
19,247
|
|
4,224
|
|
4,195
|
|
8,419
|
|
3,737
|
|
915
|
|
8,343
|
|
40,661
|
|
Capital
expenditures
|
|
268
|
|
8
|
|
45
|
|
599
|
|
920
|
|
58
|
|
65
|
|
123
|
|
368
|
|
42
|
|
302
|
|
1,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customers
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
3,543
|
a
|
2,242
|
|
6
|
|
5,791
|
|
Intersegment
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
852
|
|
–
|
|
(852
|
)
|
–
|
|
Production
and delivery
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
1,279
|
|
2,119
|
|
(873
|
)
|
2,525
|
|
Depreciation
and amortization
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
184
|
|
33
|
|
11
|
|
228
|
|
Exploration
expenses
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
12
|
|
12
|
|
Selling,
general and administrative expenses
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
211
|
|
16
|
|
(70
|
)
|
157
|
|
Operating
income
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
2,721
|
|
74
|
|
74
|
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
20
|
|
25
|
|
31
|
|
76
|
|
Provision
for income taxes
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
950
|
|
–
|
|
251
|
|
1,201
|
|
Total
assets at December 31, 2006
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
4,112
|
|
915
|
|
363
|
|
5,390
|
|
Capital
expenditures
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
234
|
|
17
|
|
–
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
customers
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
2,810
|
a
|
1,363
|
|
6
|
|
4,179
|
|
Intersegment
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
758
|
|
–
|
|
(758
|
)
|
–
|
|
Production
and delivery
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
954
|
|
1,288
|
|
(604
|
)
|
1,638
|
|
Depreciation
and amortization
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
210
|
|
29
|
|
12
|
|
251
|
|
Exploration
expenses
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
9
|
|
9
|
|
Selling,
general and administrative expenses
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
147
|
|
11
|
|
(54
|
)
|
104
|
|
Operating
income
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
2,257
|
|
35
|
|
(115
|
)
|
2,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
22
|
|
17
|
|
93
|
|
132
|
|
Provision
for income taxes
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
781
|
|
–
|
|
134
|
|
915
|
|
Total
assets at December 31, 2005
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
4,618
|
|
933
|
|
(1
|
)
|
5,550
|
|
Capital
expenditures
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
129
|
|
10
|
|
4
|
|
143
|
|
a.
|
Includes
PT Freeport Indonesia’s sales to PT Smelting totaling $1.8 billion in
2007, $1.2 billion in 2006 and $1.0 billion in
2005.
|
b.
|
The
following table summarizes the impact of purchase accounting fair value
adjustments on 2007 operating income primarily associated with the impacts
of the increases in the carrying values of Phelps Dodge’s metals
inventories (including mill and leach stockpiles) and property, plant and
equipment, and also includes the impact associated with the amortization
of intangible assets and liabilities resulting from the
acquisition:
|
Revenues
|
$
|
–
|
|
$
|
–
|
|
$
|
111
|
|
$
|
–
|
|
$
|
111
|
|
$
|
8
|
|
$
|
1
|
|
$
|
9
|
|
N/A
|
|
N/A
|
|
$
|
–
|
|
$
|
120
|
|
Production
and delivery
|
|
(218
|
)
|
–
|
|
(164
|
)
|
(230
|
)
|
(612
|
)
|
(73
|
)
|
(96
|
)
|
(169
|
)
|
N/A
|
|
N/A
|
|
–
|
|
(781
|
)
|
Depreciation,
depletion and amortization
|
|
(167
|
)
|
–
|
|
(52
|
)
|
(165
|
)
|
(384
|
)
|
(64
|
)
|
(145
|
)
|
(209
|
)
|
N/A
|
|
N/A
|
|
(2
|
)
|
(595
|
)
|
Reduction
of operating income
|
$
|
(385
|
)
|
$
|
–
|
|
$
|
(105
|
)
|
$
|
(395
|
)
|
$
|
(885
|
)
|
$
|
(129
|
)
|
$
|
(240
|
)
|
$
|
(369
|
)
|
N/A
|
|
N/A
|
|
$
|
(2
|
)
|
$
|
(1,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.
NOTE
19. SUPPLEMENTARY MINERAL RESERVE INFORMATION
(UNAUDITED)
Proven
and probable reserves have been calculated as of December 31, 2007, in
accordance with Industry Guide 7 as required by the Securities and Exchange Act
of 1934. FCX’s proven and probable reserves may not be comparable to similar
information regarding mineral reserves disclosed in accordance with the guidance
in other countries. Proven and probable reserves were determined by the use of
mapping, drilling, sampling, assaying and evaluation methods generally applied
in the mining industry, as more fully discussed below. The term “reserve,” as
used in the reserve data presented here, means that part of a mineral deposit
which can be economically and legally extracted or produced at the time of the
reserve determination. The term “proven reserves” means reserves for which (i)
quantity is computed from dimensions revealed in outcrops, trenches, workings or
drill holes; (ii) grade and/or quality are computed from the result of detailed
sampling; and (iii) the sites for inspection, sampling and measurements are
spaced so closely and the geologic character is sufficiently defined that size,
shape, depth and mineral content of reserves are well established. The term
“probable reserves” means reserves for which quantity and grade are computed
from information similar to that used for proven reserves but the sites for
sampling are farther apart or are otherwise less adequately spaced. The degree
of assurance, although lower than that for proven reserves, is high enough to
assume continuity between points of observation.
FCX’s
reserve estimates are based on the latest available geological and geotechnical
studies. FCX conducts ongoing studies of its ore bodies to optimize economic
values and to manage risk. FCX revises its mine plans and estimates of proven
and probable mineral reserves as required in accordance with the latest
available studies. FCX’s estimated consolidated recoverable reserves include
93.2 billion pounds of copper, 41.0 million ounces of gold, 2.0 billion pounds
of molybdenum, 230.9 million ounces of silver and 0.6 billion pounds of cobalt.
At December 31, 2007, recoverable reserves include estimated recoverable copper
totaling 2.6 billion pounds in leach stockpiles and 0.9 billion pounds in mill
stockpiles.
|
Recoverable
Proven and Probable Reserves
|
|
|
at
December 31, 2007
|
|
|
Copper
|
|
Gold
|
|
Molybdenum
|
|
|
(Billions
of Lbs.)
|
|
(Millions
of Ozs.)
|
|
(Billions
of Lbs.)
|
|
North
America
|
25.8
|
|
0.2
|
|
1.8
|
|
South
America
|
26.0
|
|
1.4
|
|
0.2
|
|
Indonesia
|
37.1
|
|
39.4
|
|
–
|
|
Africa
|
4.3
|
|
–
|
|
–
|
|
Consolidated
basisa
|
93.2
|
|
41.0
|
|
2.0
|
|
|
|
|
|
|
|
|
Net
equity interestb
|
77.0
|
|
37.0
|
|
1.9
|
|
a.
|
Consolidated
basis reserves represents estimated metal quantities after reduction for
joint venture partner interests at the Morenci mine in North America and
the Grasberg mining complex in
Indonesia.
|
b.
|
Net
equity interest represents FCX’s net ownership interest (i.e., estimated
consolidated reserves further reduced for minority
interests).
|
Estimated
recoverable reserves were assessed using long-term average prices of $1.20 per
pound for copper, $450 per ounce for gold, $6.50 per pound for molybdenum, $7.50
per ounce for silver and $12.00 per pound for cobalt, along with near-term price
forecasts reflective of the current price environment. The London spot metal
prices for the past three years averaged $2.65 per pound for copper and $582 per
ounce for gold, and the Metals
Week Molybdenum Dealer Oxide price averaged $28.90 per pound for
molybdenum.
100%
Basis
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable
Proven and
|
|
|
|
|
|
Average
Ore Grade
|
|
Probable
Reserves
|
|
|
|
Ore
|
|
Per
Metric Ton
|
|
Copper
|
|
Gold
|
|
Moly
|
|
|
|
(Million
|
|
Copper
|
|
Gold
|
|
Moly
|
|
(Billions
|
|
(Millions
|
|
(Millions
|
|
Year-End
|
|
Metric
Tons)
|
|
(%)
|
|
(Grams)
|
|
(%)
|
|
of
Lbs.)
|
|
of
Ozs.)
|
|
of
Lbs.)
|
|
2003
|
|
2,696
|
|
1.08
|
|
0.98
|
|
N/A
|
|
54.4
|
|
60.4
|
|
N/A
|
|
2004
|
|
2,769
|
|
1.09
|
|
0.97
|
|
N/A
|
|
56.2
|
|
61.0
|
|
N/A
|
|
2005
|
|
2,822
|
|
1.07
|
|
0.92
|
|
N/A
|
|
56.6
|
|
58.0
|
a
|
N/A
|
|
2006
|
|
2,813
|
|
1.04
|
|
0.90
|
|
N/A
|
|
54.8
|
|
54.3
|
|
N/A
|
|
2007
|
|
12,224
|
|
0.51
|
|
0.20
|
|
0.01
|
|
110.4
|
|
54.1
|
a
|
2,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Area at December
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
and producing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morenci
|
|
2,818
|
|
0.28
|
|
–
|
|
0.002
|
|
10.7
|
|
–
|
|
34
|
|
Sierrita
|
|
1,062
|
|
0.26
|
|
0.003
|
|
0.030
|
|
5.4
|
|
0.1
|
|
584
|
|
Bagdad
|
|
828
|
|
0.28
|
|
0.003
|
|
0.016
|
|
4.1
|
|
–
|
a
|
207
|
|
Safford
|
|
549
|
|
0.36
|
|
–
|
|
–
|
|
2.7
|
|
–
|
|
–
|
|
Chino
|
|
164
|
|
0.51
|
|
0.012
|
|
0.005
|
|
2.4
|
|
–
|
a
|
7
|
|
Tyrone
|
|
191
|
|
0.32
|
|
–
|
|
–
|
|
1.0
|
|
–
|
|
–
|
|
Miami
|
|
102
|
|
0.39
|
|
–
|
|
–
|
|
0.6
|
|
–
|
|
–
|
|
Henderson
|
|
122
|
|
–
|
|
–
|
|
0.193
|
|
–
|
|
–
|
|
448
|
|
Undeveloped:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climax
|
|
165
|
|
–
|
|
–
|
|
0.165
|
|
–
|
|
–
|
|
532
|
|
Cobre
|
|
77
|
|
0.40
|
|
–
|
|
–
|
|
0.5
|
|
–
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
and producing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cerro
Verde
|
|
1,765
|
|
0.44
|
|
–
|
|
0.012
|
|
14.9
|
|
–
|
|
230
|
|
El
Abra
|
|
1,201
|
|
0.43
|
|
–
|
|
–
|
|
6.1
|
|
–
|
|
–
|
|
Candelaria
|
|
360
|
|
0.59
|
|
0.133
|
|
–
|
|
4.8
|
|
1.4
|
|
–
|
|
Ojos
del Salado
|
|
7
|
|
1.14
|
|
0.286
|
|
–
|
|
0.2
|
|
–
|
a
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
and producing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grasberg
open pit
|
|
433
|
|
0.89
|
|
0.983
|
|
–
|
|
7.2
|
|
11.3
|
|
–
|
|
DOZ/ESZb
|
|
284
|
|
0.65
|
|
0.707
|
|
–
|
|
3.4
|
|
4.9
|
|
–
|
|
Undeveloped:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grasberg
block cave
|
|
983
|
|
1.06
|
|
0.852
|
|
–
|
|
19.6
|
|
18.3
|
|
–
|
|
Kucing
Liar
|
|
568
|
|
1.18
|
|
1.054
|
|
–
|
|
12.7
|
|
9.1
|
|
–
|
|
MLZ/DMLZc
|
|
392
|
|
1.01
|
|
0.813
|
|
–
|
|
7.4
|
|
7.7
|
|
–
|
|
Big
Gossan
|
|
53
|
|
2.31
|
|
1.100
|
|
–
|
|
2.4
|
|
1.3
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undeveloped:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenke
Fungurume
|
|
100
|
|
2.26
|
|
–
|
|
–
|
|
4.3
|
|
–
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
100% basis
|
|
12,224
|
|
|
|
|
|
|
|
110.4
|
|
54.1
|
|
2,042
|
|
Consolidated
basis
|
|
|
|
|
|
|
|
|
|
93.2
|
|
41.0
|
|
2,037
|
|
FCX’s
equity share
|
|
|
|
|
|
|
|
|
|
77.0
|
|
37.0
|
|
1,930
|
|
a.
|
Ounces
are not shown because of rounding.
|
b.
|
Deep
Ore Zone (DOZ) and Ertsberg Stockwork Zone
(ESZ)
|
c.
|
Mill
Level Zone (MLZ) and Deep Mill Level Zone
(DMLZ)
|
NOTE
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
Quartera
|
|
Quartera
|
|
Quarter
|
|
Quarter
|
|
Year
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenuesb
|
$
|
2,246
|
|
$
|
5,443
|
|
$
|
5,066
|
|
$
|
4,184
|
|
$
|
16,939
|
|
Operating
incomeb,
c
|
|
1,172
|
|
|
2,354
|
|
|
1,877
|
|
|
1,152
|
|
|
6,555
|
|
Income
from continuing operations applicable to common stockb, c,
d
|
|
472
|
|
|
1,076
|
|
|
763
|
|
|
423
|
|
|
2,734
|
|
Income
(loss) from discontinued operationsc
|
|
4
|
|
|
28
|
|
|
12
|
|
|
(9
|
)
|
|
35
|
|
Net
income applicable to common stockb, c,
d
|
|
476
|
|
|
1,104
|
|
|
775
|
|
|
414
|
|
|
2,769
|
|
Basic
net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
2.18
|
|
$
|
2.83
|
|
$
|
2.00
|
|
$
|
1.10
|
|
$
|
8.02
|
|
Discontinued
operations
|
|
0.02
|
|
|
0.07
|
|
|
0.03
|
|
|
(0.02
|
)
|
|
0.10
|
|
Basic
net income per share of common stock
|
$
|
2.20
|
|
$
|
2.90
|
|
$
|
2.03
|
|
$
|
1.08
|
|
$
|
8.12
|
|
Diluted
net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operationsb, c,
d
|
$
|
2.00
|
|
$
|
2.56
|
|
$
|
1.85
|
|
$
|
1.07
|
|
$
|
7.41
|
|
Discontinued
operationsc
|
|
0.02
|
|
|
0.06
|
|
|
0.02
|
|
|
(0.02
|
)
|
|
0.09
|
|
Diluted
net income per share of common stockb, c,
d
|
$
|
2.02
|
|
$
|
2.62
|
|
$
|
1.87
|
|
$
|
1.05
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenuese
|
$
|
1,086
|
|
$
|
1,426
|
|
$
|
1,636
|
|
$
|
1,643
|
|
$
|
5,791
|
|
Operating
incomee,
f
|
|
532
|
|
|
739
|
|
|
735
|
|
|
863
|
|
|
2,869
|
|
Net
income applicable to common stocke, f,
g
|
|
252
|
|
|
367
|
|
|
351
|
|
|
426
|
|
|
1,396
|
|
Basic
net income per share of common stock
|
|
1.34
|
|
|
1.95
|
|
|
1.85
|
|
|
2.17
|
|
|
7.32
|
|
Diluted
net income per share of common stocke, f,
g
|
|
1.23
|
|
|
1.74
|
|
|
1.67
|
|
|
1.99
|
|
|
6.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
As
a result of the sale of PDIC, results for the first and second quarters of
2007 have been restated to remove PDIC from continuing
operations.
|
b.
|
Includes
charges (credits) to revenues for mark-to-market accounting adjustments
for the 2007 copper price protection program totaling $38 million ($23
million to net income or $0.10 per share) in the first quarter, $130
million ($80 million to net income or $0.18 per share) in the
second quarter, $44 million ($26 million to net income or $0.06 per
share) in the third quarter, $(37) million ($(23) million to net
income or $0.06 per share) in the fourth quarter and $175
million ($106 million to net income or $0.27 per share) for the
year.
|
c.
|
Includes
the purchase accounting impact of the increases in the carrying values of
acquired metals inventories (including mill and leach stockpiles) and
property, plant and equipment, and also includes the impact
associated with the amortization of intangible assets and liabilities
resulting from the acquisition of Phelps Dodge totaling $124 million
($79 million to net income or $0.32 per share) in the first quarter, $455
million ($284 million or $0.64 per share) in the second quarter, $445
million ($279 million to net income or $0.62 per share) in the third
quarter, $232 million ($143 million to net income or $0.35 per share) in
the fourth quarter and $1.3 billion ($785 million to net income or $1.98
per share) for the year associated with continuing operations. Also
includes purchase accounting impact totaling $8 million ($0.02 per share)
in the third quarter associated with discontinued
operations.
|
d.
|
Includes
net losses on early extinguishment of debt totaling $88 million ($75
million to net income or $0.31 per share) in the first quarter, $47
million ($35 million to net income or $0.08 per share) in the second
quarter, $36 million ($31 million to net income or $0.07 per share) in the
third quarter and $173 million ($132 million to net income or $0.33 per
share) for the year. Also includes gains primarily from the
|
|
sales of marketable
securities totaling $38 million ($23 million to net income or $0.05 per
share) in the second quarter, $47 million ($29 million to net income or
$0.06 per share) in the third quarter and $85 million ($52 million to net
income or $0.13 per share) for the year. |
e.
|
Includes
a loss on redemption of FCX’s Gold-Denominated Preferred Stock, Series II
totaling $69 million ($37 million to net income or $0.17 per share) in the
first quarter, a loss on redemption of FCX’s Silver-Denominated Preferred
Stock totaling $13 million ($7 million to net income or $0.03 per share)
in the third quarter and $82 million ($44 million to net income or
$0.20 per share) for the year.
|
f.
|
Includes
net gains from the disposition of land and certain royalty rights owned by
Atlantic Copper totaling $9 million ($0.04 per share) in the second
quarter, $21 million ($0.10 per share) in the third quarter and $30
million ($0.13 per share) for the
year.
|
g.
|
Includes
net losses on early extinguishment and conversion of debt totaling $29
million ($0.13 per share) in the third quarter and $30 million ($0.14 per
share) for the year.
|
Table of Contents
Not
applicable.
(a) Evaluation of disclosure
controls and 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 annual report on Form 10-K. 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 SEC filings.
(b) Changes in internal
controls. There has been no change in our internal control
over financial reporting that occurred during the fourth quarter that has
materially affected, or is reasonably likely to materially affect our internal
control over financial reporting.
(c) Management’s
annual report on internal control over financial reporting and the report
thereon of Ernst & Young LLP are included herein.
Not
applicable.
The
information set forth under the captions “Information About Director Nominees”
and “Section 16(a) Beneficial Ownership Reporting Compliance” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2008 Annual Meeting,
is incorporated herein by reference. The information required by Item
10 regarding our executive officers appears in a separately captioned heading
after Item 4 in Part I of this report.
The
information set forth under the captions “Director Compensation” and “Executive
Officer Compensation” of our definitive Proxy Statement to be filed with the
SEC, relating to our 2008 Annual Meeting, is incorporated herein by
reference.
Equity
Compensation Plan Information as of December 31, 2007
The
information set forth under the captions “Stock Ownership of Directors and
Executive Officers” and “Stock Ownership of Certain Beneficial Owners” of our
definitive Proxy Statement to be filed with the SEC, relating to our 2008 Annual
Meeting, is incorporated herein by reference.
Table of Contents
The
following table presents information as of December 31, 2007, regarding our
incentive compensation plans under which common stock may be issued to employees
and non-employees as compensation.
Plan
Category
|
|
Number
of Securities to be Issued upon Exercise of Outstanding Options, Warrants
and Rights
(a)
|
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
(b)
|
|
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (Excluding Securities Reflected in
Column
(a))
(c)
|
Equity
compensation plans approved by security holders
|
|
11,556,171(1)
|
|
$58.17
|
|
31,763,940(2)
|
Equity
compensation plans not approved by security holders
|
|
—
|
|
—
|
|
—
|
Total
|
|
11,556,171(1)
|
|
$58.17
|
|
31,763,940(2)
|
___________________
(1)
|
The
number of securities to be issued upon the exercise of outstanding
options, warrants and rights includes shares issuable upon (a) the vesting
of 784,873 restricted stock
units, and (b) the termination of deferrals with respect to 11,500
restricted stock units that were vested as of December 31,
2007. These awards are not reflected in column (b) as they do
not have an exercise price.
|
(2)
|
As
of December 31, 2007, there were 31,338,375 shares remaining available for
future issuance under the 2006 Stock Incentive Plan, (a) all of which
could be issued under the terms of the plan upon the exercise of stock
options or stock appreciation rights, and (b) only 11,000,000 of which
could be issued under the terms of the plan in the form of restricted
stock or “other stock-based awards,” which awards are valued in whole or
in part on the value of the shares of common stock. There were
89,723 shares remaining available for future issuance under the 2003 Stock
Incentive Plan, all of which could be issued under the terms of the plan
(a) upon the exercise of stock options or stock appreciation rights, or
(b) in the form of restricted stock or “other stock-based
awards.” In addition, there were 5,693 shares remaining
available for future issuance under the 1999 Stock Incentive Plan, all of
which could be issued (a) upon the exercise of stock options or stock
appreciation rights, or (b) in the form of restricted stock or “other
stock-based awards.” Finally, there were 330,149 shares
remaining available for future issuance under the 2004 Director
Compensation Plan, which shares are issuable under the terms of the plan
(a) only to eligible directors, and (b) upon the exercise of stock options
or in the form of common stock and restricted stock units, as specifically
set forth in the plan.
|
The
information set forth under the caption “Certain Transactions” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2008 Annual Meeting,
is incorporated herein by reference.
The
information set forth under the caption “Independent Auditors” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2008 Annual Meeting,
is incorporated herein by reference.
Table of Contents
(a)(1). Financial
Statements.
Not
applicable
(a)(2). Financial Statement
Schedules.
Reference
is made to the Index to Financial Statements appearing on page F-1
hereof.
(a)(3). Exhibits.
Reference
is made to the Exhibit Index beginning on page E-1 hereof.
Table of Contents
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 29, 2008.
Freeport-McMoRan Copper & Gold
Inc.
By: /s/
Richard C. Adkerson
Richard C. Adkerson
President, Chief Executive
Officer
and Director
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities
indicated on February 29, 2008.
*
|
Chairman
of the Board
|
James
R. Moffett
|
|
|
|
*
|
Vice
Chairman of the Board
|
B.
M. Rankin, Jr.
|
|
|
|
/s/
Richard C. Adkerson
|
President,
Chief Executive Officer and Director
|
Richard
C. Adkerson
|
(Principal
Executive Officer)
|
|
|
/s/
Kathleen L. Quirk
|
Executive
Vice President, Chief Financial Officer and Treasurer
|
Kathleen
L. Quirk
|
(Principal
Financial Officer)
|
|
|
*
|
Vice
President and Controller - Financial Reporting
|
C.
Donald Whitmire, Jr.
|
(Principal
Accounting Officer)
|
|
|
*
|
Director
|
Robert
J. Allison, Jr.
|
|
|
|
*
|
Director
|
Robert
A. Day
|
|
|
|
*
|
Director
|
Gerald
J. Ford
|
|
|
|
*
|
Director
|
H.
Devon Graham, Jr.
|
|
|
|
*
|
Director
|
J.
Bennett Johnston
|
|
|
|
Table of Contents
*
|
Director
|
Charles
C. Krulak
|
|
|
|
*
|
Director
|
Bobby
Lee Lackey
|
|
|
|
*
|
Director
|
Jon
C. Madonna
|
|
|
|
*
|
Director
|
Dustan
E. McCoy
|
|
|
|
*
|
Director
|
Gabrielle
K. McDonald
|
|
|
|
*
|
Director
|
J.
Stapleton Roy
|
|
|
|
*
|
Director
|
Stephen
H. Siegele
|
|
|
|
*
|
Director
|
J.
Taylor Wharton
|
|
|
|
|
|
|
|
By: /s/
Richard C.
Adkerson
|
|
Richard
C. Adkerson
|
|
Attorney-in-Fact
|
|
Table of Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
Our
financial statements and the notes thereto, and the report of Ernst & Young
LLP included in our 2007 Annual Report are incorporated herein by
reference.
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Schedule
II-Valuation and Qualifying Accounts
|
F-2
|
Schedules
other than the one listed above have been omitted since they are either not
required, not applicable or the required information is included in the
financial statements or notes thereto.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan
COPPER & GOLD INC.
We have
audited the consolidated financial statements of Freeport-McMoRan Copper &
Gold Inc. (the Company) as of December 31, 2007 and 2006 and for each of the
three years in the period ended December 31, 2007, and have issued our report
thereon dated February 29, 2008. Our audits also included the
schedule listed in the index above for this Form 10-K. The schedule
listed in the index above is the responsibility of the Company’s
management. Our responsibility is to express an opinion based on our
audits.
In our
opinion, the schedule referred to above, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/Ernst
& Young LLP
Phoenix,
Arizona
February
29, 2008
|
FREEPORT-McMoRan
COPPER & GOLD INC.
|
|
SCHEDULE
II - VALUATION AND QUALIFYING
ACCOUNTS
|
Col.
A
|
|
Col.
B
|
|
Col.
C
|
|
Col.
D
|
|
Col.
E
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance
at
Beginning
of
Period
|
|
Charged
to Costs and Expense
|
|
Charged
to Other Accounts
|
|
Other
Add
(Deduct)
|
|
Balance
at End of Period
|
|
Reserves
and allowances deducted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials
and supplies allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
16
|
|
|
7
|
|
|
-
|
|
|
(7
|
)a
|
|
16
|
|
2006
|
|
|
17
|
|
|
6
|
|
|
-
|
|
|
(7
|
)a
|
|
16
|
|
2005
|
|
|
17
|
|
|
6
|
|
|
-
|
|
|
(6
|
)a
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
925
|
|
|
332
|
|
|
-
|
|
|
(92
|
)
|
|
1,165
|
|
2006
|
|
|
802
|
|
|
123
|
|
|
-
|
|
|
-
|
|
|
925
|
|
2005
|
|
|
658
|
|
|
144
|
|
|
-
|
|
|
-
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
for non-income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
22
|
|
|
4
|
|
|
11
|
|
|
(3
|
)
|
|
34
|
|
2006
|
|
|
19
|
|
|
7
|
|
|
-
|
|
|
(4
|
)b
|
|
22
|
|
2005
|
|
|
19
|
|
|
4
|
|
|
-
|
|
|
(4
|
)b
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Primarily
represents write-offs of obsolete materials and supplies
inventories.
|
b.
|
Represents
amounts paid or adjustments to reserves based on revised
estimates.
|
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 through 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 and filed March 31, 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
|
|
Amendment
Agreement dated as of July 3, 2007, amending the Senior Secured Credit
Agreement dated as of March 19, 2007, among Freeport-McMoRan Copper &
Gold Inc., the Lenders party thereto, the Issuing Banks party thereto, and
JPMorgan Chase Bank, N.A., as Administrative Agent and as 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 July 10,
2007.
|
|
|
|
4.4
|
|
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.
|
|
|
|
4.5
|
|
Amendment
Agreement dated as of July 3, 2007, amending the Amended and Restated
Senior Secured Credit Agreement dated as of March 19, 2007, which amended
and restated the Amended and Restated Credit Agreement, dated as of July
25, 2006, which amended and restated the Amended and Restated Credit
Agreement, dated as of September 30, 2003, which amended and restated the
Amended and Restated Credit Agreement, dated as of October 19, 2001, which
amended and restated both the Credit Agreement, originally dated as of
October 27, 1989 and amended and restated as of June 1, 1993 and the
Credit Agreement, originally dated as of June 30, 1995, among
Freeport-McMoRan Copper & Gold Inc., PT Freeport Indonesia, U.S. Bank
National Association, as trustee for the Lenders and certain other lenders
under the FI Trust Agreement, the Lenders party thereto, the Issuing Banks
party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent,
Security Agent, JAA Security Agent and Collateral Agent, 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 July 10, 2007.
|
|
|
|
4.6
|
|
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.
|
Table of Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
EXHIBIT
INDEX
Exhibit
Number Description
4.7
|
|
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.
|
|
|
|
4.8
|
|
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.
|
|
|
|
4.9
|
|
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.
|
|
|
|
4.10
|
|
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.
|
|
|
|
|
|
Note: Certain
instruments with respect to long-term debt of FCX have not been filed as
exhibits to this Quarterly Report on Form 10-K 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 and filed November 15, 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.
|
|
|
|
Table of Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
EXHIBIT
INDEX
Exhibit
Number Description
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.
|
|
|
|
10.8
|
|
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.
|
|
|
|
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.
|
|
|
|
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).
|
|
|
|
10.11
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
Table of Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
EXHIBIT
INDEX
Exhibit
Number Description
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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
10.73)
|
|
|
|
|
|
FCX
Performance Incentive Awards Program as amended effective December 4,
2007.
|
|
|
|
10.22
|
|
FCX
President’s Award Program. Incorporated by reference to Exhibit 10.7 to
the FCX November 5, 2001 Form S-3.
|
|
|
|
10.23
|
|
FCX
1995 Stock Option Plan, as amended and restated. Incorporated by reference
to Exhibit 10.23 to the Quarterly Report on Form 10-Q of FCX for the
quarter ended March 31, 2007 (the FCX 2007 First Quarter Form
10-Q).
|
|
|
|
10.24
|
|
FCX
Amended and Restated 1999 Stock Incentive Plan, as amended and restated.
Incorporated by reference to Exhibit 10.24 to the FCX 2007 First Quarter
Form 10-Q.
|
|
|
|
10.25
|
|
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).
|
|
|
|
10.26
|
|
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).
|
Table of Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
EXHIBIT
INDEX
Exhibit
Number Description
10.27
|
|
FCX
2003 Stock Incentive Plan, as amended and restated. Incorporated by
reference to Exhibit 10.30 to the FCX First Quarter 2007 Form
10-Q.
|
|
|
|
10.28
|
|
FCX
1995 Stock Option Plan for Non-Employee Directors, as amended and
restated. Incorporated by reference to Exhibit 10.34 to the FCX 2007 First
Quarter Form 10-Q.
|
|
|
|
10.29
|
|
FCX
2004 Director Compensation Plan, as amended and restated. Incorporated by
reference to Exhibit 10.35 to the FCX 2007 First Quarter Form
10-Q.
|
|
|
|
10.30
|
|
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.
|
|
|
|
10.31
|
|
FCX
Amended and Restated 2006 Stock Incentive Plan. Incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K of FCX dated July 10,
2007.
|
|
|
|
|
|
Form
of Notice of Grant of Nonqualified Stock Options for grants under the FCX
1999 Stock Incentive Plan, the 2003 Stock Incentive Plan and the 2006
Stock Incentive Plan.
|
|
|
|
|
|
Form
of Restricted Stock Unit Agreement for grants under the FCX 1999 Stock
Incentive Plan, the 2003 Stock Incentive Plan and the 2006 Stock Incentive
Plan.
|
|
|
|
|
|
Form
of Performance-Based Restricted Stock Unit Agreement for grants under the
FCX 1999 Stock Incentive Plan, the 2003 Stock Incentive Plan and the 2006
Stock Incentive Plan.
|
|
|
|
|
|
Form
of Restricted Stock Unit Agreement (form used in connection with
participant elections) for grants under the FCX 1999 Stock Incentive Plan,
the 2003 Stock Incentive Plan and the 2006 Stock Incentive
Plan.
|
|
|
|
|
|
Form
of Performance-Based Restricted Stock Unit Agreement (form used in
connection with participant elections) for grants under the FCX 1999 Stock
Incentive Plan, the 2003 Stock Incentive Plan and the 2006 Stock Incentive
Plan.
|
|
|
|
10.37
|
|
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).
|
|
|
|
10.38
|
|
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.
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10.39
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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.
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10.40
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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.
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10.41
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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.
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10.42
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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).
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Table of Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
EXHIBIT
INDEX
Exhibit
Number Description
10.43
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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.
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10.44
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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).
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10.45
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Supplemental
Consulting Agreement with Kissinger Associates and Kent Associates,
effective as of January 1, 2008. Incorporated by reference to
Exhibit 10.49 to the Quarterly Report on Form 10-Q of FCX for the quarter
ended September 31, 2007 (the FCX 2007 Third Quarter Form
10-Q).
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10.46
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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.
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10.47
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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.
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Supplemental
Letter Agreement between FMS and B. M. Rankin, Jr., effective as of
January 1, 2008.
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10.49
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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.
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10.50
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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.
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10.51
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|
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.
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10.52
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Supplemental
Consulting Agreement between FMS and J. Bennett Johnston, Jr., effective
as of January 1, 2008. Incorporated by reference to Exhibit
10.56 to the FCX 2007 Third Quarter Form 10-Q.
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10.53
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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.
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10.54
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Supplemental
Letter Agreement, between FMS and Gabrielle K. McDonald, effective as of
January 1, 2008. Incorporated by reference to Exhibit 10.58 to
the FCX 2007 Third Quarter Form 10-Q.
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10.55
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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.
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Agreement
for Consulting Services between FMS and Dr. J. Taylor Wharton effective as
of January 11, 2008.
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Executive
Employment Agreement effective January 29, 2008, between FCX and Richard
C. Adkerson.
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Table of Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
EXHIBIT
INDEX
Exhibit
Number Description
10.58
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|
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.
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10.59
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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 Annual Report on Form 10-K of FCX for the fiscal year ended
December 31, 2003 (the FCX 2003 Form 10-K).
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10.60
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|
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.
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10.61
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|
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.
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Executive
Employment Agreement effective January 29, 2008, between FCX and Kathleen
L. Quirk.
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|
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10.63
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|
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).
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10.64
|
|
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.
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|
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10.65
|
|
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.
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|
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10.66
|
|
Letter
of employment by and between Freeport-McMoRan Copper & Gold Inc. and
Timothy R. Snider dated April 4, 2007. Incorporated by reference to
Exhibit 10.73 to the FCX 2007 First Quarter Form 10-Q.
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10.67
|
|
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).
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|
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10.68
|
|
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.
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|
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10.69
|
|
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. Incorporated by
reference to Exhibit 10.76 to the FCX 2007 First Quarter Form
10-Q.
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10.70
|
|
The
Phelps Dodge Corporation Supplemental Retirement Plan, amended and
restated effective January 1, 2005 and adopted on March 16, 2007.
Incorporated by reference to Exhibit 10.77 to the FCX 2007 First Quarter
Form 10-Q.
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|
|
|
10.71
|
|
The
Phelps Dodge Corporation Supplemental Savings Plan, amended and restated
effective January 1, 2005, and adopted on March 16, 2007. Incorporated by
reference to Exhibit 10.78 to the FCX 2007 First Quarter Form
10-Q.
|
Table of Contents
FREEPORT-McMoRan
COPPER & GOLD INC.
EXHIBIT
INDEX
Exhibit
Number Description
10.72
|
|
First
Amendment to the Phelps Dodge Corporation Supplemental Savings Plan, dated
March 16, 2007. Incorporated by reference to Exhibit 10.79 to the FCX 2007
First Quarter Form 10-Q.
|
|
|
|
10.73
|
|
Second
Amendment to the Phelps Dodge Corporation Supplemental Savings Plan, dated
as of March 16, 2007. Incorporated by reference to Exhibit 10.80 to the
FCX 2007 First Quarter Form 10-Q.
|
|
|
|
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FCX
Computation of Ratio of Earnings to Fixed Charges.
|
|
|
|
|
|
FCX
Principles of Business Conduct.
|
|
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|
Subsidiaries
of FCX.
|
|
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|
Consent
of Ernst & Young LLP.
|
|
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Consent
of Independent Mining Consultants, Inc.
|
|
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Consent
of Pincock, Allen & Holt.
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Consent
of Chlumsky, Armburst & Meyer, LLC.
|
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Certified
resolution of the Board of Directors of FCX authorizing this report to be
signed on behalf of any officer or director pursuant to a Power of
Attorney.
|
|
|
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Powers
of Attorney pursuant to which this report has been signed on behalf of
certain officers and directors of FCX.
|
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|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d –
14(a).
|
|
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|
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d –
14(a).
|
|
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|
|
|
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.
|