Freeport-McMoRan 2004 Annual Report Download - page 58

Notes To Consolidated Financial Statements
“Asset฀Impairment”฀accounting฀policy.฀The฀Grasberg฀mine฀is฀
currently฀FCX’s฀only฀producing฀open-pit฀mine.
PT฀Freeport฀Indonesia’s฀geologists฀and฀engineers฀reassess฀
the฀overburden฀to฀ore฀ratio฀and฀the฀remaining฀life฀of฀its฀
open-pit฀mine฀at฀least฀annually,฀and฀any฀changes฀in฀
estimates฀are฀reflected฀prospectively฀beginning฀in฀the฀
quarter฀of฀change.฀All฀other฀variables฀being฀equal,฀increases฀
in฀the฀life฀of฀mine฀overburden฀removed฀to฀ore฀mined฀ratio฀
would฀result฀in฀more฀of฀the฀overburden฀removal฀costs฀being฀
matched฀with฀current฀period฀production฀and฀therefore฀
charged฀to฀expense฀rather฀than฀deferred.฀Decreases฀in฀the฀
life฀of฀mine฀overburden฀removed฀to฀ore฀mined฀ratio฀would฀
result฀in฀more฀of฀the฀overburden฀removal฀costs฀being฀deferred฀
and฀matched฀with฀production฀in฀future฀periods.฀
PT฀Freeport฀Indonesia’s฀estimated฀ratio฀of฀mine฀over-
burden฀removed฀to฀ore฀mined฀over฀the฀life฀of฀the฀mine฀in฀its฀
deferred฀mining฀costs฀calculation฀averaged฀2.3฀to฀1฀in฀2004,฀
2.0฀to฀1฀in฀2003฀and฀1.8฀to฀1฀in฀2002.฀The฀ratio฀changed฀in฀
the฀fourth฀quarter฀of฀each฀of฀the฀last฀three฀years฀and฀the฀
impact฀of฀the฀changes฀on฀each฀year’s฀results฀was฀to฀decrease฀
net฀income฀by฀$2.8฀million฀($0.02฀per฀share)฀in฀2004,฀$1.5฀
million฀($0.01฀per฀share)฀in฀2003฀and฀$1.1฀million฀($0.01฀
per฀share)฀in฀2002.฀If฀the฀changes฀in฀the฀ratio฀in฀the฀fourth฀
quarter฀of฀2004฀(2.4฀to฀1)฀had฀been฀applied฀at฀the฀beginning฀
of฀the฀year,฀the฀deferral฀of฀mining฀costs฀for฀2004฀would฀
have฀been฀an฀estimated฀$11.0฀million฀lower฀and฀net฀income฀
would฀have฀been฀$5.6฀million฀($0.03฀per฀share)฀lower.฀For฀
2005,฀the฀estimated฀average฀ratio฀of฀overburden฀to฀ore฀
over฀the฀life฀of฀the฀mine฀in฀PT฀Freeport฀Indonesia’s฀deferred฀
mining฀calculation฀is฀expected฀to฀be฀2.4฀to฀1.
The฀increases฀in฀the฀ratio฀over฀the฀last฀several฀years฀
primarily฀relate฀to฀changes฀in฀the฀cutoff฀grade฀at฀the฀Grasberg฀
open฀pit฀caused฀by฀a฀reassessment฀of฀the฀optimal฀milling฀
rate฀at฀the฀mill฀facilities,฀including฀a฀greater฀proportional฀
contribution฀to฀total฀ore฀processed฀from฀the฀underground฀
Deep฀Ore฀Zone฀mine.
Reclamation and Closure Costs.฀Effective฀January฀1,฀
2003,฀FCX฀adopted฀Statement฀of฀Financial฀Accounting฀Standards฀
(SFAS)฀No.฀143,฀“Accounting฀for฀Asset฀Retirement฀Obligations,”฀
which฀requires฀recording฀the฀fair฀value฀of฀an฀asset฀retirement฀
obligation฀associated฀with฀tangible฀long-lived฀assets฀in฀the฀
period฀incurred.฀Retirement฀obligations฀associated฀with฀
long-lived฀assets฀included฀within฀the฀scope฀of฀SFAS฀No.฀143฀
are฀those฀for฀which฀there฀is฀a฀legal฀obligation฀to฀settle฀under฀
existing฀or฀enacted฀law,฀statute,฀written฀or฀oral฀contract฀or฀by฀
legal฀construction.
In฀2002,฀FCX฀engaged฀an฀independent฀environmental฀
consulting฀and฀auditing฀firm฀to฀assist฀in฀estimating฀PT฀Freeport฀
Indonesia’s฀asset฀retirement฀obligations,฀and฀FCX฀worked฀
with฀other฀consultants฀in฀estimating฀Atlantic฀Copper’s฀asset฀
retirement฀obligations.฀FCX฀estimated฀these฀obligations฀
using฀an฀expected฀cash฀flow฀approach,฀in฀which฀multiple฀
cash฀flow฀scenarios฀were฀used฀to฀reflect฀a฀range฀of฀possible฀
outcomes.฀As฀of฀January฀1,฀2003,฀FCX฀estimated฀these฀
aggregate฀obligations฀to฀be฀approximately฀$120฀million฀for฀
PT฀Freeport฀Indonesia฀and฀$17฀million฀for฀Atlantic฀Copper.฀To฀
calculate฀the฀fair฀value฀of฀these฀obligations,฀FCX฀applied฀an฀
estimated฀long-term฀inflation฀rate฀of฀2.5฀percent,฀except฀for฀
Indonesian฀rupiah-denominated฀labor฀costs฀with฀respect฀to฀
PT฀Freeport฀Indonesia’s฀obligations,฀for฀which฀an฀estimated฀
inflation฀rate฀of฀9.0฀percent฀was฀applied.฀The฀projected฀cash฀
flows฀were฀discounted฀at฀FCX’s฀estimated฀credit-adjusted,฀
risk-free฀interest฀rates฀which฀ranged฀from฀9.4฀percent฀to฀12.6฀
percent฀for฀the฀corresponding฀time฀periods฀over฀which฀these฀
costs฀would฀be฀incurred.฀After฀discounting฀the฀projected฀
cash฀flows,฀a฀market฀risk฀premium฀of฀10฀percent฀was฀applied฀
to฀the฀total฀to฀reflect฀what฀a฀third฀party฀might฀require฀to฀
assume฀these฀asset฀retirement฀obligations.฀The฀market฀risk฀
premium฀was฀based฀on฀market-based฀estimates฀of฀rates฀that฀
a฀third฀party฀would฀have฀to฀pay฀to฀insure฀its฀exposure฀to฀
possible฀future฀increases฀in฀the฀value฀of฀these฀obligations.
At฀January฀1,฀2003,฀FCX฀estimated฀the฀fair฀value฀of฀its฀
total฀asset฀retirement฀obligations฀to฀be฀$28.5฀million.฀FCX฀
recorded฀the฀fair฀value฀of฀these฀obligations฀and฀the฀related฀
additional฀assets฀as฀of฀January฀1,฀2003.฀The฀net฀difference฀
between฀FCX’s฀previously฀recorded฀reclamation฀and฀closure฀
cost฀liability฀and฀the฀amounts฀estimated฀under฀SFAS฀No.฀143,฀
after฀taxes฀and฀minority฀interest,฀resulted฀in฀a฀gain฀of฀
$9.1฀million฀(after฀reduction฀by฀$8.5฀million฀for฀taxes฀and฀
minority฀interest฀sharing),฀$0.06฀per฀share฀on฀a฀diluted฀
basis,฀which฀was฀recognized฀as฀a฀cumulative฀effect฀adjust-
ment฀for฀a฀change฀in฀accounting฀principle.฀As฀a฀result฀of฀
adopting฀SFAS฀No.฀143,฀FCX฀expects฀future฀depreciation฀and฀
amortization฀expense฀to฀be฀lower฀and฀production฀costs฀to฀be฀
higher,฀with฀no฀significant฀net฀impact฀on฀net฀income฀during฀
the฀near฀term.฀Excluding฀the฀cumulative฀effect฀adjustment,฀
the฀net฀effect฀of฀adopting฀SFAS฀No.฀143฀was฀to฀increase฀net฀
income฀by฀approximately฀$1฀million,฀$0.01฀per฀share,฀in฀2003.
Prior฀to฀adoption฀of฀SFAS฀No.฀143,฀estimated฀future฀recla-
mation฀and฀mine฀closure฀costs฀for฀PT฀Freeport฀Indonesia’s฀
current฀mining฀operations฀in฀Indonesia฀were฀accrued฀and฀
charged฀to฀income฀over฀the฀estimated฀life฀of฀the฀mine฀by฀
the฀unit-of-production฀method฀based฀on฀estimated฀recover-
able฀proven฀and฀probable฀copper฀reserves.฀Estimated฀future฀
closure฀costs฀for฀Atlantic฀Copper’s฀operations฀were฀not฀
considered฀material฀and฀no฀accruals฀were฀made.฀See฀Note฀10฀
for฀further฀discussion฀about฀FCX’s฀asset฀retirement฀obliga-
tions฀as฀of฀December฀31,฀2004฀and฀2003.
Income Taxes. FCX฀accounts฀for฀income฀taxes฀pursuant฀
to฀SFAS฀No.฀109,฀“Accounting฀for฀Income฀Taxes.”฀Deferred฀
income฀taxes฀are฀provided฀to฀reflect฀the฀future฀tax฀conse-
quences฀of฀differences฀between฀the฀tax฀bases฀of฀assets฀and฀
liabilities฀and฀their฀reported฀amounts฀in฀the฀financial฀
statements฀(see฀Note฀8).
56฀| FREEPORT-McMoRan COPPER & GOLD INC.