Freeport-McMoRan 2011 Annual Report Download - page 103

2011 ANNUAL REPORT | 101
on certain goods imported aer the year 2000. e amount of such
taxes and related penalties under this view would be signicant.
PT Freeport Indonesia believes that, pursuant to the terms of its
Contract of Work, it is only required to pay value added taxes on
these types of goods imported aer December 30, 2009. PT Freeport
Indonesia has not received a formal assessment and is working
with the applicable government authorities to resolve this matter.
NOTE 14. Commitments and Guarantees
Operating Leases. FCX leases various types of properties, including
oces and equipment. A summary of future minimum rentals
under non-cancelable leases at December31,2011, follows:
2012 $ 24
2013 18
2014 15
2015 15
2016 12
Thereafter 116
Total payments $ 200
Minimum payments under operating leases have not been reduced
by aggregate minimum sublease rentals, which are minimal. Total
aggregate rental expense under operating leases was $70 million in
2011, $64 million in 2010 and $74 million in 2009.
Contractual Obligations. Based on applicable prices at December 31,
2011, FCX has unconditional purchase obligations of $2.1 billion,
primarily comprising the procurement of copper concentrates and
cathodes ($1.1 billion), electricity ($338 million), transportation
services ($293 million) and oxygen ($128 million) that are essential
to its operations worldwide. Some of FCX’s unconditional purchase
obligations are settled based on the prevailing market rate for the
service or commodity purchased. In some cases, the amount of the
actual obligation may change over time because of market conditions.
Obligations for copper concentrates and cathodes provide for
deliveries of specied volumes, at market-based prices, to Atlantic
Copper and the North America copper mines. Electricity obligations
are primarily for contractual minimum demand at the South
America and Tenke Fungurume mines. Transportation obligations
are primarily for South America contracted ocean freight and for
North America rail freight. Oxygen obligations provide for deliveries
of specied volumes, at xed prices, primarily to Atlantic Copper.
FCX’s future commitments associated with unconditional
purchase obligations total $1.3 billion in 2012, $311 million in 2013,
$86 million in 2014, $61 million in 2015, $52 million in 2016 and
$237 million thereaer. During 2011, 2010 and 2009, FCX fullled
its minimum contractual purchase obligations or negotiated
settlements in those situations in which it terminated an agreement
containing an unconditional obligation.
Mining Contracts. Indonesia. FCX is entitled to mine in
Indonesia under the Contract of Work between PTFreeport
Indonesia and the Government of Indonesia. e original Contract
of Work was entered into in 1967 and was replaced with a new
Contract of Work in 1991. e initial term of the current Contract
of Work expires in 2021, but can be extended by PT Freeport
Indonesia for two 10-year periods, subject to Indonesian
government approval, which pursuant to the Contract of Work
cannot be withheld or delayed unreasonably. Given the importance
of contracts of work under the Indonesian legal system and
PT Freeport Indonesia’s approximately 40 years of working with
the Indonesian government, which included entering into the
Contract of Work in 1991 well before the expiration of the 1967
Contract of Work, PT Freeport Indonesia fully expects that the
government will approve the extensions as long as it continues to
comply with the terms of the Contract of Work.
In July 2004, FCX received a request from the Indonesian
Department of Energy and Mineral Resources that it oer to sell
shares in PT Indocopper Investama to Indonesian nationals at fair
market value. In response to this request and in view of the
potential benets of having additional Indonesian ownership in the
operations, FCX agreed, at the time, to consider a potential sale of
an interest in PT Indocopper Investama at fair market value.
Neither its Contract of Work nor Indonesian law requires FCX to
divest any portion of its ownership in PT Freeport Indonesia or
PT Indocopper Investama. In May 2008, FCX signed a Memorandum
of Understanding with the Papua provincial government (the
Province) whereby the parties agreed to work cooperatively to
determine the feasibility of an acquisition by the Province of the
PT Indocopper Investama shares at market value.
e copper royalty rate payable by PT Freeport Indonesia under
its Contract of Work varies from 1.5 percent of copper net revenue
at a copper price of $0.90 or less per pound to 3.5 percent at a
copper price of $1.10 or more per pound. e Contract of Work
royalty rate for gold and silver sales is at a xed rate of 1.0 percent.
A large part of the mineral royalties under Government of
Indonesia regulations is designated to the provinces from which
the minerals are extracted. In connection with its fourth
concentrator mill expansion completed in 1998, PT Freeport
Indonesia agreed to pay the Government of Indonesia additional
royalties (royalties not required by the Contract of Work) to
provide further support to the local governments and the people of
the Indonesian province of Papua. e additional royalties are paid
on production exceeding specied annual amounts of copper, gold
and silver expected to be generated when PT Freeport Indonesia’s
milling facilities operate above 200,000 metric tons of ore per day.
e additional royalty for copper equals the Contract of Work
royalty rate, and for gold and silver equals twice the Contract of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS