Freeport-McMoRan 2008 Annual Report Download - page 78

Notes to Consolidated Financial Statements
76 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
exploration, research and administrative costs; and (iv) suspension
of FCX’s annual common stock dividend.
In connection with these significant adverse changes during
the fourth quarter of 2008, FCX evaluated its long-lived assets,
other than goodwill and indefinite-lived intangible assets, for
impairment as of December 31, 2008. Goodwill and indefinite-
lived intangible assets are evaluated for impairment annually as
of December 31.
FCX’s asset impairment evaluations, including its annual
goodwill impairment test, required FCX to make several
assumptions in determining estimates of future cash flows to
determine fair value of its individual mining operations,
including: near and long-term metal price assumptions; estimates
of commodity-based and other input costs; proven and probable
reserve estimates, including any costs to develop the reserves
and the timing of producing the reserves; and the use of
appropriate current escalation and discount rates. Projected
long-term average metal prices represented the most significant
assumption used in the cash flow estimates. In connection
with the March 2007 acquisition of Phelps Dodge, FCX allocated
the $25.8 billion purchase price to the estimated fair values of
net assets acquired, including $6.2 billion for goodwill. Metal price
projections used to value the net assets acquired at the
acquisition date ranged from near-term prices of $2.98 per pound
for copper declining over an eight-year period to $1.20 per
pound and $26.20 per pound for molybdenum declining over a
five-year period to $8.00 per pound, reflecting price expectations
at that time. FCX’s impairment evaluations at December 31,
2008, were based on price assumptions reflecting prevailing
copper futures prices for three years, which ranged from
approximately $1.40 per pound to $1.50 per pound, and a long-term
average price of $1.60 per pound. Molybdenum prices were
assumed to average $8.00 per pound.
FCX’s evaluation of long-lived assets (other than goodwill) for
impairment resulted in the recognition of asset impairment
charges totaling $10.9 billion ($6.6 billion to net loss or $17.34 per
diluted share) for 2008. See Note 7 for discussion of impairment
charges relating to goodwill.
Other charges relating to FCX’s revised operating plans in the
fourth quarter of 2008 include pension and postretirement
charges of $61 million ($37 million to net loss or $0.10 per diluted
share) for special retirement benefits and curtailments and
restructuring charges of $50 million ($30 million to net loss or
$0.08 per diluted share) for employee severance and benefit
costs, contract termination costs and other project cancellation
costs. The restructuring charge reflects workforce reductions of
approximately 3,000 employees and other charges resulting from
revised operating plans that reflect a 25 percent reduction in
mining and crushed-leach rates at the Morenci mine in Arizona,
a 50 percent reduction in mining and stacking rates at the Safford
mine in Arizona, a 50 percent reduction in the mining rate at the
Tyrone mine in New Mexico, suspension of mining and milling
activities at the Chino mine in New Mexico, and a 25 percent
reduction in annual production at the Henderson molybdenum
mine in Colorado. In addition, the revised operating plans
included decisions to defer certain capital projects, including the
(i) incremental expansion projects at the Sierrita and Bagdad
mines in Arizona, the Cerro Verde mine in Peru and the sulfide
project at the El Abra mine in Chile, (ii) the planned restart of the
Miami mine in Arizona and (iii) the suspension of construction
activities associated with the restart of the Climax molybdenum
mine in Colorado. In the first quarter of 2009, Morenci’s operating
plans were revised to reflect an additional reduction in mining
and crushed-leach rates for a total 50 percent reduction.
The following table reflects 2008 activities associated with the
liabilities (included in accounts payable and accrued liabilities)
incurred in connection with the restructuring:
2008 December 31,
Additions Payments 2008
North America Copper Mines
Morenci
Employee severance and benefit costs $ 3 $ (1) $ 2
Sierrita
Contract cancellation and other costs 2 (2) –
Other mines
Employee severance and benefit costs
12 – 12
Contract cancellation and other costs 6 (5) 1
23 (8) 15
South America Copper Mines
Cerro Verde
Contract cancellation and other costs 1 – 1
Other mines
Employee severance and benefit costs 6 – 6
7 – 7
Africa
Employee severance and benefit costs 2 – 2
Molybdenum
Employee severance and benefit costs 1 – 1
Contract cancellation and other costs 3 (3) –
4 (3) 1
Rod & Refining
Employee severance and benefit costs 4 – 4
Corporate & Other
Employee severance and benefit costs 7 (1) 6
Contract cancellation and other costs 3 – 3
10 (1) 9
Total $ 50 $ (12) $ 38
NOTE 3. OWNERSHIP IN SUBSIDIARIES, JOINT VENTURES
AND INVESTMENT IN PT SMELTING
Ownership in Subsidiaries. On March 19, 2007, FMC became a
wholly owned subsidiary of FCX. FMC is a fully integrated
producer of copper and molybdenum, with mines in North
America and South America, copper and molybdenum conversion
facilities, and several development projects, including Tenke
Fungurume in the Democratic Republic of Congo (DRC). At