Freeport-McMoRan 2008 Annual Report Download - page 72

Notes to Consolidated Financial Statements
70 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
The value assigned to exploration potential was determined by
interpreting the known exploration information and exploration
results, including geological data and/or geological information,
that were available as of the acquisition date.
Carrying amounts assigned to VBPP are not charged to
expense until the VBPP becomes associated with additional
proven and probable reserves and they are produced or the VBPP
is determined to be impaired. Additions to proven and probable
reserves for properties with VBPP will carry with them the value
assigned to VBPP at the date FCX acquired Phelps Dodge, less
any impairment amounts.
Goodwill. FCX recorded goodwill as a result of the acquisition
of Phelps Dodge. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, “Goodwill and Other
Intangible Assets,” goodwill has an indefinite useful life and is
not amortized, but rather is tested for impairment at least
annually, unless events occur or circumstances change between
annual tests that would more likely than not reduce the fair value
of a related reporting unit below its carrying amount. FCX
uses discounted cash flow models to determine if the carrying
value of the reporting unit is less than the fair value of the
reporting unit. FCX’s annual impairment test in the fourth quarter
of 2008 resulted in the full impairment of goodwill (see Note 7
for further discussion).
Intangible Assets and Liabilities. FCX recorded intangible
assets and liabilities as a result of the acquisition of Phelps
Dodge. Indefinite-lived intangibles primarily include water rights.
Definite-lived intangibles include favorable and unfavorable
contracts (primarily related to molybdenum sales contracts,
treatment and refining contract rates, power contracts and tire
contracts), royalty payments, patents and process technology.
The fair value of identifiable intangible assets was estimated
based principally upon comparable market transactions and
discounted future cash flow projections. The ranges for estimated
useful lives are one to 10 years for molybdenum sales, treatment
and refining, power and tire contracts; one to 12 years for royalty
payments; and principally 10 to 20 years for patents and process
technology. All indefinite-lived intangible assets are subject
to impairment testing at least annually, unless events occur or
circumstances change between annual tests that would more
likely than not reduce the indefinite-lived intangible asset’s fair
value below its carrying value.
Asset Impairment. FCX reviews and evaluates its long-lived
assets for impairment when events or changes in circumstances
indicate that the related carrying amounts may not be
recoverable. Long-lived assets, other than goodwill and
indefinite-lived intangible assets, are evaluated for impairment
under the two-step model established by SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets.” An impairment loss is measured as the amount by
which asset carrying value exceeds its fair value. Fair value is
generally determined using valuation techniques such as
estimated future cash flows. An impairment is considered to
exist if total estimated future cash flows on an undiscounted
basis are less than the carrying amount of the asset.
In evaluating mining operations’ long-lived assets for
recoverability, estimates of after-tax undiscounted future cash
flows of FCX’s individual mining operations are used, with
impairment losses measured by reference to fair value. As quoted
market prices are unavailable for FCX’s individual mining
operations, fair value is determined through the use of
discounted estimated future cash flows. Estimated cash flows
used to assess recoverability of long-lived assets and measure
the fair value of FCX’s mining operations are derived from current
business plans developed using near-term price forecasts
reflective of the current price environment and management’s
projections for long-term average metal prices. Estimates
of future cash flows include near- and long-term metal price
assumptions; estimates of commodity-based and other input
costs; proven and probable reserve estimates; and the use of
appropriate current escalation and discount rates.
Deferred Mining Costs. In accordance with EITF Issue No. 04-6,
“Accounting for Stripping Costs Incurred during Production in
the Mining Industry” (EITF 04-6), stripping costs (i.e., the costs
of removing overburden and waste material to access mineral
deposits) incurred during the production phase of a mine are
considered variable production costs and are included as a
component of inventory produced during the period in which
stripping costs are incurred. Major development expenditures,
including stripping costs to prepare unique and identifiable
areas outside the current mining area for future production that
are considered to be pre-production mine development, are
capitalized and amortized on the unit-of-production method
based on estimated recoverable proven and probable
reserves for the ore body benefited. However, where a second
or subsequent pit or major expansion is considered to be a
continuation of existing mining activities, stripping costs are
accounted for as current production cost and a component of
the associated inventory.
Prior to the adoption of EITF 04-6, FCX applied the deferred
mining cost method in accounting for its post-production
stripping costs, which FCX referred to as overburden removal
costs. The deferred mining cost method was used by some
companies in the metals mining industry; however, industry
practice varied. The deferred mining cost method matched the
cost of production with the sale of the related metal from the
open pit by assigning each metric ton of ore removed an
equivalent amount of overburden tonnage, thereby averaging
overburden removal costs over the life of the mine. The mining
cost capitalized in inventory and the amounts charged to cost
of goods sold did not represent the actual costs incurred to mine
the ore in any given period. Upon adoption of EITF 04-6 on