Freeport-McMoRan 2003 Annual Report Download - page 24

22 FREEPORT-McMoRan COPPER & GOLD INC. 2003 Annual Report
Gold prices have also increased, with the price moving
in an inverse direction to the U.S. dollar. Gold prices
rose more than 50 percent from their 2001 lows in
tandem with ongoing geo-political strife and terrorist
fears, a weak U.S. dollar and large U.S. deficits, and
actions by gold producers to reduce hedge positions.
The current view of gold prices expressed by many
market analysts is positive.
World metal prices for copper and gold have histori-
cally fluctuated widely and are affected by numerous
factors beyond our control as described further in our
Form 10-K for the year ended December 31, 2003.
CRITICAL ACCOUNTING ESTIMATES
Management’s discussion and analysis of our finan-
cial condition and results of operations are based on
our consolidated financial statements, which have
been prepared in conformity with accounting principles
generally accepted in the United States. The prepa-
ration of these statements requires that we make
estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and
expenses. We base these estimates on historical
experience and on assumptions that we consider
reasonable under the circumstances; however,
reported results could differ from those based on the
current estimates under different assumptions or con-
ditions. The areas requiring the use of management’s
estimates are discussed in Note 1 to our consoli-
dated financial statements under the subheading
“Use of Estimates.” Management has reviewed the
following discussion of its development and selection
of critical accounting estimates with the Audit
Committee of our Board of Directors.
•Depreciation and Amortization – As discussed in
Note 1 of “Notes to Consolidated Financial
Statements,” we depreciate our mining and milling
assets using the unit-of-production method based
on our estimates of our proven and probable recov-
erable copper reserves. We have other assets
which we depreciate on a straight-line basis over
their estimated useful lives. Our estimates of
proven and probable recoverable copper reserves
and of the useful lives of our straight-line assets
impact our depreciation and amortization expense.
These estimates affect both our “mining and explo-
ration” and “smelting and refining” segments.
Effective January 1, 2002, we changed our method
of computing depreciation for PT Freeport
Indonesia’s mining and milling life-of-mine assets.
Prior to January 1, 2002, PT Freeport Indonesia
depreciated mining and milling life-of-mine assets
on a composite basis. Total historical capitalized
costs and estimated future development costs
relating to PT Freeport Indonesia’s developed and
undeveloped reserves were depreciated using the
unit-of-production method based on total devel-
oped and undeveloped proven and probable recov-
erable copper reserves. Estimated future costs,
which are significant, to develop PT Freeport
Indonesia’s undeveloped ore bodies are expected
to be incurred over the next 20 to 25 years.
After considering the inherent uncertainties and
subjectivity relating to the long time frame over
which these estimated costs would be incurred,
and after consultation with the accounting staff of
the Securities and Exchange Commission, manage-
ment revised its depreciation methodology prospec-
tively. Effective January 1, 2002, depreciation for
the mining and milling life-of-mine assets excludes
consideration of future development costs. Under
the new methodology, PT Freeport Indonesia depre-
ciates the capitalized costs of individual producing
mines over the related proven and probable copper
reserves. Infrastructure and other common costs
continue to be depreciated over total proven and
probable copper reserves. The cumulative effect of
this change through December 31, 2001, as
reflected in our 2002 results, reduced net income
by $3.0 million ($0.02 per share), net of taxes and
minority interest sharing.
The accounting estimates related to depreciation
and amortization are critical accounting estimates
because (1) the determination of copper reserves
involves uncertainties with respect to the ultimate
geology of our reserves and the assumptions
used in determining the economic feasibility of
mining those reserves, including estimated copper
and gold prices and costs of conducting future
mining activities and (2) changes in estimated
proven and probable recoverable copper reserves
and useful asset lives can have a material impact
on net income. We perform annual assessments
of our existing assets, including a review of asset
costs and depreciable lives, in connection with the
review of mine operating and development plans.
When we determine that assigned asset lives do
not reflect the expected remaining period of bene-
fit, we make prospective changes to those depre-
ciable lives.
We made changes to certain asset lives at PT
Freeport Indonesia, primarily power generation
MANAGEMENT’S DISCUSSION AND ANALYSIS