Freeport-McMoRan 2011 Annual Report Download - page 78

76 | FREEPORT-McMoRan COPPER & GOLD INC.
hedge accounting and is adjusted to fair value through earnings
each period, using the period-end forward prices, until the date of
nal pricing. At December31,2011, FCX had outstanding
provisionally priced copper sales from its copper mining
operations of 252 millionpounds of copper (net of noncontrolling
interests), priced at an average of $3.44per pound, subject to nal
pricing over the rst several months of 2012 pursuant to the terms
of the sales contracts.
Gold sales are priced according to individual contract terms,
generally the average London Bullion Market Association price for
a specied month near the month of shipment.
Substantially all of FCX’s 2011 molybdenum sales were priced
based on prices published in Metals Week, Ryan’s Notes or Metal
Bulletin, plus conversion premiums for products that undergo
additional processing, such as ferromolybdenum and molybdenum
chemical products. e majority of these sales use the average price
of the previous month quoted by the applicable publication. FCX’s
remaining molybdenum sales generally have pricing that is either
based on a xed price or adjusts within certain price ranges.
PT Freeport Indonesia concentrate sales and Tenke Fungurume
Mining S.A.R.L. (TFM) metal sales are subject to certain royalties,
which are recorded as a reduction to revenues (refer to Note 14 for
further discussion).
Stock-Based Compensation. Compensation costs for share-based
payments to employees, including stock options, are measured at
fair value and charged to expense over the requisite service period
for awards that are expected to vest. e fair value of stock options
is determined using the Black-Scholes-Merton option valuation
model. e fair value for restricted stock units is based on FCX’s
stock price on the date of grant or an appropriate valuation model.
e fair value for cash-settled stock appreciation rights (SARs) is
the intrinsic value on the reporting or exercise date. FCX estimates
forfeitures at the time of grant and revises those estimates in
subsequent periods through the nal vesting date of the awards if
actual forfeitures dier from those estimates. FCX has elected
to recognize compensation costs for stock option awards that vest
over several years on a straight-line basis over the vesting period.
Refer to Note 11 for further discussion.
Earnings Per Share. FCX’s basic net income per share of common
stock was calculated by dividing net income attributable to
common stockholders by the weighted-average shares of common
stock outstanding during the year. A reconciliation of net income
and weighted-average shares of common stock outstanding for
purposes of calculating diluted net income per share for the years
ended December31 follows:
liability measured at its fair value. e accounting for changes in
the fair value of a derivative instrument depends on the intended
use of the derivative and the resulting designation. Refer to Note15
for a summary of FCX’s outstanding derivative instruments at
December31,2011, and a discussion of FCX’s risk management
strategies for those designated as hedges.
Revenue Recognition. FCX sells its products pursuant to sales
contracts entered into with its customers. Revenue for all FCX’s
products is recognized when title and risk of loss pass to the
customer and when collectibility is reasonably assured. e passing
of title and risk of loss to the customer are based on terms of the
sales contract, generally upon shipment or delivery of product.
Revenues from FCX’s concentrate and cathode sales are recorded
based on a provisional sales price or a nal sales price calculated in
accordance with the terms specied in the relevant sales contract.
Revenues from concentrate sales are recorded net of treatment
and all rening charges (including price participation, if
applicable, as discussed below) and the impact of derivative
contracts. Moreover, because a portion of the metals contained in
copper concentrates is unrecoverable as a result of the smelting
process, FCX’s revenues from concentrate sales are also recorded
net of allowances based on the quantity and value of these
unrecoverable metals. ese allowances are a negotiated term of
FCX’s contracts and vary by customer. Treatment and rening
charges represent payments or price adjustments to smelters and
reners and are either xed or, in certain cases, vary with the
price of copper (referred to as price participation).
Under the long-established structure of sales agreements
prevalent in the industry, copper contained in concentrates and
cathodes is generally provisionally priced at the time of shipment.
e provisional prices are nalized in a specied future month
(generally one to four months from the shipment date) based on
quoted monthly average spot copper prices on the London Metal
Exchange (LME) or the New York Mercantile Exchange (COMEX).
FCX receives market prices based on prices in the specied future
month, which results in price uctuations recorded to revenues
until the date of settlement. FCX records revenues and invoices
customers at the time of shipment based on then-current LME or
COMEX prices, which results in an embedded derivative (i.e., a
pricing mechanism that is nalized aer the time of delivery) that
is required to be bifurcated from the host contract. e host
contract is the sale of the metals contained in the concentrates or
cathodes at the then-current LME or COMEX price. FCX applies
the normal purchases and normal sales scope exception in
accordance with derivatives and hedge accounting guidance to the
host contract in its concentrate or cathode sales agreements since
these contracts do not allow for net settlement and always result in
physical delivery. e embedded derivative does not qualify for
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS