Freeport-McMoRan 2007 Annual Report Download - page 104

FREEPORT-McMoRan COPPER & GOLD INC.
2007 Annual Report
102 Financial & Operating Information
Notes to Consolidated Financial Statements
of $1.10 or more per pound. The Contract of Work royalty rate for gold
and silver sales is 1.0 percent.
A large part of the mineral royalties under Government of Indonesia
regulations is designated to the provinces from which the minerals are
extracted. In connection with its fourth concentrator mill expansion
completed in 1998, PT Freeport Indonesia agreed to pay the Government
of Indonesia additional royalties (royalties not required by the Contract of
Work) to provide further support to the local governments and the people
of the Indonesian province of Papua. The additional royalties are paid on
production exceeding specified annual amounts of copper, gold and silver
expected to be generated when PT Freeport Indonesia’s milling facilities
operate above 200,000 metric tons of ore per day. The additional royalty
for copper equals the Contract of Work royalty rate, and for gold and silver
equals twice the Contract of Work royalty rates. Therefore, PT Freeport
Indonesia’s royalty rate on copper net revenues from production above
the agreed levels is double the Contract of Work royalty rate, and the
royalty rates on gold and silver sales from production above the agreed
levels are triple the Contract of Work royalty rates.
The combined royalties, including the additional royalties, which became
effective January 1, 1999, totaled $133 million in 2007, $126 million
in 2006 and $104 million in 2005. PT Freeport Indonesia records these
royalty payments as a reduction to revenues.
Social and Economic Development Programs. FCX has a
comprehensive social, employment and human rights policy to ensure
that its operations are conducted in a manner respecting basic human
rights, the laws and regulations of the host country, and the culture of the
people who are indigenous to the areas in which FCX operates.
In 1996, PT Freeport Indonesia established the Freeport Partnership
Fund for Community Development, which was previously called the
Freeport Fund for Irian Jaya Development, through which PT Freeport
Indonesia has made available funding and expertise to support the
economic and social development of the area. PT Freeport Indonesia has
committed to provide one percent of its annual revenue for the
development of the local people through the Freeport Partnership Fund for
Community Development. PT Freeport Indonesia charged $48 million in
2007, $44 million in 2006 and $36 million in 2005 to production costs for
this commitment.
FCX’s Cerro Verde copper mine had previously agreed to conduct and
fund technical studies for the construction of water and sewage treatment
facilities in Arequipa, Peru, and to fund 50 percent of the construction of
both facilities. The cost associated with the construction of these facilities
is currently under review, but Cerro Verde’s share is expected to
approximate $40 million, which is recorded as a current liability.
During 2006, the Peruvian government announced that all mining
companies operating in Peru will make annual contributions to local
development funds for a five-year period. The contribution is equal to
3.75 percent of after-tax profits, of which 2.75 percent is contributed to
a local mining fund and 1.00 percent to a regional mining fund. At
December 31, 2007, Cerro Verde’s liability associated with the local
mining fund contributions totaled $49 million, which is recorded as a
current liability.
Guarantees. FCX provides certain financial guarantees (including
indirect guarantees of the indebtedness of others) and indemnities.
At its Morenci mine in Arizona, FCX has a venture agreement dated
February 7, 1986, with Sumitomo, which includes a put and call option
guarantee clause. FCX holds an 85 percent undivided interest in the
Morenci complex. Under certain conditions defined in the venture
agreement, Sumitomo has the right to sell its 15 percent share to FCX.
Likewise, under certain conditions, FCX has the right to purchase
Sumitomo’s share of the venture. Based on calculations defined in the
venture agreement, at December 31, 2007, the maximum potential
payment FCX is obligated to make to Sumitomo upon exercise of the put
option (or FCX’s exercise of its call option) totaled approximately $190
million. At December 31, 2007, FCX had not recorded any liability in its
consolidated financial statements in connection with this guarantee as
FCX does not believe, based on information available, that it is probable
that any amounts will be paid under this guarantee as the fair value of
Sumitomo’s 15 percent share is well in excess of the exercise price.
Prior to its acquisition by FCX, Phelps Dodge and its subsidiaries have,
as part of merger, acquisition, divestiture and other transactions, from
time to time, indemnified certain sellers, buyers or other parties related to
the transaction from and against certain liabilities associated with
conditions in existence (or claims associated with actions taken) prior to
the closing date of the transaction. As part of these transactions, Phelps
Dodge indemnified the counterparty from and against certain excluded or
retained liabilities existing at the time of sale that would otherwise have
been transferred to the party at closing. These indemnity provisions
generally now require FCX to indemnify the party against certain liabilities
that may arise in the future from the pre-closing activities of Phelps
Dodge for assets sold or purchased. The indemnity classifications include
environmental, tax and certain operating liabilities, claims or litigation
existing at closing and various excluded liabilities or obligations. Most of
these indemnity obligations arise from transactions that closed
many years ago, and given the nature of these indemnity obligations, it is
impossible to estimate the maximum potential exposure. Except as
described in the following sentence, FCX does not consider any of such
obligations as having a probable likelihood of payment that is reasonably
estimable, and accordingly, has not recorded any obligations associated
with these indemnities. With respect to FCX’s environmental indemnity
obligations, any expected costs from these guarantees are accrued when
potential environmental obligations are considered by management
to be probable and the costs can be reasonably estimated.
NOTE 17. FINANCIAL INSTRUMENTS
FCX and its subsidiaries do not purchase, hold or sell derivative financial
instruments unless there is an existing asset or obligation or if FCX
anticipates a future activity that is likely to occur and will result in
exposure to market risks. FCX does not enter into any derivative financial