Freeport-McMoRan 2008 Annual Report Download - page 70

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation. The consolidated financial statements of
Freeport-McMoRan Copper & Gold Inc. (FCX) include the
accounts of those subsidiaries where FCX directly or indirectly
has more than 50 percent of the voting rights and has the right to
control significant management decisions. The most significant
entities that FCX consolidates include its 90.64 percent-owned
subsidiary PT Freeport Indonesia and its wholly owned
subsidiaries, Freeport-McMoRan Corporation (FMC, formerly
Phelps Dodge Corporation) and Atlantic Copper, S.A. (Atlantic
Copper). FCX acquired Phelps Dodge Corporation (Phelps
Dodge) on March 19, 2007. FCX’s results of operations include
Phelps Dodge’s results beginning March 20, 2007 (see Note 18).
FCX changed Phelps Dodge’s legal name to Freeport-McMoRan
Corporation in 2008; therefore, references to FMC and Phelps
Dodge in these notes represent the same entity. FCX’s
unincorporated joint ventures with Rio Tinto plc (Rio Tinto) and
Sumitomo Metal Mining Arizona, Inc. (Sumitomo) are reflected
using the proportionate consolidation method (see Note 3).
All significant intercompany transactions have been eliminated.
Dollar amounts in tables are stated in millions, except per
share amounts.
Investments in unconsolidated companies owned 20 percent or
more are recorded using the equity method. Investments in
companies owned less than 20 percent, and for which FCX does
not exercise significant influence, are carried at cost.
Use of Estimates. The preparation of FCX’s financial statements
in conformity with accounting principles generally accepted in
the United States (U.S.) requires management to make estimates
and assumptions that affect the amounts reported in these
financial statements and accompanying notes. The more
significant areas requiring the use of management estimates
include fair values of assets acquired and liabilities assumed in
the acquisition of Phelps Dodge; mineral reserve estimation;
useful asset lives for depreciation, depletion and amortization;
reclamation and closure costs; environmental obligations;
estimates of recoverable copper in mill and leach stockpiles;
pension, postretirement, postemployment and other employee
benefits; deferred taxes and valuation allowances; reserves for
contingencies and litigation; and asset impairment, including
estimates used to derive future cash flows associated with those
assets. Actual results could differ from those estimates.
Foreign Currencies. For foreign subsidiaries whose functional
currency is the local currency, assets and liabilities are translated
at current exchange rates, while revenues and expenses are
translated at average rates in effect for the period. The related
translation gains and losses are included in accumulated other
comprehensive income (loss) within stockholders’ equity.
For foreign subsidiaries whose functional currency is the U.S.
dollar, assets receivable and liabilities payable in cash are
translated at current exchange rates, and inventories and other
non-monetary assets and liabilities are translated at historical
rates. Gains and losses resulting from translation of such account
balances are included in operating results, as are gains and
losses from foreign currency transactions.
Cash Equivalents. Highly liquid investments purchased with
maturities of three months or less are considered cash equivalents.
Inventories. As shown in Note 5, the largest components of
inventories include finished goods (primarily concentrates and
cathodes) at mining operations, concentrates and work-in-
process at Atlantic Copper’s smelting and refining operations,
and materials and supplies inventories. Inventories of materials
and supplies, as well as salable products, are stated at the lower
of weighted-average cost or market. Costs of finished goods and
work-in-process (i.e., not materials and supplies) inventories
include labor and benefits, supplies, energy, depreciation,
depletion, amortization, site overhead costs, and other necessary
costs associated with the extraction and processing of ore,
including, depending on the process, mining, haulage, milling,
concentrating, smelting, leaching, solution extraction, refining,
roasting and chemical processing. Corporate general and
administrative costs are not included in inventory costs.
Work-in-Process. In-process inventories represent materials that
are currently in the process of being converted to a salable
product. Conversion processes for mining operations vary
depending on the nature of the copper ore and the specific
mining operation. For sulfide ores, processing includes milling
and concentrating and results in the production of copper and
molybdenum concentrates or, alternatively, copper cathode by
concentrate leaching. For oxide ores and certain secondary
sulfide ores, processing includes leaching of stockpiles, solution
extraction and electrowinning (SX/EW) and results in the
production of copper cathodes. In-process material is measured
based on assays of the material included in these processes and
projected recoveries. In-process inventories are valued based on
the costs incurred to various points in the process, including
depreciation relating to associated process facilities. For Atlantic
Copper, in-process inventories represent copper concentrates at
various stages of conversion into anodes and cathodes. Atlantic
Copper’s in-process inventories are valued at the weighted-
average cost of the material fed to the smelting and refining
process plus in-process conversion costs.
Finished Goods. Finished goods include salable products (e.g.,
copper and molybdenum concentrates, copper anodes, copper
cathodes, copper rod, copper wire, molybdenum oxide, high-
purity molybdenum chemicals and other metallurgical products).
Finished goods are valued based on the weighted-average cost of
source material plus applicable conversion costs relating to
associated process facilities.
Notes to Consolidated Financial Statements
68 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report