Freeport-McMoRan 2007 Annual Report Download - page 33

Financial & Operating Information 31
Management’s Discussion and Analysis
London Gold Prices
Through January 31, 2008
Gold prices averaged approximately $696 per ounce in 2007, with prices
ranging from approximately $608 per ounce to a high of approximately
$842 per ounce. On February 22, 2008, London gold prices closed at
approximately $945 per ounce. Gold prices continued to be supported by
increased investment demand for gold, ongoing geopolitical tensions, a
weak U.S. dollar, inflationary pressures and reduced mine supply.
Metals Week Molybdenum Dealer Oxide Prices
Through January 31, 2008
Molybdenum markets have been strong in recent years as demand has
exceeded available supplies. During 2007, the molybdenum market
was generally balanced with prices ranging from $24.30 per pound to
$34.25 per pound and averaging $30.23 per pound. The Metals Week
Molybdenum Dealer Oxide price closed at $33.25 per pound on
February 18, 2008.
CRITICAL ACCOUNTING ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results
of Operations is based on our consolidated financial statements, which
have been prepared in conformity with generally accepted accounting
principles (GAAP) in the U.S. The preparation of these statements requires
that we make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. We base these
estimates on historical experience and on assumptions that we consider
reasonable under the circumstances; however, reported results could
differ from those based on the current estimates under different
assumptions or conditions. The areas requiring the use of management’s
estimates are discussed further in Note 1 under the subheading “Use of
Estimates.” Management has reviewed the following discussion of its
development and selection of critical accounting estimates with the Audit
Committee of our Board of Directors.
Mineral Reserves and Depreciation, Depletion and Amortization.
As discussed in Note 1, we depreciate our life-of-mine mining and milling
assets and values assigned to proven and probable reserves using the
unit-of-production method based on our estimated recoverable proven
and probable copper reserves (for our copper mines) and estimated
recoverable proven and probable molybdenum reserves (for our
molybdenum mines). We have other assets that we depreciate on a
straight-line basis over their estimated useful lives. Our estimates
of recoverable proven and probable copper and molybdenum reserves
and the useful lives of our straight-line assets impact our depreciation,
depletion and amortization expense. These estimates affect the results
of operations of our operating segments.
Accounting for depreciation, depletion and amortization represents a
critical accounting estimate because the determination of reserves
involves uncertainties with respect to the ultimate geology of our reserves
and the assumptions used in determining the economic feasibility of
mining those reserves, including estimated copper, gold and molybdenum
prices and costs of conducting future mining activities. Additionally,
changes in estimated recoverable proven and probable reserves and useful
asset lives can have a material impact on net income. We perform annual
assessments of our existing assets, including a review of asset costs and
depreciable lives, in connection with the review of mine operating and
development plans. When we determine that assigned asset lives do not
reflect the expected remaining period of benefit, we make prospective
changes to those depreciable lives.
There are a number of uncertainties inherent in estimating quantities of
reserves, including many factors beyond our control. Ore reserve estimates
are based upon engineering evaluations of samplings of drill holes, tunnels
and other underground workings. Our estimates of recoverable proven and
probable reserves are prepared by our employees, and a majority of these
estimates are reviewed and verified by independent experts in mining,
geology and reserve determination. At December 31, 2007, consolidated
recoverable reserves include 93.2 billion pounds of copper, 41.0 million
ounces of gold and 2.0 billion pounds of molybdenum. Refer to “Proven and
Probable Reserves” and Note 19 for further details of estimated recoverable
reserves. These estimates involve assumptions regarding future copper,
gold and molybdenum prices, the geology of our mines, the mining methods
we use and the related costs we incur to develop and mine our reserves.
Changes in these assumptions could result in material adjustments to our
reserve estimates, which could result in changes to depreciation, depletion
and amortization expense in future periods, with corresponding adjustments
to net income. If estimated copper reserves at our mines were 10 percent
higher at December 31, 2007, based on our current sales projections for
2008, we estimate that our annual depreciation, depletion and amortization
expense for 2008 would decrease by $98 million ($51 to net income),
and a 10 percent decrease would increase depreciation, depletion and
amortization expense for 2008 by $118 million ($62 million to net income).
As discussed in Note 1, we review and evaluate our long-lived assets
for impairment when events or changes in economic circumstances
indicate that the related carrying amount of such assets may not be
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