Freeport-McMoRan 2007 Annual Report Download - page 44

FREEPORT-McMoRan COPPER & GOLD INC.
2007 Annual Report
42 Financial & Operating Information
Management’s Discussion and Analysis
By-Product Co-Product Method
Year Ended December 31, 2005 Method Copper Molybdenuma
Revenues, after adjustments shown below $ 1.63 $ 1.63 $ 32.47
Site production and delivery, before net noncash
and nonrecurring costs shown below 0.97 0.77 9.72
By-product creditsa (0.70) – –
Treatment charges 0.07 0.07 –
Unit net cash costs 0.34 0.84 9.72
Depreciation, depletion and amortization 0.10 0.08 1.00
Noncash and nonrecurring costs, net 0.01 0.01 0.03
Total unit costs 0.45 0.93 10.75
Revenue adjustments, primarily for pricing on
prior period open sales and hedging (0.14) (0.14) –
Idle facility and other non-inventoriable costs (0.02) (0.02) –
Gross profit $ 1.02 $ 0.54 $ 21.72
Consolidated sales (millions of recoverable pounds)
Copper 1,378 1,378
Molybdenum 30
a. Molybdenum by-product credits reflect volumes produced at market-based pricing, and also include
tolling revenues at Sierrita.
2007 Compared with 2006 (Pro Forma). The North American mining
operations have experienced production cost increases in recent years
primarily as a result of higher energy costs and costs of other
consumables, higher mining costs and milling rates, labor costs and other
factors. Higher unit site production and delivery costs in 2007, compared
with 2006, primarily reflected higher labor, maintenance, operating
supplies and energy costs, and also included higher costs associated with
the ramp up of the Morenci mill operations.
Molybdenum credits were higher in 2007, compared with 2006,
reflecting higher average molybdenum prices during 2007.
Assuming average prices of $3.00 per pound of copper and $30 per
pound of molybdenum for 2008 and achievement of current 2008 sales
estimates, we estimate that the 2008 average unit net cash costs for our
North American mines, including molybdenum credits, would approximate
$1.00 per pound of copper.
2006 Compared with 2005 (Pro Forma). North American mining’s
unit net cash costs for 2006 were higher than in 2005 primarily
because of higher labor, maintenance, operating supplies and other input
costs mostly from the restart of Morenci’s mill operations and because
of lower molybdenum credits resulting from lower average realized
molybdenum prices.
Henderson Unit Net Cash Costs (Pro Forma). The following table
summarizes the pro forma unit net cash costs at the Henderson mine
for the full twelve-month periods ended December 31, 2007, 2006 and
2005. For a reconciliation of pro forma unit net cash costs per pound
to production and delivery costs applicable to sales reported in FCX’s
pro forma consolidated financial results, refer to “Product Revenues and
Production Costs.”
Henderson Gross Profit per Pound of Molybdenum (Pro Forma)
Years Ended December 31, 2007 2006 2005
Revenues $ 26.10 $ 22.14 $ 27.63
Site production and delivery, before net
noncash and nonrecurring costs shown below 4.32 3.71 3.65
Unit net cash costs 4.32 3.71 3.65
Depreciation and amortization 1.00 0.89 0.88
Noncash and nonrecurring costs, net 0.02 0.02 0.01
Total unit costs 5.34 4.62 4.54
Gross profita $ 20.76 $ 17.52 $ 23.09
Consolidated molybdenum sales
(millions of recoverable pounds) 39 37 32
a. Gross profit reflects sales of Henderson products based on volumes produced at market-based
pricing. On a consolidated basis, the Molybdenum segment includes profits on sales as they are
made to third parties and realizations based on actual contract terms.
2007 Compared with 2006 (Pro Forma). Henderson’s higher unit net
cash costs per pound of molybdenum for 2007, compared with 2006,
primarily were associated with higher input costs, including labor, supplies
and service costs, and higher taxes. These higher costs were partly offset
by lower energy costs resulting from energy credits received in 2007.
Assuming an average price of $30 per pound of molybdenum for 2008
and achievement of current 2008 sales estimates, we estimate that the
2008 average unit net cash costs for Henderson would approximate
$4.50 per pound of molybdenum.
2006 Compared with 2005 (Pro Forma). Henderson’s higher unit net
cash costs per pound of molybdenum for 2006, compared with 2005,
primarily reflected higher input costs, including labor, supplies and service
costs and higher taxes.
South American Mining
We have four operating copper mines in South America – Cerro Verde in
Peru, and Candelaria, Ojos del Salado and El Abra in Chile. These operations
include open-pit and underground mining, sulfide ore concentrating,
leaching and SX/EW.
Our South American mining operations have labor agreements
covering certain employees; the agreements at our Cerro Verde and El
Abra operations expire and will be renegotiated during 2008.
The South American mining division includes one reportable segment
(Cerro Verde). Following is further discussion of this reportable segment, as
well as other operations included in the South American mining division.
Cerro Verde. The Cerro Verde open-pit mine, located near Arequipa,
Peru, produces copper cathodes and copper concentrates. In addition to
copper, the Cerro Verde mine produces molybdenum and silver. We own a
53.56 percent interest in Cerro Verde. The remaining 46.44 percent is
held by SMM Cerro Verde Netherlands B.V., Compañía de Minas
Buenaventura S.A.A. and other shareholders, certain of whose shares are
publicly traded on the Lima Stock Exchange.
In mid-2007, the recently expanded mill at Cerro Verde reached design
capacity of 108,000 metric tons of ore per day and averaged 105,500
metric tons per day during the second half of 2007. The expansion enables
Cerro Verde to produce approximately 650 million pounds of copper per