Freeport-McMoRan 2008 Annual Report Download - page 20

Management’s Discussion and Analysis
•฀ Aggressive cost control, including workforce reductions,
reduced equipment purchases that were planned to
support expansion projects, a reduction in material and
supplies inventory and reductions in exploration, research
and administrative costs; and
•฀ The suspension of our annual common stock dividend (refer
to “Capital Resources and Liquidity – Financing Activities” for
further discussion).
While we view the long-term outlook for our business
positively, supported by limitations on supplies of copper and by
the requirements for copper in the world’s economy, we have
responded to the sudden downturn and uncertain near-term
outlook and will continue to adjust our operating strategy as
market conditions change.
At December 31, 2008, we had $872 million in consolidated cash
($454 million of which was available to our parent company). We
also had $150 million of borrowings and $74 million of letters of
credit issued under our $1.5 billion revolving credit facilities,
resulting in availability of approximately $1.3 billion ($926 million of
which could be used for additional letters of credit). During 2009,
we may use the facilities from time to time for working capital and
short-term funding requirements, but do not intend to use the
facilities for long-term funding. In addition, in February 2009, we
completed a public offering of 26.8 million shares of FCX common
stock and realized net proceeds of approximately $740 million,
which will be used for general corporate purposes (refer to “Capital
Resources and Liquidity – Financing Activities” for further
discussion). We have no significant debt maturities in the near-term
(refer to “Debt Maturities and Other Contractual Obligations”).
The sharp declines in copper and molybdenum prices during
fourth-quarter 2008, among other factors, significantly impacted
our consolidated financial results for 2008. Net loss applicable to
common stock totaled $11.3 billion ($29.72 per share) in 2008,
which included charges totaling $13.1 billion ($34.29 per share)
for long-lived asset and goodwill impairment charges and lower
of cost or market (LCM) inventory adjustments. Following is
additional discussion of these charges:
•฀
Impairment charges – During fourth-quarter 2008, we evaluated
the carrying values of our long-lived assets, including goodwill
associated with the acquisition of Phelps Dodge, for
impairment. These evaluations resulted in the recognition of
impairment charges of $10.9 billion ($6.6 billion to net loss or
$17.34 per share) associated with long-lived assets and $6.0
billion ($6.0 billion to net loss or $15.69 per share) associated
with goodwill. Refer to Notes 2 and 7 and “Critical Accounting
Estimates – Asset Impairments” for further discussion of these
impairment charges.
•฀
LCM inventory adjustments – Inventories are required to be
recorded at the lower of cost or market. In connection with the
March 2007 acquisition of Phelps Dodge, acquired inventories,
including long-term mill and leach stockpiles, were recorded at
fair value using near-term price forecasts reflecting the
then-current price environment and management’s projections
for long-term average metal prices. As a result of the declines
in copper and molybdenum prices during fourth-quarter 2008,
we recorded charges for LCM inventory adjustments totaling
$782 million ($479 million to net loss or $1.26 per share).
Refer to “Consolidated Results” for further discussion of our
consolidated financial results for the years ended December 31,
2008, 2007 and 2006.
Outlook
Following is a summary of our actual results for 2008 and our
projected consolidated sales volumes for 2009:
2008 2009
(Actual) (Projected)
Copper (billions of recoverable pounds):
North America copper mines 1.4 1.1
South America copper mines 1.5 1.4
Indonesia mining 1.1 1.3
Africa mining
a
– 0.1
4.1
b
3.9
Gold (millions of recoverable ounces)
Indonesia mining 1.2 2.1
South America copper mines 0.1 0.1
1.3 2.2
Molybdenum (millions of recoverable pounds)
c
71 60
a. Represents projected sales from the Tenke Fungurume copper and cobalt mine,
which is expected to commence production during the second half of 2009.
b. Represents the sum of copper sales before rounding.
c. Includes sales of molybdenum produced as a by-product at our North and South
America copper mines.
Estimated sales volumes of approximately 3.9 billion pounds of
copper for 2009 are lower than 2008 sales of 4.1 billion pounds
primarily reflecting the effects of curtailed production rates at our
North America copper mines, partly offset by higher volumes in
Indonesia as a result of mining in a higher-grade section of the
Grasberg open pit and also includes additional volumes from the
Tenke Fungurume copper and cobalt project, which is expected
to commence production during the second half of 2009. Estimated
sales volumes of approximately 2.2 million ounces of gold for 2009
are higher than 2008 sales of 1.3 million ounces as a result of
projected mining in a higher-grade section of the Grasberg open
pit. Estimated sales volumes of approximately 60 million pounds
of molybdenum for 2009 are lower than 2008 sales of 71 million
pounds reflecting curtailed production rates at our Henderson
molybdenum mine and adjustments to by-product molybdenum
production plans at our North and South America copper mines.
Consolidated revenues, operating cash flows and net income
vary significantly with fluctuations in the market prices of copper,
gold and molybdenum, sales volumes and other factors. Based
on projected consolidated sales volumes for 2009 and assuming
18 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report