Freeport-McMoRan 2008 Annual Report Download - page 38

Management’s Discussion and Analysis
2007 Compared with 2006
PT Freeport Indonesia’s share of sales totaled approximately
1.1 billion pounds of copper and 2.2 million ounces of gold in
2007, compared with 1.2 billion pounds of copper and 1.7 million
ounces of gold in 2006. Lower copper sales volumes in 2007
resulted from mining in a relatively low-grade section of the
Grasberg open pit during the second half of 2007, partly offset by
higher ore grades during the first half of 2007 and higher recovery
rates. The increase in gold sales volumes in 2007 resulted from
higher ore grades and recovery rates.
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/per Ounce of Gold
The following tables summarize the unit net cash costs and
gross profit at our Indonesia mining operations. Refer to
“Production Revenues and Production Costs” for an explanation
of “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.
36 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
2008 2007
Co-Product Method Co-Product Method
By-Product By-Product
Method Copper Gold Method
Copper Gold
Revenues, after adjustments shown below $ 2.36 $ 2.36 $ 861.43 $ 3.32 $ 3.32 $ 680.74
Site production and delivery, before net noncash and nonrecurring costs
shown below 1.59 1.13 412.72 1.19 0.85 172.23
Gold and silver credits (0.97) – – (1.36) – –
Treatment charges 0.24 0.17 62.69 0.34 0.24 49.45
Royalty on metals 0.10 0.07 26.50 0.12 0.08 17.05
Unit net cash costs 0.96 1.37 501.91 0.29 1.17 238.73
Depreciation and amortization 0.20 0.14 52.09 0.17 0.12 25.54
Noncash and nonrecurring costs, net 0.03 0.02 7.18 0.04 0.03 5.90
Total unit costs 1.19 1.53 561.18 0.50 1.32 270.17
Revenue adjustments, primarily for pricing on prior period open sales 0.09 0.09 5.86 0.03 0.03 1.07
PT Smelting intercompany profit 0.01 0.01 4.18 0.01 0.01 1.71
Gross profit $ 1.27 $ 0.93 $ 310.29 $ 2.86 $ 2.04 $ 413.35
Consolidated sales
Copper (millions of recoverable pounds) 1,111 1,111 1,131 1,131
Gold (thousands of recoverable ounces) 1,182 2,185
Because of the fixed nature of a large portion of PT Freeport
Indonesia’s costs, unit costs vary significantly from period to
period depending on volumes of copper and gold sold during
the period. PT Freeport Indonesia has also experienced
significant increases in production costs in recent years
primarily as a result of higher energy costs and costs of other
consumables, higher mining and milling costs, labor costs and
other factors. Unit net cash costs, after gold and silver credits,
increased to $0.96 per pound of copper in 2008, compared with
$0.29 per pound in 2007, reflecting lower gold and silver credits
associated with lower gold volumes in 2008, higher input costs,
including higher mining rates and energy costs, and also
reflected the impact of changes in cost sharing with the joint
venture partner. Partly offsetting these increases were lower
treatment charges, which vary with the volume of metals sold
and the price of copper. Market rates for treatment charges
have decreased since 2006 and will vary based on PT Freeport
Indonesia’s customer mix.
Royalties vary with the volume of metals sold and the
prices of copper and gold. Royalties totaled $113 million ($0.10
per pound of copper) in 2008, compared with $133 million
($0.12 per pound of copper) in 2007. The reduction in royalties
for 2008 primarily reflects lower copper prices and lower gold
sales volumes.
Because certain assets are depreciated on a straight-line basis,
PT Freeport Indonesia’s unit depreciation rate varies with the
level of copper production and sales.
Assuming average copper prices of $1.50 per pound and
average gold prices of $800 per ounce in 2009 and achievement of
current 2009 sales estimates and revised estimates for energy,
currency exchange rates and other factors, we estimate that
average unit net cash costs for PT Freeport Indonesia, including