Freeport-McMoRan 2004 Annual Report Download - page 43

Management’s Discussion and Analysis
2004 ANNUAL REPORT |฀41
In฀December฀2004,฀the฀FASB฀issued฀SFAS฀No.฀123฀(revised฀
2004),฀“Share-Based฀Payment.”฀SFAS฀No.฀123฀(revised฀2004)฀
requires฀all฀share-based฀payments฀to฀employees,฀including฀
grants฀of฀employee฀stock฀options,฀to฀be฀recognized฀in฀
the฀income฀statement฀based฀on฀their฀fair฀values.฀Through฀
December฀31,฀2004,฀we฀have฀accounted฀for฀grants฀of฀employee฀
stock฀options฀under฀the฀recognition฀principles฀of฀APB฀Opinion฀
No.฀25,฀“Accounting฀for฀Stock฀Issued฀to฀Employees,”฀and฀related฀
interpretations,฀which฀require฀compensation฀costs฀for฀stock-
based฀employee฀compensation฀plans฀to฀be฀recognized฀based฀
on฀the฀difference฀on฀the฀date฀of฀grant,฀if฀any,฀between฀the฀
quoted฀market฀price฀of฀the฀stock฀and฀the฀amount฀an฀employee฀
must฀pay฀to฀acquire฀the฀stock.฀If฀we฀had฀applied฀the฀fair฀value฀
recognition฀provisions฀of฀SFAS฀No.฀123,฀“Accounting฀for฀Stock-
Based฀Compensation,”฀which฀requires฀compensation฀cost฀for฀
all฀stock-based฀employee฀compensation฀plans฀to฀be฀recognized฀
based฀on฀the฀use฀of฀a฀fair฀value฀method,฀our฀net฀income฀would฀
have฀been฀reduced฀by฀$5.2฀million,฀$0.05฀per฀diluted฀share,฀for฀
2004,฀$4.7฀million,฀$0.05฀per฀diluted฀share,฀for฀2003฀and฀$6.5฀
million,฀$0.07฀per฀diluted฀share,฀for฀2002฀(see฀Note฀1฀of฀“Notes฀
to฀Consolidated฀Financial฀Statements”).฀We฀must฀adopt฀SFAS฀No.฀
123฀(revised฀2004)฀no฀later฀than฀July฀1,฀2005;฀however,฀we฀can฀
elect฀to฀adopt฀SFAS฀No.฀123฀(revised฀2004)฀as฀early฀as฀January฀
1,฀2005.฀We฀are฀still฀reviewing฀the฀provisions฀of฀SFAS฀No.฀123฀
(revised฀2004)฀and฀have฀not฀yet฀determined฀if฀we฀will฀adopt฀
SFAS฀No.฀123฀(revised฀2004)฀before฀July฀1,฀2005.฀Also,฀stock฀
options฀were฀granted฀to฀employees฀in฀February฀2005,฀including฀
multi-year฀grants฀to฀our฀senior฀executive฀officers.฀As฀a฀result,฀
the฀annual฀charges฀for฀share-based฀payments฀will฀be฀higher฀than฀
the฀pro฀forma฀annual฀amounts฀presented฀in฀Note฀1฀of฀“Notes฀
to฀Consolidated฀Financial฀Statements.”฀Based฀on฀currently฀
outstanding฀employee฀stock฀options,฀including฀those฀granted฀in฀
February฀2005,฀if฀we฀adopt฀SFAS฀No.฀123฀(revised฀2004)฀on฀July฀
1,฀2005,฀we฀estimate฀the฀charge฀to฀earnings฀before฀taxes฀and฀
minority฀interest฀sharing฀in฀the฀second฀half฀of฀2005฀would฀total฀
approximately฀$11฀million,฀and฀the฀reduction฀in฀net฀income฀
would฀be฀approximately฀$6.5฀million,฀$0.04฀per฀basic฀share฀using฀
common฀shares฀outstanding฀at฀December฀31,฀2004.
PRODUCT REVENUES AND PRODUCTION COSTS
PT Freeport Indonesia Product Revenues and Net
Cash Production Costs
Net฀cash฀production฀costs฀per฀pound฀of฀copper฀is฀a฀measure฀
intended฀to฀provide฀investors฀with฀information฀about฀the฀
cash฀generating฀capacity฀of฀our฀mining฀operations฀expressed฀
on฀a฀basis฀relating฀to฀its฀primary฀metal฀product,฀copper.฀PT฀
Freeport฀Indonesia฀uses฀this฀measure฀for฀the฀same฀purpose฀and฀
for฀monitoring฀operating฀performance฀by฀its฀mining฀opera-
tions.฀This฀information฀differs฀from฀measures฀of฀performance฀
determined฀in฀accordance฀with฀generally฀accepted฀accounting฀
principles฀and฀should฀not฀be฀considered฀in฀isolation฀or฀as฀
a฀substitute฀for฀measures฀of฀performance฀determined฀in฀
accordance฀with฀generally฀accepted฀accounting฀principles.฀
This฀measure฀is฀presented฀by฀other฀copper฀and฀gold฀mining฀
companies,฀although฀our฀measures฀may฀not฀be฀comparable฀to฀
similarly฀titled฀measures฀reported฀by฀other฀companies.
We฀calculate฀gross฀profit฀per฀pound฀of฀copper฀under฀a฀“by-
product”฀method,฀while฀the฀copper,฀gold฀and฀silver฀contained฀
within฀our฀concentrates฀are฀treated฀as฀co-products฀in฀our฀
financial฀statements.฀We฀use฀the฀by-product฀method฀in฀our฀
presentation฀of฀gross฀profit฀per฀pound฀of฀copper฀because฀
(1)฀the฀majority฀of฀our฀revenues฀are฀copper฀revenues,฀(2)฀we฀
produce฀and฀sell฀one฀product,฀concentrates,฀which฀contains฀
all฀three฀metals฀and฀(3)฀it฀is฀not฀possible฀to฀specifically฀
assign฀our฀costs฀to฀revenues฀from฀the฀copper,฀gold฀and฀
silver฀we฀produce฀in฀concentrates.฀In฀the฀co-product฀method฀
presentation฀below,฀costs฀are฀allocated฀to฀the฀different฀
products฀based฀on฀their฀relative฀revenue฀values.฀
In฀both฀the฀by-product฀and฀the฀co-product฀method฀calcu-
lations฀below,฀we฀show฀adjustments฀to฀revenues฀for฀prior฀
period฀open฀sales฀and฀for฀hedging฀as฀separate฀line฀items.฀
Because฀the฀copper฀pricing฀adjustments฀do฀not฀result฀from฀
current฀period฀sales,฀we฀have฀reflected฀these฀separately฀from฀
revenues฀on฀current฀period฀sales.฀Hedging฀adjustments,฀
which฀are฀attributed฀to฀our฀commodity-indexed฀preferred฀stock,฀
are฀included฀with฀pricing฀adjustments฀because฀they฀result฀
from฀transactions฀outside฀of฀our฀sales฀contracts.฀Noncash฀
and฀other฀nonrecurring฀costs,฀which฀consist฀of฀items฀such฀
as฀write-offs฀of฀equipment฀or฀unusual฀charges,฀have฀not฀
been฀material.฀They฀are฀removed฀from฀site฀production฀and฀
delivery฀costs฀in฀the฀calculation฀of฀net฀cash฀production฀costs฀
(credits).฀As฀discussed฀above,฀gold฀and฀silver฀revenues฀are฀
reflected฀as฀credits฀against฀site฀production฀and฀delivery฀costs฀
in฀the฀by-product฀method.฀PT฀Freeport฀Indonesia’s฀gross฀profit฀
totals฀are฀before฀considering฀the฀impact฀of฀the฀elimination฀of฀
its฀share฀of฀profits฀on฀its฀sales฀to฀PT฀Smelting.฀Presentations฀
under฀both฀methods฀are฀presented฀below฀together฀with฀a฀
reconciliation฀to฀amounts฀reported฀in฀our฀consolidated฀
financial฀statements.