Freeport-McMoRan 2008 Annual Report Download - page 36

Management’s Discussion and Analysis
The South 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 costs
and milling rates, labor costs and other factors. Unit net cash
costs, after by-product credits, increased to $1.14 per pound of
copper in 2008, compared with $1.03 per pound for the period
March 20, 2007, through December 31, 2007, reflecting higher
input costs, including higher mining costs and milling rates and
higher energy, acid and other commodity-based input costs. The
increase in input costs during 2008 was partly offset by higher
volumes, higher by-product credits and lower treatment charges.
Our South 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 South America copper mines averaged
$1.14 per pound and ranged from $0.96 per pound to $1.59 per
pound at the individual mines. Assuming average prices of $1.50
per pound of copper for 2009 and achievement of current 2009
sales and estimates for commodity-based input costs, we
estimate that average unit net cash costs, including gold credits,
for our South America copper mines would approximate $1.00 per
pound of copper in 2009 and would range from approximately
$0.90 per pound to $1.25 per pound at the individual mines.
Lower unit net cash costs at our South America copper mines for
2009, compared with 2008, reflect reduced input costs and
currency exchange rates, partly offset by mining lower ore
grades in 2009.
Noncash and nonrecurring costs for 2008 reflect lower
purchase accounting impacts related to increased carrying values
of acquired inventory, which totaled $46 million ($0.03 per
pound) in 2008 and $169 million ($0.14 per pound) in 2007. Noncash
and nonrecurring costs for 2008 also included charges for LCM
inventory adjustments totaling $10 million ($0.01 per pound).
Combined Unit Net Cash Costs per Pound of Copper
For comparative purposes, the following tables summarize unit
net cash costs at the South America copper mines for the
year ended December 31, 2007, which combines our historical
data beginning March 20, 2007, 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.
34 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
2008 2007
a
By-Product Co-Product By-Product Co-Product
Method Method Method Method
Revenues, excluding adjustments shown below $ 2.57 $ 2.57 $ 3.30 $ 3.30
Site production and delivery, before net noncash and nonrecurring costs
shown below 1.13 1.07 0.92 0.88
By-product credits (0.13) – (0.09) –
Treatment charges 0.14 0.14 0.20 0.20
Unit net cash costs 1.14 1.21 1.03 1.08
Depreciation, depletion and amortization 0.33 0.32 0.32 0.32
Noncash and nonrecurring costs, net 0.07 0.06 0.14 0.14
Total unit costs 1.54 1.59 1.49 1.54
Revenue adjustments, primarily for pricing on prior period open sales 0.15 0.15 0.06 0.06
Idle facility and other non-inventoriable costs (0.02) (0.02) (0.02) (0.02)
Gross profit $ 1.16 $ 1.11 $ 1.85 $ 1.80
Copper sales (millions of recoverable pounds) 1,521 1,521 1,177 1,177
a. Reflects the period from March 20, 2007, through December 31, 2007.
Gross Profit per Pound of Copper
The following tables summarize unit net cash costs and gross
profit at the South 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.
The below tables reflect unit net cash costs per pound of copper
under the by-product and co-product methods as the South
America copper mines also had small amounts of molybdenum,
gold and silver sales. 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.