Freeport-McMoRan 2007 Annual Report Download - page 36

FREEPORT-McMoRan COPPER & GOLD INC.
2007 Annual Report
34 Financial & Operating Information
Management’s Discussion and Analysis
studies to evaluate the extent of the environmental damage and the
available remedies. Advancement of these studies and consideration of
alternative remedies and cost sharing arrangements resulted in our
calculation of the estimated fair values being approximately $900 million
greater than the historical Phelps Dodge estimates. In accordance with
the purchase method of accounting FCX has recorded the assumed
environmental obligations at their estimated fair values of approximately
$1.3 billion. After the allocation of the purchase price associated with the
Phelps Dodge acquisition is finalized in first-quarter 2008, future
estimates of environmental obligations will be recorded in accordance
with SFAS No. 5 and SOP 96-1. Significant adjustments to these reserves
could occur in the future.
Deferred Taxes. In preparing our annual consolidated financial
statements, we estimate the actual amount of taxes currently payable or
receivable as well as deferred tax assets and liabilities attributable to
temporary differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates and laws is
recognized in income in the period in which such changes are enacted.
A valuation allowance is provided for those deferred tax assets
for which it is more likely than not that the related benefits will not be
realized. In determining the amount of the valuation allowance, we
consider estimated future taxable income as well as feasible tax planning
strategies in each jurisdiction. If we determine that we will not realize
all or a portion of our deferred tax assets, we will increase our valuation
allowance with a charge to income tax expense. Conversely, if we
determine that we will ultimately be able to realize all or a portion of the
related benefits for which a valuation allowance has been provided,
all or a portion of the related valuation allowance will be reduced with a
credit to income tax expense.
At December 31, 2007, our valuation allowances totaled $1.2 billion
and covered all of our U.S. foreign tax credit carryforwards, a portion of
our foreign net operating loss carryforwards and a portion of our U.S.
state net operating loss carryforwards. During 2007, our valuation
allowances increased by $240 million primarily because of additional
valuation allowances recorded against U.S. foreign tax credit
carryforwards.
OUTLOOK
Sales in 2007 totaled 3.4 billion pounds of copper, 2.3 million ounces of
gold and 52 million pounds of molybdenum, compared with 1.2 billion
pounds of copper and 1.7 million ounces of gold in 2006. Sales for 2007
included sales from the Phelps Dodge mines from March 20, 2007,
through December 31, 2007, totaling 2.2 billion pounds of copper, 0.1
million ounces of gold and 52 million pounds of molybdenum. At the
Grasberg open-pit mine, the sequencing in mining areas with varying ore
grades causes fluctuations in the timing of ore production resulting in
varying quarterly and annual sales of copper and gold. PT Freeport
Indonesia’s 2007 sales volumes were lower than 2006 sales volumes
because of mining in a relatively low-grade section of the Grasberg open
pit during the second half of 2007, partly offset by mining higher ore
grade material during the first half of 2007 and higher recovery rates. The
increase in gold sales for 2007, compared to 2006, is related to higher
grades and recovery rates.
Current projected consolidated sales volumes for 2008 and projected
average annual consolidated sales volumes over the three-year period
from 2008 through 2010 follow:
Projected Consolidated Sales
Average Annual
2008 2008 – 2010
Copper (billions of recoverable pounds) 4.3 4.5
Gold (millions of recoverable ounces) 1.3 1.9
Molybdenum (millions of recoverable pounds) 75 85
Because of mine sequencing at Grasberg and the ramp-up of production
at the Safford mine, second-half 2008 production is expected to be
higher than the first half of 2008. Approximately 56 percent of projected
2008 copper sales and 72 percent of projected 2008 gold sales are
expected in the second half of the year. The achievement of these sales
estimates will depend on the achievement of targeted mining rates
and expansion plans, the successful operation of production facilities, the
impact of weather conditions and other factors. Additionally, sales
volumes may vary from these estimates depending on the areas being
mined within the Grasberg open pit, with quarterly sales volumes
expected to vary significantly.
Consolidated revenues and net income vary significantly with
fluctuations in the market prices of copper, gold and molybdenum, sales
volumes and other factors. Based on projected consolidated sales
volumes (excluding purchased copper and molybdenum) for the next two
years and assuming an average price of $3.00 per pound of copper,
$800 per ounce of gold and $25 per pound of molybdenum, the impact on
our annual cash flow would approximate $575 million for each $0.20
per pound change in copper prices, $50 million for each $50 per ounce
change in gold prices and $100 million for each $2 per pound change
in molybdenum prices. Additionally, the impact on our annual net income
would approximate $490 million for each $0.20 per pound change in
copper prices, $45 million for each $50 per ounce change in gold prices
and $100 million for each $2 per pound change in molybdenum prices.