Freeport-McMoRan 2013 Annual Report Download - page 91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 ANNUAL REPORT | 89
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. The
embedded derivative does not qualify for hedge accounting and is
adjusted to fair value through earnings each period, using the
period-end forward prices, until the date of final pricing.
Gold sales are priced according to individual contract terms,
generally the average London Bullion Market Association (London)
price for a specified month near the month of shipment.
Substantially all of FCX’s 2013 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. The 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 the current month
published prices or a fixed price.
PT-FI concentrate sales and TFM metal sales are subject to
certain royalties, which are recorded as a reduction to revenues
(refer to Note 13 for further discussion).
Oil and gas revenue from FCX’s interests in producing wells is
recognized upon delivery and passage of title, net of any royalty
interests or other profit interests in the produced product. Oil
sales are primarily under contracts with prices based upon
regional benchmarks. Approximately 50 percent of gas sales
are priced monthly using industry recognized, published index
pricing, and the remainder is priced daily on the spot market.
Gas revenue is recorded using the sales method for gas imbalances.
If FCX’s sales of production volumes for a well exceed its portion
of the estimated remaining recoverable reserves of the well, a
liability is recorded. No receivables are recorded for those wells
on which FCX has taken less than its ownership share of
production unless the amount taken by other parties exceeds the
estimate of their remaining reserves. There were no material gas
imbalances at December 31, 2013.
Stock-Based Compensation. Compensation costs for share-
based payments to employees are measured at fair value and
charged to expense over the requisite service period for awards
that are expected to vest. The fair value of stock options is
determined using the Black-Scholes-Merton option valuation
model. The fair value for stock-settled restricted stock units
(RSUs) is based on FCX’s stock price on the date of grant. Shares
of common stock are issued at the vesting date for stock-settled
RSUs. The fair value for liability-classified awards (i.e., cash-
settled stock appreciation rights (SARs) and cash-settled RSUs) is
remeasured each reporting period using the Black-Scholes-Merton
option valuation model for SARs and FCX’s stock price for
cash-settled RSUs. FCX estimates forfeitures at the time of grant
and revises those estimates in subsequent periods through the
Derivative Instruments. FCX may enter into derivative contracts
to manage certain risks resulting from fluctuations in commodity
prices (primarily copper, gold, crude oil and natural gas), foreign
currency exchange rates and interest rates by creating offsetting
market exposures. Derivative instruments (including certain
derivative instruments embedded in other contracts) are recorded
in the balance sheet as either an asset or liability measured at its
fair value. The 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 14 for a
summary of FCX’s outstanding derivative instruments at
December 31, 2013, 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. The 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 final sales price
calculated in accordance with the terms specified in the relevant
sales contract. Revenues from concentrate sales are recorded net
of treatment and all refining 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. These allowances are a negotiated term of
FCX’s contracts and vary by customer. Treatment and refining
charges represent payments or price adjustments to smelters and
refiners and are either fixed 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 mining industry, copper contained in concentrate
and cathode is generally provisionally priced at the time of
shipment. The provisional prices are finalized in a specified 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 Commodity Exchange Inc.
(COMEX), a division of the New York Mercantile Exchange
(NYMEX). FCX receives market prices based on prices in the
specified future month, which results in price fluctuations
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 finalized
after the time of delivery) that is required to be bifurcated from
the host contract. The 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