Freeport-McMoRan 2008 Annual Report Download - page 33

Management’s Discussion and Analysis
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 31
The North America copper mines have experienced production
cost increases in recent years primarily as a result of higher
energy costs and costs of other consumables, higher mining and
milling rates, labor costs and other factors. Unit net cash costs,
after by-product credits, increased to $1.33 per pound of copper
in 2008, compared with $0.87 per pound of copper for the period
March 20, 2007, through December 31, 2007, primarily reflecting
higher input costs, including higher mining costs and milling
rates, higher energy and acid costs and higher costs associated
with Safford as the mine ramped up to full production rates.
Our operating North America copper mines have varying
cost structures because of differences in ore grades and ore
characteristics, processing costs, by-products and other factors.
During 2008, unit net cash costs for the North America copper
mines averaged $1.33 per pound and ranged from a net credit of
$0.89 per pound to net costs of $1.92 per pound at the individual
mines. Based on current operating plans and assuming average
prices of $1.50 per pound of copper and $9.00 per pound of
molybdenum for 2009 and estimates for commodity-based input
costs, we estimate that average unit net cash costs, including
molybdenum credits, for our North America copper mines would
approximate $1.17 per pound of copper in 2009 and would range
from approximately $0.90 per pound to $1.25 per pound at the
individual mines. If copper prices were to decline significantly
from current levels, our operating plans for the North America
copper mines would be revised further.
2008 2007
a
Co-Product Method Co-Product Method
By-Product By-Product
Method Copper Molybdenum
b
Method Copper Molybdenum
b
Revenues, excluding adjustments shown below $ 3.07 $ 3.07 $ 30.25 $ 3.40 $ 3.40 $ 30.69
Site production and delivery, before net noncash
and nonrecurring costs shown below 1.88 1.63 12.67 1.46 1.25 10.85
By-product credits
b
(0.64) – – (0.69) – –
Treatment charges 0.09 0.09 – 0.10 0.10 –
Unit net cash costs 1.33 1.72 12.67 0.87 1.35 10.85
Depreciation, depletion and amortization 0.53 0.46 2.81 0.47 0.40 2.89
Noncash and nonrecurring costs, net 0.52 0.49 1.34 0.35 0.33 0.15
Total unit costs 2.38 2.67 16.82 1.69 2.08 13.89
Revenue adjustments, primarily for pricing on
prior period open sales and hedging (0.05) (0.05) – (0.20) (0.20) –
Idle facility and other non-inventoriable costs (0.06) (0.06) (0.05) (0.05) (0.05) (0.03)
Gross profit $ 0.58 $ 0.29 $ 13.38 $ 1.46 $ 1.07 $ 16.77
Copper sales (millions of recoverable pounds) 1,430 1,430 1,038 1,038
Molybdenum sales (millions of recoverable pounds)
c
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a. Reflects the period from March 20, 2007, through December 31, 2007.
b. Molybdenum by-product credits and revenues reflect volumes produced at market-based pricing and also include tolling revenues at Sierrita.
c. Reflects molybdenum produced by the North America copper mines.
2007 Compared with 2006
Copper sales from the North America mines totaled 1.3 billion
pounds for both the combined year 2007 and in 2006. The slight
increase in copper sales volumes during 2007 primarily reflected
higher production from mill operations resulting from higher
ore grades and the incremental production from the Morenci mill
because of a full year of concentrator activity in 2007. These
increases were partly offset by lower production from SX/EW
operations in 2007 because of lower ore grades.
Unit Net Cash Costs. Unit net cash costs per pound of copper is
a measure intended to provide investors with information about
the cash-generating capacity of our mining operations expressed
on a basis relating to the primary metal product for our respective
operations. We use this measure for the same purpose and for
monitoring operating performance by our mining operations. This
information differs from measures of performance determined in
accordance with U.S. GAAP and should not be considered in
isolation or as a substitute for measures of performance
determined in accordance with U.S. GAAP. This measure is
presented by other mining companies, although our measure
may not be comparable to similarly titled measures reported
by other companies.
Gross Profit per Pound of Copper and Molybdenum
The following tables summarize unit net cash costs and gross profit
at the North America copper mines (which were acquired on
March 19, 2007) for the year ended December 31, 2008, and for
the period March 20, 2007, through December 31, 2007. Refer to
“Product Revenues and Production Costs” for an explanation of the
“by-product” and “co-product” methods and a reconciliation of
unit net cash costs per pound to production and delivery costs
applicable to sales reported in our consolidated financial statements.