Freeport-McMoRan 2008 Annual Report Download - page 34

Management’s Discussion and Analysis
Unit net cash costs, after by-product credits, for the North
America copper mines increased to $0.86 per pound of copper in
2007, compared with $0.61 per pound of copper in 2006, primarily
because of higher input costs associated with labor, maintenance,
operating supplies and energy, and also reflected higher costs
associated with the ramp-up of the Morenci mill operations.
Partly offsetting these higher costs were higher molybdenum
credits in 2007 because of higher molybdenum prices.
South America Copper Mines
We have four operating copper mines in South America – Cerro
Verde in Peru, and Candelaria, Ojos del Salado and El Abra in
Chile. We own a 53.56 percent interest in Cerro Verde, an 80
percent interest in both Candelaria and Ojos del Salado and a 51
percent interest in El Abra. These operations are consolidated in
our financial statements, with outside ownership reported as
minority interests.
The South America copper mines include open-pit and
underground mining, sulfide ore concentrating, leaching and
SX/EW operations. In addition to copper, the Cerro Verde mine
produces molybdenum concentrates as a by-product, and
the Candelaria and Ojos del Salado mines produce gold and silver
as by-products. Production from our South America copper
mines is sold as copper concentrate or copper cathode under
long-term contracts.
In response to the severity of the declines in copper and
molybdenum prices and the deterioration of market conditions in
fourth-quarter 2008, operating plans were revised at our South
America copper mines. The revised operating plans principally
reflect the incorporation of reduced input costs and the impacts of
32 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
2007
a
2006
a
Co-Product Method Co-Product Method
By-Product By-Product
Method Copper Molybdenum
b
Method Copper Molybdenum
b
Revenues, excluding adjustments primarily for
pricing on prior period open sales and hedging $ 3.25 $ 3.25 $ 29.31 $ 3.06 $ 3.06 $ 24.85
Site production and delivery, before net noncash
and nonrecurring costs $ 1.43 $ 1.23 $ 10.42 $ 1.14 $ 0.93 $ 9.34
By-product credits
b
(0.66) – – (0.60) – –
Treatment charges 0.09 0.09 – 0.07 0.06 –
Combined unit net cash costs $ 0.86 $ 1.32 $ 10.42 $ 0.61 $ 0.99 $ 9.34
Copper sales (millions of recoverable pounds) 1,316 1,316 1,292 1,292
Molybdenum sales (millions of recoverable pounds)
c
30 31
a. For comparative purposes, 2007 combines our historical data beginning March 20, 2007, with Phelps Dodge pre-acquisition data through March 19, 2007, and 2006 reflects
Phelps Dodge pre-acquisition data. As the pre-acquisition data represents the results of these operations under Phelps Dodge management, such combined data is not necessarily
indicative of what past results would have been under FCX management or of future operating results.
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.
The fair values of acquired inventory and property, plant and
equipment were based on preliminary estimates in 2007, with
adjustments made until such values were finalized in first-quarter
2008; accordingly, depreciation, depletion and amortization
reflect changes in purchase accounting impacts associated with
adjustments to the carrying values of these assets.
The increase in noncash and nonrecurring costs for 2008
reflects charges for LCM inventory adjustments in 2008 totaling
$661 million ($0.46 per pound), partly offset by lower purchase
accounting impacts related to increased carrying values of
acquired inventory, which totaled $24 million ($0.02 per pound)
in 2008 and $344 million ($0.33 per pound) in 2007.
Revenue adjustments primarily reflect unrealized losses on
copper derivative contracts entered into with our U.S. copper rod
customers, which allow us to receive market prices in the month
of shipment while the customer pays the fixed price they
requested. In 2007, revenue adjustments also reflected mark-to-
market accounting adjustments on the 2007 copper price
protection program totaling $175 million ($0.17 per pound).
Combined Unit Net Cash Costs per Pound of Copper
and Molybdenum
For comparative purposes, the following tables summarize
unit net cash costs at the North America copper mines for the
year ended December 31, 2007, which reflects our historical
data beginning March 20, 2007, combined with Phelps Dodge
pre-acquisition data through March 19, 2007, and for the year
ended December 31, 2006, which reflects Phelps Dodge
pre-acquisition data. Refer to “Product Revenues and
Production Costs” for a reconciliation of unit net cash costs per
pound to revenues and production and delivery costs included
in FCX’s pro forma consolidated financial statements (refer to
Note 18) for the year ended December 31, 2007, and as reported
in Phelps Dodge’s Form 10-K for the year ended December 31,
2006. As the pre-acquisition data represents the results of
these operations under Phelps Dodge management, such
combined data is not necessarily indicative of what past results
would have been under FCX management or of future
operating results.