Freeport-McMoRan 2008 Annual Report Download - page 29

Management’s Discussion and Analysis
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 27
“Overview and Outlook” for further discussion). For 2009,
we estimate energy costs will approximate 20 percent of our
consolidated copper production costs.
2007 Compared with 2006
Consolidated production and delivery costs totaled $8.5 billion in
2007 compared with $2.5 billion in 2006. Higher production and
delivery costs in 2007 primarily reflected amounts associated
with the acquired copper and molybdenum operations in North
and South America ($6.0 billion), which included purchase
accounting impacts of $781 million principally associated with
increased inventory values.
Depreciation, Depletion and Amortization
2008 Compared with 2007
Consolidated depreciation, depletion and amortization expense
totaled $1.8 billion in 2008 compared with $1.2 billion in 2007.
The increase in depreciation, depletion and amortization expense
reflected higher purchase accounting impacts of $293 million
primarily related to a full twelve months in 2008, and also
reflected higher depreciation expense under the unit-of-production
method resulting from a full year of production from our North
and South America copper mines in 2008.
We estimate that our annual depreciation, depletion and
amortization expense for 2009 will approximate $1.0 billion. The
decrease in projected 2009 depreciation, depletion and amortization
expense, compared with 2008, primarily reflects the impact of
long-lived asset impairments recognized at December 31, 2008
(refer to “Critical Accounting Estimates – Asset Impairments” for
further discussion), and also reflects lower expense for assets that
are depreciated under the unit-of-production method.
2007 Compared with 2006
Consolidated depreciation, depletion and amortization expense
totaled $1.2 billion in 2007 compared with $228 million in 2006.
The increase in depreciation, depletion and amortization expense
in 2007 reflected amounts associated with the acquired Phelps
Dodge operations ($1.0 billion), which included purchase
accounting impacts of $595 million related to increased carrying
values of acquired property, plant and equipment.
LCM Inventory Adjustments
Inventories are required to be recorded at the lower of cost
or market. In connection with the 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 in
fourth-quarter 2008, we recognized charges of $782 million
($479 million to net loss or $1.26 per share) for LCM inventory
adjustments in 2008. These charges were based on prevailing
copper futures prices for three years, which ranged from
approximately $1.40 per pound to $1.50 per pound, and a
long-term average price of $1.60 per pound. Molybdenum prices
were assumed to average $8.00 per pound.
Selling, General and Administrative Expenses
2008 Compared with 2007
Consolidated selling, general and administrative expenses
totaled $269 million in 2008 compared with $466 million in 2007.
Lower selling, general and administrative expenses primarily
reflected lower incentive compensation costs in 2008 ($210
million) because of weaker financial results.
2007 Compared with 2006
Consolidated selling, general and administrative expenses
totaled $466 million in 2007 compared with $157 million in 2006.
Higher selling, general and administrative expenses in 2007
primarily reflected the additional amounts associated with the
acquired Phelps Dodge operations ($272 million) and higher
stock-based compensation costs ($39 million) primarily related
to second-quarter 2007 stock option grants.
Exploration and Research Expenses
2008 Compared with 2007
Consolidated exploration and research expenses totaled $292
million in 2008 compared with $145 million in 2007. We are
conducting exploration activities near our existing mines with
a focus on opportunities to expand reserves that will support
additional future production capacity in the large mineral districts
where we currently operate. Drilling activities were significantly
expanded in 2008, and we identified additional ore adjacent to
existing ore bodies. Results to date have been positive, providing
us with opportunities for significant future potential reserve
additions at Morenci, Sierrita and Bagdad in North America, at
Cerro Verde in South America and in the high potential Tenke
Fungurume district.
The number of drill rigs in operation, which expanded from 26
in March 2007 to approximately 100 in third-quarter 2008,
declined to approximately 44 at December 31, 2008, in response to
weak market conditions. We plan to incorporate the information
obtained through exploration activities into our future plans
during 2009, enabling a significant reduction in 2009 exploration
costs, as we analyze drilling results to further define our
significant resources. For 2009, exploration expenditures are
expected to approximate $75 million, compared with $248 million
in 2008.
2007 Compared with 2006
Consolidated exploration and research expenses totaled
$145 million in 2007 compared with $12 million in 2006. Higher
expenditures in 2007 primarily reflected exploration and
research expenses associated with the acquired Phelps Dodge
operations ($127 million).