Freeport-McMoRan 2013 Annual Report Download - page 89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 ANNUAL REPORT | 87
major expansion is considered to be a continuation of existing
mining activities, stripping costs are accounted for as a current
production cost and a component of the associated inventory.
Environmental Expenditures. Environmental expenditures are
charged to expense or capitalized, depending upon their future
economic benefits. Accruals for such expenditures are recorded
when it is probable that obligations have been incurred and the
costs can be reasonably estimated. Environmental obligations
attributed to the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) or analogous state
programs are considered probable when a claim is asserted, or is
probable of assertion, and FCX, or any of its subsidiaries, have
been associated with the site. Other environmental remediation
obligations are considered probable based on specific facts and
circumstances. FCX’s estimates of these costs are based on an
evaluation of various factors, including currently available facts,
existing technology, presently enacted laws and regulations,
remediation experience, whether or not FCX is a potentially
responsible party (PRP) and the ability of other PRPs to pay their
allocated portions. With the exception of those obligations
assumed in the acquisition of FMC that were recorded at
estimated fair values (refer to Note 12 for further discussion),
environmental obligations are recorded on an undiscounted
basis. Where the available information is sufficient to estimate the
amount of the obligation, that estimate has been used. Where the
information is only sufficient to establish a range of probable
liability and no point within the range is more likely than any
other, the lower end of the range has been used. Possible
recoveries of some of these costs from other parties are not
recognized in the consolidated financial statements until they
become probable. Legal costs associated with environmental
remediation (such as fees to outside law firms for work relating to
determining the extent and type of remedial actions and the
allocation of costs among PRPs) are included as part of the
estimated obligation.
Environmental obligations assumed in the acquisition of FMC,
which were initially recorded at fair value and estimated on a
discounted basis, are accreted to full value over time through
charges to interest expense. Adjustments arising from changes in
amounts and timing of estimated costs and settlements may
result in increases and decreases in these obligations and are
calculated in the same manner as they were initially estimated.
Unless these adjustments qualify for capitalization, changes in
environmental obligations are charged to operating income when
they occur.
FCX performs a comprehensive review of its environmental
obligations annually and also reviews changes in facts and
circumstances associated with these obligations at least quarterly.
Asset Retirement Obligations. FCX records the fair value of
estimated asset retirement obligations (AROs) associated with
tangible long-lived assets in the period incurred. Retirement
obligations associated with long-lived assets are those for which
allocated to the U.S. oil and gas reporting unit. Events affecting
crude oil and natural gas prices may cause a decrease in the fair
value of the reporting unit, and FCX could have an impairment of
its goodwill in future periods. When a sale of oil and gas
properties occurs, goodwill is allocated to that property based on
the relationship of the fair value of the property sold to the total
reporting unit’s fair value. A significant sale of oil and gas
properties may represent a triggering event that requires goodwill
to be evaluated for impairment.
Asset Impairment for Mining Operations. FCX reviews and
evaluates its mining long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying
amounts may not be recoverable. Mining long-lived assets are
evaluated for impairment under the two-step model. An impairment
is considered to exist if total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the asset.
Once it is determined that an impairment exists, an impairment loss
is measured as the amount by which the asset carrying value
exceeds its fair value. Fair value is generally determined using
valuation techniques, such as discounted cash flows.
In evaluating mining operations’ long-lived assets for
recoverability, estimates of after-tax undiscounted future cash
flows of FCX’s individual mining operations are used, with
impairment losses measured by reference to fair value. As quoted
market prices are unavailable for FCX’s individual mining
operations, fair value is determined through the use of discounted
estimated future cash flows. Estimated cash flows used to assess
recoverability of long-lived assets and measure the fair value of
FCX’s mining operations are derived from current business plans,
which are developed using near-term price forecasts reflective of
the current price environment and management’s projections for
long-term average metal prices. Estimates of future cash flows
include near- and long-term metal price assumptions; estimates
of commodity-based and other input costs; proven and probable
mineral reserve estimates, including any costs to develop the
reserves and the timing of producing the reserves; and the use of
appropriate current escalation and discount rates. FCX believes its
estimates and models used to determine fair value are similar to
what a market participant would use.
Deferred Mining Costs. Stripping costs (i.e., the costs of
removing overburden and waste material to access mineral
deposits) incurred during the production phase of a mine are
considered variable production costs and are included as a
component of inventory produced during the period in which
stripping costs are incurred. Major development expenditures,
including stripping costs to prepare unique and identifiable areas
outside the current mining area for future production that are
considered to be pre-production mine development, are
capitalized and amortized using the UOP method based on
estimated recoverable proven and probable reserves for the ore
body benefited. However, where a second or subsequent pit or