Freeport-McMoRan 2008 Annual Report Download - page 80

Notes to Consolidated Financial Statements
78 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
reference to its proven and probable reserves as of December 31,
1994, and 60 percent of all remaining cash flow.
The joint venture agreement provides for adjustments to the
specified annual amounts of copper, gold and silver attributable
100 percent to PT Freeport Indonesia upon the occurrence of
certain events that cause an extended interruption in production
to occur, including events such as the fourth-quarter 2003
Grasberg open-pit slippage and debris flow. As a result of the
Grasberg slippage and debris flow events, the 2004 specified
amounts attributable 100 percent to PT Freeport Indonesia were
reduced by 172 million recoverable pounds for copper and
272,000 recoverable ounces for gold. Pursuant to agreements
in 2005 and early 2006 with Rio Tinto, these reductions were
partially offset by increases in the specified amounts attributable
100 percent to PT Freeport Indonesia totaling 62 million recoverable
pounds for copper and 170,000 recoverable ounces for gold in 2005,
and 110 million recoverable pounds for copper and 102,000
recoverable ounces for gold in 2021. The payable to Rio Tinto for
its share of joint venture cash flows was less than $1 million at
December 31, 2008, and $68 million at December 31, 2007.
Under the joint venture arrangements, Rio Tinto funded
$100 million in 1996 for approved exploration costs in the areas
covered by Contracts of Work held by FCX subsidiaries. Agreed-
upon exploration costs in the joint venture areas are shared 60
percent by FCX and 40 percent by Rio Tinto. In September 2008,
Rio Tinto notified FCX that it no longer planned to participate in
exploration joint ventures in the PT Nabire Bakti Mining and
PT Irja Eastern Minerals Contract of Work areas in Indonesia for
the remainder of 2008. As a result, as long as Rio Tinto continues
not to fund these exploration projects, FCX has the option to fund
100 percent of future exploration costs in these areas and Rio
Tinto’s interest in these areas will decline over time in accor-
dance with the joint venture agreement. Rio Tinto has the option
to resume participation in PT Irja Eastern Minerals on a monthly
basis and in PT Nabire Bakti Mining on an annual basis. Rio Tinto
continues to participate in exploration joint ventures in
PT Freeport Indonesia’s Contract of Work areas.
Sumitomo. FCX owns an 85 percent undivided interest in
Morenci via an unincorporated joint venture. The remaining 15
percent is owned by Sumitomo, a jointly owned subsidiary of
Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation.
Each partner takes in kind its share of Morenci’s production.
FMC purchased 90 million pounds of Morenci’s copper cathode
from Sumitomo for $281 million during 2008 and 87 million
pounds for $299 million during the period March 20, 2007 to
December 31, 2007. FCX had a $2 million net receivable from
Sumitomo at December 31, 2008, and a $10 million net payable
at December 31, 2007.
Investment in PT Smelting. PT Smelting, an Indonesian
company, operates a smelter/refinery in Gresik, Indonesia. During
2006, PT Smelting completed an expansion of its production
capacity to 275,000 metric tons of copper per year from 250,000
metric tons. PT Freeport Indonesia, Mitsubishi Materials
Corporation (Mitsubishi Materials), Mitsubishi Corporation
(Mitsubishi) and Nippon Mining & Metals Co., Ltd. (Nippon) own
25 percent, 60.5 percent, 9.5 percent, and 5 percent, respectively,
of the outstanding PT Smelting common stock.
PT Freeport Indonesia’s contract with PT Smelting provides for
the supply of 100 percent of the copper concentrate requirements
necessary for PT Smelting to produce 205,000 metric tons of
copper annually (essentially the smelter’s original design
capacity) on a priority basis. For the first 15 years of PT Smelting’s
commercial operations, beginning December 1998, PT Freeport
Indonesia agreed that the combined treatment and refining
charges (fees paid to smelters by miners) would approximate
market rates, but will not fall below specified minimum rates. The
minimum rate, applicable to the period April 27, 2008 to April 27,
2014, is to be determined annually and be sufficient to cover
PT Smelting’s annual cash operating costs (net of credits and
including costs of debt service) for 205,000 metric tons of copper.
The maximum rate is $0.30 per pound. The agreement is an
amendment to the long-term sales contract, which is pending
approval from the Department of Energy and Mineral Resources
of the Government of Indonesia. PT Freeport Indonesia also sells
copper concentrate to PT Smelting at market rates, which are
not subject to a minimum or maximum rate, for quantities in
excess of 205,000 metric tons of copper annually.
FCX’s investment in PT Smelting totaled $99 million at
December 31, 2008, and $71 million at December 31, 2007.
PT Smelting had project-specific debt, nonrecourse to
PT Freeport Indonesia, totaling $240 million at December 31, 2008,
and $219 million at December 31, 2007. PT Freeport Indonesia
had a trade receivable from PT Smelting totaling $37 million at
December 31, 2008, and $91 million at December 31, 2007.
NOTE 4. DISCONTINUED OPERATIONS
On October 31, 2007, FCX sold its international wire and cable
business, Phelps Dodge International Corporation (PDIC), for $735
million, which resulted in a net loss of $14 million ($9 million to net
income) for transaction-related costs. The transaction generated
after-tax proceeds of approximately $650 million (net proceeds of
$597 million after taxes, transaction-related costs and PDIC cash).
As a result of the sale, the operating results of PDIC have
been removed from continuing operations and reported as
discontinued operations in the consolidated statements of
operations. Selected financial information that has been reported
as discontinued operations for the period March 20, 2007, through
December 31, 2007, follows:
Revenues $ 937
Operating income 78
Provision for income taxes (24)
Income from discontinued operations 35