| | Mining and Exploration | | Smelting and Refining | | Eliminations and Other | | FCX Total | |
| | (In Thousands) | |
Three months ended September 30, 2005: | | | | | | | | | | | | | |
Revenues | | $ | 771,190 | a | $ | 378,412 | | $ | (166,332 | ) | $ | 983,270 | |
Production and delivery | | | 247,001 | | | 351,517 | | | (164,150 | )b | | 434,368 | |
Depreciation and amortization | | | 51,143 | | | 7,415 | | | 3,088 | | | 61,646 | |
Exploration expenses | | | 2,099 | | | - | | | 60 | | | 2,159 | |
General and administrative expenses | | | 38,394 | c | | 2,268 | | | (15,116 | )c | | 25,546 | |
Operating income | | $ | 432,553 | | $ | 17,212 | | $ | 9,786 | | $ | 459,551 | |
Equity in PT Smelting earnings | | $ | - | | $ | 1,315 | | $ | - | | $ | 1,315 | |
Interest expense, net | | $ | 5,342 | | $ | 4,140 | | $ | 23,848 | | $ | 33,330 | |
Provision for income taxes | | $ | 146,610 | | $ | - | | $ | 40,102 | | $ | 186,712 | |
Capital expenditures | | $ | 32,447 | | $ | 1,444 | | $ | 2,425 | | $ | 36,316 | |
Total assets | | $ | 3,889,800 | d | $ | 723,149 | e | $ | 264,832 | | $ | 4,877,781 | |
| | | | | | | | | | | | | |
Nine months ended September 30, 2006: | | | | | | | | | | | | | |
Revenues | | $ | 3,094,315 | a | $ | 1,722,327 | | $ | (668,269 | ) | $ | 4,148,373 | |
Production and delivery | | | 931,463 | | | 1,633,169 | | | (689,725 | )b | | 1,874,907 | |
Depreciation and amortization | | | 117,637 | | | 22,887 | | | 6,908 | | | 147,432 | |
Exploration expenses | | | 8,479 | | | - | | | 216 | | | 8,695 | |
General and administrative expenses | | | 174,285 | c | | 10,902 | | | (74,359 | )c | | 110,828 | |
Operating income | | $ | 1,862,451 | | $ | 55,369 | | $ | 88,691 | | $ | 2,006,511 | |
Equity in PT Smelting earnings | | $ | - | | $ | 7,073 | | $ | - | | $ | 7,073 | |
Interest expense, net | | $ | 5,758 | | $ | 17,123 | | $ | 39,370 | | $ | 62,251 | |
Provision for income taxes | | $ | 653,449 | | $ | - | | $ | 182,361 | | $ | 835,810 | |
Capital expenditures | | $ | 167,690 | | $ | 12,942 | | $ | (2,620 | ) | $ | 178,012 | |
| | | | | | | | | | | | | |
Nine months ended September 30, 2005: | | | | | | | | | | | | | |
Revenues | | $ | 2,136,974 | a | $ | 982,425 | | $ | (430,155 | ) | $ | 2,689,244 | |
Production and delivery | | | 664,234 | | | 937,003 | | | (411,277 | )b | | 1,189,960 | |
Depreciation and amortization | | | 142,285 | | | 21,645 | | | 8,801 | | | 172,731 | |
Exploration expenses | | | 6,263 | | | - | | | 158 | | | 6,421 | |
General and administrative expenses | | | 90,001 | c | | 8,173 | | | (25,635 | )c | | 72,539 | |
Operating income (loss) | | $ | 1,234,191 | | $ | 15,604 | | $ | (2,202 | ) | $ | 1,247,593 | |
Equity in PT Smelting earnings | | $ | - | | $ | 6,473 | | $ | - | | $ | 6,473 | |
Interest expense, net | | $ | 16,966 | | $ | 12,332 | | $ | 76,872 | | $ | 106,170 | |
Provision for income taxes | | $ | 429,936 | | $ | - | | $ | 109,488 | | $ | 539,424 | |
Capital expenditures | | $ | 85,955 | | $ | 7,307 | | $ | 2,345 | | $ | 95,607 | |
| | | | | | | | | | | | | |
Other North American mining operations, although not reportable segments, include FCX’s other southwestern U.S. copper mines - Bagdad, Sierrita, Chino, Cobre, Tyrone, Miami, Bisbee and Tohono. In addition to copper, the Bagdad, Sierrita and Chino mines produce molybdenum, gold, silver and rhenium. Other North American mining operations also include the Safford project, which is currently under development and a sales company, which functions as an agent to purchase and sell copper from the North American mines and the Manufacturing segment and also purchases and sells any copper not sold by the South American mines to third parties.
Intersegment revenues of individual North American mines represent an internal allocation based on sales to unaffiliated customers and realized copper prices. Intersegment sales by the South American mines are based upon arms-length prices at the time of the sale. Intersegment sales of any individual mine may not be reflective of the actual prices ultimately realized because of a variety of factors, including additional processing, timing of sales to unaffiliated customers and transportation premiums.
South American Mining. South American mining includes one reportable copper production segment (Cerro Verde). The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces electrowon copper cathodes and copper concentrates. In addition to copper, the Cerro Verde mine produces molybdenum and silver. FCX owns a 53.56 percent equity interest in Cerro Verde, which it fully consolidates and reports the minority interest. The remaining 46.44 percent is held by SMM Cerro Verde Netherlands B.V., Compañía de Minas Buenaventura S.A.A. and other minority shareholders through shares publicly traded on the Lima Stock Exchange.
Cerro Verde has recently completed an approximate $900 million expansion project, which permits the mining of a primary sulfide ore body beneath the leachable ore body currently in production. Through the expansion, approximately 1.5 billion tons of sulfide ore reserves averaging 0.47 percent copper and 0.02 percent molybdenum will be processed through the new concentrator. Processing of the sulfide ore began in the fourth quarter of 2006, and the mill is on schedule to reach design capacity during the second quarter of 2007. With the completion of the expansion, copper production at Cerro Verde initially is expected to approximate 650 million pounds per year (approximately 348 million pounds per year for FCX’s share). In addition, the expansion is expected to produce an average of approximately 8 million pounds of molybdenum per year (approximately 4 million pounds per year for FCX’s share) for the next 10 years.
Other South American mining operations, although not reportable segments, include FCX’s other South American copper mines - Candelaria, Ojos del Salado and El Abra - which include open-pit and underground mining, sulfide ore concentrating, leaching, solution extraction and electrowinning. In addition to copper, the Candelaria and Ojos del Salado mines produce gold and silver. FCX owns an 80 percent partnership interest in both the Candelaria and Ojos del Salado mines, and owns a 51 percent partnership interest in the El Abra mine. FCX fully consolidates these operations and reports the minority interest. Other South American mining operations also includes other ancillary operations.
Atlantic Copper Smelting & Refining. Atlantic Copper smelting & refining includes FCX’s smelting and refining operations in Spain.
PDIC. PDIC is FCX’s international manufacturing division, which produces engineered products principally for the global energy sector. Its operations are characterized by products with internationally competitive costs
and quality, and specialized engineering capabilities. Its factories, which are located in nine countries throughout Latin America, Asia and Africa, manufacture energy cables for international markets. Three of PDIC’s international manufacturing companies have continuous-cast copper rod facilities, and three have continuous-cast aluminum rod facilities.
In addition to the allocation of revenues, FCX allocates certain operating costs, expenses and capital to the individual segments that may not be reflective of market conditions. FCX does not allocate all costs and expenses applicable to a mine or operation from the division or corporate offices. Accordingly, the following segment information reflects management determinations that may not be indicative of actual financial performance of each segment as if it was an independent entity.
(in millions) | Indonesia | | North America | | South America | | | | | | | | | |
| | | | | | | | | Other | | Total | | | | Other | | Total | | Atlantic | | | | | | | |
| | | | | | | | | North | | North | | | | South | | South | | Copper | | | | Corporate, | | | |
| | | | | Manufac- | | Primary | | American | | American | | Cerro | | American | | American | | Smelting | | | | Other & | | FCX | |
First-Quarter 2007 | Grasberg | | Morenci | | turing | | Molybdenum | | Mining | | Mining | | Verde | | Mining | | Mining | | & Refining | | PDIC | | Eliminations | | Total | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unaffiliated customers | $ | 1,331.9 | a | - | | 206.6 | | 52.2 | | 60.4 | | 319.2 | | 14.4 | | 125.1 | | 139.5 | | 454.0 | | 57.0 | | 1.3 | | 2,302.9 | |
Intersegment | | 376.6 | | 21.6 | | 8.8 | | - | | (6.1 | ) | 24.3 | | 96.8 | | 25.4 | | 122.2 | | - | | 0.1 | | (523.2 | ) | - | |
Production and delivery | | 322.5 | | 29.5 | | 209.8 | | 51.8 | | 61.0 | | 352.1 | b | 44.6 | | 71.4 | | 116.0 | b | 427.0 | | 48.6 | | (314.1 | ) | 952.1 | |
Depreciation, depletion | | | | | | | | | | | | | | | | | | | | | | | | | | | |
and amortization | | 59.2 | | 5.0 | | 0.4 | | 3.3 | | 5.3 | | 14.0 | | 8.8 | | 19.6 | | 28.4 | | 10.5 | | 0.5 | | 3.7 | | 116.3 | |
Exploration and research | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expenses | | - | | - | | - | | - | | 0.2 | | 0.2 | | - | | - | | - | | - | | - | | 6.3 | | 6.5 | |
Selling, general and | | | | | | | | | | | | | | | | | | | | | | | | | | | |
administrative expenses | | 43.8 | | - | | - | | 0.5 | | 0.3 | | 0.8 | | - | | - | | - | | 4.1 | | 0.9 | | (0.7 | ) | 48.9 | |
Operating income (loss) | $ | 1,283.0 | | (12.9 | ) | 5.2 | | (3.4 | ) | (12.5 | ) | (23.6 | ) | 57.8 | | 59.5 | | 117.3 | | 12.4 | | 7.1 | | (217.1 | ) | 1,179.1 | |
Interest expense, net | $ | 4.0 | | - | | 0.2 | | - | | (0.2 | ) | - | | 0.4 | | (0.2 | ) | 0.2 | | 7.2 | | 0.3 | | 40.2 | | 51.9 | |
Equity in affiliated | | | | | | | | | | | | | | | | | | | | | | | | | | | |
companies’ net earnings | $ | - | | - | | - | | - | | 0.2 | | 0.2 | | - | | - | | - | | - | | - | | 4.3 | | 4.5 | |
Provision for income taxes | $ | 452.9 | | - | | - | | - | | - | | - | | 21.7 | | 19.2 | | 40.9 | | - | | - | | (33.6 | ) | 460.2 | |
Minority interests in net | | | | | | | | | | | | | | | | | | | | | | | | | | | |
income of consolidated | | | | | | | | | | | | | | | | | | | | | | | | | | | |
subsidiaries | $ | - | | - | | - | | - | | - | | - | | 25.3 | | 21.8 | | 47.1 | | - | | 0.7 | | 66.6 | | 114.4 | |
Total assets at March 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2007 | $ | 4,549.3 | | 4,775.5 | | 779.0 | | 1,918.1 | | 8,635.7 | | 16,108.3 | | 4,010.6 | | 4,484.9 | | 8,495.5 | | 1,074.8 | | 1,119.5 | | 10,086.6 | | 41,434.0 | |
Capital expenditures | $ | 74.0 | | 15.3 | | 1.7 | | 1.5 | | 34.3 | | 52.8 | | 0.6 | | 1.6 | | 2.2 | | 7.5 | | 0.5 | | 5.4 | | 142.4 | |
First-Quarter 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unaffiliated customers | $ | 568.4 | a | - | | - | | - | | - | | - | | - | | - | | - | | 516.1 | | - | | 1.6 | | 1,086.1 | |
Intersegment | | 228.4 | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | (228.4 | ) | - | |
Production and delivery | | 286.7 | | - | | - | | - | | - | | - | | - | | - | | - | | 491.4 | | - | | (300.2 | ) | 477.9 | |
Depreciation, depletion and | | | | | | | | | | | | | | | | | | | | | | | | | | | |
amortization | | 33.8 | | - | | - | | - | | - | | - | | - | | - | | - | | 7.4 | | - | | 2.1 | | 43.3 | |
Exploration and research | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expenses | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 2.6 | | 2.6 | |
Selling, general and | | | | | | | | | | | | | | | | | | | | | | | | | | | |
administrative expenses | | 82.3 | | - | | - | | - | | - | | - | | - | | - | | - | | 3.8 | | - | | (55.5 | ) | 30.6 | |
Operating income (loss) | $ | 394.0 | | - | | - | | - | | - | | - | | - | | - | | - | | 13.5 | | - | | 124.2 | | 531.7 | |
Interest expense, net | $ | 3.3 | | - | | - | | - | | - | | - | | - | | - | | - | | 5.4 | | - | | 14.0 | | 22.7 | |
Equity in affiliated | | | | | | | | | | | | | | | | | | | | | | | | | | | |
companies’ net earnings | $ | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 3.6 | | 3.6 | |
Provision for income taxes | $ | 144.6 | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 77.1 | | 221.7 | |
Minority interests in net | | | | | | | | | | | | | | | | | | | | | | | | | | | |
income of consolidated | | | | | | | | | | | | | | | | | | | | | | | | | | | |
subsidiaries | $ | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 27.1 | | 27.1 | |
Total assets at March 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2006 | $ | 3,724.4 | | - | | - | | - | | - | | - | | - | | - | | - | | 963.6 | | - | | 108.2 | | 4,796.2 | |
Capital expenditures | $ | 48.9 | | - | | - | | - | | - | | - | | - | | - | | - | | 3.5 | | - | | (0.3 | ) | 52.1 | |
a. | Includes PT Freeport Indonesia’s sales to PT Smelting totaling $457.6$584.3 million in the 2007 quarter and $282.5 million in the 2006 quarter, $214.1 million in the 2005 quarter, $1,065.5 million in the 2006 nine-month period and $643.1 million in the 2005 nine-month period.quarter. |
b. | Includes deferralthe purchase accounting impact of intercompany profits on 25 percent of PT Freeport Indonesia’s sales to PT Smelting, for which the final sale to third parties has not occurred, totaling $20.3 millionincrease in the 2006 quarter, $3.1carrying amount of Phelps Dodge’s metals inventories totaling $47.8 million in the 2005 quarter, $7.4for North American mining and $47.8 million in the 2006 nine-month period and $3.1 million in the 2005 nine-month period.for South American mining. |
c. | Includes charges to the mining and exploration segment for the in-the-money value of FCX stock option exercises which are eliminated in consolidation totaling $2.1 million in the 2006 quarter, $16.7 million in the 2005 quarter, $87.5 million in the 2006 nine-month period and $34.1 million in the 2005 nine-month period. |
d. | Includes PT Freeport Indonesia’s trade receivables with PT Smelting totaling $166.1 million at September 30, 2006, and $98.2 million at September 30, 2005. |
e. | Includes PT Freeport Indonesia’s equity investment in PT Smelting totaling $26.6 million at September 30, 2006, and $51.2 million at September 30, 2005. |
A summary of FCX’s comprehensive income is shown below (in thousands).
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Net income | | $ | 365,787 | | $ | 180,930 | | $ | 1,014,942 | | $ | 516,822 | |
Other comprehensive income (loss): | | | | | | | | | | | | | |
Change in unrealized derivatives’ fair value, net of taxes | | | | | | | | | | | | | |
of $(0.5) million for the three months ended September | | | | | | | | | | | | | |
30, 2006, $1.8 million for the three months ended | | | | | | | | | | | | | |
September 30, 2005, $(0.7) million for the nine months | | | | | | | | | | | | | |
ended September 30, 2006 and $2.9 million for | | | | | | | | | | | | | |
the nine months ended September 30, 2005 | | | 1,435 | | | (2,387 | ) | | (9,370 | )a | | (3,732 | ) |
Reclass to earnings, net of taxes of $0.5 million | | | | | | | | | | | | | |
for the three months ended September 30, 2006, $1.5 | | | | | | | | | | | | | |
million for the nine months ended September 30, 2006 | | | | | | | | | | | | | |
and $0.2 million for the nine months ended September | | | | | | | | | | | | | |
30, 2005 | | | 1,590 | | | (20 | ) | | 1,929 | | | (115 | ) |
Total comprehensive income | | $ | 368,812 | | $ | 178,523 | | $ | 1,007,501 | | $ | 512,975 | |
| | | | | | | | | | | | | |
a. | Includes unrealized losses on PT Smelting’s hedging contracts to fix a portion of its revenues through 2007. At September 30, 2006, FCX had unrealized losses of $7.5 million in accumulated other comprehensive income related to these contracts. |
11. | RATIO OF EARNINGS TO FIXED CHARGES |
The ratio of earnings to fixed charges for the first nine months of 2006 was 28.7 to 1 compared with 11.1 to 1 for the 2005 period. For this calculation, earnings consist of income from continuing operations before income taxes, minority interests and fixed charges. Fixed charges include interest and that portion of rent deemed representative of interest.
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan COPPER & GOLD INC.:
We have reviewed the condensed consolidated balance sheet of Freeport-McMoRan Copper & Gold Inc. and subsidiaries as of September 30, 2006 andMarch 31, 2007, the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2006 and 2005, and the consolidated statements of cash flows for the nine-monththree-month periods ended September 30,March 31, 2007 and 2006, and 2005.the related consolidated statement of stockholders’ equity for the three-month period ended March 31, 2007. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Freeport-McMoRan Copper & Gold Inc. and subsidiaries as of December 31, 2005,2006, and the related consolidated statements of income, stockholders’stockholder’s equity, and cash flows for the year then ended (not presented herein), and in our report dated February 24, 2006,26, 2007, we expressed an unqualified opinion on those consolidated financial statements.statements and which report included an explanatory paragraph for the Company’s adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” effective January 1, 2006; Emerging Issues Task Force Issue No. 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry,” effective January 1, 2006; and Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R,” effective December 31, 2006. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005,2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
New Orleans, Louisiana
October 31, 2006May 8, 2007
OVERVIEW
In management’s discussion and analysis, “we,” “us” and “our” refer to Freeport-McMoRan Copper & Gold Inc. (FCX) and its consolidated subsidiaries. References to “aggregate” amounts mean the total of our sharesubsidiaries, including, except as otherwise stated, Phelps Dodge Corporation (Phelps Dodge) and Rio Tinto plc’s share as our joint venture partner.its subsidiaries, which we acquired March 19, 2007. You should read this discussion in conjunction with our financial statements, the related discussion and analysis of financial condition and results of operations and the discussion of our “Business and Properties” in our Form 10-K for the year ended December 31, 2005,2006, filed with the Securities and Exchange Commission. The results of operations reported and summarized below are not necessarily indicative of future operating results. In particular, the financial results discussed include the operations of Phelps Dodge for only 12 days, not the full first quarter of 2007 because of the accounting treatment for the acquisition. References to “Notes” are Notes included in our “Notes to Consolidated Financial Statements.” PerThroughout management's discussion and analysis of financial condition and results of operations, all references to earnings or losses per share amounts are based on a diluted basis unless otherwise noted.earnings or losses per common share.
Through our majority-owned subsidiary, PT Freeport Indonesia, and our wholly owned subsidiary, Phelps Dodge, we haveare one of the world’s largest copper, gold and goldmolybdenum mining and production operationscompanies in terms of reserves and production. Our principal asset is a majority ownership interest in the Grasberg minerals district, which based on the latest available year-end 2005 copper reserve data and year-end 2006 gold reserve data provided by third-party industry consultants, contains the largest single copper reserve and the largest single gold reserve of any mine in the world.
On March 19, 2007, we acquired Phelps Dodge, a fully integrated producer of copper and molybdenum, with mines in North and South America and processing capabilities for other by-product minerals, such as gold, silver and rhenium, and several development projects, including the Tenke Fungurume mine in the Democratic Republic of Congo (DRC). Additionally, Phelps Dodge has an international manufacturing division, Phelps Dodge International Corporation (PDIC), which manufactures engineered products principally for the global energy sector.
Through Phelps Dodge, we have five operating open-pit copper mines in North America - Morenci, Bagdad and Sierrita in Arizona and Chino/Cobre and Tyrone in New Mexico, and two primary molybdenum mines - Henderson and Climax (not currently operating) in Colorado. In addition, a new copper mine is under construction at Safford, Arizona. All of these mining operations are wholly owned, except for Morenci. FCX records its 85 percent interest in Morenci, an unincorporated joint venture, using the proportionate consolidation method. The North American mining operations are operated in an integrated fashion and have long-lived reserves with additional development potential.
Additionally, through Phelps Dodge, we have four copper mines in South America - Candelaria, Ojos del Salado and El Abra in Chile and Cerro Verde in Peru. We own an 80 percent partnership interest in both Candelaria and Ojos del Salado, a 51 percent partnership interest in El Abra and a 53.56 percent equity interest in Cerro Verde. FCX fully consolidates the results of these operations and reports the minority interest.
ACQUISITION OF PHELPS DODGE
Phelps Dodge became a wholly owned subsidiary of FCX on March 19, 2007. In the acquisition, each share of Phelps Dodge common stock was exchanged for 0.67 of a share of FCX common stock and $88.00 in cash. As a result, FCX issued 136.9 million shares and paid approximately $18.0 billion in cash to Phelps Dodge shareholders. The estimated fair value of assets acquired and liabilities assumed and the results of Phelps Dodge’s operations are included in FCX’s consolidated financial statements beginning March 20, 2007.
FCX paid a premium (i.e., goodwill) over the estimated fair value of the net tangible and identified intangible assets acquired for a number of potential strategic and financial benefits that are expected to be realized. Refer to Note 2 for a discussion of these potential benefits.
Accounting for the Acquisition of Phelps Dodge. The acquisition of Phelps Dodge is being accounted for under the purchase method as required by Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” with FCX as the accounting acquirer. Refer to Note 2 for a summary of the $25.9 billion purchase price, which was funded through a combination of common shares issued, borrowings under a new $11.5 billion senior credit facility, proceeds from the offering of $6 billion senior notes and available cash resources.
In accordance with the purchase method of accounting, the purchase price paid for our acquisition of Phelps Dodge was determined at the date of the public announcement of the transaction and has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the closing date of March 19, 2007. The estimated fair values were based on internal estimates and are subject to change as we complete our analyses. In valuing acquired assets and liabilities, fair values were based on, but were not limited to: quoted market prices, where available; our intent with respect to whether the assets purchased are to be held, sold or abandoned; expected future cash flows; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; and appropriate discount rates and growth rates. A significant decline in copper or molybdenum prices from those used to estimate the fair values of the acquired assets could result in an impairment to the carrying amounts assigned to inventories, mill and leach stockpiles, property, plant and equipment, and goodwill.
The following table summarizes the estimated impacts of fair value adjustments on 2007 production and delivery costs and depreciation, depletion and amortization expense. These amounts do not affect cash flows and are based on the preliminary purchase price allocations and projected sales volumes (refer to Note 2 for a summary of the March 31, 2007, preliminary purchase price allocation). Changes to fair value estimates of inventories (including mill and leach stockpiles) and/or property, plant and equipment, as well as, changes in the timing of quarterly sales volumes, could result in actual amounts differing significantly from those shown below. Additionally, inventories (including mill and leach stockpiles) are subject to lower of cost or market assessments, and significant declines in metals prices could result in future impairment charges.
| 2007 | |
| First | | Second | | Second | | | |
| Quarter | | Quarter | | Half | | Total | |
(In Millions) | Actual | | Estimate | | Estimate | | Estimate | |
Depreciation, depletion and amortization | $ | 28 | | $ | 200 | | $ | 450 | | $ | 678 | |
Production costs | | 96 | | | 340 | | | 250 | | | 686 | |
Total | $ | 124 | | $ | 540 | | $ | 700 | | $ | 1,364 | |
| | | | | | | | | | | | |
Estimated reduction in net income | $ | 79 | | $ | 340 | | $ | 440 | | $ | 859 | |
COPPER, GOLD AND MOLYBDENUM MARKETS
As shown in the graphs below, world metal prices for copper have fluctuated during the period from 1992 through April 2007 with the London Metal Exchange (LME) spot copper price varying from a low of approximately $0.60 per pound in 2001 to a high of approximately $4.00 per pound in May 2006. World gold prices have fluctuated during the period from 1998 through April 2007 from a low of approximately $250 per ounce in 1999 to a high of approximately $725 per ounce in May 2006. During the past 15 years, Metals Week Dealer Oxide prices for molybdenum have ranged from a low of $1.82 per pound in 1992 to a high of $40.00 per pound in June 2005. Copper, gold and molybdenum prices are affected by numerous factors beyond our control as described further in our “Risks Factors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q.
* Excludes Shanghai stocks, producer, consumer and merchant stocks.
The graph above presents LME spot copper prices and reported stocks of copper at the LME and New York Commodity Exchange (COMEX) through April 30, 2007. From 2003 through 2005, global demand exceeded supply, evidenced by the decline in exchange warehouse inventories. LME and COMEX inventories have risen from the 2005 lows but combined stocks of approximately 211,000 metric tons at March 31, 2007, remain at historically low levels, representing less than one week of global consumption. Disruptions associated with strikes, unrest and other operational issues resulted in low levels of inventory throughout 2006. However, in December 2006 and early 2007, prices declined on concerns about reduced demand, especially in the United States (U.S.), and rising inventories. LME copper prices averaged $2.69 per pound in the first quarter of 2007, with prices ranging from $2.37 per pound to approximately $3.15 per pound. Copper prices have risen recently and the LME spot price closed at $3.55 per pound on April 30, 2007. Future copper prices are expected to continue to be influenced by demand from China, economic performance in the U.S. and other industrialized countries, the timing of the development of new supplies of copper, production levels of mines and copper smelters and the level of direct participation by investors. We consider the current underlying supply and demand conditions in the global copper markets to be positive for our company.
After reaching new 25-year highs above $700 per ounce in May 2006, gold prices declined in the second half of 2006. Gold prices averaged approximately $650 per ounce in the first quarter of 2007, with prices ranging from approximately $608 per ounce to approximately $686 per ounce. Gold prices continued to be supported by increased investment demand for gold, ongoing geopolitical tensions, a weak U.S. dollar, inflationary pressures, falling production from older mines, limited development of new mines and actions by gold producers to reduce hedge positions. The London gold price closed at approximately $677 per ounce on April 30, 2007.
Molybdenum markets have been strong in recent years as demand has exceeded available supplies. In 2006, the molybdenum market was generally balanced with prices ranging from $20.50 per pound to $28.40 per pound and averaging $24.75 per pound. Demand for molybdenum continued to be strong in the first quarter of 2007. With strong demand and a constrained supply environment, prices averaged $25.99 per pound in the first quarter of 2007, ranging from $24.50 per pound to $28.13 per pound. The Metals Week Dealer Oxide price was $28.33 per pound on April 30, 2007.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States (U.S.). The preparation of these statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experience and on assumptions that we consider reasonable under the circumstances; however, reported results could differ from those based on the current estimates under different assumptions or conditions. As a result of the acquisition of Phelps Dodge, the following provides additional and/or revised critical accounting policies and estimates to those presented in our 2006 Annual Report on Form 10-K for the year ended December 31, 2006.
Recoverable Copper. We record as inventory applicable costs for copper contained in mill and leach stockpiles that are expected to be processed in the future based on proven processing technologies. The mill and leach stockpiles are evaluated periodically to ensure that they are stated at the lower of cost or market. Because the determination of copper contained in mill and leach stockpiles by physical count is impractical, we employ reasonable estimation methods.
The quantity of material delivered to mill stockpiles and in leach stockpiles is based on surveyed volumes of mined material and daily production records. Sampling and assaying of blasthole cuttings determine the estimated copper grade contained in the material delivered to the mill and leach stockpiles. Expected copper recovery rates for mill stockpiles are determined by metallurgical testing. The recoverable copper in mill stockpiles can be extracted into copper concentrate almost immediately upon processing.
Estimates of copper contained in mill stockpiles are adjusted as material is added or removed and fed to the mill.
Expected copper recovery rates for leach stockpiles are determined using small-scale laboratory tests, small- to large-scale column testing (which simulates the production-scale process), historical trends and other factors, including mineralogy of the ore and rock type. Estimated amounts of copper contained in the leach stockpiles are reduced as stockpiles are leached, the leach solution is fed to the electrowinning process, and copper cathodes are produced. Ultimate recovery of copper contained in leach stockpiles can vary significantly depending on several variables, including type of processing, mineralogy and particle size of the rock. Although as much as 70 percent of the copper ultimately recoverable may be extracted during the first year of processing, recovery of the remaining copper may take many years.
Asset Impairments. We evaluate long-term assets to be held and used for impairment when events or changes in economic circumstances indicate the carrying amount of such assets may not be recoverable. Goodwill, investments and our identifiable intangible assets are evaluated at least annually for impairment. Evaluations are based on business plans developed using a time horizon reflective of the historical, moving average for the full price cycle. We use an estimate of future pre-tax, undiscounted net cash flows of the related asset or asset grouping over the remaining life to measure whether the assets are recoverable and measure any impairment by reference to fair value. Fair value is based on observable market prices; in the absence of observable market prices, fair value is generally estimated using estimated after-tax, discounted net cash flows. Should estimates of future copper, gold and molybdenum prices decrease, impairments may result.
Deferred Taxes. In preparing our consolidated financial statements, we recognize income taxes in each of the jurisdictions in which we operate. For each jurisdiction, we estimate the actual amount of taxes currently payable or receivable as well as deferred tax assets and liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates and laws is recognized in income in the period in which such changes are enacted.
A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each jurisdiction. If we determine that we will not realize all or a portion of our deferred tax assets, we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that we will ultimately be able to realize all or a portion of the related benefits for which a valuation allowance has been provided, all or a portion of the related valuation allowance will be reduced with a credit to income tax expense.
Environmental Obligations. Our mining, exploration, production and historical operating activities are subject to stringent laws and regulations governing the protection of the environment and compliance with those laws requires significant expenditures. Environmental expenditures for closed facilities and closed portions of operating facilities are expensed or capitalized depending upon their future economic benefits. The general guidance provided by U.S. generally accepted accounting principles requires that liabilities for contingencies be recorded when it is probable that a liability has been incurred and that the amount can be reasonably estimated. Refer to Note 3 for further discussion of our accounting policy for environmental expenditures.
Significant management judgment and estimates are required to comply with this guidance. Accordingly, management reviews changes in facts and circumstances associated with the environmental obligations. Judgments and estimates are based upon available facts, existing technology, and current laws and regulations, and take into consideration reasonably possible outcomes. The estimates can change substantially as additional information becomes available regarding the nature or extent of site contamination, required remediation methods, and actions by or against governmental agencies or private parties.
At March 31, 2007, the fair value of environmental reserves from Phelps Dodge totaled approximately $356 million for environmental liabilities attributed to Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) or analogous state programs and for estimated future costs associated with environmental matters at closed facilities and closed portions of certain facilities. The cost range for reasonably possible outcomes for all remediation sites where a liability was recognized, on an undiscounted and unescalated basis, was approximately $336 million to $624 million.
We have a number of sites for which an environmental reserve has not been recorded because it is not probable that a successful claim will be made against us for those sites, but for which there is a reasonably possible likelihood of an environmental remediation liability. The liabilities arising from these potential environmental obligations for which an environmental reserve has not been recorded at this time may be material to the operating results of any quarter or year in the future. However, we believe any liability arising from potential environmental obligations is not likely to have a material adverse effect on our liquidity or financial position as such obligations could be satisfied over a number of years.
Purchase Accounting. We accounted for the acquisition of Phelps Dodge under the purchase method as required by SFAS No. 141, with FCX as the accounting acquirer. In accordance with the purchase method of accounting, the price paid by us for Phelps Dodge was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired represents goodwill that will be allocated to reporting units and subject to annual impairment testing.
At March 31, 2007, we completed a preliminary purchase price allocation. The estimated fair values of assets acquired and liabilities assumed were based on internal estimates and are subject to change as we complete more detailed analyses. Refer to Note 2 for a summary of the March 31, 2007, preliminary purchase price allocation. At March 31, 2007, the difference between the purchase price and the preliminary fair value of net identifiable assets and liabilities acquired was recorded as goodwill. Upon finalization of the purchase price allocation, any resulting goodwill will be allocated to the reporting units, which could range from individual mines to groups of mines in each regional business unit.
CONSOLIDATED RESULTS
Below is a summary of comparative results for the first quarter of 2007 (which includes the results of Phelps Dodge beginning March 20, 2007), and the first quarter of 2006:
| First Quarter | |
| 2007 | | 2006 | |
Revenues (in millions) | $ | 2,302.9 | a,b | $ | 1,086.1 | c |
Operating income (in millions) | $ | 1,179.1 | b,d | $ | 531.7 | c |
Net income applicable to common stock (in millions)e | $ | 476.2 | b,d,f | $ | 251.7 | c |
Diluted net income per share of common stockg | $ | 2.02 | b,d,f | $ | 1.23 | c |
| | | | | | |
Sales from Mines | | | | | | |
Copper | | | | | | |
Consolidated share (millions of recoverable pounds) | | 520.3 | a | | 225.2 | |
Average realized price per pound | $ | 3.00 | b | $ | 2.43 | |
Gold | | | | | | |
Consolidated share (thousands of recoverable pounds) | | 955.9 | a | | 472.5 | |
Average realized price per ounce | $ | 654.63 | | $ | 405.54 | c |
Molybdenum | | | | | | |
Consolidated share (millions of recoverable pounds) | | 1.7 | a | | N/A | |
Average realized price per pound | $ | 23.26 | | | N/A | |
| | | | | | |
a. | Phelps Dodge consolidated revenues for the 12-day period ending March 31, 2007, totaled $515.7 million from consolidated sales totaling 103.2 million pounds of copper, 9.4 thousand ounces of gold and 1.7 million pounds of molybdenum. |
b. | Includes charges to revenues for noncash mark-to-market accounting adjustments on Phelps Dodge’s 2007 copper price protection programs totaling $38.1 million ($23.2 million to net income or $0.10 per share) or $0.07 per pound, representing the increase in the mark-to-market liability from March 20, 2007, to March 31, 2007. |
c. | Includes a loss on redemption of our Gold-Denominated Preferred Stock, Series II totaling $69.0 million ($36.6 million to net income or $0.17 per share) and a reduction in average realized prices of $150.46 per ounce for the revenue adjustment relating to the redemption. |
d. | Includes the purchase accounting impact of the increase in the carrying amount of Phelps Dodge’s property, plant and equipment costs and metals inventories totaling $124.2 million ($79.0 million to net income or $0.32 per share). |
e. | After preferred dividends. |
f. | Includes net losses on early extinguishment of debt totaling $87.8 million ($74.6 million to net income or $0.31 per share) for financing transactions related to the acquisition of Phelps Dodge. |
g. | On March 19, 2007, we issued 136.9 million common shares to acquire Phelps Dodge. On March 28, 2007, we sold 47.15 million common shares. Common shares outstanding on March 31, 2007, totaled 380.9 million. Assuming conversion of all our convertible instruments, total potential common shares outstanding would be 451.3 million at March 31, 2007. |
Below is a summary of the key components contributing to first-quarter 2007 results (in millions):
| | | Operating | | | |
| Revenues | | Income | | Net Income | |
FCX, excluding Phelps Dodge | $ | 1,787.2 | | $ | 1,085.7 | | $ | 451.8 | |
Phelps Dodge 12-day results | | 515.7 | | | 217.6 | | | 103.4 | |
Purchase accounting | | - | | | (124.2 | )a | | (79.0 | ) |
Consolidated | $ | 2,302.9 | | $ | 1,179.1 | | $ | 476.2 |
a. Includes charges of $96.4 million to production and delivery costs related to the purchase accounting impacts of the increase in metals inventories carrying value and $27.8 million to depreciation, depletion and amortization related to the purchase accounting impacts of the increases in carrying value of property, plant and equipment costs.
Outlook
Our consolidated sales volumes for 2007, including Phelps Dodge sales volumes beginning March 20, 2007, are currently projected to approximate 3.4 billion pounds of copper, 1.9 million ounces of gold and 53 million pounds of molybdenum. Pro forma sales volumes for 2007, including sales prior to the acquisition of Phelps Dodge, are estimated to approximate 3.9 billion pounds of copper, 1.9 million ounces of gold and 70 million pounds of molybdenum. Projected sales volumes for the second quarter of 2007 total 970 million pounds of copper, 600 thousand ounces of gold and 17 million pounds of molybdenum. The achievement of these sales estimates will be dependent, among other factors, on the achievement of targeted mining rates and expansion plans, the successful operation of production facilities, the impact of weather conditions and other factors.
Refer to Note 2 for pro forma financial information, which assumes that FCX acquired Phelps Dodge effective January 1, 2007, for the three-month period ended March 31, 2007, and January 1, 2006, for the three-month period ended March 31, 2006.
Revenues
Consolidated revenues include PT Freeport Indonesia’s sale of copper concentrates, which also contain significant quantities of gold and silver, the sale by Atlantic Copper of copper anodes, copper cathodes, and gold in anodes and slimes, and, beginning March 20, 2007, the sales of copper, gold, molybdenum and other metals and metal-related products by Phelps Dodge. Excluding the addition of revenues in the
first quarter of 2007 associated with Phelps Dodge’s operations ($515.7 million), revenues for the first quarter of 2007 were 65 percent higher than for the first quarter of 2006, reflecting substantially higher copper and gold prices than the 2006 quarter and higher sales volumes. As anticipated, PT Freeport Indonesia mined higher grade ore and reported higher production and sales in the first quarter of 2007, compared with the first quarter of 2006.
At March 31, 2007, our principalconsolidated copper sales included 556.5 million pounds of copper priced at an average of $3.12 per pound and subject to final pricing over the next several months. We estimate that each $0.05 change in the price realized from the March 31, 2007, pricing would impact our 2007 net income by approximately $16 million.
Adjustments to concentrate sales recognized in prior quarters decreased first-quarter 2007 revenues by $8.5 million ($4.5 million to net income or $0.02 per share), compared with an increase of $110.2 million ($58.4 million to net income or $0.26 per share) in the first quarter of 2006.
Consolidated revenues and net income vary significantly with fluctuations in the market prices of copper, gold and molybdenum, sales volumes and other factors. Based on projected consolidated copper sales, excluding purchased copper, for the remainder of 2007 (approximately 2.9 billion pounds) and provisionally priced sales at March 31, 2007, and assuming an average price of $3 per pound of copper, each $0.20 per pound change in the average price realized in the balance of the year would have an approximate $650 million impact on our revenues and an approximate $300 million impact on our 2007 net income. Based on projected consolidated gold sales for the remainder of 2007 (0.9 million ounces), a $50 per ounce change in the average price realized would have an approximate $50 million impact on our revenues and an approximate $25 million impact on our 2007 net income. Based on projected consolidated molybdenum sales for the remainder of 2007 (51 million pounds), a $2 per pound change in the average price realized would have an approximate $80 million impact on our revenues and an approximate $50 million impact on our 2007 net income.
On limited past occasions, in response to market conditions, we have entered into copper and gold price protection contracts for a portion of our expected future mine production to mitigate the risk of adverse price fluctuations. We currently have a very small quantity of gold production subject to price protection contracts acquired in the Phelps Dodge transaction. In connection with the acquisition of Phelps Dodge, FCX also now has Phelps Dodge’s 2007 copper price protection programs, which resulted in first-quarter 2007 mark-to-market accounting adjustments to revenues totaling $38.1 million ($23.2 million to net income or $0.10 per share). Refer to Note 14 and “Contractual Obligations - Hedging Activities” for further discussion of the 2007 copper price protection programs. FCX does not currently intend to enter into similar hedging programs in the future. In February 2006, we redeemed our Gold-Denominated Preferred Stock, Series II, which resulted in a $69.0 million ($36.6 million to net income or $0.17 per share) charge to revenues.
Production and Delivery Costs
Consolidated production and delivery costs were higher in the first quarter of 2007 at $952.1 million compared with $477.9 million for the first quarter of 2006. Excluding the addition of production and delivery costs in the first quarter of 2007 associated with the Phelps Dodge operations ($369.3 million, including $96.4 million related to purchase accounting impacts), the increase of $104.9 million was primarily because of a $56.5 million increase related to the change in the amount of intercompany profits eliminated on sales from PT Freeport Indonesia to its 25-percent owned affiliate, PT Smelting. Production and delivery costs for Phelps Dodge operations included $96.4 million of production costs related to the purchase accounting impact of the increase in inventory carrying values.
Energy Costs. Energy, including electricity, diesel fuel, coal and natural gas, represents a significant portion of our production and delivery costs. To moderate the impact of increasing energy costs, we have in place (primarily involving North America operations) a combination of multi-year energy contracts, as well as self-generation and diesel fuel and natural gas hedging contracts. We will continue to review our energy costs and consider appropriate hedging strategies. We may continue to experience high energy costs if prices remain at the levels experienced in 2006.
As a result of the acquisition of Phelps Dodge, we own a one-third interest in the Luna Energy Facility (Luna) located near Deming, New Mexico, which became operational in April 2006. Public Service Company of New Mexico (PNM), a subsidiary of PNM Resources, and Tucson Electric Power, a subsidiary of Unisource Energy Corporation, partnered in the purchase of Luna, each owning a one-third interest and each responsible for one-third of the costs and expenses. PNM is the operating subsidiary,partner of the plant. Approximately 190 megawatts, or one-third of the plant’s electricity, is available to satisfy a significant portion of the electricity demands of our New Mexico and Arizona operations. Electricity in excess of our demand is sold on the wholesale market. Our interest in this efficient, low-cost plant is expected to continue to stabilize our southwest North American mining operations’ energy costs and increase the reliability of our energy supply.
Cost Structure. We continue to experience increases in our worldwide copper production costs. One factor affecting the increase in average copper production costs is Phelps Dodge’s previous restart of certain higher-cost properties in response to strong demand for copper. Costs are also affected by the prices of commodities and equipment consumed or used in our operations. In addition, our cost structure in certain of our North American operations is higher than that of some mines located outside the U.S. This is because of lower ore grades, higher labor costs (including pension and health-care costs) and, in some cases, stricter regulatory requirements.
Depreciation, Depletion and Amortization
Consolidated depreciation, depletion and amortization expense increased to $116.3 million in the first quarter of 2007 compared with $43.3 million in the first quarter of 2006. Excluding the addition of depreciation, depletion and amortization in the first quarter of 2007 associated with the Phelps Dodge operations ($43.3 million, including $27.8 million related to purchase accounting impacts), the remaining $29.7 million increase was primarily because of higher copper sales volumes at PT Freeport Indonesia during the first quarter of 2007 which resulted in higher depreciation, depletion and amortization expense determined using the unit-of-production method.
Selling, General and Administrative Expense
Consolidated selling, general and administrative expense increased to $48.9 million in the first quarter of 2007, compared with $30.6 million in the first quarter of 2006. Excluding the addition of selling, general and administrative expense in the first quarter of 2007 associated with the Phelps Dodge operations ($6.3 million), the remaining increase of $12.0 million was primarily because of sharing arrangements pursuant to our joint venture agreement in Indonesia. Our parent company charges PT Freeport Indonesia for the in-the-money value of exercised employee stock options. These charges are eliminated in consolidation; however, PT Freeport Indonesia shares a portion of these charges with Rio Tinto plc (our joint venture partner in Indonesia) and Rio Tinto’s reimbursements reduce our consolidated selling, general and administrative expenses. Selling, general and administrative expenses are net of Rio Tinto’s share of joint venture reimbursements for employee stock option exercises, which decreased selling, general and administrative expenses by $0.6 million in the first quarter of 2007 and $4.5 million in the first quarter of 2006. In accordance with our joint venture agreement, Rio Tinto’s percentage share of PT Freeport Indonesia’s general and administrative expenses varies with metal sales volumes and prices and totaled approximately 4 percent in the first quarter of 2007, compared with 8 percent in the first quarter of 2006.
Interest Expense, Net
Total consolidated interest cost (before capitalization) increased to $58.7 million in the first quarter of 2007 from $24.4 million in the first quarter of 2006. Interest costs increased primarily because of the debt we incurred to acquire Phelps Dodge (refer to Note 8 and “Capital Resources and Liquidity - Financing Activities” for further discussion). We expect our interest cost for 2007 to be significantly higher compared with 2006 because of this new debt.
Capitalized interest totaled $6.8 million in the first quarter of 2007, compared to $1.8 million in the first quarter of 2006.
Losses on Early Extinguishment and Conversion of Debt, Net
We recorded net charges totaling $87.8 million ($74.6 million to net income or $0.31 per share) in the first quarter of 2007 related to acceleration of amortization of deferred financing costs for the credit facility, net of a $34.6 million refund of fees for early repayment (refer to Note 8 and “Capital Resources and Liquidity - Financing Activities” for further discussion).
Other Income, Net
Other income, net increased to $23.6 million in the first quarter of 2007, compared with $5.0 million in the first quarter of 2006. The increase primarily relates to higher interest income which totaled $18.0 million in the first quarter of 2007, including interest income on cash acquired from Phelps Dodge of $10.8 million for the 12-day period ended March 31, 2007, compared to $7.0 million in the first quarter of 2006. Higher cash balances caused the increase in interest income.
Provision for Income Taxes
Our first-quarter 2007 income tax provision resulted from taxes on earnings at international operations ($505.7 million), partly offset by a tax benefit from losses in the U.S. ($45.5 million). The first-quarter 2007 income tax provision primarily related to the operations of PT Freeport Indonesia. Also included was $33.5 million associated with Phelps Dodge’s earnings for the 12-day period ending March 31, 2007. Our income tax provision ($221.7 million) for first-quarter 2006 resulted from taxes on PT Freeport Indonesia’s earnings.
Our effective income tax rate was approximately 43 percent for first-quarter 2007 and 2006. The difference between the effective income tax rates for the first quarters of 2007 and 2006 and the U.S. federal statutory rate of 35 percent primarily was attributable to withholding taxes incurred in connection with earnings from Indonesian mining operations and income taxes incurred by PT Indocopper Investama. Refer to Note 9 for further discussion of first-quarter 2007 income taxes.
Summaries of the approximate significant components of the calculation of our consolidated provision for income taxes are shown below (in millions, except percentages):
| | | Effective | | | |
| Income | | Tax Rate | | Tax | |
North America | | | | | | | | | |
Income before taxes and minority interests | $ | (76.2 | ) | | 32% | | $ | (24.4 | ) |
Purchase accounting adjustments | | (54.1 | ) | | 39% | | | (21.1 | ) |
Subtotal | | (130.3 | ) | | | | | (45.5 | ) |
South America | | | | | | | | | |
Income before taxes and minority interest | | 187.1 | | | 34% | | | 64.5 | |
Purchase accounting adjustments | | (70.0 | ) | | 34% | | | (24.0 | ) |
Subtotal | | 117.1 | | | | | | 40.5 | |
Indonesia | | | | | | | | | |
Income before taxes and minority interests | | 1,086.1 | | | 43% | | | 462.3 | |
Other | | | | | | | | | |
Income before taxes and minority interests | | (5.4 | ) | | | | | 2.9 | |
| | | | | | | | | |
Consolidated totals | $ | 1,067.5 | | | 43% | | $ | 460.2 | |
Minority Interests in Net Income of Consolidated Subsidiaries
Minority interests in net income of consolidated subsidiaries increased to $114.4 million in the first quarter of 2007, compared with $27.1 million in the first quarter of 2006. Excluding the amounts in the first quarter of 2007 associated with the Phelps Dodge operations ($48.1 million), the increase of $39.2 million was primarily because of higher earnings at PT Freeport Indonesia. First-quarter 2007 minority interest associated with Phelps Dodge’s operations primarily relates to South American mining operations.
RESULTS OF OPERATIONS
Following with the acquisition of Phelps Dodge, our business consists of three primary operating divisions - Indonesian mining, North American mining and South American mining. Refer to “Mining Operations” for further discussion of the operations associated with these divisions.
A summary of revenues from unaffiliated customers and intersegment revenues for the first quarter of 2007 (which includes the results of Phelps Dodge beginning March 20, 2007) and for the first quarter of 2006 follows (in millions):
| 2007 | | 2006 | |
| Unaffiliated | | | | | | | | Unaffiliated | | | | | | | |
| Customers | | Intersegment | | Total | | Customers | | Intersegment | | Total | |
Indonesian mining | $ | 1,331.9 | | $ | 376.6 | | $ | 1,708.5 | | $ | 568.4 | | $ | 228.4 | | $ | 796.8 | |
North American mininga | | 319.2 | | | 24.3 | | | 343.5 | | | - | | | - | | | - | |
South American miningb | | 139.5 | | | 122.2 | | | 261.7 | | | - | | | - | | | - | |
Atlantic Copper smelting & | | | | | | | | | | | | | | | | | | |
refining | | 454.0 | | | - | | | 454.0 | | | 516.1 | | | - | | | 516.1 | |
PDIC | | 57.0 | | | 0.1 | | | 57.1 | | | - | | | - | | | - | |
Corporate, other & eliminations | | 1.3 | | | (523.2 | ) | | (521.9 | ) | | 1.6 | | | (228.4 | ) | | (226.8 | ) |
Consolidated revenues | $ | 2,302.9 | | $ | - | | $ | 2,302.9 | | $ | 1,086.1 | | $ | - | | $ | 1,086.1 | |
a. | Includes our operating mines at Morenci, Bagdad, Sierrita, Chino and Tyrone. Also includes our Manufacturing and Primary Molybdenum operations (see Note 15). |
b. | Includes our mines at Candelaria, Ojos del Salado, El Abra and Cerro Verde (see Note 15). |
Intersegment revenues of individual North American mines represent an internal allocation based on sales to unaffiliated customers and realized copper prices. Intersegment sales by the South American mines are based upon arms-length prices at the time of the sale. Intersegment sales of any individual mine may not be reflective of the actual prices ultimately realized due to a variety of factors, including additional processing, timing of sales to unaffiliated customers and transportation premiums. In addition to the allocation of revenues, we allocate certain operating costs, expenses and capital to the individual divisions and segments that may not be reflective of market conditions. We do not allocate all costs and expenses applicable to a mine or operation from the division or corporate offices. Accordingly, the division segment information reflects management determinations that may not be indicative of actual financial performance of each division or segment as if it was an independent entity.
A summary of operating income (loss) data for the first quarter of 2007 (which includes the results of Phelps Dodge beginning March 20, 2007) and for the first quarter of 2006 follows (in millions):
| First Quarter | |
| 2007 | | 2006 | |
Indonesian mining | $ | 1,283.0 | | $ | 394.0 | |
North American mining | | (23.6 | )a | | - | |
South American mining | | 117.3 | a | | - | |
Atlantic Copper smelting & refining | | 12.4 | | | 13.5 | |
PDIC | | 7.1 | | | - | |
Corporate, other & eliminations | | (217.1 | ) | | 124.2 | |
Consolidated operating income | $ | 1,179.1 | | $ | 531.7 | |
a. Includes the purchase accounting impact of the increase in the carrying amount of Phelps Dodge’s property, plant and equipment costs and metals inventories totaling $54.2 million for North American mining and $69.2 million for South America mining.
MINING OPERATIONS
Indonesian Mining Operations
PT Freeport Indonesia operates under an agreement, called a Contract of Work, with the Government of Indonesia. The Contract of Work allows us to conduct exploration, mining and production activities in a 24,700-acre area called Block A located in Papua, Indonesia. Under the Contract of Work, PT Freeport Indonesia also conducts exploration activities (which are currentlyhad been suspended, but are under review for resumption)have resumed in 2007) in an approximate 500,000-acre area called Block B in Papua. All of ourPT Freeport Indonesia’s proven and probable mineral reserves and current mining operations are located in Block A.
We own 90.64 percent of PT Freeport Indonesia, including 9.36 percent owned through our wholly owned subsidiary, PT Indocopper Investama. The Government of Indonesia owns the remaining 9.36 percent of PT Freeport Indonesia. In July 2004, we received a request from the Indonesian Department of Energy and Mineral Resources that we offer to sell shares in PT Indocopper Investama to Indonesian nationals at fair market value. In response to this request and in view of the potential benefits of having additional Indonesian ownership in our project,operations, we have agreed to consider a potential sale of an interest in PT Indocopper Investama at fair market value. Neither our Contract of Work nor Indonesian law requires us to divest any portion of our ownership interest in PT Freeport Indonesia or PT Indocopper Investama.
We also operate through a majority-owned subsidiary, PT Puncakjaya Power (Puncakjaya Power), and through Atlantic Copper, S.A. (Atlantic Copper) and PT Irja Eastern Minerals (Eastern Minerals), our principal wholly owned subsidiaries. Puncakjaya Power’s sole business is to supply power to PT Freeport Indonesia’s operations. Atlantic Copper’s operations are in Spain and involve the smelting and refining of copper concentrates and the marketing of refined copper and precious metals in slimes. Eastern Minerals conducts mineral exploration activities (which are currently suspended) in Papua, Indonesia. PT Freeport Indonesia owns a 25 percent interest in PT Smelting, an Indonesian company which operates a copper smelter and refinery in Gresik, Indonesia.
In 1996, we established joint ventures with Rio Tinto plc (Rio Tinto), an international mining company with headquarters in London, England. One joint venture covers PT Freeport Indonesia’s mining operations in Block A and gives Rio Tinto, through 2021, a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver in Block A, and, after 2021, a 40 percent interest in all production from Block A. Operating, nonexpansion capital and administrative costs are shared proportionately between PT Freeport Indonesia and Rio Tinto based on the ratio of (a) the incremental revenues from production from our expansion completed in 1998 to (b) total revenues from Block A, including production from PT Freeport Indonesia’s previously existing reserves. PT Freeport Indonesia receives 100 percent of the cash flow from specified annual amounts of copper, gold and silver through 2021, calculated by reference to its proven and probable reserves as of December 31, 1994, and 60 percent of all remaining cash flow. PT Freeport Indonesia records its joint venture interest using the proportionate consolidation method.
| | First Quarter | |
| | 2007 | | 2006 | |
Consolidated, net of Rio Tinto’s interest | | | | | | | |
Copper (millions of recoverable pounds) | | | | | | | |
Production | | | 467.6 | | | 221.3 | |
Sales | | | 417.1 | | | 225.2 | |
Average realized price per pound | | $ | 3.09 | | $ | 2.43 | |
Gold (thousands of recoverable ounces) | | | | | | | |
Production | | | 1,074.7 | | | 461.8 | |
Sales | | | 946.5 | | | 472.5 | |
Average realized price per ounce | | $ | 654.79 | | $ | 405.54 | a |
a. | Amount was $556.00 per ounce before a loss resulting from redemption of FCX’s Gold-Denominated Preferred Stock, Series II. |
| | | First Quarter | |
100% Operating Data, including Rio Tinto’s interest | | | 2007 | | | 2006 | |
Ore milled (metric tons per day) | | | 228,500 | | | 216,800 | |
Average ore grade | | | | | | | |
Copper (percent) | | | 1.21 | | | 0.72 | |
Gold (grams per metric ton) | | | 2.01 | | | 0.92 | |
Recovery rates (percent) | | | | | | | |
Copper | | | 91.0 | | | 82.5 | |
Gold | | | 87.8 | | | 80.6 | |
| | | | | | | |
Copper (millions of recoverable pounds) | | | | | | | |
Production | | | 479.9 | | | 246.6 | |
Sales | | | 428.2 | | | 251.3 | |
Gold (thousands of recoverable ounces) | | | | | | | |
Production | | | 1,146.9 | | | 470.7 | |
Sales | | | 1,010.1 | | | 486.3 | |
| | | | | | | |
Outlook
PT Freeport Indonesia’sIndonesia reported higher first-quarter 2007 sales volumes compared with the first quarter of 2006, primarily because of higher ore grades. PT Freeport Indonesia's share of annualfirst-quarter 2007 sales in 2006 is currently projected to approximate 1.2 billion pounds of copper and 1.7 million ounces of gold. We expect our fourth-quarter operations to benefit from access to higher grade material, providing estimated sales of approximately 415totaled 417.1 million pounds of copper and 470946.5 thousand ounces of gold.gold, exceeding previous estimates reported in January 2007 of 400 million pounds of copper and 850 thousand ounces of gold, primarily because it mined certain sections of high-grade ore previously expected to be mined in future periods.
Mill throughput, which varies depending on ore types being processed, averaged 228,500 metric tons of ore per day in the first quarter of 2007, compared with 216,800 metric tons of ore per day in the first quarter of 2006. Mill rates will vary during 2007 depending on ore types mined and are expected to average in excess of 200,000 metric tons of ore per day during the remainder of the year. Grasberg operated at reduced mining and milling rates during a four-day period from April 18 to April 21, 2007, as a result of peaceful protests by certain workers regarding benefits. The protests ended on April 21 with an agreement on a framework for minimum wages for workers and Grasberg has returned to normal operations. The impacts to production were not significant. Approximate average daily throughput processed at our mill facilities from each of our producing mines follows (metric tons of ore per day):
| First Quarter | |
| 2007 | | 2006 | |
Grasberg open pit | 179,300 | | 173,000 | |
Deep Ore Zone underground mine | 49,200 | | 43,800 | |
Total mill throughput | 228,500 | | 216,800 | |
| | | | |
In the first quarter of 2007, copper ore grades averaged 1.21 percent and recovery rates averaged 91.0 percent, compared with 0.72 percent and 82.5 percent for the first quarter of 2006. Gold ore grades averaged 2.01 grams per metric ton (g/t) and recovery rates averaged 87.8 percent in the first quarter of 2007, compared with 0.92 g/t and 80.6 percent for the first quarter of 2006. At the Grasberg 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. The achievementApproximately 65 percent of PT Freeport Indonesia’s copper sales estimates will be dependent, among other factors, on the achievementand 85 percent of targeted mining rates, the successful operation of PT Freeport Indonesia production facilities, the impact of weather conditions at the end of fiscal periods on concentrate loading activities and other factors.
Sales volumes may vary from these estimates depending on the areas being mined within the Grasberg open pit. Based on current estimatedPT-FI’s gold sales volumes for the fourth quarter of 2006 and copper prices of approximately $3.25 per pound and gold prices of approximately $575 per ounce, we expect to generate operating cash flows approximating $1.7 billion in 2006. The impact on our projected 2006 cash flows for each $0.10 per pound change in copper prices in the balance of the year would approximate $20 million, including the effects of price changes on related royalty costs, and for each $25 per ounce change in gold prices in the balance of the year would approximate $6 million.
Our mine plans are based on latest available data and studies, which take into account factors such as mining and milling rates, ore grades and recoveries, economic conditions and geological/geotechnical considerations. We update these plans to incorporate new data and conditions, with the objective of operating safely, managing risks and maximizing economic values. While ongoing analyses may alter current expectations, average annual sales for the period 2006 - 2010 are estimated to approximate 1.24 billion pounds of copper and 1.9 million ounces of gold.
We are continuing to analyze our longer range mine plans to assess the optimal design of the Grasberg open pit, which may affect the timing of development of the Grasberg underground block cave ore body. The analysis is incorporating the latest geological and geotechnical studies, costs and other economic factors to develop the optimal timing for transitioning from the open pit to the Grasberg block cave. Our previous plan included the transition from the Grasberg open pit to the Grasberg block cave ore body in 2015. We expect to complete the current studies on longer range plans by year-end 2006.
Copper and Gold Markets
As shown in the graphs below, world metal prices for copper have fluctuated during the period from 1992 through October 2006 with the London Metal Exchange (LME) spot copper price varying from a low of approximately $0.60 per pound in 2001 to a record high of approximately $4.00 per pound on May 12, 2006, and world gold prices have fluctuated during the period from 1998 through October 2006 from a low of approximately $250 per ounce in 1999 to a high of approximately $725 per ounce on May 12, 2006. Current copper and gold prices reflect significantly higher levels of direct investment by commodity investors. This can be expected to result in higher levels of volatility in copper and gold prices and in the share prices of FCX and other commodity producers. Copper and gold prices are affected by numerous factors beyond our control as described further in our Form 10-K for the year ended December 31, 2005.
* 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 October 31, 2006. Since 2003 and through 2005, global demand exceeded supply, evidenced by the decline in exchange warehouse inventories. LME and COMEX inventories have risen from the 2005 lows in recent months but combined stocks of approximately 135,000 metric tons at September 29, 2006 represent less than three days of global consumption. Copper prices averaged $3.48 per pound in the third quarter of 2006, with prices ranging from $3.28 per pound to $3.73 per pound. The LME spot price closed at $3.36 per pound on October 31, 2006. Disruptions associated with strikes, unrest and other operational issues have resulted in a continuation of low levels of inventory. Future copper prices2007 are expected to continue to be influenced by demand from China, economic performance 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.
After reaching new 25-year highs above $700 per ounce in the second quarter of 2006, prices declined in the third quarter to an average of $622 per ounce, with prices ranging from $574 per ounce to $672 per ounce. Gold prices continued to be supported by increased investment demand for gold, ongoing geopolitical tensions, a weak U.S. dollar, inflationary pressures, falling production from older mines, limited development of new mines and actions by gold producers to reduce hedge positions. The London gold price closed at $604 per ounce on October 31, 2006.
CONSOLIDATED RESULTS
Summary comparative results for the third-quarter and nine-month periods follow (in millions, except per share amounts):
| Third Quarter | | Nine Months | |
| 2006 | | 2005 | | 2006 | | 2005 | |
Revenues | $ | 1,636.0 | | $ | 983.3 | | $ | 4,148.4 | | $ | 2,689.2 | |
Operating income | | 735.4 | | | 459.6 | | | 2,006.5 | | | 1,247.6 | |
Net income applicable to common stock | | 350.7 | | | 165.8 | | | 969.6 | | | 471.4 | |
Diluted net income per share of common stock | | 1.67 | | | 0.86 | | | 4.64 | | | 2.48 | |
Consolidated revenues include PT Freeport Indonesia’s sale of copper concentrates, which also contain significant quantities of gold and silver, and the sale by Atlantic Copper of copper anodes, copper cathodes, and gold in anodes and slimes. Consolidated revenues for the third quarter of 2006 and the first nine months of 2006 were higher than consolidated revenues for the 2005 periods, reflecting substantially higher copper and gold prices than the 2005 periods, partly offset by lower PT Freeport Indonesia sales volumes. PT Freeport Indonesia mined lower grade ore and reported lower production and sales in the third quarter of 2006 (except for gold sales which were only slightly higher in the third quarter) and the first nine months of 2006, compared with the 2005 periods.
At September 30, 2006, our consolidated concentrate sales included 231.6 million pounds of copper recorded at an average price of $3.43 per pound, subject to final pricing. Final prices on these sales will be established over the next several months pursuant to terms of sales contracts. We estimate that a five-cent change in the price realized from the September price would have an approximate $12 million impact on our 2006 consolidated revenues and an approximate $6 million impact on our 2006 consolidated net income.
Third-quarter 2006 consolidated revenues included net additions of $33.3 million ($17.6 million to net income or $0.08 per share) primarily for final pricing of concentrates sold in prior quarters, compared with net additions of $48.8 million ($25.9 million to net income or $0.12 per share) to third-quarter 2005 revenues. Nine-month 2006 consolidated revenues included net additions of $138.5 million ($73.5 million to net income or $0.33 per share) compared with net additions of $8.6 million ($4.5 million to net income or $0.02 per share) for the nine-month 2005 period, primarily for final pricing of concentrates sold in prior years.
Consolidated revenues and net income vary significantly with fluctuations in the market prices of copper and gold, sales volumes and other factors. Based on PT Freeport Indonesia’s projected share of copper sales for the fourth quarter of 2006 (415 million pounds) and assuming an average price of $3.25 per pound of copper, each $0.10 per pound change in the average price realized in the fourth quarter of 2006 would have an approximate $40 million impact on our annual revenues and an approximate $21 million impact on our annual net income. A $25 per ounce change in the average price realized in the fourth quarter of 2006 on PT Freeport Indonesia’s projected share of gold sales for the fourth quarter of 2006 (470 thousand ounces) would have an approximate $12 million impact on our annual revenues and an approximate $6 million impact on our annual net income.
We currently have no copper or gold price protection contracts relating to our mine production. We had outstanding gold-denominated and silver-denominated preferred stock with dividends and redemption amounts determined by commodity prices. Our Gold-Denominated Preferred Stock, Series II was redeemed in February 2006, resulting in a $69.0 million reduction in revenues ($36.6 million to net income or $0.17 per share); and the final scheduled redemption of our Silver-Denominated Preferred Stock occurred on August 1, 2006, resulting in a $13.3 million reduction in revenues ($7.0 million to net income or $0.03 per share) (see “Capital Resources and Liquidity - Financing Activities”).
Consolidated production and delivery costs were higher for the 2006 periods than the 2005 periods. The increases were primarily because of higher costs of concentrate purchases at Atlantic Copper caused by higher metals prices and higher production costs at PT Freeport Indonesia primarily because of higher energy and labor costs and 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). See Note 3 and “New Accounting Standards.”
Consolidated depreciation and amortization expense decreased to $60.8 million in the third quarter of 2006 and $147.4 million in the first nine months of 2006, compared with $61.6 million in the third quarter of 2005 and $172.7 million in the first nine months of 2005, primarily because of lower copper sales volumes at PT Freeport Indonesia during the 2006 periods. Exploration expenses increased to $3.3 million in the third quarter of 2006 and $8.7 million in the first nine months of 2006 from $2.2 million in the third quarter of 2005 and $6.4 million in the first nine months of 2005 (see “Mining and Exploration - PT Freeport Indonesia Exploration Activities”). Consolidated general and administrative expenses increased to $45.1 million in the third quarter of 2006 and $110.8 million in the first nine months of 2006 from $25.5 million in the third quarter of 2005 and $72.5 million in the first nine months of 2005 (see “Other Financial Results”).
Net interest expense decreased to $18.6 million in the third quarter of 2006 and $62.3 million in the first nine months of 2006 from $33.3 million in the third quarter of 2005 and $106.2 million in the first nine months of 2005 primarily because of lower debt levels. In September 2006, we completed a tender offer for our 7% Convertible Senior Notes due 2011, resulting in the conversions of $286.1 millionhalf of the notes into 9.3 million shares of FCX common stock. In the first nine months of 2006, we also induced conversion of $30.5 million of the 7% Convertible Senior Notes due 2011 into 1.0 million shares of FCX common
stock and purchased in an open market transaction $11.5 million of our 10⅛% Senior Notes due 2010 for $12.4 million. As a result ofProduction from the induced conversions and open market transactions, we recorded losses on early extinguishment and conversion of debt totaling $29.9 million ($28.9 million to net income, net of related reduction of interest expense, or $0.13 per share) in the third quarter of 2006 and $32.1 million ($30.4 million to net income, net of related reduction of interest expense, or $0.14 per share) in the first nine months of 2006 (see “Capital Resources and Liquidity - Financing Activities”).
Atlantic Copper recorded gains on sales of assets totaling of $21.1 million ($21.1 million to net income or $0.10 per share) in the third quarter of 2006 and $29.7 million ($29.7 million to net income or $0.13 per share) in the first nine months of 2006 for the disposition of land and certain royalty rights.
Other income includes interest income of $7.6 million in the third quarter of 2006, $4.7 million in the third quarter of 2005, $19.4 million in the first nine months of 2006 and $11.7 million in the first nine months of 2005. Other income also includes the impact of translating into U.S. dollars Atlantic Copper’s net euro-denominated liabilities, primarily its retiree pension obligations. Changes in the U.S. dollar/euro exchange rate require us to adjust the dollar value of our net euro-denominated liabilities and record the adjustment in earnings. The exchange rate was $1.18 per euro at December 31, 2005, and $1.27 per euro at June 30, 2006 and September 30, 2006. Exchange rate effects on our net income from euro-denominated liabilities were gains (losses) of $(0.3) million in the third quarter of 2006, $(1.3) million in the third quarter of 2005, $(1.9) million in the first nine months of 2006 and $4.9 million in the first nine months of 2005.
PT Freeport Indonesia’s Contract of Work provides for a 35 percent corporate income tax rate. PT Indocopper Investama pays a 30 percent corporate income tax on dividends it receives from its 9.36 percent ownership in PT Freeport Indonesia. In addition, the tax treaty between Indonesia and the U.S. provides for a withholding tax rate of 10 percent on dividends and interest that PT Freeport Indonesia and PT Indocopper Investama pay to their parent company, FCX. We currently record no income taxes at Atlantic Copper, which is subject to taxation in Spain, because it has not generated significant taxable income in recent years and has substantial tax loss carryforwards for which we have provided no net financial statement benefit. We receive no consolidated tax benefit from these losses because they cannot be used to offset PT Freeport Indonesia’s profits in Indonesia, but can be utilized to offset Atlantic Copper’s future profits.
Parent company costs consist primarily of interest, depreciation and amortization, and general and administrative expenses. We receive minimal, if any, tax benefit from these costs, including interest expense, primarily because our parent company normally generates no taxable income from U.S. sources. As a result, our provision for income taxes as a percentage of our consolidated income before income taxes and minority interests will vary as PT Freeport Indonesia’s income changes, absent changes in Atlantic Copper and parent company costs. Summaries of the approximate significant components of the calculation of our consolidated provision for income taxes are shown below (in thousands, except percentages).
| Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
| 2006 | | 2005 | | 2006 | | 2005 | |
Mining and exploration segment operating incomea | $ | 811,460 | | $ | 449,248 | | $ | 1,949,964 | | $ | 1,268,335 | |
Mining and exploration segment interest expense, net | | (877 | ) | | (5,342 | ) | | (5,758 | ) | | (16,966 | ) |
Intercompany operating profit recognized (deferred) | | (83,696 | ) | | (1,904 | ) | | 24,723 | | | (17,124 | ) |
Income before taxes | | 726,887 | | | 442,002 | | | 1,968,929 | | | 1,234,245 | |
Indonesian corporate income tax rate | | 35 | % | | 35 | % | | 35 | % | | 35 | % |
Corporate income taxes | | 254,410 | | | 154,701 | | | 689,125 | | | 431,986 | |
| | | | | | | | | | | | |
Approximate PT Freeport Indonesia net income | | 472,477 | | | 287,301 | | | 1,279,804 | | | 802,259 | |
Withholding tax on FCX’s equity share | | 9.064 | % | | 9.064 | % | | 9.064 | % | | 9.064 | % |
Withholding taxes | | 42,825 | | | 26,041 | | | 116,001 | | | 72,717 | |
| | | | | | | | | | | | |
PT Indocopper Investama corporate income tax | | 16,869 | | | 9,840 | | | 33,739 | | | 30,921 | |
Other, net | | (10,260 | )b | | (3,870 | ) | | (3,055 | )b | | 3,800 | |
FCX consolidated provision for income taxes | $ | 303,844 | | $ | 186,712 | | $ | 835,810 | | $ | 539,424 | |
| | | | | | | | | | | | |
FCX consolidated effective tax rate | | 42 | % | | 48 | % | | 43 | % | | 48 | % |
| | | | | | | | | | | | |
a. | Excludes charges for the in-the-money value of FCX stock option exercises, which are eliminated in consolidation, totaling $2.1 million for the 2006 quarter, $16.7 million for the 2005 quarter, $87.5 million for the 2006 nine-month period and $34.1 million for the 2005 nine-month period. |
b. | Includes $15.5 million related to the reversal of a tax reserve following the outcome of a recent tax decision. |
RESULTS OF OPERATIONS
We have two operating segments: “mining and exploration” and “smelting and refining.” The mining and exploration segment consists of our Indonesian activities including PT Freeport Indonesia’s copper and gold mining operations, Puncakjaya Power’s power generating operations (after eliminations with PT Freeport Indonesia) and our Indonesian exploration activities, including those of Eastern Minerals. The smelting and refining segment includes Atlantic Copper’s operations in Spain and PT Freeport Indonesia’s equity investment in PT Smelting. Summary comparative operating income data by segment follow (in millions):
| Third Quarter | | Nine Months | |
| 2006 | | 2005 | | 2006 | | 2005 | |
Mining and explorationa | $ | 809.4 | | $ | 432.6 | | $ | 1,862.4 | | $ | 1,234.2 | |
Smelting and refining | | 20.1 | | | 17.2 | | | 55.4 | | | 15.6 | |
Intercompany eliminations and othera, b | | (94.1 | ) | | 9.8 | | | 88.7 | | | (2.2 | ) |
FCX operating income | $ | 735.4 | | $ | 459.6 | | $ | 2,006.5 | | $ | 1,247.6 | |
| | | | | | | | | | | | |
a. | Includes charges to the mining and exploration segment for the in-the-money value of FCX stock option exercises, which are eliminated in consolidation, totaling $2.1 million in the third quarter of 2006, $16.7 million in the third quarter of 2005, $87.5 million in the first nine months of 2006 and $34.1 million in the first nine months of 2005. |
b. | We defer recognizing profits on PT Freeport Indonesia’s sales to Atlantic Copper and on 25 percent of PT Freeport Indonesia’s sales to PT Smelting until their sales of final products to third parties. Changes in the amount of these deferred profits impacted operating income by $(83.7) million in the third quarter of 2006, $(1.9) million in the third quarter of 2005, $24.7 million in the first nine months of 2006 and $(17.1) million in the first nine months of 2005. Our consolidated earnings can fluctuate materially depending on the timing and prices of these sales. At September 30, 2006, our deferred profits to be recognized in future periods’ operating income totaled $197.9 million, $104.9 million to net income, after taxes and minority interest sharing. |
MINING AND EXPLORATION
PT Freeport Indonesia Operating Results
| | | Third Quarter | | Nine Months | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
PT Freeport Indonesia Operating Data, Net of Rio Tinto’s Interest | | | | | | |
Copper (recoverable) | | | | | | | | | | |
Production (000s of pounds) | | | 307,600 | | 344,500 | | 766,000 | | 982,400 | |
Production (metric tons) | | | 139,600 | | 156,300 | | 347,500 | | 445,600 | |
Sales (000s of pounds) | | | 323,600 | | 346,300 | | 768,900 | | 988,100 | |
Sales (metric tons) | | | 146,800 | | 157,100 | | 348,800 | | 448,200 | |
Average realized price per pound | | | $3.43 | | $1.73 | | $3.38 | | $1.67 | |
Gold (recoverable ounces) | | | | | | | | | | |
Production | | | 448,700 | | 472,100 | | 1,217,800 | | 1,672,800 | |
Sales | | | 478,000 | | 475,000 | | 1,228,500 | | 1,686,700 | |
Average realized price per ounce | | | $608.57 | | $445.79 | | $540.67 | a | $431.88 | |
| | | | | | | | | | |
PT Freeport Indonesia, 100% Aggregate Operating Data | | | | | | | | |
Ore milled (metric tons per day) | | | 230,100 | | 216,300 | | 223,600 | | 209,200 | |
Average ore grade | | | | | | | | | | |
Copper (percent) | | | 0.85 | | 1.06 | | 0.76 | | 1.06 | |
Gold (grams per metric ton) | | | 0.83 | | 1.16 | | 0.81 | | 1.40 | |
Recovery rates (percent) | | | | | | | | | | |
Copper | | | 85.9 | | 87.8 | | 84.3 | | 88.3 | |
Gold | | | 80.5 | | 80.6 | | 79.4 | | 82.5 | |
Copper (recoverable) | | | | | | | | | | |
Production (000s of pounds) | | | 325,300 | | 394,700 | | 830,700 | | 1,134,200 | |
Production (metric tons) | | | 147,600 | | 179,100 | | 376,800 | | 514,500 | |
Sales (000s of pounds) | | | 342,900 | | 396,600 | | 834,100 | | 1,140,500 | |
Sales (metric tons) | | | 155,500 | | 179,900 | | 378,300 | | 517,300 | |
Gold (recoverable ounces) | | | | | | | | | | |
Production | | | 456,400 | | 590,700 | | 1,252,800 | | 2,082,000 | |
Sales | | | 486,800 | | 594,400 | | 1,266,900 | | 2,096,200 | |
a. | Amount was $597.07 before a loss resulting from redemption of FCX’s Gold-Denominated Preferred Stock, Series II. |
PT Freeport Indonesia’s share of third-quarter 2006 sales totaled 323.6 million pounds of copper and 478,000 ounces of gold, exceeding previous estimates reported in July 2006 of 280.0 million pounds of copper and 320,000 ounces of gold. The higher than previously projected third-quarter sales reflect the mining of a high-grade section of the Grasberg pit previously scheduled to be mined in future periods. PT Freeport Indonesia will continue to seek to advance metal production when opportunities are available within safety and long-term productivity criteria. For the nine-month periods, copper and gold sales volumes totaled 768.9 million pounds of copper and 1,228,500 ounces of gold in 2006, compared with sales of 988.1 million pounds of copper and 1,686,700 ounces of gold in 2005.
Mill throughput, which varies depending on ore types being processed,Deep Ore Zone (DOZ) underground mine averaged 230,10049,200 metric tons of ore per day in the thirdfirst quarter of 2006, 216,300 metric tons in the third quarter of 2005, 223,600 metric tons in the first nine months of 2006 and 209,200 metric tons in the first nine months of 2005. Operations were temporarily suspended for an approximate four-day period in February 2006 when illegal miners (“gold panners”) blocked a road leading to our mill. While this situation was resolved peacefully by Indonesian government authorities, we continue to work with the government to resolve the legal and security concerns presented by the increased presence of gold panners in our area of operations.
Approximate average daily throughput processed at our mill facilities from each of our producing mines follows (metric tons of ore per day):
| Third Quarter | | Nine Months | |
| 2006 | | 2005 | | 2006 | | 2005 | |
Grasberg open pit | 182,900 | | 174,500 | | 177,500 | | 167,200 | |
Deep Ore Zone underground mine | 47,200 | | 41,800 | | 46,100 | | 42,000 | |
Total mill throughput | 230,100 | | 216,300 | | 223,600 | | 209,200 | |
| | | | | | | | |
In the third quarter of 2006, copper ore grades averaged 0.85 percent and recovery rates averaged 85.9 percent, compared with 1.06 percent and 87.8 percent for the third quarter of 2005. Gold ore grades averaged 0.83 grams per metric ton (g/t) and recovery rates averaged 80.5 percent in the third quarter of 2006, compared with 1.16 g/t and 80.6 percent for the third quarter of 2005. The 2006 ore grades and recoveries for copper and gold reflect the mining of lower grade material compared with the extraordinarily high grades mined in 2005. Average ore grades improved during the third quarter of 2006, compared to the first half of 2006. The highest grades of 2006 are expected to be mined in the fourth quarter.
Production from the DOZ underground mine averaged 47,200 metric tons of ore per day in the third quarter of 2006,2007, representing 21approximately 22 percent of mill throughput. DOZ continues to perform above design capacity of 35,000 metric tons of ore per day. PT Freeport Indonesia is expanding
the capacity of the DOZ underground operation to a sustained rate of 50,000 metric tons of ore per day with the installation of a second crusher and additional ventilation, expected to be completed in mid-2007. PT Freeport Indonesia’s 60 percent share of capital expenditures for the DOZ expansion totaled approximately $12$2 million in the first nine monthsquarter of 2006 (cumulative $292007 (approximately $36 million through September 30, 2006) and is expected to approximate $37 million through the projected 2007 ramp-up.March 31, 2007). PT Freeport Indonesia anticipates a further expansion of the DOZ mine to 80,000 metric tons of ore per day.day, with budgeted capital of approximately $21 million in 2007 for its 60 percent share. The success of the development of the DOZ mine, one of the world’s largest underground mines, provides confidence in the future development of PT Freeport Indonesia’s large-scale undeveloped ore bodies.
In 2004, PT Freeport Indonesia commenced its “Common Infrastructure” project, which will provide access to its large undeveloped underground ore bodies located in the Grasberg minerals district through a tunnel system located approximately 400 meters deeper than its existing underground tunnel system. In addition to providing access to our underground ore bodies, the tunnel system will enable PT Freeport Indonesia to conduct future exploration in prospective areas associated with currently identified ore bodies. The tunnel system has reached the Big Gossan terminal and PT Freeport IndonesiaCommon Infrastructure project is proceeding with development of the lower Big Gossan infrastructure.progressing according to plan. PT Freeport Indonesia has also advanced development of the Deep Grasberg spur and as of March 31, 2007, has completed 6073 percent of the tunneling required to reach the Grasberg underground ore body. PT Freeport Indonesia expects the Deep Grasberg spur to reach the Grasberg underground ore body and to initiate multi-year mine development activities in the second half of 2007. PT Freeport Indonesia’s share of capital expenditures for its Common Infrastructure project totaled approximately $8 million in the first nine months of 2006 and is estimated to total approximately $9 million in 2006. The Common Infrastructure project is progressing according to plan. Work on the Grasberg underground ore body has beguncontinues with PT Freeport Indonesia’s share of capital expenditures totaling approximately $11$15 million in the first nine monthsquarter of 2006. Projected 2006 capital expenditures2007 and projected to total approximately $70 million for the Grasberg underground ore body approximate $30 million.2007.
The Big Gossan underground mine is a high-grade deposit located near the existing milling complex. We are currently developingRemaining capital expenditures for the $260 million Big Gossan project with aggregate capital expenditures from 2005 to 2009 expected tobe incurred over the next few years total approximately $225$185 million ($195175 million net to PT Freeport Indonesia, with approximately $58$90 million in 2006)2007). PT Freeport Indonesia’s share of capital expenditures for Big Gossan totaled approximately $40$20 million in the first nine monthsquarter of 2006.2007. Production is expected to ramp up to full production of 7,000 metric tons per day byin late 2010 (average annual aggregate incremental production of 135 million pounds of copper and 65,000 ounces of gold, with PT Freeport Indonesia receiving 60 percent of these amounts). The Big Gossan mine is being developed as an open-stope mine with cemented 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.
PT Freeport Indonesia RevenuesIndonesian Mining Revenues.
A summary of changes in PT Freeport Indonesia revenues between the periods follows (in millions):
| Third | | Nine | | |
| Quarter | | Months | | 2007 | |
PT Freeport Indonesia revenues - prior year period | $ | 771.2 | | $ | 2,137.0 | | $ | 796.8 | |
Sales volumes: | | | | |
Copper | | | 466.2 | |
Gold | | | 192.2 | |
Price realizations: | | | | | | | | | |
Copper | | 550.4 | | | 1,313.3 | | | 274.3 | |
Gold | | 77.8 | | | 133.6 | | | 236.5 | |
Sales volumes: | | | | | | | |
Copper | | (39.2 | ) | | (366.9 | ) | |
Gold | | 1.3 | | | (197.9 | ) | |
Adjustments, primarily for copper pricing on prior period open sales | | (27.3 | ) | | 195.8 | | |
Adjustments, primarily for copper pricing on prior year | | | | |
open sales | | | (157.5 | ) |
Treatment charges, royalties and other | | (71.8 | ) | | (120.6 | ) | | (100.0 | ) |
PT Freeport Indonesia revenues - current year period | $ | 1,262.4 | | $ | 3,094.3 | | $ | 1,708.5 | |
| | | | | | | | | |
PT Freeport Indonesia’s share of first-quarter 2007 sales increased to 417.1 million pounds of copper and 946.5 thousand ounces of gold, compared with 225.2 million pounds and 472.5 thousand ounces in the 2006 quarter primarily because of higher ore grades. Realized copper prices nearly doubled to an average of $3.43 per pound in the third quarter of 2006 from $1.73 in the third quarter of 2005. Realized gold prices improved by 3727 percent to an average of $608.57 per ounce from $445.79 in the third quarter of 2005. Realized copper prices more than doubled to an average of $3.38$3.09 per pound in the first nine monthsquarter of 20062007 from $1.67$2.43 in the 2005 period.first quarter of 2006. Realized gold prices in the first nine monthsquarter of 2007 averaged $654.79 compared to $405.54 per ounce in the first
quarter of 2006, averaged $540.67 per ounce; includingwhich included a reduction of $56.40$150.46 per ounce for revenue adjustments associated with the first-quarter 2006 redemption of our Gold-Denominated Preferred Stock, Series II; compared to $431.88 in the first nine months of 2005.
As discussed above, PT Freeport Indonesia’s share of third-quarter 2006 copper sales of 323.6 million pounds was lower than third-quarter 2005 copper sales of 346.3 million pounds. PT Freeport Indonesia’s share of third-quarter 2006 gold sales of 478,000 ounces was slightly higher than third-quarter 2005 gold sales of 475,000 ounces. For the nine-month periods, copper and gold sales volumes totaled 768.9 million pounds of copper and 1,228,500 ounces of gold in 2006, compared with sales of 988.1 million pounds of copper and 1,686,700 ounces of gold in 2005.II.
Treatment charges vary with the volume of metals sold and the price of copper, and royalties vary with the volume of metals sold and the prices of copper and gold. Market rates for treatment and refining chargescharge rates began to increase significantly in late 2004. A large part of the increase relates to the price participation componentand price sharing components of our concentrate sales agreements. Royalties totaled $37.0 million in the third quarter of 2006 and $79.9$49.8 million in the first nine monthsquarter of 20062007, compared with $20.3 million in the third quarter of 2005 and $56.9$19.9 million in the first nine monthsquarter of 2005,2006, reflecting higher sales volumes and metal prices partly offset by lower sales volumes.prices.
Substantially all of PT Freeport Indonesia’s concentrate sales contracts provide final copper pricing in a specified future period based on prices quoted on the LME. PT Freeport Indonesia records revenues and invoices its customers based on LME prices at the time of shipment. Under accounting rules, these terms create an “embedded derivative” in our concentrate sales contracts which must be adjusted to fair value through earnings each period until the date of final copper pricing. PT Freeport Indonesia’s third-quarter 2006first-quarter 2007 revenues include net additions of $29.6$139.0 million for adjustments to the fair value of embedded copper derivatives in concentrate sales contracts, compared with $74.6$184.6 million in the thirdfirst quarter of 2005. PT Freeport Indonesia’s nine-month 2006 revenues included net additions of $481.7 million for adjustments to the fair value of embedded derivatives in concentrate sales contracts, compared with $111.8 million in the 2005 period.2006.
PT Freeport Indonesia has long-term contracts to provide approximately 60 percent of Atlantic Copper’s copper concentrate requirements at market prices and nearly all of PT Smelting’s copper concentrate requirements. PT Freeport Indonesia owns 25 percent of PT Smelting. Under the PT Smelting contract, for the first 15 years of PT Smelting’s operations beginning December 1998, the treatment and refining charges on the majority of the concentrate PT Freeport Indonesia provides will not fall below specified minimum rates, subject to renegotiation in 2008. The rate
was $0.23 per pound during the period from the commencement of PT Smelting’s operations in 1998 until April 2004, when it declined to a minimum of $0.21 per pound. PT Smelting’s rates for 20062007 are expected to exceed the minimum $0.21 per pound (see “Smelting and Refining”).pound. Current rates are substantially higher than the minimum rate.
PT Freeport Indonesia CostsIndonesian Mining Costs.
Gross Profit per Pound of Copper/per Ounce of Gold and Silver | |
| |
Three Months Ended March 31, 2007 | | | | | | | | | | | | |
| | By-Product | | | Co-Product Method | |
| | Method | | | Copper | | | Gold | | | Silver | |
Revenues, after adjustments shown below | | $3.09 | | | $3.09 | | | $654.79 | | | $13.29 | |
| | | | | | | | | | | | |
Site production and delivery, before net | | | | | | | | | | | | |
noncash and nonrecurring costs shown below | | 0.75 | | | 0.50 | | | 106.26 | | | 2.15 | |
Gold and silver credits | | (1.54 | ) | | - | | | - | | | - | |
Treatment charges | | 0.37 | | | 0.25 | | | 51.94 | | | 1.05 | |
Royalty on metals | | 0.12 | | | 0.08 | | | 16.86 | | | 0.34 | |
Unit net cash (credits) costsa | | (0.30 | ) | | 0.83 | | | 175.06 | | | 3.54 | |
Depreciation and amortization | | 0.14 | | | 0.10 | | | 20.05 | | | 0.40 | |
Noncash and nonrecurring costs, net | | 0.02 | | | 0.01 | | | 2.99 | | | 0.06 | |
Total unit (credits) costs | | (0.14 | ) | | 0.94 | | | 198.10 | | | 4.00 | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | |
prior period open sales | | (0.04 | ) | | (0.04 | ) | | 2.72 | | | (0.01 | ) |
PT Smelting intercompany profit elimination | | (0.09 | ) | | (0.06 | ) | | (12.09 | ) | | (0.24 | ) |
Gross profit | | $3.10 | | | $2.05 | | | $447.32 | | | $9.04 | |
| | | | | | | | | | | | |
Pounds of copper sold (in millions) | | 417.1 | | | 417.1 | | | | | | | |
Ounces of gold sold (000s) | | | | | | | | 946.5 | | | | |
Ounces of silver sold (000s) | | | | | | | | | | | 1,576.9 | |
| | | | | | |
Gross Profit per Pound of Copper/per Ounce of Gold and Silver | |
| |
Three Months Ended September 30, 2006 | | | | | | | | | | | | |
Pounds of copper sold (000s) | | 323,600 | | | 323,600 | | | | | | | |
Ounces of gold sold | | | | | | | | 478,000 | | | | |
Ounces of silver sold | | | | | | | | | | | 1,096,100 | |
| | | | | | |
| | By-Product | | | Co-Product Method | |
| | Method | | | Copper | | | Gold | | | Silver | |
Revenues, after adjustments shown below | | $3.43 | | | $3.43 | | | $608.57 | | | $5.25 | a |
| | | | | | | | | | | | |
Site production and delivery, before net non- | | | | | | | | | | | | |
cash and nonrecurring costs shown below | | 1.10 | | | 0.86 | | | 155.90 | | | 2.91 | |
Gold and silver credits | | (0.95 | ) | | - | | | - | | | - | |
Treatment charges | | 0.44 | b | | 0.34 | c | | 62.19 | c | | 1.16 | c |
Royalty on metals | | 0.11 | | | 0.09 | | | 16.24 | | | 0.30 | |
Unit net cash costsd | | 0.70 | | | 1.29 | | | 234.33 | | | 4.37 | |
Depreciation and amortization | | 0.15 | | | 0.12 | | | 21.94 | | | 0.41 | |
Noncash and nonrecurring costs, net | | 0.03 | | | 0.02 | | | 3.75 | | | 0.07 | |
Total unit costs | | 0.88 | | | 1.43 | | | 260.02 | | | 4.85 | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | |
prior period open sales | | 0.07 | e | | 0.12 | | | 8.11 | | | (5.84 | ) |
PT Smelting intercompany profit elimination | | (0.06 | ) | | (0.05 | ) | | (8.94 | ) | | (0.17 | ) |
Gross profit (loss) per pound/ounce | | $2.56 | | | $2.07 | | | $347.72 | | | $(5.61 | ) |
| | | | | | | | | | | | |
a. | Amount was $11.68 before a loss resulting from redemption of FCX’s Silver-Denominated Preferred Stock. |
b. | Includes $6.7 million or $0.02 per pound for adjustments to prior quarters’ concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since June 30, 2006. |
c. | Includes $5.2 million or $0.02 per pound for copper, $1.4 million or $2.95 per ounce for gold and $0.1 million or $0.05 per ounce for silver for adjustments to prior quarters’ concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since June 30, 2006. |
d. | For a reconciliation of unit net cash (credits) costs to production and delivery costs applicable to sales reported in FCX’s consolidated financial statements refer to “Product Revenues and Production Costs.” |
e. | Includes a $13.3 million or $0.04 per pound loss on the redemption of FCX’s Silver-Denominated Preferred Stock. |
Three Months Ended September 30, 2005 | | | | | | | | | | | |
Pounds of copper sold (000s) | | 346,300 | | 346,300 | | | | | | | |
Ounces of gold sold | | | | | | | 475,000 | | | | |
Ounces of silver sold | | | | | | | | | 1,065,500 | | |
| | | | | | |
Three Months Ended March 31, 2006 | | | | | | | | | | | |
| | By-Product | | Co-Product Method | | | By-Product | | Co-Product Method | |
| | Method | | Copper | | | Gold | | Silver | | | Method | | Copper | | | Gold | | Silver | |
Revenues, after adjustments shown below | | $1.73 | | $1.73 | | | $445.79 | | $5.25 | a | | $2.43 | | $2.43 | | | $405.54 | a | | $9.76 | |
| | | | | | | | | | | | | | | | | | | | |
Site production and delivery, before net non- | | | | | | | | | | | |
cash and nonrecurring costs shown below | | 0.71 | b | | 0.52 | c | | 133.52 | c | | 2.09 | c | |
Site production and delivery, before net noncash | | | | | | | | | | | |
and nonrecurring costs shown below | | | 1.22 | | 0.80 | | | 197.43 | | 3.62 | |
Gold and silver credits | | (0.63 | ) | | - | | | - | | - | | | (1.29 | ) | | - | | | - | | - | |
Treatment charges | | 0.25 | | 0.18 | | | 47.06 | | 0.74 | | | 0.37 | | 0.24 | | | 60.05 | | 1.10 | |
Royalty on metals | | 0.06 | | 0.04 | | | 11.11 | | 0.17 | | | 0.09 | | 0.06 | | | 14.31 | | 0.26 | |
Unit net cash costsd | | 0.39 | | 0.74 | | | 191.69 | | 3.00 | | |
Unit net cash costsb | | | 0.39 | | 1.10 | | | 271.79 | | 4.98 | |
Depreciation and amortization | | 0.14 | | 0.11 | | | 27.92 | | 0.44 | | | 0.15 | | 0.10 | | | 24.25 | | 0.44 | |
Noncash and nonrecurring costs, net | | 0.01 | | 0.01 | | | 1.35 | | 0.02 | | | 0.05 | | 0.03 | | | 8.38 | | 0.15 | |
Total unit costs | | 0.54 | | 0.86 | | | 220.96 | | 3.46 | | | 0.59 | | 1.23 | | | 304.42 | | 5.57 | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | | | | | | | | | |
prior period open sales | | 0.18 | e | | 0.19 | | | (2.90 | ) | | (2.95 | ) | | 0.28 | c | | 0.59 | | | 47.03 | | 1.20 | |
PT Smelting intercompany profit elimination | | (0.01 | ) | | - | | | (1.69 | ) | | (0.03 | ) | |
Gross profit (loss) per pound/ounce | | $1.36 | | $1.06 | | | $220.24 | | $(1.19 | ) | |
PT Smelting intercompany profit recognized | | | 0.09 | | 0.06 | | | 14.95 | | 0.27 | |
Gross profit | | | $2.21 | | $1.85 | | | $163.10 | | $5.66 | |
| | | | | | | | | | | | | | | | | | | | |
Pounds of copper sold (in millions) | | | 225.2 | | 225.2 | | | | | | |
Ounces of gold sold (000s) | | | | | | | | 472.5 | | | |
Ounces of silver sold (000s) | | | | | | | | | | 707.1 | |
| | | | | | | | | | | |
Because of the fixed nature of a large portion of our costs, unit costs vary significantly from period to period depending on volumes of copper and gold sold during the period. HigherLower unit site production and delivery costs in the 2006 periods,first quarter of 2007, compared with the 2005 periods,2006 quarter, primarily reflected lowerhigher sales volumes resulting from mine sequencing in the Grasberg open pit, the impact of adopting EITF 04-6 (see Note b above, Note 3 and “New Accounting Standards”) andpartly offset by higher input costs including energy. While lower(including energy). Although higher sales volumes constitute the largest component of variance on a unit basis,more than offset increases in input costs this quarter, we have experienced significant increases in our production costs in recent years primarily as a result of higher energy costs and costs of other consumables, higher mining costs and milling rates, labor costs and other factors. Aggregate energy costs, which approximate 2320 percent of PT Freeport Indonesia’s production costs, primarily include purchases of approximately 100 million gallons of diesel fuel per year and approximately 650,000 metric tons of coal per year. Diesel prices have risen nearly 170 percent since 2002more than doubled and our coal costs are approximately 30
Unit treatment charges vary with the price of copper, and unit royalty costs vary with prices of copper and gold. In addition, market rates for treatment charges have increased significantly since 2004 and will vary based on PT Freeport Indonesia’s customer mix. The copper royalty rate payable by PT Freeport Indonesia under its Contract of Work varies from 1.5 percent of copper net revenue at a copper price of $0.90 or less per pound to 3.5 percent at a copper price of $1.10 or more per pound. The Contract of Work royalty rate for gold and silver sales is 1.0 percent.
In connection with our fourth concentrator mill expansion completed in 1998, PT Freeport Indonesia agreed to pay the Government of Indonesia additional royalties (royalties not required by the Contract of Work) to provide further support to the local governments and the people of the Indonesian province of Papua (see Note 1 in our 20052006 Annual Report on Form 10-K). The additional royalties are paid on metal from production fromexceeding 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 200,000 metric tons of ore per daythe agreed levels is double the Contract of Work royalty rate, and the royalty rates on gold and silver sales from production above 200,000 metric tons of ore per daythe agreed levels are triple the Contract of Work royalty rates.
Unit Net Cash Costs: By-Product Method - Unit net cash costs per pound of copper calculated using a by-product method is a measure intended to provide investors with information about the cash generating capacity of our mining operations expressed on a basis relating to our primary metal product, copper. PT Freeport Indonesia uses this measure for the same purpose and for monitoring operating performance by its mining operations. This information differs from measures of performance determined in accordance with generally accepted accounting principles and should not be considered in isolation or as a substitute for measures of performance determined in accordance with generally accepted accounting principles. This measure is presented by other copper and gold mining companies, although our measures may not be comparable to similarly titled measures reported by other companies.
Unit Net Cash Costs: Co-Product Method - Using the co-product method, unit site production and delivery costs in the thirdfirst quarter of 20062007 averaged $0.86$0.50 per pound of copper, compared with $0.52$0.80 in the 2005 quarter. Unit site production and delivery costs in the first nine months of 2006 averaged $0.90 per pound of copper, compared with $0.46 in the 2005 period. For gold, unit site production and delivery costs in the thirdfirst quarter of 20062007 averaged $156$106 per ounce, compared with $134$197 in the 2005 quarter. Unit site production and delivery costs in the first nine months of 2006 averaged $163 per ounce, compared with $118 in the 2005 period. As discussed above, unit site production and delivery costs in the 2006 periodsfirst quarter of 2007 benefited from higher sales volumes resulting from higher ore grades, but were primarily impactedadversely affected by lower volumes, higher energy, labor and other input costs and the adoption of EITF 04-6. Treatment charges per pound and per ounce were higher in the 2006 periods primarily because of higher market rates and copper prices. In addition, unit treatment charges include adjustments to prior period concentrate sales subject to final pricing to reflect the impact of the increase in copper prices totaling $0.02 per pound for copper and $2.95 per ounce for gold in the third quarter of 2006 and $0.01 per pound for copper and $2.24 per ounce for gold in the first nine months of 2006.(including energy). Royalties per pound and per ounce were also higher in the 2006 periodsfirst quarter of 2007 because of higher coppersales volumes and goldrealized prices compared with the 2005 periods.2006 period.
PT Freeport Indonesia’s 2007 exploration efforts in 2006 are focused on testingIndonesia will continue to test extensions of the Deep Grasberg and Kucing Liar mine complexcomplex. PT Freeport Indonesia also expects to test the open-pit potential of the Wanagon gold prospect, the Ertsberg open-pit resource through surface drilling programs, possible extensions of the Deep Mill Level Zone deposit and other targets in Block A, the existing producing area ofbetween the Ertsberg and Grasberg minerals district. We continue to assessmineral systems from the timing of resumption of suspendednew Common Infrastructure tunnels. During 2007, we have resumed exploration activities that were suspended in recent years in certain prospective areas outside Block A.
The Indonesian government previously approved suspensionsA including the Kamopa prospect. Field programs were initiated at the Ular Merah copper/gold prospect in our Eastern Minerals contract of our field exploration activities outsidework area during the first quarter of our current mining operations area, which have been in suspension in recent years due to safety and security issues and regulatory uncertainty relating to a possible conflict between our mining and exploration rights in certain forest areas and an Indonesian Forestry law enacted in 1999 prohibiting open-pit mining in forest preservation areas. The current suspensions were granted for one-year periods ending November 15, 2006, for Eastern Minerals; February 26, 2007, for Block B; and March 30, 2007, for PT Nabire Bakti Mining. Recent Indonesian legislation permits open-pit mining in PT Freeport Indonesia’s
Block B area, subject to certain requirements. We continue to assess these requirements and security issues. The timing for our resumption of exploration activities in our Contract of Work areas outside of Block A depends on the resolution of these matters.
ATLANTIC COPPER SMELTING AND& 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 ourPT Freeport Indonesia’s concentrate production. Low smelter treatment and refining charges prior to 2005will adversely affectedaffect the operating results of Atlantic Copper and benefitedbenefit the operating results of PT Freeport Indonesia’sIndonesian and South America mining operations. Smelting and refining charges consist of a base rate and, in certain contracts, price participation based on copper prices. Market rates for treatment and refining charges have increased significantly since late 2004 as worldwide smelter availability was insufficient to accommodate increased mine production and because of higher copper prices. Higher treatment and refining charges benefit our smelter operations at Atlantic Copper and adversely affect our mining operations. Taking into account taxesoperations in Indonesia and minority ownership interests, an equivalent changeSouth America. North American mining operations are not affected by changes in PT Freeport Indonesia’s and Atlantic Copper’s smeltingtreatment and refining charge rates essentially offsets incharges because of our consolidated operating results.integrated operations.
Atlantic Copper Operating Results | | | | |
(In Millions) | Third Quarter | | Nine Months | |
| 2006 | | 2005 | | 2006 | | 2005 | |
Gross profit | $23.7 | | $19.5 | | $66.3 | | $23.8 | |
Add depreciation and amortization expense | 8.1 | | 7.4 | | 22.9 | | 21.6 | |
Other | - | | 1.5 | | 0.1 | | 3.6 | |
Cash margin | $31.8 | | $28.4 | | $89.3 | | $49.0 | |
| | | | | | | | |
Operating income (in millions) | $20.1 | | $17.2 | | $55.4 | | $15.6 | |
Concentrate and scrap treated (metric tons) | 244,500 | | 253,600 | | 724,100 | | 716,300 | |
Anodes production (000s of pounds) | 148,400 | | 162,300 | | 444,200 | | 469,100 | |
Treatment rates per pound | $0.32 | | $0.26 | | $0.32 | | $0.22 | |
Cathodes sales (000s of pounds) | 125,200 | | 138,500 | | 392,900 | | 411,900 | |
Cathode cash unit cost per pounda | $0.19 | | $0.16 | | $0.20 | | $0.17 | |
Gold sales in anodes and slimes (ounces) | 124,600 | | 176,400 | | 569,200 | | 422,600 | |
| |
a. | For a reconciliation of cathode cash unit cost per pound to production costs applicable to sales reported in FCX’s consolidated financial statements refer to “Product Revenues and Production Costs” below. |
Atlantic Copper Operating Results | First Quarter | |
(In Millions) | 2007 | | 2006 | |
Gross profit | $ | 16.5 | | $ | 17.3 | |
Add depreciation and amortization expense | | 10.5 | | | 7.4 | |
Other | | (0.4 | ) | | (0.4 | ) |
Cash margin | $ | 26.6 | | $ | 24.3 | |
| | | | | | |
Operating income (in millions) | $ | 12.4 | | $ | 13.5 | |
Concentrate and scrap treated (thousand metric tons) | | 242.5 | | | 250.7 | |
Anodes production (million pounds) | | 149.0 | | | 157.1 | |
Treatment rates per pound | $ | 0.35 | | $ | 0.29 | |
Cathodes sales (million pounds) | | 134.6 | | | 136.6 | |
Gold sales in anodes and slimes (thousand ounces) | | 114.2 | | | 245.6 | |
| | | | | | |
Atlantic Copper’s operating cash margin was $31.8 million in the third quarter of 2006, compared with $28.4 million in the 2005 quarter, and $89.3$26.6 million in the first nine monthsquarter of 2006,2007, compared with $49.0$24.3 million in the 20052006 period. Atlantic Copper reported operating income of $20.1$12.4 million in the thirdfirst quarter of 2006 and $55.4 million for the first nine months of 2006,2007, compared with $17.2$13.5 million in the 2005 quarter and $15.6 million in the 2005 nine-month2006 period. The positive results in the 2006 periods primarily reflect higher treatment charges, partly offset by higher unit costs. The next major maintenance activity at Atlantic Copper ishas a 23-day maintenance turnaround currently scheduled for mid-2007.the second quarter of 2007.
Atlantic Copper treated 244,500242,500 metric tons of concentrate and scrap in the thirdfirst quarter of 2006,2007, compared with 253,600250,700 metric tons in the 2005 quarter. For the nine-month periods, concentrate and scrap treated totaled 724,100 metric tons in 2006 and 716,300 metric tons in 2005.period. Cathode production totaled 124.6132.2 million pounds and sales totaled 125.2134.6 million pounds during the thirdfirst quarter of 2006,2007, compared with cathode production of 138.2129.4 million pounds and sales of 138.5136.6 million pounds during the thirdfirst quarter of 2005. For the nine-month periods, cathode production totaled 385.5 million pounds and sales totaled 392.9 million pounds during 2006, compared with cathode production of 407.7 million pounds
and sales of 411.9 million pounds during 2005. Cathode production and sales volumes were lower in the 2006 periods primarily because of lower refinery output.
2006. Atlantic Copper’s treatment charges (including price participation), which reflect charges paid byare what PT Freeport Indonesia and third parties topay Atlantic Copper to smelt and refine concentrates, averaged $0.32 per pound during the third quarter of 2006, $0.26 per pound during the third quarter of 2005, $0.32$0.35 per pound during the first nine monthsquarter of 20062007 and $0.22$0.29 per pound during the first nine monthsquarter of 2005.2006. The increase in treatment charges in the 2006 periods2007 period primarily reflects higher markettreatment rates and price participationnegotiated under the terms of Atlantic Copper’s concentrate purchase and sales agreements. The difference between PT Freeport Indonesia’s and Atlantic Copper’s treatment charge rates in the third quarter of 2006 primarily reflects variations in price participation provisions in long-term contracts and spot market purchases with no price participation by Atlantic Copper during the period. Treatment charge rates have increased significantly since late 2004 with increased mine production and higher copper prices. Assuming copper prices of $3.25 per pound for the fourth quarter of 2006, Atlantic Copper expects these rates to average approximately $0.33 per pound in 2006. Atlantic Copper’s cathode cash unit cost per pound of copper averaged $0.19 in the third quarter of 2006, $0.16 in the third quarter of 2005, $0.20 in the first nine months of 2006 and $0.17 in the first nine months of 2005. Higher unit costs in the 2006 periods primarily reflect the impact of lower volumes and higher operating costs.
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 a reduction to our operating income totaling $83.7 million ($44.4 million to net income or $0.20 per share) in the third quarter of 2006 and an addition to our operating income totaling $24.7 million ($13.1 million to net income or $0.06 per share) in the first nine months of 2006. For the 2005 periods, changes in these net deferrals resulted in reductions to our operating income totaling $1.9$206.0 million ($1.5109.3 million to net income or $0.01$0.45 per share) in the thirdfirst quarter and $17.1of 2007, compared with an increase of $74.2 million ($10.039.3 million to net income or $0.05$0.18 per share) in the first nine months.quarter of 2006. At September 30, 2006,March 31, 2007, our net deferred profits on PT Freeport Indonesia concentrate inventories at Atlantic Copper and PT Smelting to be recognized in future periods’ net income after taxes and minority interest sharing totaled $104.9$210.1 million. Based on copper prices of $3.25$3 per pound and gold prices of $575$650 per ounce for the fourthsecond quarter of 20062007 and current shipping schedules, we estimate the net change in deferred profits on intercompany sales will result in a decreasean increase to net income of approximately $25$50 million in the fourthsecond quarter of 2006.2007. The actual change in deferred intercompany profits may differ substantially from this estimate because of changes in the timing of shipments to affiliated smelters and metal prices.
The majority of Atlantic Copper’s revenues are denominated in U.S. dollars; however, operating costs, other than concentrate purchases, and certain asset and liability accounts are denominated in euros. Atlantic Copper’s estimated annual euro payments total approximately 100 million euros. A $0.05 increase or decrease in the exchange rate would result in an approximate $5 million change in annual costs. The exchange rate on September 30, 2006,March 31, 2007, was $1.27$1.33 per euro.
As of September 30, 2006, FCX’s net investment in Atlantic Copper totaled approximately $160 million, FCX had a $189.5 million loan outstanding to Atlantic Copper and Atlantic Copper’s debt to third parties under nonrecourse financing arrangements totaled $41.2 million.
Atlantic Copper had euro-denominated net monetary liabilities at September 30, 2006, totaling $12.7 million recorded at an exchange rate of $1.27 per euro. The exchange rate was $1.18 per euro at December 31, 2005 and $1.27 per euro at June 30, 2006. Adjustments to Atlantic Copper’s euro-denominated net monetary liabilities to reflect changes in the exchange rate are recorded in other income (expense) and totaled $(0.3) million in the third quarter of 2006, $(1.3) million in the third quarter of 2005, $(1.9) million in the first nine months of 2006 and $4.9 million in the first nine months of 2005.
PT Smelting Operating ResultsPHELPS DODGE INTERNATIONAL CORPORATION (PDIC)
| Third Quarter | | Nine Months | |
(In Millions) | 2006 | | 2005 | | 2006 | | 2005 | |
PT Freeport Indonesia sales to PT Smelting | $457.6 | | $214.1 | | $1,065.5 | | $643.1 | |
Equity in PT Smelting earnings | 1.5 | | 1.3 | | 7.1 | | 6.5 | |
PT Freeport Indonesia operating profits deferred | 20.3 | | 3.1 | | 7.4 | | 3.1 | |
| | | | | | | | |
PT Freeport Indonesia accounts for its 25 percent interest in PT Smelting using the equity method and provides PT Smelting with substantially all of its concentrate requirements. PT Smelting treated 214,900 metric tons of concentrate in the third quarter of 2006, 223,000 metric tons in the third quarter of 2005, 636,800 metric tons in the first nine months of 2006 and 680,100 metric tons in the first nine months of 2005. PT Smelting is completing an expansion of its production capacity from 250,000 metric tons of copper metal per year to 270,000 metric tons of copper metal per year. PT Smelting produced 127.7 million pounds of cathodes and sold 124.0 million pounds of cathodes in the third quarter of 2006, compared with production and sales of 144.7 million pounds in the third quarter of 2005. For the first nine months of 2006, cathode production totaled 397.4 million pounds and sales totaled 394.3 million pounds, compared with cathode production of 434.3 million pounds and sales of 433.9 million poundsPDIC, our international manufacturing division, produces engineered products principally for the first nine months of 2005. The lower volumes in the 2006 periods reflect the ramp-up in production following completion in the second quarter of a 22-day maintenance turnaround. The next major maintenance turnaround is scheduled for 2008. PT Smelting’s cathode cash unitglobal energy sector. Its operations are characterized by products with internationally competitive costs averaged $0.20 per pound in the third quarter of 2006, compared with $0.13 per pound in the third quarter of 2005, primarily reflecting the impact of higher energy costs in the 2006 period. PT Smelting’s cathode cash unit costs averaged $0.20 per pound in the first nine months of 2006, compared with $0.11 per pound in the first nine months of 2005, primarily reflecting the impact of the maintenance turnaround discussed above and higher energy costs in the 2006 period (see “Product Revenuesquality, and Production Costs”).
In late 2005 and early 2006, PT Smelting entered into hedging contracts to fix a portion of its revenues through 2007. FCX’s share of the unrealized losses on these contracts totaled $7.5 million as of September 30, 2006, and is recorded in accumulated other comprehensive income in stockholders’ equity.
In October 2006, PT Smelting temporarily suspended smelter operations following an equipment failure at the oxygen plant supplying the smelter. PT Smelting expects to resume operations in mid-December 2006. PT Freeport Indonesia’s share of the financial impact of the downtime to be recognized in the fourth quarter is estimated to approximate $11 million ($9 million to net income).
OTHER FINANCIAL RESULTS
The FCX/Rio Tinto joint ventures incurred $4.3 million of aggregate exploration costs in the third quarter of 2006, $3.0 million in the third quarter of 2005, $12.1 million in the first nine months of 2006 and $9.7 million in the first nine months of 2005. As discussed above in “PT Freeport Indonesia Exploration Activities,” our exploration program for 2006 is focused on testing extensions of the Deep Grasberg and Kucing Liar mine complex and other targets in Block A. Our share of exploration costs,specialized engineering capabilities. Its factories, which are charged to expense, totaled $3.3 millionlocated in the third quarternine countries throughout Latin America, Asia and Africa, manufacture energy cables for international markets. Three of 2006, $2.2 million in the third quarter of 2005, $8.7 million in the first nine months of 2006our international wire and $6.4 million in the first nine months of 2005.
Consolidated generalcable companies have continuous-cast copper rod facilities and administrative expenses increased to $45.1 million in the third quarter of 2006, compared with $25.5 million in the year-ago period. For the first nine months of 2006, general and administrative expenses increased to $110.8 million, compared with $72.5 million for the first nine months of 2005. The increases in the 2006 periods primarily relate to higher incentive compensation costs and legal fees. Incentive compensation costs were higher primarily because of programs based on our financial results and stock-based compensation following adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” or “SFAS No. 123R” on January 1, 2006 (see Note 2 and “New Accounting Standards”).
Our parent company charges PT Freeport Indonesia forFor the in-the-money value of exercised employee stock options. These charges are eliminated in consolidation; however, PT Freeport Indonesia shares a portion of these charges with Rio Tinto and Rio Tinto’s reimbursements reduce our consolidated general and administrative expenses. General and administrative expenses are net of Rio Tinto’s share of the cost of employee stock option exercises, which increased consolidated general and administrative expenses by $1.012-day period ended March 31, 2007, PDIC added $57.1 million in the third quarter of 2006revenues and which decreased consolidated general and administrative expenses by $2.9$7.1 million in the third quarter of 2005, $6.1 million in the first nine months of 2006 and $5.9 million in the first nine months of 2005. In accordance with our joint venture agreement, Rio Tinto’s percentage share of PT Freeport Indonesia’s general and administrative expenses varies with metal sales volumes and prices and totaled approximately 7 percent in the first nine months of 2006, compared with approximately 16 percent in the first nine months of 2005.
Total consolidated interest cost (before capitalization) was $21.4 million in the third quarter of 2006, $34.4 million in the third quarter of 2005, $69.1 million in the first nine months of 2006 and $109.1 million in the first nine months of 2005. Interest costs decreased primarily because we reduced average debt levels, with significant reductions in 2005 and 2006. Our interest cost for 2006 is expectedoperating income to be lower than 2005 primarily because of debt reductions. See “Capital Resources and Liquidity - Financing Activities” for further discussion. Capitalized interest totaled $2.8 million in the third quarter of 2006, $1.1 million in the third quarter of 2005, $6.9 million in the first nine months of 2006 and $2.9 million in the first nine months of 2005.
Foreign Currency Exchange Risk
The functional currency for our operations in Indonesia and Spain 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 asset and liability accounts are denominated in Indonesian rupiah, Australian dollars or euros. Generally, our results are positively affected when the U.S. dollar strengthens in relation to those foreign currencies and adversely affected when the U.S. dollar weakens in relation to those foreign currencies.
One U.S. dollar was equivalent to 9,825 rupiah at December 31, 2005, 9,288 rupiah at June 30, 2006, and 9,224 rupiah at September 30, 2006. PT Freeport Indonesia recorded gains (losses) to production costs totaling $(0.2) million in the third quarter and first nine months of 2006 and $0.1 million in both of the 2005 periods, related to its rupiah-denominated net monetary assets and liabilities. PT Freeport Indonesia’s labor costs are mostly rupiah denominated. At estimated aggregate annual rupiah payments of 1.6 trillion for operating costs and an exchange rate of 9,224 rupiah to one U.S. dollar, the exchange rate as of September 30, 2006, a one-thousand-rupiah increase in the exchange rate would result in an approximate $16 million decrease in aggregate annual operating costs. A one-thousand-rupiah decrease in the exchange rate would result in an approximate $20 million increase in aggregate annual operating costs.
Approximately 13 percent of PT Freeport Indonesia’s total purchases of materials, supplies and services are denominated in Australian dollars. The exchange rate was $0.73 to one Australian dollar at December 31, 2005, $0.74 to one Australian dollar at June 30, 2006, and $0.75 to one Australian dollar at September 30, 2006. At estimated annual aggregate Australian dollar payments of 225 million and an exchange rate of $0.75 to one Australian dollar, the exchange rate as of September 30, 2006, a $0.01 increase or decrease in the exchange rate would result in an approximate $2 million change in aggregate annual operating costs.
At times, PT Freeport Indonesia has entered into foreign currency forward contracts to hedge a portion of its aggregate anticipated Indonesian rupiah and/or Australian dollar payments. As of September 30, 2006, PT Freeport Indonesia had foreign currency contracts to hedge 195.0 billion in rupiah payments, including certain rupiah-based capital expenditures, or approximately 50 percent of aggregate projected rupiah payments for the remainder of 2006, at an average exchange rate of 10,132 rupiah to one U.S. dollar. PT Freeport Indonesia accounts for these contracts as cash flow hedges.
CAPITAL RESOURCES AND LIQUIDITY
Our operating cash flows vary with prices realized forfrom copper, gold and goldmolybdenum 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 goldmolybdenum prices, we expect to generate cash flows significantly greater than our budgeted capital expenditures, and scheduled debt maturities and other cash requirements, thereby providing us with opportunities to reduce debt.
Following the significant increase in our debt associated with the acquisition of Phelps Dodge, we have placed a high priority on debt reduction, and if market conditions remain favorable, we expect to achieve our objective of meaningful debt reduction in the near-term. We will continue to consider opportunities to reduce debt furtherthrough possible asset sales.
Cash and return cash equivalents
At March 31, 2007, we had consolidated cash and cash equivalents of $3.1 billion. The following table reflects the U.S. and international components of consolidated cash and cash equivalents at March 31, 2007, and December 31, 2006 (in billions):
| March 31, | | December 31, | |
| 2007 | | 2006 | |
Cash from U.S. operations | $ | 0.3 | | $ | - | |
Cash from international operations | | 2.8 | | | 0.9 | |
Total consolidated cash and cash equivalents | | 3.1 | | | 0.9 | |
Less: minority interests’ share | | (0.5 | ) | | - | |
Cash, net of minority interests’ share | | 2.6 | | | 0.9 | |
Withholding taxes if distributeda | | (0.2 | ) | | (0.1 | ) |
Net cash available to parent company | $ | 2.4 | | $ | 0.8 | |
| | | | | | |
a. | Cash at our international operations is subject to foreign withholding taxes of up to 22 percent upon repatriation into the U.S. |
Using estimated sales volumes for the remainder of 2007 and assuming average prices of $3 per pound of copper, $650 per ounce of gold and $20 per pound of molybdenum for the remainder of 2007, our consolidated operating cash flows would exceed $5.3 billion in 2007, including over $4.6 billion projected in the remaining three quarters. Each $0.20 per pound change in copper prices would affect 2007 cash flows by approximately $400 million, each $50 per ounce change in gold prices would affect 2007 cash flows by approximately $30 million, and each $2 per pound change in molybdenum prices would affect 2007 cash flows by approximately $50 million.
We expect to shareholders throughgenerate cash flows during 2007 significantly greater than our capital expenditures, minority interests distributions, dividends and share purchases. Commonother cash requirements. Using the same assumptions regarding average prices for the remainder of 2007, and assuming excess cash is applied to reduce debt, total debt at year-end 2007 would approximate $9 billion and consolidated cash would approximate $2 billion.
Operating Activities
Net cash provided by operating activities totaled $668.9 million during the first quarter of 2007, net of $202.2 million used for working capital requirements. In the first quarter of 2006, net cash used in operating activities totaled $123.8 million, including $501.1 million in working capital requirements. First-quarter 2007 operating cash flows benefited from higher net income because of higher sales volumes and metals prices, and $108.3 million of cash flows from Phelps Dodge’s operations for the 12-day period ended March 31, 2007.
First-quarter 2006 operating cash flows were reduced by $453.7 million of income tax payments, including $328.4 million attributable to 2005 results, other working capital requirements totaling $172.7 million and a $44.9 million net use of operating cash resulting from the loss on the redemption of our Gold-Denominated Preferred Stock, Series II.
Investing Activities
On March 19, 2007, we issued 136.9 million shares of common stock dividendsand 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 $558.8$142.4 million in the first nine monthsquarter of 2006,2007 and $52.1 million in the first quarter of 2006. PT Freeport Indonesia capital expenditures for the first quarter of 2007 totaled $74.0 million, which included approximately $20 million for Big Gossan and approximately $15 million for the development of the underground Grasberg ore body. Also included in first-quarter 2007 capital expenditures were Phelps Dodge capital expenditures of $60.9 million for the 12-day period ended March 31, 2007, which included approximately $25 million associated with the Safford project and approximately $5 million associated with Tenke Fungurume.
Capital expenditures, including $94.2approximately $800 million for long-term projects, are estimated to total $1.6 billion for 2007. The increase in capital expenditures for 2007 primarily is associated with the addition of Phelps Dodge capital spending, which is expected to approximate $1.2 billion for 2007, and includes amounts for the development of the Tenke Fungurume copper/cobalt mining project (approximately $300
million) and the Safford copper mine (approximately $270 million). PT Freeport Indonesia’s projected capital expenditures for 2007 include approximately $90 million for Big Gossan.
Financing Activities
At March 31, 2007, we had $12.0 billion in debt, including $10.4 billion in acquisition debt, $0.9 billion of debt assumed in the Phelps Dodge acquisition and $0.7 billion of previously existing debt. In connection with financing our acquisition of Phelps Dodge, we used $2.5 billion of cash and completed the following debt transactions:
· | borrowed $10.0 billion in term loans under a new $11.5 billion senior credit facility |
· | issued $6.0 billion in senior notes |
Additionally, in accordance with our plan to reduce debt, we completed the following equity transactions immediately following closing of the acquisition, using the net proceeds to reduce borrowings under the credit facility:
· | sold 47.15 million shares of common stock at $61.25 per share for net proceeds of $2.8 billion |
· | sold 28.75 million shares of 6¾% mandatory convertible preferred stock with a liquidation preference of $100 per share for net proceeds of $2.8 billion |
In the first quarter of 2007, we recorded net charges totaling $87.8 million ($0.5074.6 million to net income or $0.31 per share) associated with the acceleration of amortization of deferred financing costs for the credit facility because of prepayments on the term loans, net of a supplemental dividend$34.6 million refund of fees for early repayment.
In May 2007, we redeemed our 10⅛% Senior Notes ($272.4 million balance) for $286.2 million. We also prepaid an additional $500 million of term debt in April 2007. As a result, we will record charges totaling approximately $24 million (approximately $21 million to net income) in the second quarter of 2007 related to the premiums paid on March 31, 2006, $140.4 million ($0.75 per share) for a supplemental dividend paid on June 30, 2006 and $147.7 million ($0.75 per share) for a supplemental dividend paid on September 29, 2006. Our current regular annual common stock dividend, which is declared bythe accelerated recognition of deferred financing costs associated with these debt reductions.
In 2003, our Board is $1.25 perof Directors approved an open market share paid at a quarterly rate of $0.3125 per share. On October 31, 2006,purchase program for up to 20 million shares, which replaced our Board declared a supplemental dividend of $1.50 per share payable December 29, 2006 to shareholders of record on December 14, 2006.
We purchasedprevious program. Through April 30, 2007, we had acquired 2.0 million shares of our common stockin 2006 for $99.8 million ($49.94 per share average) during the second quarter of 2006 and have purchased a total of 7.8, 2.4 million shares in 2005 for $279.5$80.2 million ($36.0533.83 per share average) under the Board authorized 20-millionand 3.4 million shares in 2004 for $99.5 million ($29.39 per share open market purchase program. As of July 31, 2006,average); 12.2 million shares remain available under the Board authorized 20-million share open market purchase program.
The potential payment of future regular and supplemental dividends will be determined by our Board of Directors and will be dependent upon many factors, including our cash flows and financial position, copper and gold prices, and general economic and market conditions.available. The timing of future purchases of our common stock is dependent upon a number ofon many factors including the price of our common shares, our cash flows and financial position, copper and gold prices and general economic and market conditions.
Operating Activities
We generated operating cash flows totaling $1,068.5 million, net of $299.8 million that we used for working capital, during the first nine months of 2006, compared with $883.0 million, including $154.7 million from working capital sources, during the first nine months of 2005. Using estimated sales volumes for the fourth quarter of 2006 and assuming average prices of $3.25 per pound of copper and $575 per ounce of gold for the fourth quarter of 2006, we estimate that we would generate operating cash flows approximating $1.7 billion in 2006.
Investing Activities
Total capital expenditures of $178.0Common stock dividends totaled $62.9 million in the first nine months of 2006 were nearly double the $95.6 million reported in the 2005 period, reflecting an increase in expenditures for long-term development projects. Our capital expenditures for the 2006 period included approximately $40 million for Big Gossan, $12 million for the DOZ expansion, $11 million for the Grasberg underground ore body and $8 million for the Common Infrastructure project. Capital expenditures, including approximately $120 million for long-term projects, are estimated to total $250 million for 2006. Cash flows from the sale of assets totaled $32.6 million during 2006, primarily from Atlantic Copper’s disposition of land and certain royalty rights. In the first quarter of 2005, PT Freeport Indonesia received the $23.2 million balance of its share of insurance settlement proceeds related to its 2003 open-pit slippage claim, $2.0 million of which represented a recovery of property losses.
Financing Activities
As of September 30, 2006, we had total unrestricted cash and cash equivalents of $698.9 million and total outstanding debt of $774.5 million. Total debt was reduced by a net $481.4 million during the first nine months of 2006, including the following transactions:
· | $286.1 million for the completion of a tender offer to induce conversion of 7% Convertible Senior Notes due 2011 into 9.3 million shares of FCX2007. Our current regular annual common stock in the third quarter; |
· | $167.4 million for the mandatory redemption of Gold-Denominated Preferred Stock, Series II in the first quarter for $236.4 million; |
· | $12.5 million for the final mandatory redemption of Silver-Denominated Preferred Stock in the third quarter for $25.8 million; |
· | $30.5 million for privately negotiated transactions to induce conversion of 7% Convertible Senior Notes due 2011 into 1.0 million shares of FCX common stock; and |
· | $11.5 million for purchase in an open market transaction of 10⅛% Senior Notes due 2010 for $12.4 million. |
We recorded charges of $43.1 million ($35.9 million to net income, net of related reduction of interest expense, or $0.16 per share) in the third quarter of 2006 and $114.3 million ($74.0 million to net income, net of related reduction of interest expense, or $0.33 per share) in the first nine months of 2006 in connection with these transactions. The portion of these charges related to the mandatory redemptions of our gold- and silver-denominated preferred stock are recorded in revenues in accordance with our accounting policy for these instruments and totaled $13.3 million in the third quarter of 2006 and $82.2 million in the first nine months of 2006.
Following the debt repayments and redemptions during the first nine months of 2006, we have $58.8 million in debt maturities for the fourth quarter of 2006, which can be funded with the $698.9 million of cash on hand. Debt maturities total $81.7 million for the three-year period of 2007 through 2009. We will continue to consider opportunities to repay debt in advance of scheduled maturities. In addition, we have the option to call our 10⅛% Senior Notes due 2010 (outstanding principal amount of $272.4 million) in February 2007.
In July 2006, FCX and PT Freeport Indonesia entered into an amended credit agreement for a $465 million revolving credit facility to refinance its previous $195 million facility that was scheduled to mature in September 2006. The new facility, which can be expanded to up to $500 million with additional lender commitments, matures in 2009 and no amounts are outstanding under the facility.
During the first nine months of 2005, total debt was reduced by a net $565.8 million, primarily reflecting the following transactions:
· | $187.0 million prepayment of bank debt associated with Puncakjaya Power’s power-generating facilities at PT Freeport Indonesia’s mining operations; |
· | $15.5 million for purchases in open market transactions of 7.50% Senior Notes due 2006 and 7.20% Senior Notes due 2026 for $15.5 million; |
· | $149.9 million for purchases in open market transactions of 10⅛% Senior Notes due 2010 for $166.3 million; |
· | $188.4 million for privately negotiated transactions to induce conversion of 7% Convertible Senior Notes due 2011 into 6.1 million shares of FCX common stock; and |
· | $12.5 million for the partial mandatory redemption of Silver-Denominated Preferred Stock for $17.5 million. |
We recorded net charges of $43.4 million, $32.9 million to net income or $0.15dividend is $1.25 per share, in the third quarter and $43.3 million, $32.9 million to net income or $0.15paid at a quarterly rate of $0.3125 per share, in the first nine months of 2005 as a result of these transactions. The portion of these charges related to the partial mandatory redemption of the Silver-Denominated Preferred Stock totaled $5.0 million and is recorded in revenues for the third quarter and first nine months of 2005.
In the first nine months of 2006, totalshare. Based on outstanding common stock dividends were $558.8 million ($2.9375 per share), including three supplemental dividends of $0.50 per shareshares on March 31, 2006, $0.75 per share on June 30, 2006 and $0.75 per share on September 29, 2006. Since December 2004, we have paid seven supplemental dividends totaling $699.4 million ($3.75 per share). In the first nine months of 2005, we paid2007, our regular quarterly dividend ($0.25 per share) in February, May and July and two supplementalannual common stock dividends of $0.50 per share in March and September, for total common stock dividends of $312.9 million for the 2005 period.dividend totals approximately $475 million. The declaration and payment of dividends is at the discretion of our Board of Directors. The amount of our current quarterly cash dividend ($0.3125 per share) on our common stock and the possible payment of additional future supplemental cash dividends will depend onbe dependent upon our financial results, cash requirements, future prospects and other factors deemed relevant by our Board of Directors. On March 29, 2007, FCX declared a regular quarterly dividend, which was paid on May 1, 2007, to common shareholders of record at the close of business on April 16, 2007.
During the first nine months of 2006 and 2005, cashCash dividends on preferred stock of $45.4$15.1 million in each of the first quarters of 2007 and 2006, represent dividends on our 5½% Convertible Perpetual Preferred Stock. Each share of preferred stock was initially convertible into 18.8019 shares of our common stock, equivalent to an initial conversion price of approximately $53.19 per common share. The conversion rate is adjustable upon the occurrence of certain events, including any quarter that our common stock dividend exceeds $0.20 per share. As a result of the quarterly and supplemental common stock dividends paid through September 2006 discussed above,May 1, 2007, each share of preferred stock is now convertible into 20.598321.1923 shares of FCX common stock, equivalent to a conversion price of approximately $48.55$47.19 per common share. On March 29, 2007, FCX declared a regular quarterly
dividend of $13.75 per share of FCX’s 5½% Convertible Perpetual Preferred Stock, which was paid on May 1, 2007, to shareholders of record at the close of business on April 16, 2007.
The 6¾% mandatory convertible preferred stock sold in March 2007, will automatically convert on May 1, 2010, into between approximately 39 million and 47 million shares of FCX common stock. The conversion rate will be subject to anti-dilution adjustments in certain circumstances. Holders may elect to convert at any time at a conversion rate equal to 1.3605 shares of common stock for each share of 6¾% mandatory convertible preferred stock. We will pay, when declared by our Board of Directors, quarterly dividends at a rate of 6.75 percent per annum. The first dividend date is August 1, 2007.
Cash dividends to minority interests of $47.0 million in the first quarter of 2007 and $18.7 million in the first quarter of 2006 represent dividends paid to the minority interest owners of PT Freeport Indonesia and Puncakjaya Power.
Pursuant to the restricted payment covenants in our 10⅛% Senior Notes$11.5 billion senior credit facility and 6⅞% Senior Notes,certain senior notes, the amount available for dividend payments, purchases of our common stock and other restricted payments as of September 30, 2006,March 31, 2007, was approximately $900 million.$3.6 billion.
DISCLOSURES ABOUT MARKET RISKS
In 2003,connection with the acquisition of Phelps Dodge, the following supplements the disclosures about market risks contained in our Board2006 Annual Report on Form 10-K for the year ended December 31, 2006.
Commodity Price Risk
Our consolidated revenues include the sale of Directors approvedcopper concentrates, which also may contain significant quantities of gold and silver, the sale of copper anodes, cathodes, wire rod, wire and gold in anodes and slimes, and the sale of molybdenum. Consolidated revenues and net income vary significantly with fluctuations in the market prices of copper, gold and molybdenum, sales volumes and other factors. For further information on commodity price risk see the discussion under “Consolidated Results - Revenues.”
Foreign Currency Exchange Risk
The functional currency for most of our operations is the U.S. dollar. All of our revenues and a new open market share purchase program for upsignificant portion of our costs are denominated in U.S. dollars; however, some costs and certain assets and liability accounts are denominated in local currencies, including the Indonesian rupiah, Australian dollars, Chilean pesos, Peruvian nuevos soles and euros. Generally, our results are positively affected when the U.S. dollar strengthens in relation to 20 million shares, which replaced our previous program. Through Octoberthose foreign currencies and adversely affected when the U.S. dollar weakens in relation to those foreign currencies.
One U.S. dollar was equivalent to 8,989 rupiah at December 31, 2006 and 9,113 rupiah at March 31, 2007. PT Freeport Indonesia’s labor costs are mostly rupiah denominated. At estimated aggregate annual rupiah payments of 1.6 trillion for operating costs and an exchange rate of 9,113 rupiah to one U.S. dollar, the exchange rate as of March 31, 2007, a one-thousand-rupiah increase in the exchange rate would result in an approximate $17 million decrease in aggregate annual operating costs. A one-thousand-rupiah decrease in the exchange rate would result in an approximate $22 million increase in aggregate annual operating costs.
Approximately 14 percent of PT Freeport Indonesia’s total projected 2007 purchases of materials, supplies and services are denominated in Australian dollars. The exchange rate was $0.79 to one Australian dollar at December 31, 2006, and $0.81 to one Australian dollar at March 31, 2007. At estimated annual aggregate Australian dollar payments of 250 million and an exchange rate of $0.81 to one Australian dollar, the exchange rate as of March 31, 2007, a $0.01 increase or decrease in the exchange rate would result in an approximate $2.5 million change in aggregate annual operating costs.
The majority of Atlantic Copper’s revenues are denominated in U.S. dollars; however, operating costs, other than concentrate purchases, and certain asset and liability accounts are denominated in euros. Atlantic Copper’s estimated annual euro payments total approximately 100 million euros. A $0.05 increase
or decrease in the exchange rate would result in an approximate $5 million change in annual costs. The exchange rate on December 31, 2006, was $1.32 per euro and on March 31, 2007, was $1.33 per euro.
At our South American mining operations, labor costs and local supply costs are mostly denominated in the local currencies. One U.S. dollar was equivalent to 532.4 Chilean pesos and 3.2 Peruvian nuevos soles at December 31, 2006, and 539.4 Chilean pesos and 3.2 Peruvian nuevos soles at March 31, 2007. At estimated aggregate annual Chilean peso payments of 160 billion for operating costs and an exchange rate of 539.4 Chilean pesos to one U.S. dollar, the exchange rate as of March 31, 2007, a ten-peso increase or decrease in the exchange rate would result in an approximate $5.5 million change in aggregate annual operating costs. At estimated aggregate annual Peruvian nuevo sol payments of 330 million for operating costs and an exchange rate of 3.2 Peruvian nuevos soles to one U.S. dollar, the exchange rate as of March 31, 2007, a 0.10 nuevo sol increase or decrease in the exchange rate would result in an approximate $3.0 million change in aggregate annual operating costs.
Interest Rate Risk
As of March 31, 2007, we had approximately $12.0 billion of long-term debt. Approximately 48 percent of our debt is variable rate debt, with an interest rate based on London Interbank Offered Rate (LIBOR). An increase in LIBOR would increase our interest costs and would negatively affect our cash flows and results of operations.
CONTRACTUAL OBLIGATIONS
In connection with the acquisition of Phelps Dodge, contractual obligations (including debt) as of March 31, 2007, have increased when compared to December 31, 2006. The following table, as of March 31, 2007, reflects an update of only the major changes to the similar table presented in our 2006 Annual Report on Form 10-K, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in millions):
| | | | Less Than | | | | | | After |
| Total | | 1 Year | | 1-3 Years | | 4-5 Years | | +5 Years |
Short-term debt | $ | 96.1 | | $ | 96.1 | | $ | - | | $ | - | | $ | - |
Long-term debt | | 11,940.0 | | | 103.1 | | | 379.5 | | | 181.4 | | | 11,276.0 |
Scheduled interest payment obligationsa | | 7,663.4 | | | 887.2 | | | 2,519.7 | | | 1,669.1 | | | 2,587.4 |
Asset retirement obligationsb | | 104.4 | | | 65.1 | | | 36.9 | | | 2.1 | | | 0.3 |
Take-or-pay contractsc | | 1,574.9 | | | 1,132.1 | | | 320.6 | | | 85.8 | | | 36.4 |
Total contractual cash obligationsd | $ | 21,378.8 | | $ | 2,283.6 | | $ | 3,256.7 | | $ | 1,938.4 | | $ | 13,900.1 |
a. | Scheduled interest payment obligations were calculated using stated coupon rates for fixed debt and interest rates applicable at March 31, 2007, for variable debt. |
b. | Asset retirement obligations only include our estimated contractual cash payments associated with reclamation activities at certain Phelps Dodge sites we acquired for which our costs are estimable and the timing of payments was reasonably determinable as of March 31, 2007. The timing and the amount of these payments could change as a result of changes in regulatory requirements, changes in scope of reclamation activities and as actual reclamation spending occurs. The table excludes remaining cash payments of approximately $66 million that are expected to be incurred in connection with accelerating certain closure projects at our discretion. We have also excluded payments for reclamation activities that are expected to occur after five years and the associated trust assets of approximately $522 million that have been dedicated to funding those reclamation activities because a majority of these cash flows are expected to occur over an extended period of time and are dependent upon the timing of the end of the mine life, which is subject to revision. |
c. Take-or-pay contracts acquired in the acquisition of Phelps Dodge primarily include contracts for copper deliveries of specified volumes
at market-based prices (approximately $1 billion), transportation and port fee commitments (approximately $211 million) and contracts for electricity (approximately
| $124 million). Approximately 39 percent of our take-or-pay electricity obligations are through Phelps Dodge Energy Services (PDES), the legal entity used to manage power for North American operations at generally fixed-priced arrangements. PDES has the right and the ability to resell the electricity as circumstances warrant. |
d. | This table excludes certain other obligations in our Condensed Consolidated Balance Sheet, including estimated funding for pension obligations as the funding may vary from year-to-year based on changes in the fair value of plan assets and actuarial assumptions. Environmental obligations and contingencies for which the timing of payments is not determinable are also excluded. |
Hedging Activities
In connection with the acquisition of Phelps Dodge, we acquired 7.8certain derivative instruments entered into by Phelps Dodge. The most significant of these derivatives are zero-premium copper collars (consisting of both put and call options) and copper put options (see Note 14). These derivative instruments do not qualify for hedge accounting and are adjusted to fair market value based on the forward curve price and implied volatility as of the last day of the respective reporting period, with the gain or loss recorded in revenues. First-quarter 2007 results include charges to revenues totaling $38.1 million shares($23.2 million to net income or $0.10 per share) representing the increase in the mark-to-market liability from March 20, 2007, to March 31, 2007. The actual impact of our 2007 zero-premium copper collar price protection program will not be fully determinable until their maturity at year-end 2007, with final adjustments based on the average annual LME price.
At March 31, 2007, these zero-premium copper collars covered 486.0 million pounds of copper sales. At March 31, 2007, the liability associated with these contracts totaled $461.5 million. At March 31, 2007, we also had in place copper put options acquired in the Phelps Dodge acquisition at a strike price of $0.95 per pound for $279.5approximately 730 million ($36.05 per share average), including 2.0 million sharespounds of 2007 copper sales. Based on copper prices at April 30, 2007, the mark-to-market accounting adjustments in the second quarter of 20062007 for $99.8the copper collars would reduce revenues by approximately $147 million ($49.94 per share average),(approximately $90 million to net income). The 2007 copper collars and 12.2 million shares remain available. The timingput contracts will settle in the first quarter of future purchases of our common stock is dependent2008 based on many factors including the price of our common shares, our cash flows and financial position, copper and gold prices and general economic and market conditions.average 2007 LME price.
We do not currently intend to enter into similar hedging programs in the future.
Debt Maturities. Below is a summary (in millions) of our total debt maturities based on loan balances as of September 30, 2006.ENVIRONMENTAL AND RECLAMATION MATTERS
| 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | |
Equipment loans and other | $ | 3.4 | | $ | 13.5 | | $ | 13.5 | | $ | 13.5 | | $ | 10.2 | | $ | 3.8 | |
7.50% Senior Notes due 2006 | | 55.4 | | | - | | | - | | | - | | | - | | | - | |
Atlantic Copper debt | | - | | | 41.2 | | | - | | | - | | | - | | | - | |
10⅛% Senior Notes due 2010 | | - | | | - | | | - | | | - | | | 272.4 | | | - | |
7% Convertible Senior Notes due 2011 | | - | | | - | | | - | | | - | | | - | | | 7.1 | |
6⅞% Senior Notes due 2014 | | - | | | - | | | - | | | - | | | - | | | 340.3 | |
7.20% Senior Notes due 2026 | | - | | | - | | | - | | | - | | | - | | | 0.2 | |
Total debt maturities | $ | 58.8 | | $ | 54.7 | | $ | 13.5 | | $ | 13.5 | | $ | 282.6 | | $ | 351.4 | |
| | | | | | | | | | | | | | | | | | |
EnvironmentalWe are subject to stringent federal, state and local environmental laws and regulations that govern emissions of air pollutants; discharges of water pollutants; and generation, handling, storage and disposal of hazardous substances, hazardous wastes and other toxic materials. We also are subject to potential liabilities arising under CERCLA and similar state laws that impose responsibility on persons who arranged for the disposal of hazardous substances, and on current and previous owners and operators of a facility for the cleanup of hazardous substances released from the facility into the environment, including damages to natural resources. In addition, we are subject to potential liabilities under the Resource Conservation and Recovery Act (RCRA) and analogous state laws that require responsible parties to remediate releases of hazardous or solid waste constituents into the environment associated with past or present activities.
Phelps Dodge or its subsidiaries previously have been advised by the U.S. Environmental Protection Agency (EPA), U.S. Forest Service and several state agencies that under CERCLA or similar state laws and regulations, they may be liable for costs of responding to environmental conditions at a number of sites that have been or are being investigated by the EPA, the U.S. Forest Service or states to determine whether releases of hazardous substances have occurred and, if so, to develop and implement remedial actions to address environmental concerns. Phelps Dodge has also been advised by trustees for natural resources that it may be liable under CERCLA or similar state laws for damages to natural resources caused by releases of hazardous substances.
Asset Retirement Obligations
In connection with the acquisition of Phelps Dodge, we acquired certain asset retirement obligations (AROs). At March 31, 2007, we had $405.9 million recorded for AROs in current and long-term liabilities on the balance sheet. We estimate at March 31, 2007, that our share of the total cost of Phelps Dodge’s AROs, including anticipated future disturbances and cumulative payments, to be approximately $1.3 billion (unescalated, undiscounted and on a third-party cost basis), leaving approximately $900 million remaining to be accreted over time. These aggregate costs may increase or decrease materially in the future as a result of changes in regulations, engineering designs and technology, permit modifications or updates, mine plans or other factors and as actual reclamation spending occurs. ARO activities and expenditures generally are made over an extended period of time commencing near the end of the mine life; however, certain reclamation activities could be accelerated if they are determined to be economically beneficial.
At March 31, 2007, we had a trust dedicated to funding global reclamation and remediation activities totaling $422.4 million and also had trust assets that are legally restricted, totaling $99.4 million, to fund a portion of our asset retirement obligations for Chino, Tyrone and Cobre as required for New Mexico financial assurance.
Refer to Note 11 for additional information on significant environmental matters and asset retirement obligations.
Prior to its acquisition by FCX, Phelps Dodge had initiated a process of identifying and prioritizing opportunities to accelerate certain demolition, environmental reserve and asset retirement obligation projects. The projects were prioritized based on projects where it has regulatory flexibility to remediate at a faster pace, structures that can be readily demolished, reclamation of visibly impacted areas, and projects in Arizona and New Mexico where we have substantial long-term closure obligations. The current plan is to spend, including capital, at least $300 million through 2008 associated with environmental reserve and reclamation projects.
NEW ACCOUNTING STANDARDS
Accounting for Stock-Based Compensation. As of September 30, 2006, we had four stock-based employee compensation plans and two stock-based director compensation plans. Prior to January 1, 2006, we accounted for options granted under all of our 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 the plans require that the option exercise price be at least the market price on the date of grant, we recognized no
compensation cost on the grant or exercise of our employees’ options through December 31, 2005. 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 and the intrinsic value on the reporting or exercise date for cash-settled stock appreciation rights (SARs).
Effective January 1, 2006,2007, we adopted the fair value recognition provisions of SFASFASB Interpretation No. 123R using the modified prospective transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) 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 (b) 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. Fair value of stock option awards granted to employees was calculated using the Black-Scholes-Merton option-pricing model before and after adoption of SFAS No. 123R. Other stock-based awards charged to expense under SFAS No. 123 continue to be charged to expense under SFAS No. 123R (see Note 2). These include restricted stock units granted in lieu of certain cash compensation and SARs, which are settled in cash. Results for prior periods have not been restated.
As a result of adopting SFAS No. 123R on January 1, 2006, our income before income taxes and minority interests for the three months ended September 30, 2006, was $5.7 million lower and net income was $3.3 million ($0.02 per basic share and $0.01 per diluted share) lower, and our income before income taxes and minority interests for the nine months ended September 30, 2006, was $21.6 million lower and net income was $12.5 million ($0.07 per basic share and $0.06 per diluted share) lower than if we had continued to account for share-based compensation under APB Opinion No. 25.
Prior to the adoption of SFAS No. 123R, we presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS No. 123R requires the cash flows generated by tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $20.7 million excess tax benefit classified as a financing cash inflow in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 would have been classified as an operating cash inflow if we had not adopted SFAS No. 123R.
Compensation cost charged against earnings for stock-based awards is shown below (in thousands). We did not capitalize any stock-based compensation costs to fixed assets during the periods presented.
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Production and delivery costs | | $ | 6,196 | | $ | 1,842 | | $ | 17,780 | | $ | 4,424 | |
General and administrative expenses | | | 7,883 | a | | 5,059 | a, b | | 21,101 | a | | 10,467 | a, b |
Exploration expenses | | | 276 | | | - | | | 1,019 | | | - | |
Total stock-based compensation cost | | $ | 14,355 | | $ | 6,901 | | $ | 39,900 | | $ | 14,891 | |
| | | | | | | | | | | | | |
a. | Amounts are before Rio Tinto’s share of the cost of employee exercises of in-the-money stock options which increased consolidated general and administrative expenses by $1.0 million in the 2006 quarter and which decreased consolidated general and administrative expenses by $2.9 million in the 2005 quarter, $6.1 million in the 2006 nine-month period and $5.9 million in the 2005 nine-month period. |
b. | Includes amortization of the intrinsic value of FCX’s Class A stock options that were converted to Class B stock options in 2002 totaling $0.5 million for the 2005 quarter and $1.6 million for the 2005 nine-month period. |
As of September 30, 2006, total compensation cost related to nonvested stock option awards not yet recognized in earnings was $52.3 million.
Deferred Mining Costs. On January 1, 2006, we adopted EITF 04-6, which requires that stripping costs incurred during production be considered costs of the extracted minerals and included as a component of
inventory to be recognized in cost of sales in the same period as the revenue from the sale of inventory. Upon adoption of EITF 04-6, we recorded our deferred mining costs asset ($285.4 million) at December 31, 2005, net of taxes, minority interest share and inventory effects ($135.9 million), as a cumulative effect adjustment to reduce our retained earnings on January 1, 2006. In addition, stripping costs incurred in 2006 and later periods are now charged to cost of sales as incurred. As a result of adopting EITF 04-6 on January 1, 2006, our income before income taxes and minority interests for the three months ended September 30, 2006, was $9.6 million lower and net income was $5.1 million ($0.03 per basic share and $0.02 per diluted share) lower, and our income before income taxes and minority interests for the nine months ended September 30, 2006, was $48.3 million lower and net income was $25.6 million ($0.14 per basic share and $0.12 per diluted share) lower than if we had not adopted EITF 04-6 and continued to defer stripping costs. Adoption of the new guidance has no impact on our cash flows.
Accounting for Uncertainty in Income Taxes. In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No.(FIN) 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimumwhich prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position is requiredtaken or expected to meet before being recognizedbe taken in the financial statements.a tax return. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The cumulative effect of adopting FIN 48 was an increase in beginning retained earnings of approximately $4 million. Refer to Note 9 for further discussion.
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159 “The Fair Value Option for Financial Assets and Liabilities - Including an amendment of FASB No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for the first fiscal yearyears beginning after DecemberNovember 15, 2006.2007, with early adoption allowed. We are reviewing the provisions of FIN 48 and have not yet determined the impact, of adoption.
Accounting for Defined Benefit Pension and Other Postretirement Plans. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R.” SFAS No. 158 represents the completion of the first phase of FASB’s postretirement benefits accounting project and requires an entity to:
· | Recognize in its statements of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, |
· | Measure a defined benefit postretirement plan’s assets and obligationsif any, that determine its funded status as of the end of the employer’s fiscal year, and |
· | Recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. |
SFAS No. 158 does not change the manner of determining the amount of net periodic benefit cost included in net income or address the various measurement issues associated with postretirement benefit plan accounting. The requirement to recognize the funded status of a defined benefit postretirement plan is effective for year-end 2006. We currently expect the impact of adopting SFAS No. 158 will be to increase long-term liabilities and to decrease stockholders’ equity.this standard might have on our financial statements.
PRODUCT REVENUES AND PRODUCTION COSTS
PT Freeport Indonesia Product Revenues and Unit Net Cash Costs
All amounts used in both the by-product and co-product method presentations are included in our recorded results under generally accepted accounting principles. We separately identify certain of these amounts as shown in the following reconciliation to amounts reported in our consolidated financial statements and as explained here.
1. | We show adjustments to copper revenues for prior period open sales as separate line items. Because such copper pricing adjustments do not result from current period sales, we have reflected these separately from revenues on current period sales. |
2. | Noncash and nonrecurringnet cash costs consist of items such as stock-based compensation costs starting January 1, 2006 (see “New Accounting Standards”), write-offs of equipment or unusual charges. They are removed from site production and delivery costs in the calculation of unit net cash costs. |
3. | Gold and silver revenues, excluding any impacts from redemption of our gold- and silver-denominated preferred stocks, are reflected as credits against site production and delivery costs in the by-product method. |
Three Months Ended September 30, 2006 | | | | |
| By-Product | | Co-Product Method | |
(In Thousands) | Method | | Copper | | Gold | | Silver | | Total | |
Revenues, after adjustments shown below | $ | 1,096,610 | | $ | 1,096,610 | | $ | 294,776 | | $ | 12,608 | | $ | 1,403,994 | |
| | | | | | | | | | | | | | | |
Site production and delivery, before net noncash | | | | | | | | | | | | | | | |
and nonrecurring costs shown below | | 354,930 | | | 277,224 | | | 74,519 | | | 3,187 | | | 354,930 | |
Gold and silver credits | | (307,384 | ) | | - | | | - | | | - | | | - | |
Treatment charges | | 141,585 | a | | 110,587 | b | | 29,727 | b | | 1,271 | b | | 141,585 | |
Royalty on metals | | 36,982 | | | 28,885 | | | 7,765 | | | 332 | | | 36,982 | |
Unit net cash costs | | 226,113 | | | 416,696 | | | 112,011 | | | 4,790 | | | 533,497 | |
Depreciation and amortization | | 49,954 | | | 39,017 | | | 10,488 | | | 449 | | | 49,954 | |
Noncash and nonrecurring costs, net | | 8,548 | | | 6,677 | | | 1,794 | | | 77 | | | 8,548 | |
Total unit costs | | 284,615 | | | 462,390 | | | 124,293 | | | 5,316 | | | 591,999 | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | | | | |
prior period open sales and silver hedging | | 36,937 | c | | 50,192 | | | - | | | (13,255 | ) | | 36,937 | |
PT Smelting intercompany profit elimination | | (20,347 | ) | | (15,892 | ) | | (4,272 | ) | | (183 | ) | | (20,347 | ) |
Gross profit (loss) | $ | 828,585 | | $ | 668,520 | | $ | 166,211 | | $ | (6,146 | ) | $ | 828,585 | |
| | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
(In Thousands) | Revenues | | Production and Delivery | | Depreciation and Amortization | | | | | | | |
Totals presented above | $ | 1,403,994 | | $ | 354,930 | | $ | 49,954 | | | | | | | |
Net noncash and nonrecurring costs per above | | N/A | | | 8,548 | | | N/A | | | | | | | |
Less: Treatment charges per above | | (141,585 | ) | | N/A | | | N/A | | | | | | | |
Royalty per above | | (36,982 | ) | | N/A | | | N/A | | | | | | | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | | | | |
prior period open sales and hedging per above | | 36,937 | | | N/A | | | N/A | | | | | | | |
Mining and exploration segment | | 1,262,364 | | | 363,478 | | | 49,954 | | | | | | | |
Smelting and refining segment | | 613,089 | | | 581,357 | | | 8,071 | | | | | | | |
Eliminations and other | | (239,404 | ) | | (153,450 | ) | | 2,802 | | | | | | | |
As reported in FCX’s consolidated financial | | | | | | | | | | | | | | | |
statements | $ | 1,636,049 | | $ | 791,385 | | $ | 60,827 | | | | | | | |
| | | | | | | | | | | | | | | |
Three Months Ended September 30, 2005 | | | | |
| By-Product | | Co-Product Method | |
(In Thousands) | Method | | Copper | | Gold | | Silver | | Total | |
Revenues, after adjustments shown below | $ | 593,374 | | $ | 593,374 | | $ | 210,377 | | $ | 7,402 | | $ | 811,153 | |
| | | | | | | | | | | | | | | |
Site production and delivery, before net noncash | | | | | | | | | | | | | | | |
and nonrecurring costs shown below | | 244,532 | d | | 178,880 | e | | 63,421 | e | | 2,231 | e | | 244,532 | |
Gold and silver credits | | (217,779 | ) | | - | | | - | | | - | | | - | |
Treatment charges | | 86,197 | | | 63,055 | | | 22,356 | | | 786 | | | 86,197 | |
Royalty on metals | | 20,348 | | | 14,885 | | | 5,277 | | | 186 | | | 20,348 | |
Unit net cash costs | | 133,298 | | | 256,820 | | | 91,054 | | | 3,203 | | | 351,077 | |
Depreciation and amortization | | 51,143 | | | 37,412 | | | 13,264 | | | 467 | | | 51,143 | |
Noncash and nonrecurring costs, net | | 2,469 | | | 1,806 | | | 640 | | | 23 | | | 2,469 | |
Total unit costs | | 186,910 | | | 296,038 | | | 104,958 | | | 3,693 | | | 404,689 | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | | | | |
prior period open sales and silver hedging | | 66,582 | f | | 71,534 | | | - | | | (4,952 | ) | | 66,582 | |
PT Smelting intercompany profit elimination | | (3,096 | ) | | (2,265 | ) | | (803 | ) | | (28 | ) | | (3,096 | ) |
Gross profit (loss) | $ | 469,950 | | $ | 366,605 | | $ | 104,616 | | $ | (1,271 | ) | $ | 469,950 | |
| | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
(In Thousands) | Revenues | | Production and Delivery | | Depreciation and Amortization | | | | | | | |
Totals presented above | $ | 811,153 | | $ | 244,532 | | $ | 51,143 | | | | | | | |
Net noncash and nonrecurring costs per above | | N/A | | | 2,469 | | | N/A | | | | | | | |
Less: Treatment charges per above | | (86,197 | ) | | N/A | | | N/A | | | | | | | |
Royalty per above | | (20,348 | ) | | N/A | | | N/A | | | | | | | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | | | | |
prior period open sales and hedging per above | | 66,582 | | | N/A | | | N/A | | | | | | | |
Mining and exploration segment | | 771,190 | | | 247,001 | | | 51,143 | | | | | | | |
Smelting and refining segment | | 378,412 | | | 351,517 | | | 7,415 | | | | | | | |
Eliminations and other | | (166,332 | ) | | (164,150 | ) | | 3,088 | | | | | | | |
As reported in FCX’s consolidated financial | | | | | | | | | | | | | | | |
statements | $ | 983,270 | | $ | 434,368 | | $ | 61,646 | | | | | | | |
| | | | | | | | | | | | | | | |
a. | Includes $6.7 million or $0.02 per pound for adjustments to prior quarters’ concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since June 30, 2006. |
b. | Includes $5.2 million or $0.02 per pound for copper, $1.4 million or $2.95 per ounce for gold and $0.1 million or $0.05 per ounce for silver for adjustments to prior quarters’ concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since June 30, 2006. |
c. | Includes a $13.3 million or $0.04 per pound loss on the redemption of FCX’s Silver-Denominated Preferred Stock. |
d. | Net of deferred mining costs totaling $15.8 million or $0.05 per pound. Following adoption of EITF 04-6 on January 1, 2006 (see Note 3 and “New Accounting Standards”), stripping costs are no longer deferred. |
e. | Net of deferred mining costs totaling $11.6 million or $0.03 per pound for copper, $4.1 million or $8.63 per ounce for gold and $0.1 million or $0.14 per ounce for silver (see Note d above). |
f. | Includes a $5.0 million or $0.01 per pound loss on the redemption of FCX’s Silver-Denominated Preferred Stock. |
Nine Months Ended September 30, 2006 | | | | |
| By-Product | | Co-Product Method | |
(In Thousands) | Method | | Copper | | Gold | | Silver | | Total | |
Revenues, after adjustments shown below | $ | 2,607,013 | | $ | 2,607,013 | | $ | 753,338 | | $ | 31,115 | | $ | 3,391,466 | |
| | | | | | | | | | | | | | | |
Site production and delivery, before net noncash | | | | | | | | | | | | | | | |
and nonrecurring costs shown below | | 900,838 | | | 692,472 | | | 200,101 | | | 8,265 | | | 900,838 | |
Gold and silver credits | | (784,453 | ) | | - | | | - | | | - | | | - | |
Treatment charges | | 332,425 | a | | 255,534 | b | | 73,841 | b | | 3,050 | b | | 332,425 | |
Royalty on metals | | 79,850 | | | 61,381 | | | 17,736 | | | 733 | | | 79,850 | |
Unit net cash costs | | 528,660 | | | 1,009,387 | | | 291,678 | | | 12,048 | | | 1,313,113 | |
Depreciation and amortization | | 117,637 | | | 90,428 | | | 26,130 | | | 1,079 | | | 117,637 | |
Noncash and nonrecurring costs, net | | 30,625 | | | 23,541 | | | 6,803 | | | 281 | | | 30,625 | |
Total unit costs | | 676,922 | | | 1,123,356 | | | 324,611 | | | 13,408 | | | 1,461,375 | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | | | | |
prior period open sales and gold/silver hedging | | 115,124 | c | | 197,341 | | | (68,962 | ) | | (13,255 | ) | | 115,124 | |
PT Smelting intercompany profit elimination | | (7,368 | ) | | (5,664 | ) | | (1,637 | ) | | (67 | ) | | (7,368 | ) |
Gross profit | $ | 2,037,847 | | $ | 1,675,334 | | $ | 358,128 | | $ | 4,385 | | $ | 2,037,847 | |
| | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
(In Thousands) | Revenues | | Production and Delivery | | Depreciation and Amortization | | | | | | | |
Totals presented above | $ | 3,391,466 | | $ | 900,838 | | $ | 117,637 | | | | | | | |
Net noncash and nonrecurring costs per above | | N/A | | | 30,625 | | | N/A | | | | | | | |
Less: Treatment charges per above | | (332,425 | ) | | N/A | | | N/A | | | | | | | |
Royalty per above | | (79,850 | ) | | N/A | | | N/A | | | | | | | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | | | | |
prior period open sales and hedging per above | | 115,124 | | | N/A | | | N/A | | | | | | | |
Mining and exploration segment | | 3,094,315 | | | 931,463 | | | 117,637 | | | | | | | |
Smelting and refining segment | | 1,722,327 | | | 1,633,169 | | | 22,887 | | | | | | | |
Eliminations and other | | (668,269 | ) | | (689,725 | ) | | 6,908 | | | | | | | |
As reported in FCX’s consolidated financial | | | | | | | | | | | | | | | |
statements | $ | 4,148,373 | | $ | 1,874,907 | | $ | 147,432 | | | | | | | |
| | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2005 | | | | |
| By-Product | | Co-Product Method | |
(In Thousands) | Method | | Copper | | Gold | | Silver | | Total | |
Revenues, after adjustments shown below | $ | 1,660,045 | | $ | 1,660,045 | | $ | 725,415 | | $ | 23,908 | | $ | 2,409,368 | |
| | | | | | | | | | | | | | | |
Site production and delivery, before net noncash | | | | | | | | | | | | | | | |
and nonrecurring costs shown below | | 658,958 | d | | 454,019 | e | | 198,400 | e | | 6,539 | e | | 658,958 | |
Gold and silver credits | | (749,323 | ) | | - | | | - | | | - | | | - | |
Treatment charges | | 225,551 | | | 155,404 | | | 67,909 | | | 2,238 | | | 225,551 | |
Royalty on metals | | 56,867 | | | 39,181 | | | 17,122 | | | 564 | | | 56,867 | |
Unit net cash costs | | 192,053 | | | 648,604 | | | 283,431 | | | 9,341 | | | 941,376 | |
Depreciation and amortization | | 142,285 | | | 98,034 | | | 42,839 | | | 1,412 | | | 142,285 | |
Noncash and nonrecurring costs, net | | 5,276 | | | 3,635 | | | 1,589 | | | 52 | | | 5,276 | |
Total unit costs | | 339,614 | | | 750,273 | | | 327,859 | | | 10,805 | | | 1,088,937 | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | | | | |
prior period open sales and silver hedging | | 10,024 | f | | 14,976 | | | - | | | (4,952 | ) | | 10,024 | |
PT Smelting intercompany profit elimination | | (3,120 | ) | | (2,150 | ) | | (939 | ) | | (31 | ) | | (3,120 | ) |
Gross profit | $ | 1,327,335 | | $ | 922,598 | | $ | 396,617 | | $ | 8,120 | | $ | 1,327,335 | |
| | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
(In Thousands) | Revenues | | Production and Delivery | | Depreciation and Amortization | | | | | | | |
Totals presented above | $ | 2,409,368 | | $ | 658,958 | | $ | 142,285 | | | | | | | |
Net noncash and nonrecurring costs per above | | N/A | | | 5,276 | | | N/A | | | | | | | |
Less: Treatment charges per above | | (225,551 | ) | | N/A | | | N/A | | | | | | | |
Royalty per above | | (56,867 | ) | | N/A | | | N/A | | | | | | | |
Revenue adjustments, primarily for pricing on | | | | | | | | | | | | | | | |
prior period open sales and hedging per above | | 10,024 | | | N/A | | | N/A | | | | | | | |
Mining and exploration segment | | 2,136,974 | | | 664,234 | | | 142,285 | | | | | | | |
Smelting and refining segment | | 982,425 | | | 937,003 | | | 21,645 | | | | | | | |
Eliminations and other | | (430,155 | ) | | (411,277 | ) | | 8,801 | | | | | | | |
As reported in FCX’s consolidated financial | | | | | | | | | | | | | | | |
statements | $ | 2,689,244 | | $ | 1,189,960 | | $ | 172,731 | | | | | | | |
| | | | | | | | | | | | | | | |
a. | Includes $12.4 million or $0.02 per pound for adjustments to 2005 concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since December 31, 2005. |
b. | Includes $9.5 million or $0.01 per pound for copper, $2.8 million or $2.24 per ounce for gold and $0.1 million or $0.04 per ounce for silver for adjustments to 2005 concentrate sales subject to final pricing to reflect the impact on treatment charges resulting from the increase in copper prices since December 31, 2005. |
c. | Includes a $69.0 million or $0.09 per pound loss on the redemption of FCX’s Gold-Denominated Preferred Stock, Series II and a $13.3 million or $0.02 per pound loss on the redemption of FCX’s Silver-Denominated Preferred Stock. |
d. | Net of deferred mining costs totaling $68.6 million or $0.07 per pound. Following adoption of EITF 04-6 on January 1, 2006 (see Note 3 and “New Accounting Standards”), stripping costs are no longer deferred. |
e. | Net of deferred mining costs totaling $47.3 million or $0.05 per pound for copper, $20.7 million or $12.25 per ounce for gold and $0.7 million or $0.20 per ounce for silver (see Note d above). |
f. | Includes a $5.0 million or less than $0.01 per pound loss on the redemption of FCX’s Silver-Denominated Preferred Stock. |
CATHODE CASH UNIT COST
Cathode cash unit cost per pound of copper is a measure intended to provide investors with information about the costs incurredcash generating capacity of our mining operations expressed on a basis relating to produce cathodes at our smelting operations in Spain and Indonesia.primary metal product, copper. We use this measure for the same purpose and for monitoring operating performance atby our smeltingmining operations. This information differs from measures of performance determined in accordance with generally accepted accounting principles and should not be considered in isolation or as a substitute for measures of performance determined in accordance with generally accepted accounting principles. Other smeltingThis measure is presented by other copper and gold mining companies, present this measure, although Atlantic Copper’s and PT Smelting’sour measures may not be comparable to similarly titled measures reported by other companies.
Atlantic Copper Cathode Cash Unit Cost Per Pound Of Copper
The reconciliation below presents reported production costs for our smelting and refining segment (Atlantic Copper) and subtracts or adds components of those costs that do not directly relate to the process of converting copper concentrates to cathodes. The adjusted production costs amounts are used to calculate Atlantic Copper’s cathode cash unit costWe present gross profit per pound of copper (in thousands, exceptusing both a “by-product” method and a “co-product” method. We use the by-product method in our presentation of gross profit per pound amounts):of copper because (1) the majority of our revenues are copper revenues, (2) we mine ore, which contains copper, gold, molybdenum and other metals, (3) it is not possible to specifically assign all of our costs to revenues from the copper, gold, and molybdenum and other metals we produce, (4) it is the method used to compare mining operations in certain industry publications and (5) it is the method used by our management and Board of Directors to monitor operations. In the co-product method presentation below, costs are allocated to the different products based on their relative revenue values, which will vary to the extent our metals sales volumes and realized prices change.
| Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
| 2006 | | 2005 | | 2006 | | 2005 | |
Smelting and refining segment production costs reported | | | | | | | | | | | | |
in FCX’s consolidated financial statements | $ | 581,357 | | $ | 351,517 | | $ | 1,633,169 | | $ | 937,003 | |
Less: | | | | | | | | | | | | |
Raw material purchase costs | | (465,864 | ) | | (237,502 | ) | | (1,201,282 | ) | | (643,972 | ) |
Production costs of anodes sold | | (4,475 | ) | | (4,194 | ) | | (14,842 | ) | | (10,008 | ) |
Other | | 4,844 | | | (1,238 | ) | | 13,691 | | | (2,260 | ) |
Credits: | | | | | | | | | | | | |
Gold and silver revenues | | (85,219 | ) | | (78,215 | ) | | (334,078 | ) | | (188,636 | ) |
Acid and other by-product revenues | | (7,584 | ) | | (7,818 | ) | | (20,521 | ) | | (22,408 | ) |
Production costs used in calculating cathode cash unit | | | | | | | | | | | | |
cost per pound | $ | 23,059 | | $ | 22,550 | | $ | 76,137 | | $ | 69,719 | |
| | | | | | | | | | | | |
Pounds of cathode produced | | 124,600 | | | 138,200 | | | 385,500 | | | 407,700 | |
| | | | | | | | | | | | |
Cathode cash unit cost per pound | $ | 0.19 | | $ | 0.16 | | $ | 0.20 | | $ | 0.17 | |
| | | | | | | | | | | | |
PT Smelting Cathode Cash Unit Cost Per Pound of Copper
The calculationIn both the by-product and the co-product method calculations below, presents PT Smelting’s reported operating costs and subtracts or adds components of those costs thatwe show adjustments to copper revenues for prior period open sales as separate line items. Because the copper pricing adjustments do not directly relateresult from current period sales, we have reflected these separately from revenues on current period sales. Noncash and nonrecurring costs consist of items such as stock-based compensation costs, write-offs of equipment or unusual charges. They are removed from site production and delivery costs in the calculation of unit net cash costs. In addition, costs resulting from the application of the purchase accounting method are removed. As discussed above, gold, molybdenum and other metal revenues, excluding any impacts from redemption of the gold- and silver-denominated preferred stocks, are reflected as credits against site production and delivery costs in the by-product method. Presentations under both methods are shown below together with reconciliations to the process of converting copper concentrates to cathodes. PT Smelting’s operating costs are then reconciled to PT Freeport Indonesia’s equity in PT Smelting earningsamounts reported in FCX’sour consolidated financial statements (in thousands, except per pound amounts):or pro forma consolidated results.
Indonesia Mining Product Revenues and Production Costs
Three Months Ended March 31, 2007 | | | | |
| By-Product | | Co-Product Method | |
(In Millions) | Method | | Copper | | Gold | | Silver | | Total | |
Revenues, after adjustments shown below | $ | 1,297.6 | | $ | 1,297.6 | | $ | 622.3 | | $ | 21.0 | | $ | 1,940.9 | |
| | | | | | | | | | | | | | | |
Site production and delivery, before net | | | | | | | | | | | | | | | |
noncash and nonrecurring costs shown | | | | | | | | | | | | | | | |
below | | 313.7 | | | 209.7 | | | 100.6 | | | 3.4 | | | 313.7 | |
Gold and silver credits | | (643.3 | ) | | - | | | - | | | - | | | - | |
Treatment charges | | 153.3 | | | 102.5 | | | 49.1 | | | 1.7 | | | 153.3 | |
Royalty on metals | | 49.8 | | | 33.3 | | | 16.0 | | | 0.5 | | | 49.8 | |
Unit net cash (credits) costs | | (126.5 | ) | | 345.5 | | | 165.7 | | | 5.6 | | | 516.8 | |
Depreciation and amortization | | 59.2 | | | 39.6 | | | 19.0 | | | 0.6 | | | 59.2 | |
Noncash and nonrecurring costs, net | | 8.8 | | | 5.9 | | | 2.8 | | | 0.1 | �� | | 8.8 | |
Total unit (credits) costs | | (58.5 | ) | | 391.0 | | | 187.5 | | | 6.3 | | | 584.8 | |
Revenue adjustments, primarily for pricing | | | | | | | | | | | | | | | |
on prior period open sales | | (29.3 | ) | | (29.3 | ) | | - | | | - | | | (29.3 | ) |
PT Smelting intercompany profit elimination | | (35.7 | ) | | (23.9 | ) | | (11.4 | ) | | (0.4 | ) | | (35.7 | ) |
Gross profit | $ | 1,291.1 | | $ | 853.4 | | $ | 423.4 | | $ | 14.3 | | $ | 1,291.1 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
| | | Production | | Depreciation | | | | | | | |
| | | and | | and | | | | | | | |
(In Millions) | Revenues | | Delivery | | Amortization | | | | | | | |
Totals presented above | $ | 1,940.9 | | $ | 313.7 | | $ | 59.2 | | | | | | | |
Net noncash and nonrecurring costs per | | | | | | | | | | | | | | | |
above | | N/A | | | 8.8 | | | N/A | | | | | | | |
Less: Treatment charges per above | | (153.3 | ) | | N/A | | | N/A | | | | | | | |
Royalty per above | | (49.8 | ) | | N/A | | | N/A | | | | | | | |
Revenue adjustments, primarily for pricing | | | | | | | | | | | | | | | |
on prior period open sales per above | | (29.3 | ) | | N/A | | | N/A | | | | | | | |
Total Indonesian mining operations | | 1,708.5 | | | 322.5 | | | 59.2 | | | | | | | |
Eliminations and other | | 594.4 | | | 629.6 | | | 57.1 | | | | | | | |
As reported in FCX’s consolidated | | | | | | | | | | | | | | | |
financial statements | $ | 2,302.9 | | $ | 952.1 | | $ | 116.3 | | | | | | | |
| | | | | | | | | | | | | | | |
Indonesia Mining Product Revenues and Production Costs
Three Months Ended March 31, 2006 | | | | |
| By-Product | | Co-Product Method | |
(In Millions) | Method | | Copper | | Gold | | Silver | | Total | |
Revenues, after adjustments shown below | $ | 543.1 | | $ | 543.1 | | $ | 282.8 | | $ | 7.8 | | $ | 833.7 | |
| | | | | | | | | | | | | | | |
Site production and delivery, before net | | | | | | | | | | | | | | | |
noncash and nonrecurring costs shown | | | | | | | | | | | | | | | |
below | | 275.0 | | | 179.2 | | | 93.3 | | | 2.5 | | | 275.0 | |
Gold and silver credits | | (290.6 | ) | | - | | | - | | | - | | | - | |
Treatment charges | | 83.6 | | | 54.5 | | | 28.3 | | | 0.8 | | | 83.6 | |
Royalty on metals | | 19.9 | | | 13.0 | | | 6.7 | | | 0.2 | | | 19.9 | |
Unit net cash costs | | 87.9 | | | 246.7 | | | 128.3 | | | 3.5 | | | 378.5 | |
Depreciation and amortization | | 33.8 | | | 22.0 | | | 11.5 | | | 0.3 | | | 33.8 | |
Noncash and nonrecurring costs, net | | 11.7 | | | 7.6 | | | 4.0 | | | 0.1 | | | 11.7 | |
Total unit costs | | 133.4 | | | 276.3 | | | 143.8 | | | 3.9 | | | 424.0 | |
Revenue adjustments, primarily for pricing | | | | | | | | | | | | | | | |
on prior period open sales and gold | | | | | | | | | | | | | | | |
hedging | | 66.7 | a | | 135.7 | | | (69.0 | ) | | - | | | 66.7 | |
PT Smelting intercompany profit recognized | | 20.8 | | | 13.6 | | | 7.1 | | | 0.1 | | | 20.8 | |
Gross profit | $ | 497.2 | | $ | 416.1 | | $ | 77.1 | | $ | 4.0 | | $ | 497.2 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
| | | Production | | Depreciation | | | | | | | |
| | | and | | and | | | | | | | |
(In Millions) | Revenues | | Delivery | | Amortization | | | | | | | |
Totals presented above | $ | 833.7 | | $ | 275.0 | | $ | 33.8 | | | | | | | |
Net noncash and nonrecurring costs per | | | | | | | | | | | | | | | |
above | | N/A | | | 11.7 | | | N/A | | | | | | | |
Less: Treatment charges per above | | (83.6 | ) | | N/A | | | N/A | | | | | | | |
Royalty per above | | (19.9 | ) | | N/A | | | N/A | | | | | | | |
Revenue adjustments, primarily for pricing | | | | | | | | | | | | | | | |
on prior period open sales and hedging | | | | | | | | | | | | | | | |
per above | | 66.7 | | | N/A | | | N/A | | | | | | | |
Total Indonesia mining operations | | 796.9 | | | 286.7 | | | 33.8 | | | | | | | |
Eliminations and other | | 2,513.8 | | | 2,140.0 | | | 313.0 | | | | | | | |
As reported in FCX’s pro forma | | | | | | | | | | | | | | | |
consolidated financial results | $ | 3,310.7 | | $ | 2,426.7 | | $ | 346.8 | | | | | | | |
| | | | | | | | | | | | | | | |
a. | Includes a $69.0 million or $0.31 per pound loss on the redemption of FCX’s Gold-Denominated Preferred Stock, Series II. |
TABLE OF CONTENTSNorth America Mining Product Revenues and Production Costs (Pro Forma)
Three Months Ended March 31, 2007 | | | | |
| By-Product | | Co-Product Method | |
(In Millions) | Method | | Copper | | Gold | | Silver | | Molybdenum | | Other | | Total | |
Revenues, after adjustments shown | | | | | | | | | | | | | | | | | | | | | |
below | $ | 812.3 | | $ | 812.3 | | $ | 2.0 | | $ | 4.5 | | $ | 178.5 | | $ | 3.5 | | $ | 1,000.8 | |
| | | | | | | | | | | | | | | | | | | | | |
Site production and delivery, before | | | | | | | | | | | | | | | | | | | | | |
net noncash and nonrecurring | | | | | | | | | | | | | | | | | | | | | |
costs shown below | | 394.1 | | | 347.4 | | | 1.0 | | | 1.6 | | | 68.1 | | | 3.1 | | | 421.2 | |
By-product credits | | (161.4 | ) | | - | | | - | | | - | | | - | | | - | | | - | |
Treatment charges | | 22.0 | | | 21.5 | | | 0.2 | | | 0.3 | | | - | | | - | | | 22.0 | |
Unit net cash costs | | 254.7 | | | 368.9 | | | 1.2 | | | 1.9 | | | 68.1 | | | 3.1 | | | 443.2 | |
Depreciation and amortization | | 39.6 | | | 33.7 | | | 0.1 | | | 0.2 | | | 5.6 | | | - | | | 39.6 | |
Noncash and nonrecurring costs, net | | 5.8 | | | 5.6 | | | - | | | - | | | 0.2 | | | - | | | 5.8 | |
Total unit costs | | 300.1 | | | 408.2 | | | 1.3 | | | 2.1 | | | 73.9 | | | 3.1 | | | 488.6 | |
Revenue adjustments, primarily for | | | | | | | | | | | | | | | | | | | | | |
pricing on prior period open sales | | | | | | | | | | | | | | | | | | | | | |
and hedging | | 8.5 | | | 8.5 | | | - | | | - | | | - | | | - | | | 8.5 | |
Idle facility and other non- | | | | | | | | | | | | | | | | | | | | | |
inventoriable costs | | (10.0 | ) | | (10.0 | ) | | - | | | - | | | - | | | - | | | (10.0 | ) |
Gross profit | $ | 510.7 | | $ | 402.6 | | $ | 0.7 | | $ | 2.4 | | $ | 104.6 | | $ | 0.4 | | $ | 510.7 | |
| | | | | | | | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | | | | | | | |
| | | | Production | | Depreciation | | | | | | | | | | | | | |
| | | | and | | and | | | | | | | | | | | | | |
(In Millions) | Revenues | | Delivery | | Amortization | | | | | | | | | | | | | |
Totals presented above | $ | 1,000.8 | | $ | 421.2 | | $ | 39.6 | | | | | | | | | | | | | |
Net noncash and nonrecurring costs | | | | | | | | | | | | | | | | | | | | | |
per above | | N/A | | | 5.8 | | | N/A | | | | | | | | | | | | | |
Pre-acquisition amounts | | (943.4 | ) | | (413.6 | ) | | (34.5 | ) | | | | | | | | | | | | |
Other North America operations | | 277.6 | | | 311.4 | | | 4.2 | | | | | | | | | | | | | |
Purchase accounting impact | | N/A | | | 27.3 | | | 4.7 | | | | | | | | | | | | | |
Revenue adjustments, primarily for | | | | | | | | | | | | | | | | | | | | | |
pricing on prior period open sales | | | | | | | | | | | | | | | | | | | | | |
and hedging per above | | 8.5 | | | N/A | | | N/A | | | | | | | | | | | | | |
Total North American mining | | | | | | | | | | | | | | | | | | | | | |
operations | | 343.5 | | | 352.1 | | | 14.0 | | | | | | | | | | | | | |
Eliminations and other | | 1,959.4 | | | 600.0 | | | 102.3 | | | | | | | | | | | | | |
As reported in FCX’s consolidated | | | | | | | | | | | | | | | | | | | | | |
financial statements | $ | 2,302.9 | | $ | 952.1 | | $ | 116.3 | | | | | | | | | | | | | |
TABLE OF CONTENTSNorth America Mining Product Revenues and Production Costs (Pro Forma)
Three Months Ended March 31, 2006 | | | | |
| By-Product | | Co-Product Method | |
(In Millions) | Method | | Copper | | Gold | | Silver | | Molybdenum | | Other | | Total | |
Revenues, after adjustments shown | | | | | | | | | | | | | | | | | | | | | |
below | $ | 740.5 | | $ | 740.5 | | $ | 2.8 | | $ | 4.8 | | $ | 190.6 | | $ | 3.1 | | $ | 941.8 | |
| | | | | | | | | | | | | | | | | | | | | |
Site production and delivery, before | | | | | | | | | | | | | | | | | | | | | |
net noncash and nonrecurring | | | | | | | | | | | | | | | | | | | | | |
costs shown below | | 327.7 | | | 256.2 | | | 1.7 | | | 2.2 | | | 75.3 | | | 2.5 | | | 337.9 | |
By-product credits | | (191.1 | ) | | - | | | - | | | - | | | - | | | - | | | - | |
Treatment charges | | 22.5 | | | 21.2 | | | 0.5 | | | 0.8 | | | - | | | - | | | 22.5 | |
Unit net cash costs | | 159.1 | | | 277.4 | | | 2.2 | | | 3.0 | | | 75.3 | | | 2.5 | | | 360.4 | |
Depreciation and amortization | | 36.3 | | | 29.2 | | | 0.2 | | | 0.2 | | | 6.6 | | | 0.1 | | | 36.3 | |
Noncash and nonrecurring costs, net | | 5.1 | | | 4.9 | | | - | | | - | | | 0.2 | | | - | | | 5.1 | |
Total unit costs | | 200.5 | | | 311.5 | | | 2.4 | | | 3.2 | | | 82.1 | | | 2.6 | | | 401.8 | |
Revenue adjustments, primarily for | | | | | | | | | | | | | | | | | | | | | |
pricing on prior period open sales | | | | | | | | | | | | | | | | | | | | | |
and hedging | | (374.8 | ) | | (374.8 | ) | | - | | | - | | | - | | | - | | | (374.8 | ) |
Idle facility and other non- | | | | | | | | | | | | | | | | | | | | | |
inventoriable costs | | (6.8 | ) | | (6.8 | ) | | - | | | - | | | - | | | - | | | (6.8 | ) |
Gross profit | $ | 158.4 | | $ | 47.4 | | $ | 0.4 | | $ | 1.6 | | $ | 108.5 | | $ | 0.5 | | $ | 158.4 | |
| | | | | | | | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | | | | | | | |
| | | | Production | | Depreciation | | | | | | | | | | | | | |
| | | | and | | and | | | | | | | | | | | | | |
(In Millions) | Revenues | | Delivery | | Amortization | | | | | | | | | | | | | |
Totals presented above | $ | 941.8 | | $ | 337.9 | | $ | 36.3 | | | | | | | | | | | | | |
Net noncash and nonrecurring costs | | | | | | | | | | | | | | | | | | | | | |
per above | | N/A | | | 5.1 | | | N/A | | | | | | | | | | | | | |
Revenue adjustments, primarily for | | | | | | | | | | | | | | | | | | | | | |
pricing on prior period open sales | | | | | | | | | | | | | | | | | | | | | |
and hedging per above | | (374.8 | ) | | N/A | | | N/A | | | | | | | | | | | | | |
Purchase accounting impact | | N/A | | | 501.4 | | | 196.5 | | | | | | | | | | | | | |
Eliminations and other | | 2,743.7 | | | 1,582.3 | | | 114.0 | | | | | | | | | | | | | |
As reported in FCX's pro forma | | | | | | | | | | | | | | | | | | | | | |
consolidated financial results | $ | 3,310.7 | | $ | 2,426.7 | | $ | 346.8 | | | | | | | | | | | | | |
TABLE OF CONTENTSSouth America Mining Product Revenues and Production Costs (Pro Forma)
Three Months Ended March 31, 2007 | | | | | | | | | | | | | | | |
| By-Product | | Co-Product Method | |
(In Millions) | Method | | Copper | | Gold | | Silver | | Total | |
Revenues, after adjustments shown | | | | | | | | | | | | | | | |
below | $ | 828.1 | | $ | 828.1 | | $ | 16.7 | | $ | 7.1 | | $ | 851.9 | |
| | | | | | | | | | | | | | | |
Site production and delivery, before | | | | | | | | | | | | | | | |
net noncash and nonrecurring | | | | | | | | | | | | | | | |
costs shown below | | 252.5 | | | 243.1 | | | 7.3 | | | 2.8 | | | 253.2 | |
By-product credits | | (23.1 | ) | | - | | | - | | | - | | | - | |
Treatment charges | | 54.8 | | | 52.9 | | | 1.1 | | | 0.8 | | | 54.8 | |
Unit net cash costs | | 284.2 | | | 296.0 | | | 8.4 | | | 3.6 | | | 308.0 | |
Depreciation and amortization | | 44.1 | | | 43.1 | | | 0.7 | | | 0.3 | | | 44.1 | |
Noncash and nonrecurring costs, net | | 0.7 | | | 0.7 | | | - | | | - | | | 0.7 | |
Total unit costs | | 329.0 | | | 339.8 | | | 9.1 | | | 3.9 | | | 352.8 | |
Revenue adjustments, primarily for | | | | | | | | | | | | | | | |
pricing on prior period open sales | | | | | | | | | | | | | | | |
and hedging | | 57.1 | | | 57.6 | | | (0.4 | ) | | (0.1 | ) | | 57.1 | |
Idle facility and other non- | | | | | | | | | | | | | | | |
inventoriable costs | | (6.3 | ) | | (6.0 | ) | | (0.2 | ) | | (0.1 | ) | | (6.3 | ) |
Gross profit | $ | 549.9 | | $ | 539.9 | | $ | 7.0 | | $ | 3.0 | | $ | 549.9 | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
| | | | Production | | Depreciation | | | | | | | |
| | | | and | | and | | | | | | | |
(In Millions) | Revenues | | Delivery | | Amortization | | | | | | | |
Totals presented above | $ | 851.9 | | $ | 253.2 | | $ | 44.1 | | | | | | | |
Net noncash and nonrecurring costs | | | | | | | | | | | | | | | |
per above | | N/A | | | 0.7 | | | N/A | | | | | | | |
Treatment charges per above | | (54.8 | ) | | N/A | | | N/A | | | | | | | |
Pre-acquisition amounts | | (631.7 | ) | | (230.9 | ) | | (37.2 | ) | | | | | | |
Purchased metal | | 68.0 | | | 68.0 | | | N/A | | | | | | | |
Purchase accounting impact | | N/A | | | 47.8 | | | 21.4 | | | | | | | |
Eliminations and other | | (28.8 | ) | | (22.8 | ) | | 0.1 | | | | | | | |
Revenue adjustments, primarily for | | | | | | | | | | | | | | | |
pricing on prior period open sales | | | | | | | | | | | | | | | |
and hedging per above | | 57.1 | | | N/A | | | N/A | | | | | | | |
Total South American mining | | | | | | | | | | | | | | | |
operations | | 261.7 | | | 116.0 | | | 28.4 | | | | | | | |
Eliminations and other | | 2,041.2 | | | 836.1 | | | 87.9 | | | | | | | |
As reported in FCX’s consolidated | | | | | | | | | | | | | | | |
financial statements | $ | 2,302.9 | | $ | 952.1 | | $ | 116.3 | | | | | | | |
South America Mining Product Revenues and Production Costs (Pro Forma)
Three Months Ended March 31, 2006 | | | | | | | | | | |
| By-Product | | Co-Product Method | |
(In Millions) | Method | | Copper | | Gold | | Silver | | Total | |
Revenues, after adjustments shown | | | | | | | | | | | | | | | |
below | $ | 710.9 | | $ | 710.9 | | $ | 17.0 | | $ | 6.2 | | $ | 734.1 | |
| | | | | | | | | | | | | | | |
Site production and delivery, before | | | | | | | | | | | | | | | |
net noncash and nonrecurring | | | | | | | | | | | | | | | |
costs shown below | | 205.3 | | | 198.1 | | | 5.2 | | | 2.0 | | | 205.3 | |
By-product credits | | (23.2 | ) | | - | | | - | | | - | | | - | |
Treatment charges | | 42.2 | | | 40.5 | | | 1.3 | | | 0.4 | | | 42.2 | |
Unit net cash costs | | 224.3 | | | 238.6 | | | 6.5 | | | 2.4 | | | 247.5 | |
Depreciation and amortization | | 46.6 | | | 45.8 | | | 0.6 | | | 0.2 | | | 46.6 | |
Noncash and nonrecurring costs, net | | 0.4 | | | 0.4 | | | - | | | - | | | 0.4 | |
Total unit costs | | 271.3 | | | 284.8 | | | 7.1 | | | 2.6 | | | 294.5 | |
Revenue adjustments, primarily for | | | | | | | | | | | | | | | |
pricing on prior period open sales | | | | | | | | | | | | | | | |
and hedging | | (45.9 | ) | | (39.2 | ) | | (4.8 | ) | | (1.9 | ) | | (45.9 | ) |
Idle facility and other non- | | | | | | | | | | | | | | | |
inventoriable costs | | (4.3 | ) | | (4.0 | ) | | (0.2 | ) | | (0.1 | ) | | (4.3 | ) |
Gross profit | $ | 389.4 | | $ | 382.9 | | $ | 4.9 | | $ | 1.6 | | $ | 389.4 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
| | | | Production | | Depreciation | | | | | | | |
| | | | and | | and | | | | | | | |
(In Millions) | Revenues | | Delivery | | Amortization | | | | | | | |
Totals presented above | $ | 734.1 | | $ | 205.3 | | $ | 46.6 | | | | | | | |
Net noncash and nonrecurring costs | | | | | | | | | | | | | | | |
per above | | N/A | | | 0.4 | | | N/A | | | | | | | |
Treatment charges per above | | (42.2 | ) | | N/A | | | N/A | | | | | | | |
Purchased metal | | 45.1 | | | 45.0 | | | N/A | | | | | | | |
Revenue adjustments, primarily for | | | | | | | | | | | | | | | |
pricing on prior period open sales | | | | | | | | | | | | | | | |
and hedging per above | | (45.9 | ) | | N/A | | | N/A | | | | | | | |
Purchase accounting adjustments | | - | | | 501.4 | | | 196.5 | | | | | | | |
Eliminations and other | | 2,619.6 | | | 1,674.6 | | | 103.7 | | | | | | | |
As reported in FCX’s pro forma | | | | | | | | | | | | | | | |
consolidated financial results | $ | 3,310.7 | | $ | 2,426.7 | | $ | 346.8 | | | | | | | |
Henderson Product Revenues and Production Costs (Pro Forma)
| Three Months Ended | | | | | | | |
| March 31, | | | | | | | |
(In Millions) | 2007 | | 2006 | | | | | | | |
Revenues, after adjustments shown | | | | | | | | | | | | | | | |
below | $ | 207.9 | | $ | 201.4 | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Site production and delivery, before | | | | | | | | | | | | | | | |
net noncash and nonrecurring | | | | | | | | | | | | | | | |
costs shown below | | 38.9 | | | 33.8 | | | | | | | | | | |
Unit net cash costs | | 38.9 | | | 33.8 | | | | | | | | | | |
Depreciation and amortization | | 8.7 | | | 8.4 | | | | | | | | | | |
Noncash and nonrecurring costs, net | | 0.2 | | | 0.2 | | | | | | | | | | |
Total unit costs | | 47.8 | | | 42.4 | | | | | | | | | | |
Gross profit | $ | 160.1 | | $ | 159.0 | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
| | | | Production | | Depreciation | | | | | | | |
Three Months Ended March 31, 2007 | | | | and | | and | | | | | | | |
(In Millions) | Revenues | | Delivery | | Amortization | | | | | | | |
Totals presented above | $ | 207.9 | | $ | 38.9 | | $ | 8.7 | | | | | | | |
Net noncash and nonrecurring costs | | | | | | | | | | | | | | | |
per above | | N/A | | | 0.2 | | | N/A | | | | | | | |
Purchase accounting adjustments | | N/A | | | N/A | | | 1.7 | | | | | | | |
Eliminations and other | | 2,095.0 | | | 913.0 | | | 105.9 | | | | | | | |
As reported in FCX’s consolidated | | | | | | | | | | | | | | | |
financial results | $ | 2,302.9 | | $ | 952.1 | | $ | 116.3 | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
| 2006 | | 2005 | | 2006 | | 2005 | |
Operating costs - PT Smelting (100%) | $ | 27,995 | | $ | 21,696 | | $ | 83,399 | | $ | 57,770 | |
Add: Gold and silver refining charges | | 764 | | | 1,112 | | | 3,269 | | | 3,187 | |
Less: Acid and other by-product revenues | | (3,601 | ) | | (3,616 | ) | | (11,004 | ) | | (11,117 | ) |
Other | | 750 | | | (114 | ) | | 2,677 | | | (1,070 | ) |
Production costs used in calculating cathode cash unit | | | | | | | | | | | | |
cost per pound | $ | 25,908 | | $ | 19,078 | | $ | 78,341 | | $ | 48,770 | |
| | | | | | | | | | | | |
Pounds of cathode produced | | 127,700 | | | 144,700 | | | 397,400 | | | 434,300 | |
| | | | | | | | | | | | |
Cathode cash unit cost per pound | $ | 0.20 | | $ | 0.13 | | $ | 0.20 | | $ | 0.11 | |
| | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | |
Operating costs per above | $ | (27,995 | ) | $ | (21,696 | ) | $ | (83,399 | ) | $ | (57,770 | ) |
Other costs | | (519,972 | ) | | (332,544 | ) | | (1,520,555 | ) | | (923,489 | ) |
Revenue and other income | | 554,238 | | | 359,738 | | | 1,632,967 | | | 1,007,872 | |
PT Smelting net income | | 6,271 | | | 5,498 | | | 29,013 | | | 26,613 | |
| | | | | | | | | | | | |
PT Freeport Indonesia’s 25% equity interest | | 1,568 | | | 1,375 | | | 7,253 | | | 6,653 | |
Amortization of excess investment cost | | (60 | ) | | (60 | ) | | (180 | ) | | (180 | ) |
Equity in PT Smelting earnings reported in FCX’s | | | | | | | | | | | | |
consolidated financial statements | $ | 1,508 | | $ | 1,315 | | $ | 7,073 | | $ | 6,473 | |
| | | | | | | | | | | | |
Reconciliation to Amounts Reported | | | | | | | | | | | | | | | |
| | | | Production | | Depreciation | | | | | | | |
Three Months Ended March 31, 2006 | | | | and | | and | | | | | | | |
(In Millions) | Revenues | | Delivery | | Amortization | | | | | | | |
Totals presented above | $ | 201.4 | | $ | 33.8 | | $ | 8.4 | | | | | | | |
Net noncash and nonrecurring costs | | | | | | | | | | | | | | | |
per above | | N/A | | | 0.2 | | | N/A | | | | | | | |
Eliminations and other | | 3,109.3 | | | 2,392.7 | | | 338.4 | | | | | | | |
As reported in FCX’s pro forma | | | | | | | | | | | | | | | |
consolidated financial results | $ | 3,310.7 | | $ | 2,426.7 | | $ | 346.8 | | | | | | | |
TABLE OF CONTENTSCAUTIONARY STATEMENT
Our discussion and analysis contains forward-looking statements in which we discuss our expectations regarding future performance. Forward-looking statements are all statements other than historical facts, such as those regarding anticipated sales volumes, ore grades, milling rates, commodity prices, selling, general and administrative expenses, unit net cash costs, operating cash flows, royalty costs, capital expenditures, reclamation and closure costs, environmental expenditures, litigation expenses and liabilities, the impact of copper, gold and molybdenum price changes, the impact of changes in deferred intercompany profits on earnings, projected debt repayments and refinancing, debt maturities,cash balances, treatment charge rates, depreciation rates, exploration efforts and results, dividend payments, liquidity and other financial commitments. Accuracy of the forward-looking statements depends on assumptions about events that change over time and is thus susceptible to periodic change based on actual experience and new developments. We caution youreaders that these statements are not guarantees of future performance, and our actual results may differ materially from those projected, anticipatedwe assume no obligation to update or assumed inpublicly release any revisions to the forward-looking statements. Importantstatements in this Form 10-Q and, except to the extent required by applicable law, do not intend to update or otherwise revise the forward-looking statements more frequently than quarterly. Additionally, important factors that canmight cause our actualfuture results to differ materially from those anticipated in thethese forward-looking statements include unanticipated mining, milling and other processing problems, accidents that lead to personal injury or property damage, persistentmine sequencing, production rates, industry risks, regulatory changes, commodity price reductions, changes inprices, political social or economic circumstances in our area of operations, variances in ore grades,risks, weather-related risks, labor relations, adverse weather conditions, the speculative nature of mineral exploration, fluctuations in interest rates and other adverse financial market conditions,environmental risks, litigation results, currency translation risks and other factors described in more detail under the heading “Risk Factors” in ourPart II, Item 1A. of this Quarterly Report on Form 10-K for the year ended December 31, 2005.10-Q.
There have been no significantFor information about changes in our market risks since the year ended December 31, 2005.2006, see “Disclosures About Market Risks” included in Part I, Item 2 of this Quarterly Report on Form 10-Q.
On March 19, 2007, Freeport McMoRan Copper & Gold Inc. (FCX) completed its acquisition of Phelps Dodge Corporation (Phelps Dodge), at which time Phelps Dodge became a wholly owned subsidiary of FCX. For more information, please readaccounting purposes, FCX was designated the acquiring entity.
FCX considers the acquisition of Phelps Dodge material to the results of its operations, financial position and cash flows from the date of acquisition through March 31, 2007, and believes that the internal controls and procedures of Phelps Dodge have a material effect on FCX’s internal control over financial reporting. FCX is integrating the Phelps Dodge operations and has extended its Sarbanes-Oxley Act Section 404 compliance program to include Phelps Dodge. FCX will report on its assessment of its combined operations within the time provided by the Sarbanes-Oxley Act and applicable rules relating to business acquisitions.
Although FCX has generally maintained its disclosure controls and procedures that were in effect prior to the acquisition, since the acquisition there have been changes in FCX’s internal control over financial reporting, including preparation of the consolidated financial statements and notes thereto included in our Annual Report on Form 10-Kchanges of personnel with direct responsibility for the year ended December 31, 2005.financing reporting. FCX believes these changes have not negatively affected its internal control over financial reporting.
Item 4. Controls and Procedures.In addition, as a matter of course, FCX continues to update its internal controls over financial reporting as necessary to accommodate any modifications to its business processes or accounting procedures.(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 quarterly report on Form 10-Q. Based on their evaluation, they have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to FCX (including our consolidated subsidiaries) required to be disclosed in our periodic Securities and Exchange Commission filings.
(b)Changes in internal controls. There has been no change in our internal control over financial reporting that occurred during the third quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
Environmental Proceedings
Pinal Creek
The Pinal Creek site was listed under the Arizona Department of Environmental Quality’s (ADEQ) Water Quality Assurance Revolving Fund program in 1989 for contamination in the shallow alluvial aquifers within the Pinal Creek drainage near Miami, Arizona. Since that time, environmental remediation has been performed by members of the Pinal Creek Group (PCG), consisting of Phelps Dodge Miami, Inc. (a wholly owned subsidiary of Phelps Dodge) and two other companies. In 1998, the District Court approved a Consent Decree between the PCG members and the state of Arizona resolving all matters related to an enforcement action contemplated by the state of Arizona against the PCG members with respect to the groundwater matter. The Consent Decree committed Phelps Dodge Miami, Inc. and the other PCG members to complete the remediation work outlined in the Consent Decree. That work continues at this time pursuant to the Consent Decree and consistent with state law and the National Contingency Plan prepared by the U.S. Environmental Protection Agency (EPA) under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).
Phelps Dodge Miami, Inc. and the other PCG members have been pursuing contribution litigation against three other parties involved with the site. Phelps Dodge Miami, Inc. dismissed its contribution claims against one defendant when another PCG member agreed to be responsible for any share attributable to that defendant. Phelps Dodge Miami, Inc. and the other members of the PCG settled their contribution claims against another defendant in April 2005. While the terms of the settlement are confidential, the proceeds of the settlement will be used to address remediation at the Pinal Creek site. The trial on the issue of allocating liability has been postponed because of a discovery dispute and related orders and appeals, and has not yet been rescheduled.
Approximately $96 million based on discounted present value calculations remained in the Pinal Creek remediation reserve at March 31, 2007. While recoveries or payments may result from the contribution litigation, we cannot reasonably estimate the amount and, therefore, have not taken this into consideration in the recorded reserve.
New Mexico Closure Permits
Litigation is pending regarding closure permits issued by the New Mexico Environmental Department for the Phelps Dodge Tyrone, Inc. (Tyrone) and Chino Mines Company (Chino) operations. Tyrone appealed a decision by the New Mexico Water Quality Control Commission (WQCC) upholding certain conditions imposed by the New Mexico Environment Department in Tyrone’s Supplemental Discharge Permit for Closure, DP-1341. Phelps Dodge Tyrone, Inc. v. New Mexico Water Quality Control Commission, No. 25027. In this case, Tyrone objected to permit conditions requiring Tyrone to perform approximately $75 million of additional closure work. On June 15, 2006, the New Mexico Court of Appeals issued its decision overturning two permit conditions that Tyrone had challenged in its closure permit. The New Mexico Supreme Court denied Petitions for Certiorari and the case has been remanded by the Court of Appeals to WQCC for further proceedings to address the Court of Appeals decision and a hearing before the WQCC is set for June 12, 2007.
Chino’s Supplemental Discharge Permit for Closure, DP-1340, was appealed by a third party, whose appeal was dismissed by WQCC on procedural grounds. WQCC’s decision dismissing the appeal was overturned by the New Mexico Court of Appeals. Gila Resources Information Project v. New Mexico Water Quality Control Commission, No. 24478. The permit decision has been remanded to WQCC for further proceedings. WQCC has postponed the hearing on the Chino closure permit pending a report by the parties on settlement discussions, which are ongoing.
Arizona Notice of Violation (NOV) - Sierrita operations
In September and October 2006, ADEQ sent NOVs to the Phelps Dodge Sierrita operations in southeastern Arizona. The two NOVs alleged certain visibility and permit violations associated with dust emissions from Sierrita’s tailing facility during high-wind events. No action has been filed at this time and Sierrita has responded to the NOVs by acknowledging that dust likely did exceed a certain visibility standard, but denying the other allegations. Sierrita has implemented response actions that ADEQ has accepted, and has entered into discussions with ADEQ to seek to resolve the NOVs.
EPA Notice re Violation of Consent Decree - Sierrita operations
In September 2006, EPA notified Phelps Dodge Sierrita, Inc. (PDSI) of the possible assessment of stipulated penalties arising from deviations from certain provisions of a Consent Decree dated June 21, 2004, by and among PDSI, the United States and ADEQ, entitled United States and the State of Arizona v. Phelps Dodge Sierrita, Inc. No. CIV 04-312 TUC FRZ. PDSI is preparing to enter into negotiations with EPA and ADEQ concerning the potential assessment of the stipulated penalties.
Asbestos Claims
Since approximately 1990, Phelps Dodge or its subsidiaries have been named as a defendant in a large number of product liability or premises lawsuits claiming injury from exposure to asbestos found in electrical wire products produced or marketed many years ago, or from asbestos at certain Phelps Dodge properties. We believe our liability, if any, in these matters will not have a material adverse effect, either individually or in the aggregate, upon our business, financial condition, liquidity, results of operations or cash flow. There can be no assurance, however, that future developments will not alter this conclusion.
Antitrust Claims
Columbian Chemicals Company (Columbian), formerly a subsidiary of Phelps Dodge, together with several other companies, is a defendant in an action entitled Technical Industries, Inc. v. Cabot Corporation, et al., No. CIV 03-10191 WGY, filed on January 30, 2003, in the U.S. District Court in Boston, Massachusetts, and 14 other actions filed in four U.S. district courts, on behalf of a purported class of all individuals or entities who purchased carbon black directly from the defendants since January 1999. The Judicial Panel on Multidistrict Litigation consolidated all of these actions in the U.S. District Court for the District of Massachusetts under the caption In Re Carbon Black Antitrust Litigation. The consolidated amended complaint, which alleges that the defendants fixed the prices of carbon black and engaged in other unlawful activities in violation of the U.S. antitrust laws, seeks treble damages in an unspecified amount and attorney’s fees. The court certified a class that includes all direct purchasers of carbon black in the United States from January 30, 1999 through January 18, 2005. On March 20, 2007, the court approved a $4 million settlement by one group of defendants. The motion for summary judgment filed by Columbian and the other remaining defendants is still pending. The court has scheduled a trial date of July 23, 2007, if the motion is not granted.
A separate action entitled Carlisle Companies Incorporated, et al. v. Cabot Corporation, et al., was filed against Columbian and other defendants on behalf of a group of affiliated companies that opted out of the federal class action. This action, which asserts similar claims as the class action, was filed in the Northern District of New York on July 28, 2005, but was transferred to the District of Massachusetts, where the class action is pending, and was consolidated with the class action for pretrial purposes. No separate proceedings have occurred in this action, which is not subject to the summary judgment motion in the class action.
Actions are pending in state courts in California, Florida, Kansas, South Dakota and Tennessee on behalf of purported classes of indirect purchasers of carbon black in those and six other states, alleging violations of state antitrust and deceptive trade practices laws. Motions to dismiss are pending in the Kansas and South Dakota actions. A motion for class certification has been filed in the Tennessee action.
Similar actions filed in state courts in New Jersey and North Carolina, and additional actions in Florida and Tennessee, have been dismissed. Columbian also received a demand for relief on behalf of indirect purchasers in Massachusetts, but no lawsuit has been filed.
Phelps Dodge retained responsibility for the claims against Columbian pursuant to the agreement for the sale of Columbian. Columbian has committed to provide appropriate assistance to defend these matters. We believe the claims are without merit and intend to defend the lawsuits vigorously.
Shareholder Litigation
Phelps Dodge and its directors were named as defendants in three actions brought on behalf of a purported class of all shareholders of Phelps Dodge, one filed in the Supreme Court of the State of New York, County of New York (Phillips v. Phelps Dodge Corporation, et al., No. 06604255, filed December 12, 2006) and two in the Superior Court of the state of Arizona, county of Maricopa, (Nathanson v. Phelps Dodge Corporation, et al., No. CV2006-017963, filed November 22, 2006, and Knisley v. Phelps Dodge Corp. et al., No. CV2006-053422, filed December 14, 2006), alleging that the directors breached their fiduciary duties when they approved the proposed merger of Phelps Dodge and FCX. We were also named as a defendant in the Knisley case. The complaints in these actions seek various forms of injunctive relief, including prohibition of the consummation of the merger, imposition of a constructive trust on any benefits improperly received by the defendants, an accounting for any damages sustained by the purported class members, and costs and disbursements, including plaintiffs’ attorney fees.
We have entered into a memorandum of understanding with the plaintiffs with respect to a settlement of the three cases. Pursuant to this agreement in principle, we agreed that if, within 12 months after the closing of the merger, we sell all or substantially all of the capital stock or assets of Phelps Dodge, we will pay $125 million in additional pro rata consideration (less any fees awarded to plaintiffs’ counsel with respect to such consideration) to the shareholders of Phelps Dodge who received the merger consideration in the merger. In addition, Phelps Dodge agreed to make additional disclosures beyond the information provided in the definitive joint proxy statement/prospectus, which was provided in a Current Report on Form 8-K filed March 9, 2007.
The settlement is subject to agreement on a stipulation of settlement and court approval after notice to the class members.
Arizona Water Rights
Arizona surface water law is based on the doctrine of prior appropriation (first in time, first in right) and permits the water right holder the right to use public waters for a statutorily defined beneficial use, at a designated location. Arizona has initiated two water rights adjudications in order to quantify and prioritize all of the surface water rights and water right claims to two of the state’s river systems and sources. Groundwater is not subject to the adjudication; however, wells may be adjudicated to the extent that they are involvedfound to produce or impact surface water. The two cases that could potentially impact Phelps Dodge’s surface water rights and claims (including some wells) are entitled In Re The General Adjudication of All Rights to Use Water in the Little Colorado Water System and Source, Arizona Superior Court, Apache County, Cause No. 6417 (1978) and In Re The General Adjudication of All Rights to Use Water in the Gila River System and Source, Arizona Superior Court, Maricopa County, Cause Nos. W-1 (Salt), W-2 (Verde), W-3 (Upper Gila), W-4 (San Pedro), (1974). The major parties in addition to Phelps Dodge in these matters are: the State of Arizona, Arizona Public Service Company, the Gila Valley Irrigation District, the San Carlos Irrigation and Drainage District, the Salt River Project, the San Carlos Apache Tribe, the Gila River Indian Community, and the United States on behalf of those Tribes, on its own behalf, and on the behalf of the White Mountain Apache Tribe, Ft. McDowell Mohave-Apache Indian Community, Salt River Pima-Maricopa Indian Community, the Payson Community of Yavapai Apache Indians, the Navajo Nation, the Hopi Indian Tribe, and the San Juan Southern Paiute Tribe.
TABLE OF CONTENTSPhelps Dodge has four active operations in Arizona: Morenci, Miami, Sierrita and Bagdad. Each facility requires water for operational and related support facilities. With the exception of Bagdad, each operation is located in a watershed subject to ongoing surface water adjudication. Each operation has sufficient water claims in the ongoing adjudications to cover operational demands. In many instances, the water supply comes from timea variety of possible sources.
Other Water Adjudications and Settlements
Gila River Indian Community Water Settlement
In 1988, Phelps Dodge executed a settlement agreement with the Gila River Indian Community (the Community). The Phelps Dodge settlement with the Community was later incorporated into the comprehensive Gila River Settlement which was authorized by federal legislation passed in December 2004. The legislation authorizing the settlement provided that the parties must obtain necessary court approval and that the Secretary of Interior must make certain findings by December 31, 2007 in order for the settlement to timebecome enforceable. The remaining contractual obligations prior to December 31, 2007 include participation on a technical committee for implementation of certain aspects of the settlement, and cooperation to obtain court approval of the settlement. Our remaining payment obligations may not occur until up to seven years after December 31, 2007. The exact payment date is dependent on the outcome of future water exchange negotiations.
Gila River Indian Community
In 1988, the Community intervened in United States v. Gila Valley Irrigation District, et al., and Globe Equity No. 59. The underlying actions were initiated by the United States in 1925 to settle conflicting claims to water rights in certain portions of the Gila River watershed, although Phelps Dodge was dismissed as a defendant in March 1935. In 1935, the Court entered a decree setting forth the water rights of numerous parties, minus Phelps Dodge, but retained jurisdiction of the case. The 1988 intervention does not name Phelps Dodge as a defendant; however, it does name the Gila Valley Irrigation District as a defendant which could affect the approximately 3,000 acre-feet of water that Phelps Dodge has the right to divert annually from Eagle Creek, Chase Creek or the San Francisco River pursuant to decreed rights and an agreement between Phelps Dodge and the Gila Valley Irrigation District.
During 1997, 1998 and 2007, Phelps Dodge purchased additional water rights that are subject to this litigation. As a result, Phelps Dodge has been named and served as a party in this case. The lands and associated water rights are not currently used in connection with any Phelps Dodge mining operation.
The Miami operation’s predecessor (formerly named Cyprus Miami Mining Corporation) was named and served as a defendant in this action in 1989. These proceedings potentially affect water rights associated with Miami holdings in the Gila River watershed.
Various Indian Tribes
Prior to January 1, 1983, various legalIndian tribes filed several suits in Arizona Federal Court claiming superior rights to use waters, which at present are being used by many water users, including Phelps Dodge, and claiming damages for prior use in derogation of their allegedly superior rights. These federal proceedings have been stayed pending state court adjudication.
Tohono O’odham Nation
Cyprus Sierrita Corporation, a subsidiary of Phelps Dodge, was a character normally incidentdefendant in United States, et al. v. City of Tucson, et al., No. CIV 75-39 (D. Ariz.). This is a consolidation of several actions seeking a declaration of the rights of the United States, the Tohono O’odham Nation (the Nation), and individual allottees of the Nation, to surface water and groundwater in the Santa Cruz River watershed; damages from the defendants’ use of surface water and groundwater from the watershed in derogation of those rights; and injunctive relief. Federal legislation has been passed authorizing a settlement. The parties have until
December 31, 2007, to finalize the agreements and meet certain obligations for the settlement to become enforceable. The outcome of this dispute could impact water right claims associated with the operations at Sierrita, and miscellaneous land holdings in the Santa Cruz River watershed.
FINANCIAL RISKS
Our substantial indebtedness, including the indebtedness incurred in connection with our recent acquisition of Phelps Dodge, could adversely affect our operating results and financial condition.
We incurred significant debt to fund a portion of the cash consideration paid to the Phelps Dodge shareholders in our acquisition of Phelps Dodge. As of March 31, 2007, the outstanding principal amount of our indebtedness was approximately $12.0 billion (excluding unused availability under our revolving credit facility of approximately $1.4 billion after giving effect to outstanding letters of credit). Our level of indebtedness could have important consequences. For example, it could:
· | make it difficult for us to satisfy our debt obligations; |
· | increase our vulnerability to general adverse economic and industry conditions; |
· | require us to dedicate a substantial portion of our cash flow from operations and proceeds of equity issuances or asset sales to payments on our indebtedness, thereby reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions, investments and other general corporate purposes; |
· | limit our flexibility in planning for, or reacting to, changes in our businesses and the markets in which we operate; |
· | place us at a competitive disadvantage to our competitors that have less debt; |
· | limit our ability to borrow money or sell stock to fund our working capital, capital expenditures, acquisitions and debt service requirements and other financing needs; and |
· | increase our interest expense if interest rates in general increase, because a substantial portion of our indebtedness bears interest at floating rates. |
In addition, we may need to incur additional indebtedness in the future in the ordinary course of business. The terms of our business. We believe that potential liability in such proceedings wouldnew senior credit facilities and other agreements governing our indebtedness allow us to incur additional debt, subject to limitations. If new debt is added to current debt levels, the risks described above could intensify. Further, if future debt financing is not available to us when required or is not available on acceptable terms, we may be unable to grow our business, take advantage of business opportunities, respond to competitive pressures or refinance maturing debt, any of which could have a material adverse effect on our operating results and financial condition. Most of the financial assurance provided for our southwestern U.S. mines requires a demonstration that we meet financial tests showing our capability to perform the required closure and remediation. Demonstrations of financial capability have been made for all of the financial assurance for our Arizona mines. We maintain a part of our financial assurance using financial strength tests in New Mexico and Arizona. However, a portion of our financial assurance requirements might be required to be supplied in another form, such as letters of credit, real property collateral or cash. Moreover, our ability to satisfy financial tests or utilize third-party guarantees for financial assurance with respect to reclamation obligations may be adversely affected if our credit ratings continue to be rated below investment grade and we are unable to pass the affirmative financial tests.
The agreements governing our indebtedness contain provisions that limit our discretion in the operation of our business and require us to meet financial maintenance tests and other covenants. The failure to comply with such tests and covenants could have a material adverse effect on us.
The agreements governing our indebtedness contain covenants that restrict our ability to:
· | incur additional indebtedness; |
· | engage in transactions with affiliates; |
· | create liens on our assets; |
· | make payments in respect of, or redeem or acquire, debt or equity issued by us or our subsidiaries, including the payment of dividends on our common stock; |
· | make acquisitions of new subsidiaries; |
· | make investments in, or loans, to entities that we do not control, including joint ventures; |
· | use assets as security in other transactions; |
· | sell assets, subject to certain exceptions; |
· | merge with or into other companies; |
· | enter into sale and leaseback transactions; |
· | enter into unrelated businesses; |
· | enter into agreements or arrangements that restrict the ability of certain of our subsidiaries to pay dividends or other distributions; |
· | prepay indebtedness; and |
· | enter into certain new hedging transactions other than in the ordinary course of business. |
In addition, our senior credit facilities require that we meet specified financial tests at any time that borrowings are outstanding under our revolving credit facility, including a leverage ratio test and a secured leverage ratio test.
Any failure to comply with the restrictions of our senior credit facilities or any agreement governing our other indebtedness may result in an event of default. Such default may allow the creditors to accelerate the related debt, which may trigger cross-acceleration or cross-default provisions in other debt agreements. Our assets and cash flow may not be sufficient to fully repay borrowings under our debt instruments that are accelerated upon an event of default.
If we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our senior credit agreements at maturity or in the event of a default, the lenders under our senior credit facilities could terminate their commitments thereunder, cease making further loans, declare all borrowings outstanding (together with accrued interest and other fees) immediately due and payable and institute foreclosure proceedings against the security. Any such actions could force us into bankruptcy or liquidation.
We need significant amounts of cash to service our debt. If we are unable to generate sufficient cash to service our debt, our financial condition and results of operations could be negatively affected.
We must generate significant amounts of cash to service and repay our debt. Our ability to generate cash will be affected by general economic, financial, competitive and other factors that may be beyond our control. Future borrowings may not be available to us under our senior credit facilities or from the capital markets in amounts sufficient to pay our obligations as they mature or to fund other liquidity needs. If we are not able to obtain such borrowings or generate sufficient cash from operations to service and repay our indebtedness, we will need to refinance our indebtedness to avoid any default. Such refinancing may not be available on favorable terms or at all. The inability to service, repay or refinance our indebtedness could negatively affect our financial condition and results of operations. We maintain liability insurance
Declines in the market prices of copper, gold and molybdenum could adversely affect our earnings and cash flows and, therefore, our ability to cover some, but not all, potential liabilities normally incident torepay debt. Such declines could also cause significant volatility in our financial performance and adversely affect the ordinary coursetrading prices of our businessdebt and equity securities.
Our earnings and cash flows will be affected significantly by the market prices of copper and, to a lesser extent, gold and molybdenum. The world market prices of these commodities have fluctuated historically and are affected by numerous factors beyond our control. Many financial analysts who follow the metals markets are predicting that copper prices will decline significantly from their current, historically high levels over the next few years. A decline in the world market price of one or more of these commodities could adversely affect our earnings and cash flows and, therefore, could adversely affect the ability to repay our debt and depress the trading prices of our common and preferred stock and of our publicly traded debt securities.
World copper prices have historically fluctuated widely. During the two years ended December 31, 2006, LME daily closing spot prices ranged from $1.39 to $3.99 per pound for copper. World copper prices are affected by numerous factors beyond our control, including:
· | the strength of the U.S. economy and the economies of other industrialized and developing nations, including China, which has become the largest consumer of refined copper in the world; |
· | available supplies of copper from mine production and inventories; |
· | sales by holders and producers of copper; |
· | demand for industrial products containing copper; |
· | investment activity, including speculation, in copper as a commodity; |
· | the availability and cost of substitute materials; and |
· | currency exchange fluctuations, including the relative strength or weakness of the U.S. dollar. |
World gold prices have historically fluctuated widely. During the two years ended December 31, 2006, the daily closing prices on the London spot market ranged from $411 to $726 per ounce for gold. World gold prices are affected by numerous factors beyond our control, including:
· | the strength of the U.S. economy and the economies of other industrialized and developing nations, including China; |
· | global or regional political or economic crises; |
· | the relative strength of the U.S. dollar and other currencies; |
· | expectations with respect to the rate of inflation; |
· | purchases and sales of gold by central banks and other holders; |
· | demand for jewelry containing gold; and |
· | investment activity, including speculation, in gold as a commodity. |
Molybdenum prices also fluctuate widely, even more so than copper. Molybdenum demand depends primarily on the global steel industry, which uses the metal as wella 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 other insurance coverage customarycatalysts, water treatment agents and lubricants. Approximately 65 percent of global molybdenum production is a by-product of copper mining, which is relatively insensitive to molybdenum prices. During the two years ended December 31, 2006, the Metals Week Dealer Oxide price for molybdenum ranged from $20.50 to $40.00 per pound. Molybdenum prices are affected by numerous factors beyond our control, including:
· | the worldwide balance of molybdenum demand and supply; |
· | rates of global economic growth, especially construction and infrastructure activity that requires significant amounts of steel; |
· | the volume of molybdenum produced as a by-product of copper production; |
· | currency exchange fluctuations, including the relative strength of the U.S. dollar; and |
· | production costs of U.S. and foreign competitors. |
Our 2007 copper price protection program may cause significant volatility in our business,financial performance.
At March 31, 2007, we had in place zero-premium copper collars (consisting of both put and call options) for approximately 486 million pounds of our expected 2007 copper sales. For 2007, the annual average LME call strike price (ceiling) for our zero-premium copper collars is $2.00 per pound. At March 31, 2007, we also had in place copper put options for approximately 730 million pounds of our expected 2007 copper sales, with coverage limits thatan annual average LME put strike price (floor) of $0.95 per pound for 2007. In accordance with generally accepted accounting principles in the U.S., transactions under the 2007 copper price protection programs do not qualify for hedge accounting treatment and are adjusted to fair market value based on the forward-curve price and implied volatility as of the last day of the reporting period, with the gain or loss recorded in revenues. These adjustments represent non-cash events as the contracts are settled in cash only after the end of 2007 based on the annual average LME copper price. The 2007 copper price protection program resulted in charges to revenues totaling $38.1 million ($23.2 million to net income or $0.10 per share) for the first quarter of 2007.
Movements in foreign currency exchange rates or interest rates could negatively affect our operating results.
Substantially all of our revenues and a significant portion of our costs are denominated in U.S. dollars; however, some of our costs, and certain of our asset and liability accounts, are denominated in Indonesian rupiah, Chilean pesos, Peruvian nuevos soles, Australia dollars, Euros and other foreign currencies. As a result, we deem prudent.will be generally less profitable when the U.S. dollar weakens in relation to these foreign currencies.
As of March 31, 2007, approximately 48 percent of outstanding debt of approximately $12 billion was subject to variable interest rates. Increases in these rates will increase our interest costs and reduce our profits and operating cash flows.
From time to time, we may implement currency or interest rate hedges intended to reduce our exposure to changes in foreign currency exchange or interest rates. However, our hedging strategies may not be successful, and any of our unhedged foreign exchange or interest payments will continue to be subject to market fluctuations.
OPERATIONAL RISKS
The volume and grade of ore reserves that we recover and our rate of production may be more or less than anticipated. In addition, our exploration activities may not result in additional discoveries.
Our ore reserve amounts are determined in accordance with established mining industry practices and standards, but are estimates of the mineral deposits that can be recovered economically and legally based on currently available data. Ore bodies may not conform to standard geological expectations, and estimates may change as new data becomes available. Because ore bodies do not contain uniform grades and types of minerals, our metal recovery rates will vary from time to time. There are also uncertainties inherent in estimating quantities of ore reserves and copper recovered from stockpiles. The quantity of copper contained in mill and leach stockpiles is based on surveyed volumes of mined material and daily production records. The volume and grade of ore reserves recovered, rates of production and recovered copper from stockpiles may be less than anticipated. Additionally, because the determination of reserves is based partially on historical selling prices, a prospective decrease in such prices may result in a reduction in economically recoverable, and therefore reported, ore reserves. These factors may result in Januaryvariations in the volumes of mineral reserves that we report and the volume of minerals that we can sell from period to period.
Our ability to replenish our ore reserves is important to our long-term viability. Our exploration programs may not result in the discovery of sufficient additional mineral deposits that can be mined profitably.
TABLE OF CONTENTSOur business is subject to operational risks that are generally outside of our control and could adversely affect our business. Mines by their nature are subject to many operational risks and factors that are generally outside of our control and could adversely affect our business, operating results and cash flows. These operational risks and factors include the following:
· | unanticipated ground and water conditions; |
· | adverse claims to water rights; |
· | geological problems, including earthquakes and other natural disasters; |
· | metallurgical and other processing problems; |
· | the occurrence of unusual weather or operating conditions and other force majeure events; |
· | lower than expected ore grades or recovery rates; |
· | delays in the receipt of or failure to receive necessary government permits; |
· | the results of litigation, including appeals of agency decisions; |
· | uncertainty of exploration and development; |
· | delays in transportation; |
· | inability to hire and retain a sufficient number of skilled employees; |
· | inability to obtain satisfactory insurance coverage; |
· | unavailability of materials and equipment; and |
· | the failure of equipment or processes to operate in accordance with specifications or expectations. |
Increased energy and other production costs could reduce our profitability and cash flow.
Our production costs have increased significantly in recent years, primarily because of higher costs of energy and other consumables, higher mining costs and higher labor costs (including pension and health-care costs).
Energy represents a significant portion of our production costs. Our principal energy sources are electricity, purchased petroleum products, natural gas and coal. Because energy represents a significant portion of our production costs, an inability to procure sufficient energy at reasonable prices could adversely affect our profits and cash flow.
Our production costs also are affected by the prices of commodities we consume or use in our operations, such as sulfuric acid, grinding media, steel, reagents, liners, explosives and diluents. The prices of such commodities are influenced by supply and demand trends affecting the copper industry in general and other factors outside our control, and such prices are at times subject to volatile movements. Increases in the cost of these commodities could make our operations less profitable, even in an environment of relatively high copper prices. Increases in the costs of commodities that we consume or use may also significantly affect the capital costs of new projects.
In addition to the usual risks encountered in the mining industry, our Indonesian operations involve additional risks because they are located on unusually difficult terrain in a very remote area.
Our Grasberg mining operations are located in steeply mountainous terrain in a very remote area in Indonesia. Because of these conditions, we have had to overcome special engineering difficulties and develop extensive infrastructure facilities. In addition, the area receives considerable rainfall, which has led to periodic floods and mudslides. The mine site is also in an active seismic area and has experienced earth tremors from time to time. Our insurance may not sufficiently cover an unexpected natural or operating disaster.
On October 9, 2003, a slippage of material occurred in a section of the Grasberg open pit, resulting in eight fatalities. On December 12, 2003, a debris flow involving a relatively small amount of loose material
occurred in the same section of the open pit resulting in only minor property damage. The events caused us to alter our short-term mine sequencing plans, which adversely affected our 2003 and 2004 production. While we resumed normal production activities in the second quarter of 2004, no assurance can be given that similar events will not occur in the future.
On March 23, 2006, a mud/topsoil slide involving approximately 75,000 metric tons of material occurred from a mountain ridge above service facilities supporting PT Freeport Indonesia’s mining facilities. Regrettably, three contract workers were fatally injured in the event. The material damaged a mess hall and an adjacent area. As a result of investigations by PT Freeport Indonesia and the Indonesian Department of Energy and Mineral Resources, we conducted geotechnical studies to identify any potential hazards to facilities from slides. The existing early warning system for potential slides, based upon rainfall and other factors, has also been expanded.
ENVIRONMENTAL RISKS
Our domestic and international operations are respondingsubject to requestscomplex and evolving environmental laws and regulations, and compliance with environmental and regulatory requirements involves significant costs.
Our domestic operations are subject to various federal, state and local environmental laws and regulations relating to improving or maintaining environmental quality. Environmental laws often require parties to pay for remedial action or to pay damages regardless of fault and may also often impose liability with respect to divested or terminated operations, even if the operations were terminated or divested many years ago. The federal Clean Air Act has had a significant impact, particularly on our domestic smelter and power plants. We also have potential liability for certain U.S. sites we currently operate or formerly operated and for certain third-party sites under the federal Superfund law and similar state laws. We are also subject to claims for natural resource damages where the release of hazardous substances is alleged to have injured natural resources.
Our mining operations and exploration activities, both in the U.S. and elsewhere, are subject to extensive laws and regulations governing exploration, development, production, exports, taxes, labor standards, occupational health, mine safety, toxic substances, waste disposal, protection and remediation of the environment, protection of endangered and protected species, and other matters. Compliance with these laws and regulations imposes substantial costs and subjects us to significant potential liabilities.
In addition to the cost of ongoing environmental regulation, we incur significant costs for remediating environmental conditions and monitoring remediation efforts on properties that we owned or operated in the past, or that were owned or operated by companies we acquired or affiliates of those companies, including properties that have been out of production for many years.
The environmental laws and regulations that apply to us are complex and continuously evolving, and they vary considerably from governmental authoritiescountry to country. Costs associated with environmental and regulatory compliance have increased over time, and we expect these costs to continue to increase in the future. In addition, environmental laws and regulations may change in ways that could adversely affect our operations or financial results. The costs of environmental obligations may exceed the reserves that we have established for such liabilities.
Although the Kyoto Protocol, established in December 1997, has not been ratified by the U.S., several states have initiated potential legislative action on climate change in late 2006 and early 2007. During 2007, the United States Congress may consider federal legislation on climate change, which could increase future energy costs. We are evaluating the impact of potential climate change programs on our operations.
Mine closure regulations impose substantial costs on our operations.
Our domestic operations are subject to various federal and Indonesiastate mine closure and mined-land reclamation laws. The requirements of these laws vary depending upon the jurisdiction. Over the last several years, there have been substantial changes in these laws and regulations in the states in which
our mines are located, as well as changes in the regulations promulgated by the federal Bureau of Land Management (BLM) for information about PT Freeport Indonesia, primarily relatingmining operations located on federal public lands. The amended BLM regulations governing reclamation for mining on federal lands will likely increase our regulatory obligations and compliance costs over time. As estimated costs increase, our domestic mines are required to PT Freeport Indonesia’spost increasing amounts of financial assurance to ensure the availability of funds to meet future closure and reclamation obligations.
Our New Mexico financial assurance amounts at March 31, 2007, which reflected reductions for work completed through 2006 and agreed upon by the New Mexico Environment Department and Mining Minerals Division, were $185 million for Chino and $29 million for Cobre. As of April 23, 2007, Tyrone’s financial assurance requirement was adjusted to $218 million. Up to 70 percent of the financial assurance for Chino, Tyrone and Cobre is in the form of guarantees issued by Phelps Dodge on behalf of our operating subsidiaries and the balance is in the form of real property collateral, letters of credit and cash. These amounts may change based on the completion of additional permitting procedures, final agency determinations and the results of administrative appeals, which could result in changes to the closure and reclamation plans and lead to increases in the cost estimates and our related financial assurance obligations.
At March 31, 2007, we had accrued closure costs of approximately $71 million for our Arizona operations. The amount of financial assurance currently demonstrated for Arizona closure and reclamation activities is approximately $183 million. We have also approved mined-land reclamation plans and financial assurance in place for our two Colorado mines totaling approximately $81 million.
Most of the financial assurance provided for our U.S. mines requires that we meet financial tests that demonstrate our capability to perform the required closure and remediation. We have satisfactorily demonstrated our financial capability for all of the financial assurances given for our Arizona mines. We maintain a part of our financial assurance using financial strength tests in New Mexico and Arizona. However, a portion of our financial assurance requirements might be required to be supplied in another form, such as letters of credit, real property collateral or cash.
In recent years, many surety companies have begun to require a significant level of collateral to support surety bonds, and the costs associated with such bonds have increased significantly. As a result, if surety bonds are unavailable at commercially reasonable terms to support our financial assurance obligations, we could be required to post other collateral or cash or cash equivalents directly in support of Indonesian security institutions. As describedthose obligations.
In addition, our international mines are subject to various mine closure and mined-land reclamation laws, and there have recently been significant changes in closure and reclamation programs in both Peru and Chile that impose more stringent obligations on us for closure and reclamation.
Our mining operations in Indonesia create difficult and costly environmental challenges, and future changes in environmental laws, or unanticipated environmental impacts from those operations, could require us to incur increased costs.
Mining operations on the scale of our Form 10-K foroperations in Papua involve significant environmental risks and challenges. Our primary challenge is to dispose of the year ended December 31, 2005,large amount of crushed and ground rock material, called tailings, that results from the process by which we provide support to assist security institutions deployedphysically separate the copper-, gold- and directedsilver-bearing materials from the ore that we mine. Our tailings management plan, which has been approved by the Government of Indonesia, with infrastructure, logistics anduses the hardship elements of posting in Papua andriver system near our practices adheremine to transport the tailings to the joint U.S. State Department-British Foreign Office Voluntary Principleslowlands where the tailings and natural sediments are deposited in a controlled area contained within an engineered levee system that will be revegetated. We incurred aggregate costs relating to tailings management of $3.6 million in the first three months of 2007, $12.8 million in 2006 and $8.7 million in 2005.
Another major environmental challenge is managing overburden, which is the rock that must be moved aside in the mining process in order to reach the ore. In the presence of air, water and naturally occurring
bacteria, some overburden can cause acid rock drainage, or acidic water containing dissolved metals which, if not properly managed, can have a negative impact on Securitythe environment.
Certain Indonesian governmental officials have from time to time raised issues with respect to our tailings and Human Rights.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 cooperatingworking with these requests.the Ministry of Environment to address the issues raised as it completes the audit process.
The risk factors includedWe plan to continue to spend significant financial and managerial resources on environmental compliance related to our Indonesian operations. In addition, changes in Indonesian environmental laws or unanticipated environmental impacts from our Annual Report on Form 10-K for the year ended December 31, 2005, have not materially changed other than the updates set forth below, which should be read in conjunction with our 2005 Form 10-K.operations could require us to incur significant unanticipated costs.
BecauseINTERNATIONAL RISKS
Our acquisition of Phelps Dodge in March 2007 has broadened the geographical scope of our operations, thereby broadening the range of political, social and geographic risks to which we are exposed.
Prior to our acquisition of Phelps Dodge, our primary operating assets arewere located in the Republic of Indonesia, and our business maycould be adversely affected by Indonesian political, economic and social uncertainties, in addition to the usual risks associated with conducting business in a foreign country. As a result of the Phelps Dodge acquisition, we now also conduct mining operations in the U.S. and have expanded our international operations to Chile and Peru. We also have a significant development project in the Democratic Republic of Congo, which is expected to begin production by early 2009. Accordingly, our business may also be adversely affected by political, economic and social uncertainties in each of these countries, in addition to the usual risks associated with conducting business in a foreign country.
Such risks include (1) forced modification of existing contracts, (2) changes in a country’s laws and policies, including those relating to labor, taxation, royalties, divestment, imports, exports, trade regulations, currency and environmental matters, (3) political instability and civil strife, (4) exchange controls, and (5) the risk of having to submit to the jurisdiction of a foreign court or arbitration panel or having to enforce the judgment of a foreign court or arbitration panel against a sovereign nation within its own territory. We may also be subject to the risk of expropriation, and our insurance does not cover losses caused by expropriation.
Our Grasberg mine in Papua, Indonesia remains our most significant operating asset, and because it is located in the Republic of Indonesia, our business may continue to be adversely affected by Indonesian political, economic and social uncertainties.
Indonesia has faced political, economic and social uncertainties, including separatist movements and civil and religious strife in a number of provinces. In particular, several separatist groups are opposing Indonesian rule over the province of Papua, where our mining operations areGrasberg 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 this instabilityit 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 all of our mining operations there are located in Indonesiaamong Indonesia’s most significant business enterprises and are conducted pursuant to a Contract of Work with the Indonesian government. Accordingly,Partially because of their significance to Indonesia’s economy, the environmentally sensitive area in which they are located, and the number of people employed, our operations are occasionally the subject of criticism in the Indonesian press and in political debates, and have been the target of protests and occasional violence.
Most recently, Grasberg operated at reduced mining and milling rates during a four-day period from April 18 to April 21 as a result of peaceful protests by certain workers regarding benefits. The protests ended on April 21 with an agreement on a framework for minimum wages for its workers and Grasberg has returned to normal operations. The impacts to production were not significant.
We cannot predict whether additional incidents will occur that could disrupt our Indonesian operations, or whether similar incidents may occur in other countries that could affect our other operations. If additional protests or other disruptive incidents occur at any of our facilities, they could adversely affect our business and profitability in ways that we cannot predict at this time.
We do not expect to mine all of our Indonesian ore reserves before the initial term of our Contract of Work in Indonesia expires.
All of our Indonesian proven and probable ore reserves, including the Grasberg deposit, are alsolocated 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 risks associated with conducting business inapproval 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 withour 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 foreign country, includingresult, we will not mine all of these ore reserves during the riskcurrent term of forced modificationour Contract of existing contracts; changesWork, and there can be no assurance that the Indonesian government will approve the extensions. Prior to the end of 2021, we expect to mine approximately 39 percent of aggregate proven and probable recoverable ore at December 31, 2006, representing approximately 45 percent of PT Freeport Indonesia’s share of recoverable copper reserves and approximately 59 percent of its share of recoverable gold reserves.
The terrorist attacks in the country’s laws and policies, including those relating to taxation, royalties, divestment, imports, exports and currencyU.S. in 2001, subsequent attacks in other parts of the world and 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. In addition, we are subject to the risk of expropriation. Our insurance does not cover losses causedpotential 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 expropriation.
In February 2006, a group of illegal gold panners engaged in conflict with Indonesian police andunidentified assailants on the road near Tembagapura, the mining town where the majority of PT Freeport Indonesia securityIndonesia’s personnel when they were requestedreside. The assailants shot at several vehicles transporting international contract teachers from our school in Tembagapura, their family members and other contractors to leave an area near our milling facilities. FollowingPT Freeport Indonesia. The U.S. FBI investigated the incident, which resulted in the illegal panners blockedU.S. indictment of an alleged operational commander of the road leading toFree Papua Movement/National Freedom Force. In January 2006, Indonesian Police, accompanied by FBI agents, arrested the Grasberg minealleged operational commander and mill11 other Papuans. In November 2006, verdicts and sentencing were announced for seven of those accused in protest and we temporarily suspendedthe 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 asoperations. Indonesian authorities arrested 35 people in connection with this bombing and 29 of those arrested have been tried and convicted. On August 5, 2003, 12 people were killed and over 100 others were injured by a precautionary measure.car bomb detonated outside of the JW Marriott Hotel in Jakarta, Indonesia. On September 9, 2004, 11 people were killed and over 200 others injured by a car bomb detonated in front of the Australian embassy in Jakarta. On October 1, 2005, three suicide bombers killed 19 people and wounded over 100 others in Bali. The panners also vandalized somesame international terrorist organizations are suspected in each of our light vehicles and offices near this area, causing approximately $4these incidents. In November 2005, Indonesian Police raided a house in East Java
million in damages. Our port facilities continued to operate during the disruption and concentrate shipments were not affected. The panners, mostly Papuans from outside our area of operations, presented a list of aspirations, primarily relating to their desire to sharethat resulted in the benefitsdeath of our existing initiatives and programs provided forother accused terrorists linked to the Papuans who are the traditional residents of our operations area. Miningbombings discussed above. Our mining and milling operations resumed after an approximate four-day outage. During the incident at our mine and mill, protestorswere not interrupted by these incidents, but PT Freeport Indonesia’s corporate office in Jakarta vandalizedhad to relocate for several months following the entrance floorbombing in front of the office building housing our Indonesian headquartersAustralian embassy. In addition to the Bali, JW Marriott Hotel and staged a three-day rally outsideAustralian embassy bombings, there have been anti-American demonstrations in certain sections of Indonesia reportedly led by radical Islamic activists. Radical activists have also threatened to attack foreign interests and have called for the building. The Indonesian police handled this matter, which did not disrupt our administrative functions or damage anyexpulsion of our facilities.U.S. and British citizens and companies from Indonesia.
Since February 2006, other illegal panning activities and conflicts among the local residents have occurred, none of which have resulted in the interruption of our business operations. We cannot predict if there will bewhether additional incidents similar to the February 2006 proteststhose described above will occur in Indonesia or in other countries where we operate. Any such incidents that do occur could disruptmaterially and adversely affect our operations. If there were additional protestsbusiness and profitability in ways that we cannot predict at this time.
Terrorist attacks and other events have caused uncertainty in the world’s financial and insurance markets and may significantly increase global political, economic and social instability. It is possible that further acts of terrorism may be directed against the U.S. domestically or other incidents atabroad, and such acts could be directed against properties and personnel of companies such as ours. The attacks and the resulting economic and political uncertainties, including the potential for further terrorist acts, have negatively affected insurance markets. Moreover, while our mineproperty and mill facilities, it couldbusiness interruption insurance covers damages to insured property directly caused by terrorism, this insurance does not cover damages and losses caused by war. Terrorism and war developments may materially and adversely affect our business and profitability in ways that we cannot predict at this time.
Our Contracts of Work in Indonesia are subject to termination if we do not comply with our contractual obligations, and if a dispute arises, we may have to submit to the jurisdiction of a foreign court or arbitration panel.
PT Freeport Indonesia’s ContractsContract 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)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. Notwithstanding that provision,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 a periodican 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 working meetings with these groups. The joint team has indicated that it will issue its report shortly.a report. While we believe that we comply with thePT Freeport Indonesia’s Contract of Work in all material respects, we cannot assure you that the report will concludesupport that we are complying with all of the provisions of PT Freeport Indonesia’s Contract of Work.conclusion. Separately, the Indonesian House of Representatives created a working committee on PT Freeport Indonesia. Members of this group have also visited our operations and held a number of hearings in Jakarta. We will continue to work with these groups to respond to their questions about our operations and our compliance with PT Freeport Indonesia’s Contract of Work.
TABLE OF CONTENTSAny suspension of required activities under our Contracts of Work requires the consent of the Indonesian government. Our Contracts of Work permit us to suspend certain contractually required activities, including exploration, for a period of one year by making a written request to the Indonesian government. These requests are subject to the approval of the Indonesian government and are renewable annually. If we do not request a suspension or are denied a suspension, then we are required to continue our activities under the Contract of Work or potentially be declared in default. Moreover, if a suspension continues for more than one year for reasons other than force majeure and the Indonesian government has not approved such continuation, then the government would be entitled to declare a default under the Contract of Work.
We suspended our field exploration activities outside of Block A in recent years due to safety and security issues and regulatory uncertainty relating to a possible conflict between our mining and exploration rights in certain forest areas and an Indonesian Forestry law enacted in 1999 prohibiting open-pit mining in forest preservation areas. In 2001, we requested and received from the Government of Indonesia, formal temporary suspensions of our obligations under the Contracts of Work in all areas outside of Block A. Recent Indonesian legislation permits open-pit mining in PT Freeport Indonesia’s Block B area, subject to certain requirements. Following an assessment of these requirements and a review of security issues, in 2007 we resumed exploration activities in certain prospective Contract of Work areas outside of Block A.
OTHER RISKS
The impact of purchase accounting in connection with our acquisition of Phelps Dodge in March 2007 will adversely affect our reported earnings.
Purchase accounting requires us to allocate the price paid in our acquisition of Phelps Dodge on the basis of the fair value of Phelps Dodge’s assets at the time the transaction closed. Those adjustments resulted in significant increases in the carrying values of certain acquired assets, including, based on preliminary estimates, increases of approximately $1.7 billion in metal inventories and stockpiles and approximately $14.6 billion in property, plant and equipment costs.
The increased value of metal inventories and stockpiles will cause our cost of goods sold to increase in the year those inventories are recognized as sold, and because we changed Phelps Dodge’s method of accounting for metal inventories from their previous method of last-in, first-out to the average cost method, the increase in our cost of goods will occur in the near term. The increased value of property, plant and equipment costs will increase our depreciation, depletion and amortization expense. These items will reduce reported earnings but have no effect on cash flows.
A decline in the market price of metals produced by us could result in a write down of metal and stockpile inventories to recoverable values and the recognition of impairment charges to property, plant and equipment costs. These charges would have the effect of reducing reported earnings, although they would have no effect on cash flows.
In addition, our estimate of goodwill associated with the acquisition of Phelps Dodge is approximately $7.4 billion. We will annually assess this amount for impairment. If we conclude that the goodwill associated with the transaction is impaired, the amount of the impairment would reduce our reported earnings but would have no effect on cash flows.
As a result of our acquisition of Phelps Dodge, we may experience difficulty in effectively integrating both businesses, which could deprive us of many of the anticipated benefits of these transactions.
Achieving the anticipated benefits of the acquisition of Phelps Dodge will depend in part on whether we integrate the businesses in an efficient and effective manner. We may not be able to accomplish this integration process smoothly or successfully. The difficulties of combining both companies’ businesses potentially will include, among other things:
· | the necessity of coordinating geographically separated organizations and addressing possible differences in corporate cultures and management philosophies, and the integration of diverse operations, which will require the dedication of significant management resources that may temporarily distract management’s attention from our day-to-day business; |
· | any inability of our management to adapt to the addition of lines of business in which we have not historically engaged; and |
· | any inability of our management to cause best practices to be applied to all of our businesses. |
An inability to realize the full extent of the anticipated benefits of the acquisition, as well as any delays encountered in the transition process, could have an adverse effect on the revenues, level of expenses and our operating results.
We depend on our senior management team and other key employees, and the loss of any of these employees could adversely affect our business.
Our success depends in part on our ability to retain senior management and other key employees. Competition for qualified personnel can be very intense. In addition, senior management and key employees may depart because of issues relating to the uncertainty or difficulty associated with the successful integration of the business and operations as formerly conducted by Phelps Dodge, or a desire not to remain with us. Accordingly, no assurance can be given that we will be able to retain senior management and key employees to the same extent that we have been able to do so in the past.
Our holding company structure may impact your ability to receive dividends.
We are a holding company with no material assets other than the capital stock of our subsidiaries. As a result, our ability to repay our indebtedness and pay dividends is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries do not have any obligation to make funds available to us to repay our indebtedness or pay dividends. In addition, our subsidiaries may not be able to, or be permitted to, make distributions to enable us to repay our indebtedness or pay dividends. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. Our rights to participate in any distribution of our subsidiaries’ assets upon their liquidation, reorganization or insolvency would generally be subject to the prior claims of the subsidiaries’ creditors, including any trade creditors and preferred shareholders.
Anti-takeover provisions in our charter documents and Delaware law may make an acquisition of us more difficult.
Anti-takeover provisions in our charter documents and Delaware law may make an acquisition of us more difficult. These provisions:
· | authorize our board of directors to issue preferred stock without stockholder approval and to designate the rights, preferences and privileges of each class; if issued, such preferred stock would increase the number of outstanding shares of our capital stock and could include terms that may deter an acquisition of us; |
· | establish advanced notice requirements for nominations to the board of directors or for proposals that can be acted on at stockholder meetings; and |
· | limit who may call stockholder meetings. |
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders from consummating a merger with, or acquisition of, us.
These provisions may deter an acquisition of us that might otherwise be attractive to stockholders.
Our mining operations create difficult and costly environmental challenges, and future changes in environmental laws, or unanticipated environmental impacts from our operations, could require us to incur increased costs.
Mining operations on the scale of our operations in Papua involve significant environmental impacts 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 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 a levee system that will be revegetated. We incurred aggregate costs relating to tailings management of $9.0 million in the first nine months of 2006, $8.7 million in 2005 and $11.8 million in 2004.
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.
From time to time issues have been raised 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, more prone to catastrophic failure and involve significant potentially adverse environmental issues. An external panel of qualified experts, as directed in our 300K ANDAL (the Environmental Impact Assessment document submitted to the Indonesian government), conducted detailed reviews and analyses of a number of technical studies. They concluded that all significant impacts identified were in line with the 300K ANDAL predictions, and that the current system of riverine tailings management was appropriate considering all site-specific factors. For these reasons, 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 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.
We anticipate that we will continue to spend significant financial and managerial resources on environmental compliance. In addition, changes in Indonesian environmental laws or unanticipated environmental impacts from our operations could require us to incur significant unanticipated costs.
(c)In October 2003, our Board of Directors approved ana new open market share purchase program for up to 20 million shares, which replaced our previous program. The program does not have an expiration date. No shares were purchased during the three-month period ended September 30, 2006,March 31, 2007, and 12.2 million shares remain available for purchase.
The following table sets forth information with respect to shares of common stock of FCX purchased by FCX during the three months ended March 31, 2007:
| | | | | | | | | (d) Maximum Number |
| | | | | | | (c) Total Number of | | (or Approximate |
| | (a) Total | | | | | Shares (or Units) | | Dollar Value) of Shares |
| | Number of | | (b) Average | | Purchased as Part of | | (or Units) That May |
| | Shares (or Units) | | Price Paid Per | | Publicly Announced | | Yet Be Purchased Under |
Period | | Purchaseda | | Share (or Unit) | | Plans or Programs | | the Plans or Programs |
January 1-31, 2007 | | - | | $ | - | | - | | - |
February 1-28, 2007 | | 237,517 | | | - | | - | | - |
March 1-31, 2007 | | 854,988 | | | 61.59 | | - | | - |
Total | | 1,092,505 | | | 61.59 | | - | | - |
| | | | | | | | | |
a. | This category include shares repurchased under FCX’s applicable stock incentive plans (Plans) and its non-qualified supplemental savings plan (SSP). In February 2007 FCX repurchased previously issued shares to satisfy exercise prices on option awards under the Plans. In March 2007 FCX repurchased shares to satisfy tax obligations on restricted stock awards under the Plans. In the SSP, FCX repurchases shares as a result of changes in investment elections by plan participants. |
A special meeting of stockholders was held on March 14, 2007 (the “Special Meeting”). Proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. The following matters were submitted to a vote of security holders during our Special Meeting:
| For | Against | Abstentions |
1. Proposal to amend our certificate of incorporation to increase the authorized number of shares of capital stock to 750,000,000, increase the number of shares of Class B common stock to 700,000,000, rename the Class B common stock as common stock and delete the provisions governing and references to the previously designated classes and series of our preferred stock of which no shares are outstanding (other than the Series A Participating Cumulative Preferred Stock and the 5½% Convertible Perpetual Preferred Stock). | 131,604,795 | 1,168,227 | 1,189,607 |
TABLE OF CONTENTS | For | Against | Abstentions |
2. Proposal to issue shares of our common stock in connection with the transaction contemplated by the Agreement and Plan of Merger dated as of November 18, 2006, among Freeport-McMoRan Copper & Gold Inc., Phelps Dodge Corporation, and Panther Acquisition Corporation, a direct wholly owned subsidiary of Freeport-McMoRan Copper & Gold Inc., as amended. | 131,641,450 | 1,131,345 | 1,189,834 |
3. Proposal to approve an adjournment of the Special Meeting, if necessary, to permit solicitation of additional proxies in favor of the above proposals. | 121,694,167 | 11,012,900 | 1,255,562 |
The exhibits to this report are listed in the Exhibit Index beginning on Page E-1 hereof.
FREEPORT-McMoRan COPPER & GOLD INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
FREEPORT-McMoRan COPPER & GOLD INC.
By: /s/ C. Donald Whitmire, Jr.
C. Donald Whitmire, Jr.
Vice President and
Controller-Financial Reporting
(authorized signatory and
Principal Accounting Officer)
Date: November 2, 2006May 10, 2007
Freeport-McMoRan Copper & Gold Inc.