Freeport-McMoRan 2008 Annual Report Download - page 19

OVERVIEW and OUTLOOK
In Management’s Discussion and Analysis of Financial Condition
and Results of Operations, “we,” “us” and “our” refer to
Freeport-McMoRan Copper & Gold Inc. (FCX) and its consolidated
subsidiaries, including, except as otherwise stated, Phelps Dodge
Corporation (Phelps Dodge) and its subsidiaries, which we
acquired on March 19, 2007. The results of operations reported
and summarized below are not necessarily indicative of future
operating results. In particular, the financial results for 2007
include the operations of Phelps Dodge from March 20, 2007,
through December 31, 2007, not the full twelve-month period
because of the accounting treatment for the acquisition. References
to “Notes” are Notes included in our “Notes to Consolidated
Financial Statements.” Throughout Management’s Discussion
and Analysis of Financial Condition and Results of Operations
all references to earnings or losses per share are on a diluted
basis, unless otherwise noted.
We are one of the world’s largest copper, gold and molybdenum
mining companies in terms of reserves and production.
Our portfolio of assets includes the Grasberg minerals district in
Indonesia, which contains the largest single recoverable copper
reserve and the largest single gold reserve of any mine in the
world based on the latest available reserve data provided by
third-party industry consultants; significant mining operations
in North and South America; and the Tenke Fungurume
development project in the Democratic Republic of Congo (DRC).
Our mining revenues for 2008 include sales of copper
(approximately 76 percent), molybdenum (approximately 14
percent) and gold (approximately seven percent). We currently
have five operating copper mines in North America, four in
South America and the Grasberg minerals district in Indonesia.
We also have one operating primary molybdenum mine in
North America. During 2008, approximately 60 percent of our
consolidated copper production was from our Grasberg, Morenci
and Cerro Verde mines, and more than half of our mined
copper was sold in concentrate, approximately 27 percent as
rod (principally from our North America operations) and
approximately 19 percent as cathodes. For 2008, approximately
55 percent of our consolidated molybdenum production was from
the Henderson molybdenum mine and approximately 45 percent
was produced as a by-product primarily at our North America
copper mines. We also produce gold as a by-product at our copper
mines, primarily at the Grasberg minerals district in Indonesia,
which accounted for approximately 90 percent of our consolidated
gold production for 2008. Refer to “Operations” for further
discussion of our mining operations.
Prior to March 19, 2007, we operated our Grasberg mine in
Indonesia and our wholly owned copper smelting and refining
operation at Atlantic Copper in Spain. On March 19, 2007, we
acquired Phelps Dodge, a fully integrated producer of copper and
molybdenum with mines in North and South America, and
several development projects, including Tenke Fungurume in the
DRC, which we believe is one of the world’s highest potential
copper and cobalt concessions. After completion of the Phelps
Dodge acquisition, our business strategy was focused on
repaying acquisition-related debt, defining the potential of our
resources and developing expansion and growth plans to deliver
additional volumes to a growing marketplace. During 2007, we
repaid $10.0 billion in term loans using a combination of equity
proceeds and internally generated cash flows. Because of the
significant reduction in debt and historically high prices for
copper, molybdenum and gold, our financial policy during most
of 2008 was designed to use our cash flow to invest in growth
projects with anticipated high rates of return and to return
excess cash flows to shareholders in the form of dividends
and share purchases.
During fourth-quarter 2008, there was a dramatic decline in
copper and molybdenum prices. After averaging $3.05 per
pound in 2006, $3.23 per pound in 2007 and $3.61 per pound for
the first nine months of 2008, London Metal Exchange (LME) spot
copper prices declined to a four-year low of $1.26 per pound in
December 2008 and averaged $1.78 per pound in fourth-quarter
2008. Additionally, while molybdenum markets have been strong
in recent years with prices averaging approximately $25 per
pound in 2006, $30 per pound in 2007 and $33 per pound for
the first nine months of 2008, molybdenum prices declined
significantly to a four-year low of $8.75 per pound in November
2008 and averaged approximately $16 per pound in fourth-
quarter 2008.
Although our long-term strategy of developing our resources to
their full potential remains in place, the severity of the decline in
copper and molybdenum prices and the deterioration of the
economic and credit environment during fourth-quarter 2008
have limited our ability to invest in growth projects and required
us to make adjustments to our near-term plans. Our near-term
strategy has been designed to protect liquidity while preserving
our large mineral resources and growth options for the longer
term; accordingly, our operating and financial plans were revised
to reflect the following changes:
•฀ Curtailment of copper production at high-cost North
America operations and of molybdenum production at the
Henderson molybdenum mine (refer to “Operations” for
further discussion);
•฀ Capital cost reductions, including deferral of most of
our project development activities and also reduced capital
spending on the Tenke Fungurume project and projects
in Indonesia (refer to “Development Projects” for further
discussion);
Management’s Discussion and Analysis
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 17