Freeport-McMoRan 2013 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS
34 | FREEPORT-McMoRan
Recoverable Copper in Stockpiles. We record, as inventory,
applicable costs for copper contained in mill and leach stockpiles
that are expected to be processed in the future based on proven
processing technologies. Mill and leach stockpiles are evaluated
periodically to ensure that they are stated at the lower of cost
or market. Accounting for recoverable copper from mill and leach
stockpiles represents a critical accounting estimate because
(i) it is impracticable to determine copper contained in mill and
leach stockpiles by physical count, thus requiring management to
employ reasonable estimation methods and (ii) recovery rates
from leach stockpiles can vary significantly. The quantity of
material delivered to mill and leach stockpiles is based on surveyed
volumes of mined material and daily production records.
Sampling and assaying of blasthole cuttings determine the
estimated copper grade contained in the material delivered to the
mill and leach stockpiles.
Expected copper recovery rates for mill stockpiles are determined
by metallurgical testing. The recoverable copper in mill
stockpiles, once entered into the production process, can be
produced into copper concentrate almost immediately.
Expected copper recovery rates for leach stockpiles are
determined using small-scale laboratory tests, small- to large-scale
column testing (which simulates the production-scale process),
historical trends and other factors, including mineralogy of the ore
and rock type. Total copper recovery in leach stockpiles can vary
significantly from a low percentage to more than 90 percent
depending on several variables, including processing methodology,
processing variables, mineralogy and particle size of the rock. For
newly placed material on active stockpiles, as much as 80 percent
total copper recovery may be extracted during the first year, and
the remaining copper may be recovered over many years.
Processes and recovery rates for mill and leach stockpiles are
monitored regularly, and recovery rate estimates are adjusted
periodically as additional information becomes available and as
related technology changes. Adjustments to recovery rates will
typically result in a future impact to the value of the material
removed from the stockpiles at a revised weighted-average cost
per pound of recoverable copper. At December 31, 2013,
estimated consolidated recoverable copper was 3.3 billion
pounds in leach stockpiles (with a carrying value of $3.3 billion)
and 1.4 billion pounds in mill stockpiles (with a carrying value of
$789 million), compared with 2.9 billion pounds in leach
stockpiles (with a carrying value of $2.9 billion) and 1.4 billion
pounds in mill stockpiles (with a carrying value of $719 million) at
December 31, 2012.
Oil and Natural Gas Reserves. Proved reserves are those
quantities of oil and natural gas, which, by analysis of geoscience
and engineering data, can be estimated with reasonable certainty
to be economically producible from a given date forward,
from known reservoirs, and under existing economic conditions,
operating methods and government regulations. The term
The following table summarizes changes in our estimated
consolidated recoverable proven and probable copper, gold and
molybdenum reserves during 2013 and 2012:
Copper
a
Gold Molybdenum
(billion (million (billion
pounds) ounces) pounds)
Consolidated reserves at
December 31, 2011 119.7 33.9 3.42
Net additions/revisions 0.5 (0.4) 0.08
Production (3.7) (1.0) (0.08)
Consolidated reserves at
December 31, 2012 116.5 32.5 3.42
Net additions/revisions (1.2) — (0.07)
Production (4.1) (1.2) (0.09)
Consolidated reserves at
December 31, 2013 111.2 31.3 3.26
a. Includes estimated recoverable metals contained in stockpiles. See below for additional
discussion of recoverable copper in stockpiles.
Refer to Note 20 for further information regarding estimated
recoverable proven and probable mineral reserves.
As discussed in Note 1, we depreciate our life-of-mine mining
and milling assets and values assigned to proven and probable
mineral reserves using the unit-of-production (UOP) method
based on our estimated recoverable proven and probable mineral
reserves. Because the economic assumptions used to estimate
mineral reserves change from period to period and additional
geological data is generated during the course of operations,
estimates of reserves may change, which could have a significant
impact on our results of operations, including changes to
prospective depreciation rates and impairments of asset carrying
values. Excluding impacts associated with changes in the levels of
finished goods inventories and based on projected copper sales
volumes for 2014, if estimated copper reserves at our mines were
10 percent higher at December 31, 2013, we estimate that our
annual depreciation, depletion and amortization expense for 2014
would decrease by $59 million ($30 million to net income
attributable to common stockholders), and a 10 percent decrease
in copper reserves would increase depreciation, depletion and
amortization expense by $72 million ($37 million to net income
attributable to common stockholders). We perform annual
assessments of our existing assets in connection with the review
of mine operating and development plans. If it is determined that
assigned asset lives do not reflect the expected remaining period
of benefit, any change could affect prospective depreciation rates.
As discussed below and in Note 1, we review and evaluate our
long-lived assets for impairment when events or changes in
circumstances indicate that the related carrying amount of such
assets may not be recoverable, and changes to our estimates of
recoverable proven and probable mineral reserves could have an
impact on our assessment of asset recoverability.