Freeport-McMoRan 2004 Annual Report Download - page 57

Notes To Consolidated Financial Statements
estimated฀useful฀lives฀of฀15฀to฀20฀years฀for฀buildings฀and฀3฀
to฀25฀years฀for฀machinery฀and฀equipment.
Effective฀January฀1,฀2002,฀FCX฀changed฀its฀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฀its฀
developed฀and฀undeveloped฀reserves฀were฀depreciated฀using฀
the฀unit-of-production฀method฀based฀on฀total฀developed฀and฀
undeveloped฀proven฀and฀probable฀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฀subjec-
tivity฀relating฀to฀the฀long฀time฀frame฀over฀which฀these฀estimated฀
costs฀would฀be฀incurred,฀management฀revised฀its฀depreciation฀
methodology฀prospectively.฀Effective฀January฀1,฀2002,฀deprecia-
tion฀for฀the฀mining฀and฀milling฀life-of-mine฀assets฀excludes฀
consideration฀of฀future฀development฀costs.฀Under฀the฀new฀
methodology,฀PT฀Freeport฀Indonesia฀depreciates฀the฀capital-
ized฀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.
Asset Impairment.฀FCX฀reviews฀and฀evaluates฀its฀long-
lived฀assets฀for฀impairment฀when฀events฀or฀changes฀in฀
circumstances฀indicate฀that฀the฀related฀carrying฀amounts฀
may฀not฀be฀recoverable.฀An฀impairment฀loss฀is฀measured฀as฀
the฀amount฀by฀which฀asset฀carrying฀value฀exceeds฀its฀fair฀
value.฀Fair฀value฀is฀generally฀determined฀using฀valuation฀tech-
niques฀such฀as฀estimated฀future฀cash฀flows.฀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.฀An฀impairment฀loss฀is฀measured฀and฀recorded฀based฀on฀
discounted฀estimated฀future฀cash฀flows.฀Future฀cash฀flows฀for฀
PT฀Freeport฀Indonesia’s฀mining฀assets,฀which฀are฀considered฀
one฀asset฀group,฀include฀estimates฀of฀recoverable฀pounds฀
and฀ounces,฀metal฀prices฀(considering฀current฀and฀historical฀
prices,฀price฀trends฀and฀related฀factors),฀production฀rates฀and฀
costs,฀capital฀and฀reclamation฀costs฀as฀appropriate,฀all฀based฀
on฀detailed฀life-of-mine฀engineering฀plans.฀Future฀cash฀flows฀
for฀Atlantic฀Copper’s฀smelting฀assets฀include฀estimates฀of฀
treatment฀and฀refining฀rates฀(considering฀current฀and฀histor-
ical฀prices,฀price฀trends฀and฀related฀factors),฀production฀rates฀
and฀costs,฀capital฀and฀reclamation฀costs฀as฀appropriate,฀all฀
based฀on฀operating฀projections.฀Assumptions฀underlying฀future฀
cash฀flow฀estimates฀are฀subject฀to฀risks฀and฀uncertainties.฀No฀
impairment฀losses฀were฀recorded฀during฀the฀periods฀presented.
Deferred Mining Costs.฀Mining฀costs฀are฀charged฀to฀
operations฀as฀incurred.฀However,฀because฀of฀the฀configura-
tion฀and฀location฀of฀the฀Grasberg฀open-pit฀ore฀body฀and฀the฀
location฀and฀extent฀of฀the฀related฀surrounding฀overburden,฀
the฀ratio฀of฀overburden฀to฀ore฀is฀much฀higher฀in฀the฀initial฀
mining฀of฀the฀open฀pit฀than฀in฀later฀years.฀As฀a฀result,฀
surface฀mining฀costs฀associated฀with฀overburden฀removal฀
at฀PT฀Freeport฀Indonesia’s฀Grasberg฀open-pit฀mine฀that฀are฀
estimated฀to฀relate฀to฀future฀production฀are฀initially฀deferred฀
when฀the฀ratio฀of฀actual฀overburden฀removed฀to฀ore฀mined฀
exceeds฀the฀estimated฀average฀ratio฀of฀overburden฀removed฀
to฀ore฀mined฀over฀the฀life฀of฀the฀Grasberg฀open-pit฀mine.฀
Those฀deferred฀costs฀are฀subsequently฀charged฀to฀operating฀
costs฀when฀the฀ratio฀of฀actual฀overburden฀removed฀to฀ore฀
mined฀falls฀below฀the฀estimated฀average฀ratio฀of฀overburden฀
to฀ore฀over฀the฀life฀of฀the฀Grasberg฀open-pit฀mine.฀The฀
reserve฀quantities฀used฀to฀develop฀the฀life฀of฀mine฀ratio฀are฀
the฀proven฀and฀probable฀ore฀quantities฀for฀the฀Grasberg฀open฀
pit฀disclosed฀in฀Note฀13.฀
The฀deferred฀mining฀cost฀method฀is฀used฀by฀some฀
companies฀in฀the฀metals฀mining฀industry;฀however,฀industry฀
practice฀varies.฀The฀Emerging฀Issues฀Task฀Force฀of฀the฀
Financial฀Accounting฀Standards฀Board฀(FASB)฀currently฀is฀
evaluating฀this฀issue.฀The฀deferred฀mining฀cost฀method฀
matches฀the฀cost฀of฀production฀with฀the฀sale฀of฀the฀related฀
metal฀from฀the฀open฀pit฀by฀assigning฀each฀metric฀ton฀of฀
ore฀removed฀an฀equivalent฀amount฀of฀overburden฀tonnage฀
thereby฀averaging฀the฀overburden฀removal฀costs฀over฀the฀life฀
of฀the฀mine.฀The฀mining฀costs฀capitalized฀in฀inventory฀and฀
the฀amounts฀charged฀to฀cost฀of฀goods฀sold฀do฀not฀represent฀
the฀actual฀costs฀incurred฀to฀mine฀the฀ore฀in฀any฀given฀period.฀฀
If฀PT฀Freeport฀Indonesia฀were฀to฀charge฀all฀mining฀costs฀to฀
expense฀when฀incurred,฀including฀all฀overburden฀removal฀costs,฀
as฀some฀mining฀companies฀do,฀there฀would฀be฀greater฀
volatility฀in฀FCX’s฀period-to-period฀results฀of฀operations.
The฀application฀of฀the฀deferred฀mining฀cost฀method฀has฀
resulted฀in฀an฀asset฀on฀FCX’s฀balance฀sheets฀(“Deferred฀
Mining฀Costs”),฀which฀based฀on฀current฀mine฀plans,฀is฀
estimated฀to฀increase฀through฀about฀2010.฀Subsequently,฀
these฀costs฀are฀expected฀to฀be฀amortized฀as฀a฀charge฀to฀
production฀and฀delivery฀costs฀until฀they฀are฀fully฀amortized฀
at฀the฀end฀of฀the฀open฀pit’s฀life,฀which฀is฀estimated฀to฀be฀in฀
approximately฀2015.฀This฀is฀because฀PT฀Freeport฀Indonesia฀
expects฀to฀mine฀higher฀than฀average฀amounts฀of฀overburden฀
through฀2010฀and฀less฀than฀average฀thereafter.฀Deferred฀
mining฀costs฀totaled฀$220.4฀million฀at฀December฀31,฀2004,฀
and฀$142.6฀million฀at฀December฀31,฀2003.฀Additions฀to฀
deferred฀mining฀costs฀are฀classified฀as฀increases฀in฀deferred฀
mining฀costs฀in฀operating฀activities฀in฀the฀consolidated฀
statements฀of฀cash฀flows฀and฀totaled฀$77.8฀million฀in฀2004,฀
$64.4฀million฀in฀2003฀and฀$30.6฀million฀in฀2002.฀PT฀Freeport฀
Indonesia฀evaluates฀the฀recoverability฀of฀these฀deferred฀
mining฀costs฀in฀conjunction฀with฀its฀evaluation฀of฀the฀
recoverability฀of฀its฀mining฀assets฀as฀described฀in฀FCX’s฀
2004 ANNUAL REPORT |฀55