Freeport-McMoRan 2013 Annual Report Download - page 60

MANAGEMENT’S DISCUSSION AND ANALYSIS
58 | FREEPORT-McMoRan
third-party cost basis and comply with our legal obligation to
retire tangible, long-lived assets. At December 31, 2013, we had
$2.3 billion recorded in our consolidated balance sheets for
AROs, including $1.1 billion related to our oil and gas properties.
Spending on AROs totaled $107 million in 2013, $47 million in
2012 and $49 million in 2011. The increase in ARO spending in 2013,
compared to 2012 and 2011, primarily reflected $64 million for
our oil and gas operations for the seven-month period following
the acquisition date. For 2014, we expect to incur approximately
$115 million for aggregate ARO payments. Refer to Note 12 for
further discussion.
Litigation and Other Contingencies
Refer to Note 12 and “Legal Proceedings” contained in Part I,
Item 3 of our annual report on Form 10-K for the year ended
December 31, 2013, for further discussion of contingencies
associated with legal proceedings and other matters.
DISCLOSURES ABOUT MARKET RISKS
Commodity Price Risk
Metals. Our consolidated revenues from our mining operations
include the sale of copper concentrates, copper cathodes, copper
rod, gold, molybdenum and other metals by our North and South
America mines, the sale of copper concentrates (which also
contain significant quantities of gold and silver) by our Indonesia
mining operations, the sale of copper cathodes and cobalt
hydroxide by our Africa mining operations, the sale of
molybdenum in various forms by our molybdenum operations,
and the sale of copper cathodes, copper anodes and gold in
anodes and slimes by Atlantic Copper. Our financial results can
vary significantly as a result of fluctuations in the market prices of
copper, gold, molybdenum, silver and cobalt. World market prices
for these commodities have fluctuated historically and are
affected by numerous factors beyond our control. Because we
cannot control the price of our products, the key measures that
management focuses on in operating our mining business are
sales volumes, unit net cash costs and consolidated operating
cash flow. Refer to “Outlook” for further discussion of projected
sales volumes, unit net cash costs for our copper mining
operations and consolidated operating cash flows for 2014.
For 2013, 49 percent of our mined copper was sold in concentrate,
28 percent as cathode and 23 percent as rod. Substantially all
of our copper concentrate and cathode sales contracts provide final
copper pricing in a specified future month (generally one to four
months from the shipment date) based primarily on quoted LME
monthly average spot copper prices. We receive market prices
based on prices in the specified future period, which results
in price fluctuations recorded through revenues until the date of
In addition to our debt maturities and other contractual obligations
discussed above, we have other commitments, which we expect
to fund with available cash, projected operating cash flows, available
credit facilities or future financing transactions, if necessary.
These include (i) PT-FI’s commitment to provide one percent of
its annual revenue for the development of the local people in
its area of operations through the Freeport Partnership Fund for
Community Development, (ii) TFM’s commitment to provide
0.3 percent of its annual revenue for the development of the local
people in its area of operations and (iii) other commercial
commitments, including standby letters of credit, surety bonds and
guarantees. Refer to Notes 12 and 13 for further discussion.
CONTINGENCIES
Environmental
The cost of complying with environmental laws is a fundamental
and substantial cost of our business. At December 31, 2013, we
had $1.2 billion recorded in our consolidated balance sheets for
environmental obligations attributed to CERCLA or analogous
state programs and for estimated future costs associated with
environmental obligations that are considered probable based on
specific facts and circumstances.
During 2013, we incurred environmental capital expenditures
and other environmental costs (including our joint venture
partners’ shares) of $595 million for programs to comply with
applicable environmental laws and regulations that affect our
operations, compared to $612 million in 2012 and $387 million in
2011. The increase in environmental costs in 2012, compared with
2011, primarily relates to higher expenditures for land and
settlements of environmental matters. For 2014, we expect to
incur approximately $475 million of aggregate environmental
capital expenditures and other environmental costs, which are
part of our overall 2014 operating budget. The timing and amount
of estimated payments could change as a result of changes in
regulatory requirements, changes in scope and timing of
reclamation activities, the settlement of environmental matters
and as actual spending occurs.
Refer to Note 12 for further information about environmental
regulation, including significant environmental matters.
Asset Retirement Obligations
We recognize AROs as liabilities when incurred, with the initial
measurement at fair value. These obligations, which are initially
estimated based on discounted cash flow estimates, are
accreted to full value over time through charges to income. Mine
reclamation costs for disturbances are recorded as an ARO in
the period of disturbance. Oil and gas plugging and abandonment
costs are recognized as an ARO and as a related asset retirement
cost (included in oil and gas properties) in the period in which the
well is drilled or acquired. Our cost estimates are reflected on a