Freeport-McMoRan 2007 Annual Report Download - page 34

FREEPORT-McMoRan COPPER & GOLD INC.
2007 Annual Report
32 Financial & Operating Information
Management’s Discussion and Analysis
recoverable. Our long-lived assets include amounts assigned to proven and
probable reserves totaling $13.8 billion at December 31, 2007. Changes
to our estimates of recoverable proven and probable reserves could have
an impact on our assessment of asset impairment. Revisions to our estimates
of recoverable proven and probable copper, gold and molybdenum
reserves could give rise to an impairment of our assets.
Recoverable Copper. We record, as inventory, applicable costs for
copper contained in mill and leach stockpiles that are expected to be
processed in the future based on proven processing technologies. Mill and
leach stockpiles are evaluated periodically to ensure that they are stated
at the lower of cost or market. Accounting for recoverable copper from
mill and leach stockpiles represents a critical accounting estimate
because (i) it is generally impracticable to determine copper contained in
mill and leach stockpiles by physical count, and therefore, requires
management to employ reasonable estimation methods and (ii) recovery
rates from leach stockpiles can vary significantly. The quantity of material
delivered to mill and leach stockpiles is based on surveyed volumes of
mined material and daily production records. Sampling and assaying of
blasthole cuttings determine the estimated copper grade contained in
the material delivered to the mill and leach stockpiles.
Expected copper recovery rates for mill stockpiles are determined
by metallurgical testing. The recoverable copper in mill stockpiles, once
entered into the production process, can be extracted into copper
concentrate almost immediately.
Expected copper recovery rates for leach stockpiles are determined
using small-scale laboratory tests, small- to large-scale column testing
(which simulates the production-scale process), historical trends and
other factors, including mineralogy of the ore and rock type. Ultimate
recovery of copper contained in leach stockpiles can vary significantly
from a low percentage to more than 90 percent depending on several
variables, including type of copper recovery, mineralogy and particle size
of the rock. For newly placed material on active stockpiles, as much as 70
percent of the copper ultimately recoverable may be extracted during the
first year, and the remaining copper may be recovered over many years.
Processes and recovery rates are monitored continuously, and
recovery rate estimates are adjusted periodically as additional information
becomes available and as related technology changes.
At December 31, 2007, estimated recoverable copper was 2.6 billion
pounds in leach stockpiles (with a carrying value of $1.6 billion) and 0.9
billion pounds in mill stockpiles (with a carrying value of $254 million).
Carrying Value of Goodwill. At December 31, 2007, the carrying value
of goodwill totaled $6.1 billion, which is associated with our acquisition
of Phelps Dodge. In accordance with accounting rules, goodwill resulting
from a business combination is assigned to the acquiring entity’s
reporting units that are expected to benefit from the business
combination. Adjustments to the recorded values of the assets acquired
and liabilities assumed in the acquisition of Phelps Dodge will occur until
such values are finalized. Accordingly, the allocation of goodwill to
reporting units, which we have determined will include our individual mines,
will be completed when we finalize our purchase price allocation in
first-quarter 2008. Our approach to allocating goodwill includes the
identification of the reporting units we believe have contributed to the
excess purchase price and also includes consideration of the reporting
unit’s potential for future growth.
Goodwill is required to be evaluated on at least an annual basis and at
any other time if events or circumstances indicate that such carrying
amount may no longer be recoverable. If we determine that the carrying
value of a reporting unit exceeds its fair value at the time of the evaluation
the shortfall would be charged to earnings. Our evaluations are based on
business plans developed using near-term price forecasts reflective of the
current price environment and management’s projections for long-term
average metal prices.
FCX will perform annual impairment tests of goodwill during the fourth
quarter of each year, and upon the occurrence of events or circumstances
in an interim period that may indicate impairment. Although the allocation
of goodwill to reporting units has not yet been finalized, we performed
an initial impairment evaluation in fourth-quarter 2007 based on a
preliminary allocation and concluded that there was no impairment of
goodwill as of December 31, 2007.
Projected copper prices represent the most significant assumption
used in the discounted cash flows analyses to evaluate goodwill for
impairment. At the date of acquisition of Phelps Dodge, copper price
projections used to value the assets acquired ranged from a near-term
price of $2.98 per pound to a long-term average price of $1.20 per
pound. At year-end 2007, the copper price projections used to test goodwill
for impairment ranged from a near-term price of $3.03 per pound to a
long-term average price of $1.50 per pound. The LME spot price for the
past three years averaged $2.65 per pound of copper. If our estimates
of future copper prices decrease, it is likely that we would record goodwill
impairment charges in the future.
We believe that other events that could indicate impairment of goodwill
assigned to reporting units include, but are not limited to (i) a decrease in
estimated recoverable proven and probable reserves, (ii) a significant
reduction in the estimated fair value of mine site exploration potential and
(iii) any event that might otherwise have a material adverse affect on
mine site production levels or costs. Additionally, as our mines represent
depleting assets with definite lives, absent reserve additions in excess
of production or increases in pricing, the amount of goodwill we allocate
to individual reporting units will be impaired at a future date.
Reclamation and Closure Costs. Reclamation is an ongoing activity
that occurs throughout the life of a mine. In accordance with SFAS
No. 143, “Accounting for Asset Retirement Obligations,” we record the fair
value of our estimated asset retirement obligations (AROs) associated
with tangible long-lived assets in the period incurred. Fair value is
measured as the present value of cash flow estimates after considering
inflation and then applying a market risk premium. Our cost estimates are
reflected on a third-party cost basis and comply with our legal obligation
to retire tangible, long-lived assets as defined by SFAS No. 143. These
cost estimates may differ from financial assurance cost estimates for
reclamation activities because of a variety of factors, including obtaining