Freeport-McMoRan 2011 Annual Report Download - page 106

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104 | FREEPORT-McMoRan COPPER & GOLD INC.
NOTE 15. Financial Instruments
FCX does not purchase, hold or sell derivative nancial
instruments unless there is an existing asset or obligation or it
anticipates a future activity that is likely to occur and will result in
exposure to market risks that FCX intends to oset or mitigate.
FCX does not enter into any derivative nancial instruments for
speculative purposes, but has entered into derivative nancial
instruments in limited instances to achieve specic objectives.
ese objectives principally relate to managing risks associated
with commodity price, foreign currency and interest rate risks. e
fair values of FCX’s nancial derivative instruments are based on
widely published market closing prices.
Commodity Contracts. From time to time, FCX has entered
into forward, futures and swap contracts to hedge the market risk
associated with uctuations in the prices of commodities it
purchases and sells. Derivative nancial instruments used by FCX
to manage its risks do not contain credit risk-related contingent
provisions. As of December31,2011 and 2010, FCX had no price
protection contracts relating to its mine production. A summary of
FCX’s derivative contracts and programs follows.
Derivatives Designated as Hedging Instruments —
Fair Value Hedges
Copper Futures and Swap Contracts. Some of FMC’s U.S. copper
rod customers request a xed market price instead of the COMEX
average copper price in the month of shipment. FCX hedges this
price exposure in a manner that allows it to receive the COMEX
average price in the month of shipment while the customers pay
the xed price they requested. FCX accomplishes this by entering
into copper futures and swap contracts and then liquidating
the copper futures contracts and settling the copper swap
contracts during the month of shipment, which generally results in
FCX receiving the COMEX average copper price in the month
of shipment. Hedge gains or losses from these copper futures
and swap contracts are recorded in revenues. FCX did not have
any signicant gains or losses during the three years ended
December31,2011, resulting from hedge ineectiveness. At
December31,2011, FCX held copper futures and swap contracts
that qualied for hedge accounting for 73 million pounds at an
average contract price of $3.58per pound, with maturities through
April 2013.
A summary of gains (losses) recognized in revenues for
derivative nancial instruments related to commodity contracts
that are designated and qualify as fair value hedge transactions,
along with the unrealized gains (losses) on the related
hedged item (rm sales commitments) for the years ended
December31 follows:
2011 2010 2009
Unrealized gains (losses):
Derivative financial instruments $ (28) $ 7 $ 11
Hedged item 28 (7) (11)
Realized gains (losses):
Matured derivative financial instruments (28) 37 49
Derivatives Not Designated as Hedging Instruments
Embedded derivatives and derivative nancial instruments
that do not meet the criteria to qualify for hedge accounting are
discussed below.
Embedded Derivatives. As described in Note 1 under “Revenue
Recognition,” certain FCX copper concentrate, copper cathode
and gold sales contracts provide for provisional pricing primarily
based on LME or COMEX prices (copper) and the London
Bullion Market Association price (gold) at the time of shipment as
specied in the contract. Similarly, FCX purchases copper and
molybdenum under contracts that provide for provisional pricing
(molybdenum purchases are generally based on an average
Metals Week Molybdenum Dealer Oxide price). Sales and purchases
with a provisional sales price contain an embedded derivative
(i.e., the price settlement mechanism that is settled aer the time of
delivery) that is required to be bifurcated from the host contract.
e host contract is the sale or purchase of the metals contained in
the concentrates or cathodes at the then-current LME or COMEX
price (copper), the London Bullion Market Association price (gold)
or the average Metals Week Molybdenum Dealer Oxide price
(molybdenum) as dened in the contract. Mark-to-market price
uctuations recorded through the settlement date are reected in
revenues for sales contracts and in cost of sales as production and
delivery costs for purchase contracts.
A summary of FCX’s embedded derivatives at December31,
2011, follows:
Average Price
Open Per Unit Maturities
Positions Contract Market Through
Embedded derivatives in
provisional sales contracts:
Copper (millions of pounds) 388 $ 3.55 $ 3.44 June 2012
Gold (thousands of ounces) 52 1,676 1,576 February 2012
Embedded derivatives in
provisional purchase contracts:
Copper (millions of pounds) 376 3.56 3.45 April 2012
Molybdenum
(thousands of pounds) 33 11.80 11.78 January 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS