Freeport-McMoRan 2003 Annual Report Download - page 71

2003 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 69
NOTE 10. COMMITMENTS AND CONTINGENCIES
Grasberg Open-Pit Slippage Event. On October 9,
2003, a slippage of material occurred in a section of
the Grasberg open pit, resulting in eight fatalities.
On December 12, 2003, a debris flow involving a
relatively small amount of loose material occurred in
the same section of the open pit resulting in only
minor property damage. All material involved in the
affected mining areas has been removed. The events
caused PT Freeport Indonesia to alter its short-term
mine sequencing plans, which is adversely affecting
near-term production. While PT Freeport Indonesia
expects to resume normal production activities in the
second quarter of 2004, no assurance can be given
that these events will not adversely affect production
over the longer term or that similar events will not
occur in the future.
As a result of the fourth quarter 2003 slippage
events, PT Freeport Indonesia notified its copper con-
centrate customers that it was declaring force
majeure under the terms of its contracts as it would
be unable to satisfy its annual sales and delivery
commitments. Under those contracts, a declaration of
force majeure allows PT Freeport Indonesia to cancel,
reduce or delay the sale and delivery of concentrates
to its customers during the affected period caused by
an event of force majeure. No assurance can be
given that concentrate customers will not challenge
the declaration of force majeure or assert claims for
the failure to sell and deliver copper concentrates.
PT Freeport Indonesia maintains property damage
and business interruption insurance related to its
operations. PT Freeport Indonesia has notified its
insurers that it will be presenting a claim and is in
the process of quantifying the extent of its losses
from the October 9 and December 12 events. Any
losses covered by insurance would be subject to a
substantial deductible and various coverage limits.
No assurance can be provided at this time about the
extent to which PT Freeport Indonesia’s losses will
be covered by insurance.
Environmental, Reclamation and Mine Closure.
FCX has an environmental policy committing it not
only to compliance with federal, state and local
environmental statutes and regulations, but also to
continuous improvement of its environmental
performance at every operational site. FCX believes
that its operations are being conducted pursuant to
applicable permits and are in compliance in all
material respects with applicable environmental laws,
rules and regulations. FCX incurred aggregate
environmental capital expenditures and other environ-
mental costs, including Rio Tinto’s share, totaling
$72.1 million in 2003, $62.6 million in 2002 and
$78.2 million in 2001.
The ultimate amount of reclamation and closure
costs to be incurred at PT Freeport Indonesia’s oper-
ations will be determined based on applicable laws
and regulations and PT Freeport Indonesia’s assess-
ment of appropriate remedial activities in the circum-
stances, after consultation with governmental
authorities, affected local residents and other affected
parties and cannot currently be projected with precision.
Estimates of the ultimate reclamation and closure
costs PT Freeport Indonesia will incur in the future
involve complex issues requiring integrated assess-
ments over a period of many years and are subject to
revision over time as more complete studies are
performed. Some reclamation costs will be incurred
during mining activities, while most closure costs
and the remaining reclamation costs will be incurred
at the end of mining activities, which are currently
estimated to continue for more than 30 years.
Effective January 1, 2003, FCX adopted SFAS No.
143 (see Note 1). At December 2003, PT Freeport
Indonesia revised its reclamation and closure esti-
mates for (1) changes in the projected timing of cer-
tain reclamation costs because of the slippage in
the Grasberg open pit, (2) changes in certain cost
estimates and (3) additional asset retirement obliga-
tions incurred during 2003. At December 31, 2003,
FCX estimated these aggregate undiscounted obli-
gations to be approximately $130 million for PT
Freeport Indonesia, $17 million for Atlantic Copper
and $11 million for PT Smelting, and estimated
PT Freeport Indonesia’s aggregate discounted asset
retirement obligations to be $25.7 million and
Atlantic Copper’s to be $0.8 million. These changes are
not expected to have a material impact on future net
income. A rollforward of FCX’s consolidated discounted
asset retirement obligations follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003
Asset retirement obligation at beginning of year $28,485
Liabilities incurred 605
Liabilities settled (1,222)
Accretion expense 2,852
Revision for changes in estimates (4,333)
Foreign exchange loss 99
Asset retirement obligation at end of year $26,486