Freeport-McMoRan 2008 Annual Report Download - page 103

Notes to Consolidated Financial Statements
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 101
capped at $2.00 per pound and copper put options for 730 million
pounds with a floor price of $0.95 per pound. The zero-premium
copper collars consisted of the simultaneous purchase of a
monthly or annual put option and the sale of an annual call
option. The put option portion of this economic hedge effectively
ensured a minimum price per pound while the call option portion
established a maximum price per pound. The primary objective of
these contracts was to set a minimum price, and the secondary
objective was to retain market upside. At December 31, 2007, the
copper put options expired without settlement, and FCX paid
$598 million in January 2008 to settle the copper call options. FCX
does not currently intend to enter into similar hedging programs
in the future.
Gold- and Silver-Denominated Preferred Stock. In 2006, FCX
redeemed its gold-denominated and silver-denominated preferred
stock that had dividends and redemption amounts determined by
commodity prices.
Foreign Currency Exchange Contracts. As a global company,
FCX transacts business in many countries and in many
currencies. Foreign currency transactions of FCX’s international
subsidiaries increase its risks because exchange rates can
change between the time agreements are made and the time
foreign currency transactions are settled. FCX may hedge or
protect its international subsidiaries’ foreign currency
transactions from time to time by entering into forward exchange
contracts to lock in or minimize the effects of fluctuations in
exchange rates. FCX had no outstanding foreign currency
exchange contracts at December 31, 2008.
Interest Rate Swap Contracts. From time to time, FCX or its
subsidiaries may enter into interest rate swaps to manage its
exposure to interest rate changes on a portion of its debt.
Floating-rate debt exposes FCX to increasing costs from rising
interest rates. FCX may enter into interest rate swap contracts to
lock in an interest rate considered to be favorable in order to
protect against its exposure to variability in future interest
payments attributable to increases in interest rates of the
designated floating-rate debt. FCX had no outstanding interest
rate swap contracts at December 31, 2008.
Credit Risk. FCX is exposed to credit loss when financial
institutions with which FCX has entered into derivative
transactions (commodity, foreign exchange and interest rate
swaps) are unable to pay. To minimize the risk of such losses,
FCX uses highly rated financial institutions that meet certain
requirements. FCX also periodically reviews the creditworthiness
of these institutions to ensure that they are maintaining their
ratings. FCX does not anticipate that any of the financial
institutions FCX deals with will default on their obligations. As of
December 31, 2008, FCX did not have any significant credit
exposure associated with derivative transactions.
Other Financial Instruments. The methods and assumptions
FCX used to estimate the fair value of significant groups of
financial instruments for which it can reasonably determine a
value are as follows:
Cash and Cash Equivalents. The financial statement amount is
a reasonable estimate of the fair value because of the short
maturity of these instruments.
Trust Assets. The financial statement amount represents the
fair value of trust assets, which is based on quoted market prices.
Long-Term Debt. The fair value of substantially all of FCX’s
long-term debt is estimated based on quoted market prices.
NOTE 18. ACQUISITION OF PHELPS DODGE
On March 19, 2007, FCX acquired Phelps Dodge, a fully integrated
producer of copper and molybdenum, with mines in North and
South America and processing capabilities for other by-product
minerals, such as gold, silver and rhenium, and several
development projects, including Tenke Fungurume in the DRC.
In the acquisition, each share of Phelps Dodge common stock
was exchanged for 0.67 of a share of FCX common stock and
$88.00 in cash. As a result, FCX issued 136.9 million shares and
paid $18.0 billion in cash to Phelps Dodge shareholders. The
acquisition was accounted for under the purchase method as
required by SFAS No. 141 with FCX as the accounting acquirer.
The estimated fair value of assets acquired and liabilities
assumed and the results of Phelps Dodge’s (now known as FMC)
operations are included in FCX’s consolidated financial
statements beginning March 20, 2007.
The following table summarizes the $25.8 billion purchase
price, which was funded through a combination of common
shares issued, borrowings under an $11.5 billion senior credit
facility, proceeds from the offering of $6.0 billion of senior notes
(see Note 11 for further discussion) and available cash resources:
Phelps Dodge common stock outstanding and issuable at
March 19, 2007 (in millions) 204.3
Exchange offer ratio per share of FCX common stock for
each Phelps Dodge common share 0.67
Shares of FCX common stock issued (in millions) 136.9
Cash consideration of $88.00 for each Phelps Dodge
common share $ 17,979
a
Fair value of FCX common stock issued 7,781
b
Transaction and change of control costs and related
employee benefits 137
Release of FCX deferred tax asset valuation allowances (92)
c
Total purchase price $ 25,805
a. Cash consideration includes cash paid in lieu of any fractional shares of FCX stock.
b. Measurement of the common stock component of the purchase price was based on a
weighted-average closing price of FCX’s common stock of $56.85 for the two days
prior to through two days after the public announcement of the merger on
November 19, 2006.
c. FCX determined that, as a result of the acquisition of Phelps Dodge, it would be
able to realize certain U.S. tax credits for which it had previously not recognized any
benefit. Recognition of these tax credits resulted in a $92 million reduction to the
purchase price.