Freeport-McMoRan 2005 Annual Report Download - page 69
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Please find page 69 of the 2005 Freeport-McMoRan annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.66|FREEPORT-McMoRanCOPPER&GOLDINC.FINANCIAL&OPERATINGINFORMATION66|FREEPORT-McMoRanCOPPER&GOLDINC.FINANCIAL&OPERATINGINFORMATION
and$1.5million($0.01pershare)in2003.Theincreasesin
theratioin2003and2004primarilyrelatetochangesinthe
cutoffgradeattheGrasbergopenpitcausedbyareassessment
oftheoptimalmillingrateatthemillfacilities,includinga
greaterproportionalcontributiontototaloreprocessedfrom
theundergroundDeepOreZonemine.
ReclamationandClosureCosts.EffectiveJanuary1,2003,
FCXadoptedStatementofFinancialAccountingStandards
(SFAS)No.143,“AccountingforAssetRetirement
Obligations,”whichrequiresrecordingthefairvalueofan
assetretirementobligationassociatedwithtangible
long-livedassetsintheperiodincurred.Retirementobligations
associatedwithlong-livedassetsincludedwithinthescope
ofSFASNo.143arethoseforwhichthereisalegalobligation
tosettleunderexistingorenactedlaw,statute,writtenor
oralcontractorbylegalconstruction.
In2002,FCXengagedanindependentenvironmental
consultingandauditingfirmtoassistinestimatingPTFreeport
Indonesia’sassetretirementobligations,andFCXworked
withotherconsultantsinestimatingAtlanticCopper’sasset
retirementobligations.FCXestimatedtheseobligationsusing
anexpectedcashflowapproach,inwhichmultiplecashflow
scenarioswereusedtoreflectarangeofpossibleoutcomes.
Tocalculatethefairvalueoftheseobligations,FCXapplied
anestimatedlong-terminflationrateof2.5percent,exceptfor
Indonesianrupiah-denominatedlaborcostswithrespect
toPTFreeportIndonesia’sobligations,forwhichanestimated
inflationrateof9.0percentwasapplied.Theprojected
cashflowswerediscountedatFCX’sestimatedcredit-adjusted,
risk-freeinterestrates,whichrangedfrom9.4percentto
12.6percentforthecorrespondingtimeperiodsoverwhich
thesecostswouldbeincurred.Afterdiscountingtheprojected
cashflows,amarketriskpremiumof10percentwasapplied
tothetotaltoreflectwhatathirdpartymightrequireto
assumetheseassetretirementobligations.Themarketrisk
premiumwasbasedonmarket-basedestimatesofratesthata
thirdpartywouldhavetopaytoinsureitsexposuretopossible
futureincreasesinthevalueoftheseobligations.
AtJanuary1,2003,FCXestimatedthefairvalueofitstotal
assetretirementobligationstobe$28.5million.FCX
recordedthefairvalueoftheseobligationsandtherelated
additionalassetsasofJanuary1,2003.Thenetdifference
betweenFCX’spreviouslyrecordedreclamationandclosure
costliabilityandtheamountsestimatedunderSFASNo.143,
aftertaxesandminorityinterest,resultedinagainof
$9.1million(afterreductionby$8.5millionfortaxesand
minorityinterestsharing),$0.06perdilutedshare,whichwas
recognizedasacumulativeeffectadjustmentforachangein
accountingprinciple.SeeNote10forfurtherdiscussion
aboutFCX’sassetretirementobligationsasofDecember
31,2005and2004.
IncomeTaxes.FCXaccountsforincometaxespursuant
toSFASNo.109,“AccountingforIncomeTaxes.”Deferred
incometaxesareprovidedtoreflectthefuturetax
consequencesofdifferencesbetweenthetaxbasesofassets
andliabilitiesandtheirreportedamountsinthefinancial
statements(seeNote8).
DerivativeInstruments.AttimesFCXanditssubsidiaries
haveenteredintoderivativecontractstomanagecertainrisks
resultingfromfluctuationsincommodityprices(primarily
copperandgold),foreigncurrencyexchangeratesandinterest
ratesbycreatingoffsettingmarketexposures.FCXaccounts
forderivativespursuanttoSFASNo.133,“Accountingfor
DerivativeInstrumentsandHedgingActivities.”SFASNo.133,
assubsequentlyamended,establishedaccountingand
reportingstandardsrequiringthateveryderivativeinstrument
(includingcertainderivativeinstrumentsembeddedin
othercontracts)berecordedinthebalancesheetaseitheran
assetorliabilitymeasuredatitsfairvalue.Theaccounting
forchangesinthefairvalueofaderivativeinstrument
dependsontheintendeduseofthederivativeandtheresulting
designation.SeeNote11forasummaryofFCX’s
outstandingderivativeinstrumentsatDecember31,2005,and
adiscussionofFCX’sriskmanagementstrategiesforthose
designatedashedges.
FCXelectedtocontinueitshistoricalaccountingforits
redeemablepreferredstockindexedtocommoditiesunder
theprovisionsofSFASNo.133,whichallowsuchinstruments
issuedbeforeJanuary1,1998,tobeexcludedfromthose
instrumentsrequiredtobeadjustedforchangesintheirfair
values.Redeemablepreferredstockindexedtocommodities
istreatedasahedgeoffutureproductionandiscarriedat
itsoriginalissuevalue.Asredemptionpaymentsoccur,
differencesbetweenthecarryingvalueandthepaymentare
recordedasanadjustmenttorevenues(seeNotes5and11).
EffectiveJuly1,2003,FCXadoptedSFASNo.150,
“AccountingforCertainFinancialInstrumentswith
CharacteristicsofbothLiabilitiesandEquity.”OnJuly1,2003,
FCXreclassifieditsmandatorilyredeemablepreferredstock
totaling$450.0millionasdebtandreclassifiedthe$26.6million
oforiginalissuancecostsfromcapitalinexcessofpar
valueofcommonstocktootherassets.FCXalsorecordeda
$24.7million($0.16pershare)cumulativeeffectadjustment
Notes to Consolidated Financial Statements