Freeport-McMoRan 2013 Annual Report Download - page 43

MANAGEMENT’S DISCUSSION AND ANALYSIS
2013 ANNUAL REPORT | 41
2012 compared with 2011. Consolidated production and delivery
costs totaled $10.4 billion in 2012, compared with $9.9 billion in
2011. Higher production and delivery costs for 2012 primarily
reflected higher costs at our mining operations, partly offset by
lower costs of concentrate purchases at Atlantic Copper
associated with lower copper prices and lower volumes and lower
costs of cathode purchases in North America.
Depreciation, Depletion and Amortization
Consolidated depreciation, depletion and amortization expense
totaled $2.8 billion in 2013 (which included $1.4 billion for the
seven-month period following the acquisition date for our oil and
gas operations), $1.2 billion in 2012 and $1.0 billion in 2011.
Depreciation will vary under the UOP method as a result of
changes in sales volumes and the related UOP rates at our mining
and oil and gas operations. Excluding oil and gas operations,
higher depreciation, depletion and amortization expense in 2013
primarily reflected asset additions and higher production at our
mining operations.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses totaled
$657 million in 2013, $431 million in 2012 and $415 million in 2011.
Excluding selling, general and administrative expenses associated
with oil and gas operations of $120 million for the seven-month
period following the acquisition date, higher expense in 2013,
compared with 2012, primarily reflected transaction and related
costs associated with acquisitions ($80 million in 2013, compared
with $9 million in 2012) and a $37 million charge in 2013 for
restructuring an executive employment arrangement.
Mining Exploration and Research Expenses
Consolidated exploration and research expenses for our mining
operations totaled $210 million in 2013, $285 million in 2012 and
$271 million in 2011. In 2013, we took steps to reduce or defer
operating, exploration and other costs in response to market
conditions and our debt reduction objectives. We are actively
conducting exploration activities near our existing mines with a
focus on opportunities to expand reserves that will support
additional future production capacity in the large mineral districts
where we currently operate. Exploration results indicate
opportunities for what we believe could be significant future
reserve additions in North and South America and in the Tenke
minerals district. The drilling data in North America continues to
indicate the potential for expanded sulfide production.
For 2014, exploration and research expenditures for our mining
operations are expected to total approximately $150 million,
including approximately $120 million for exploration.
As further discussed in Note 1, under the full cost method of
accounting, exploration costs for our oil and gas operations are
capitalized to oil and gas properties.
Our oil and gas operations use various derivative contracts to
manage exposure to commodity price risk for a substantial portion
of our oil and gas production through 2015. In connection with
the acquisition of PXP, we assumed derivative contracts for 2013,
2014 and 2015 that consisted of crude oil options, and crude oil
and natural gas swaps. These crude oil and natural gas derivative
contracts are not designated as hedging instruments; accordingly,
they are recorded at fair value with the mark-to-market gains
and losses recorded in revenues each period. Net charges to
revenues for unrealized and noncash realized losses on crude oil
and natural gas derivative contracts totaled $312 million for the
seven-month period following the acquisition date. Refer to Note 14
and “Disclosure About Market Risks — Commodity Price Risk” for
further discussion of crude oil and natural gas derivative contracts.
Production and Delivery Costs
2013 compared with 2012. Consolidated production and delivery
costs totaled $11.8 billion in 2013, compared with $10.4 billion
in 2012. Excluding production and delivery costs associated with
oil and gas operations of $682 million for the seven-month
period following the acquisition date, higher production and
delivery costs for our mining operations primarily reflected higher
copper purchases.
Consolidated unit site production and delivery costs, before net
noncash and other costs, for our copper mining operations
averaged $1.88 per pound of copper in 2013, compared with
$2.00 per pound of copper in 2012. Lower consolidated unit site
production and delivery costs in 2013 primarily reflect higher
copper volumes in Indonesia and South America. Assuming
achievement of current 2014 volume and cost estimates,
consolidated site production and delivery costs are expected to
average $1.87 per pound of copper for 2014. Refer to “Operations —
Indonesia Mining” for discussion of a regulatory matter impacting
projected unit net cash costs, “Operations — Unit Net Cash
Costs” for further discussion of unit net cash costs associated
with our operating divisions, and “Product Revenues and
Production Costs” for reconciliations of per pound costs by
operating division to production and delivery costs applicable to
sales reported in our consolidated financial statements.
Our copper mining operations require significant energy,
principally diesel, electricity, coal and natural gas, most of which
is obtained from third parties under long-term contracts. Energy
approximated 20 percent of our consolidated copper production
costs in 2013 and included purchases of approximately 260 million
gallons of diesel fuel; 7,200 gigawatt hours of electricity at our
North America, South America and Africa copper mining
operations (we generate all of our power at our Indonesia mining
operation); 705 thousand metric tons of coal for our coal power
plant in Indonesia; and 1 MMBtu of natural gas at certain of our
North America mines. For 2014, we estimate energy will
approximate 21 percent of our consolidated copper
production costs.