Freeport-McMoRan 2008 Annual Report Download - page 102

Notes to Consolidated Financial Statements
100 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
FCX derivative instruments met all the criteria under SFAS No.
133, as amended, to qualify as a hedge transaction. A recap of
gains (losses) charged to (loss) income from continuing
operations before income taxes, minority interests and equity in
affiliated companies’ net earnings for derivative financial
instruments, including embedded derivatives, for the years
ended December 31, 2008, 2007 and 2006, follows:
2008 2007 2006
Commodity contracts:
Embedded derivatives in provisional
sales contracts
a
$ (1,278) $ 197 $ 293
Embedded derivatives in provisional
purchase contracts
b
34 (10) –
Copper forward contracts
b
(71) (44) 47
Copper futures and swap contracts
a
(184) (38) –
FMC’s zero-premium copper collars
a
– (175) –
Gold-Denominated Preferred Stock,
Series II
a
– – (69)
Silver-Denominated Preferred Stock
a
– – (13)
Foreign currency exchange contracts
b
– – 7
a. Amounts recorded in revenues.
b. Amounts recorded in cost of sales as production and delivery costs.
Summarized below are financial instruments whose carrying
amounts are not equal to their fair values and unsettled
derivative financial instruments at December 31, 2008 and 2007:
2008 2007
Carrying Fair Carrying Fair
Amount Value Amount Value
Commodity contracts:
Embedded derivatives in provisional
sales/purchases contracts:
a
Asset position $ 87 $ 87 $ 34 $ 34
Liability position (485) (485) (157) (157)
Copper forward contracts:
Liability position
b
(4) (4) (4) (4)
Copper futures and swap contracts:
Asset position
c
2 2 – –
Liability position
b,d
(89) (89) (9) (9)
Long-term debt (including amounts
due within one year) (7,351) (5,889) (7,211) (7,595)
a. Amounts recorded either as a net accounts receivable or a net accounts payable
except for Atlantic Copper's copper purchases, which are recorded to product
inventories ($56 million for 2008 and $18 million for 2007).
b. Amounts recorded in accounts payable and accrued liabilities.
c. Amounts recorded in accounts receivable.
d. At December 31, 2008, FCX had paid $92 million to brokers for margin requirements,
which is recorded in other current assets.
Commodity Contracts. From time to time, FCX has entered into
forward, futures, swaps and option contracts to hedge the market
risk associated with fluctuations in the prices of commodities it
sells. Derivative financial instruments used by FCX to manage its
risks do not contain credit risk-related contingent provisions. As
of December 31, 2008 and 2007, FCX had no price protection
contracts relating to its mine production. A summary of FCX’s
derivative contracts and programs follows.
Embedded Derivatives. As described in Note 1 under “Revenue
Recognition,” a portion of FCX’s copper concentrate and cathode
sales contracts and gold sales contracts provides for provisional
pricing primarily based on LME or COMEX prices at the time
of shipment as specified in the contract. Similarly, FCX purchases
copper and molybdenum under contracts that provide for
provisional pricing. FCX applies the normal purchase and sale
exception under SFAS No. 133, as amended, to the host sales
agreements since the contracts do not allow for net settlement
and always result in physical delivery. Under SFAS No. 133, as
amended, sales and purchases made on a provisional sales price
contain an embedded derivative (i.e., the price settlement
mechanism that is settled after the time of delivery) that is
required to be bifurcated from the host contract. The host
contract is the sale or purchase of the metals contained in the
concentrates or cathodes at the then-current LME or COMEX
price. Mark-to-market price fluctuations recorded through the
settlement date are reflected in revenues for sales contracts and
in cost of sales as production and delivery costs for purchase
contracts. At December 31, 2008, FCX had embedded derivatives
on 508 million pounds of copper sales (net of minority interests),
with maturities through May 2009 and 113 million pounds of
copper purchases, with maturities through March 2009.
Copper Forward Contracts. Atlantic Copper enters into forward
copper contracts designed to hedge its copper price risk
whenever its physical purchases and sales pricing periods do
not match. These economic hedge transactions are intended to
hedge against changes in copper prices, with the mark-to-market
hedging gains or losses recorded to cost of sales. At December 31,
2008, Atlantic Copper held forward copper purchase contracts
for 55 million pounds at an average price of $1.45 per pound, with
maturities through February 2009.
Copper Futures and Swap Contracts. Some of FCX’s U.S. copper
rod customers request a fixed market price instead of the COMEX
average price in the month of shipment. FCX hedges this price
exposure in a manner that allows it to receive the COMEX
average price in the month of shipment while the customers pay
the fixed price they requested. FCX accomplishes this by entering
into copper futures and swap contracts and then liquidating the
copper futures contracts and settling the copper swap contracts
during the month of shipment, which generally results in FCX
receiving the COMEX average price in the month of shipment.
Gains and losses for these economic hedge transactions are
recorded to revenues. At December 31, 2008, FCX held copper
futures and swap contracts for 93 million pounds at an average
price of $2.34 per pound, with maturities through December 2010.
FMC Copper Collars. As a result of the acquisition of Phelps
Dodge, FCX assumed Phelps Dodge’s 2007 copper price
protection program ($423 million obligation at acquisition date),
which consisted of zero-premium copper collars (consisting
of both put and call options) for 486 million pounds of copper