Freeport-McMoRan 2007 Annual Report Download - page 58

FREEPORT-McMoRan COPPER & GOLD INC.
2007 Annual Report
56 Financial & Operating Information
Management’s Discussion and Analysis
In 2005, PT Freeport Indonesia agreed to participate in the Government
of Indonesia’s PROPER program. In March 2006, the Indonesian Ministry of
Environment announced the preliminary results of its PROPER
environmental management audit, acknowledging the effectiveness of PT
Freeport Indonesia’s environmental management practices in some areas
while making several suggestions for improvement in others. We are
working with the Ministry of Environment to address the issues raised as
we complete the audit process.
In connection with obtaining our environmental approvals from
the Indonesian government, we committed to perform a one-time
environmental risk assessment on the impacts of our tailings
management plan. We completed this extensive environmental risk
assessment with more than 90 scientific studies conducted over
four years and submitted it to the Indonesian government in December
2002. We developed the risk assessment study with input from an
independent review panel, which included representatives from the
Indonesian government, academia and non-governmental organizations.
The risks that we identified during this process were in line with our
impact projections of the tailings management program contained in our
environmental approval documents.
The cost of complying with environmental laws is a fundamental cost
of our business. In 2007, we incurred aggregate environmental capital
expenditures and other environmental costs (including our joint venture
partners’ shares) of $320 million, including $228 million incurred since
March 20, 2007, related to the acquired Phelps Dodge operations, for
programs to comply with applicable environmental laws and regulations
that affect our operations. Aggregate environmental capital expenditures
and other environmental costs totaled $63 million in 2006 and $44
million in 2005. In 2008, we expect to incur approximately $520 million
of aggregate environmental capital expenditures and other
environmental costs, which are part of our overall 2008 operating
budget. The increase in projected 2008 amounts, compared with 2007,
primarily relates to ongoing environmental compliance and related
capital costs, plus increased expenditures on accelerated reclamation
and remediation activities.
Refer to Note 15 for additional information on significant environmental
matters.
Asset Retirement Obligations
We recognize asset retirement obligations (AROs) as liabilities when
incurred, with the initial measurement at fair value. These liabilities are
accreted to full value over time through charges to income. Reclamation
costs for future disturbances are recorded as an ARO in the period of
disturbance. 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. Refer to Note 1 for further discussion
of our accounting policy for reclamation and closure costs.
At December 31, 2007, we had $728 million recorded for AROs
in current and long-term liabilities on the consolidated balance sheets.
ARO costs may increase or decrease significantly in the future as a
result of changes in regulations, engineering designs and technology,
permit modifications or updates, mine plans, cost of inflation or other
factors and as actual reclamation spending occurs. ARO activities and
expenditures generally are made over an extended period of time
commencing near the end of the mine life; however, certain reclamation
activities could be accelerated if required, or if they are determined to
be economically beneficial.
Legal requirements in New Mexico, Arizona and Colorado require
financial assurance to be provided for the estimated costs of
reclamation and closure, including groundwater quality protection
programs. We have satisfied financial assurance requirements by using
a variety of mechanisms, such as third-party performance guarantees,
financial capability demonstrations, trust funds, surety bonds, letters of
credit and collateral. The applicable regulatory requirements provide
financial strength tests to support third-party performance guarantees
and financial capability demonstrations, which are designed to
confirm a company’s or third-party guarantor’s financial capability to
fund future estimated reclamation and closure costs. The amount of
financial assurance FCX is required to provide will vary with changes in
laws, regulations and reclamation and closure cost estimates. At
December 31, 2007, we had trust assets totaling $544 million that are
designated for funding global reclamation and remediation activities,
of which $106 million is legally restricted to fund a portion of our AROs
for Chino, Tyrone and Cobre as required by New Mexico regulatory
authorities.
Additionally, in 1996, PT Freeport Indonesia began contributing to a
cash fund ($10 million balance at December 31, 2007) designed to
accumulate at least $100 million (including interest) by the end of our
Indonesian mining activities. We plan to use this fund, including accrued
interest, to pay mine closure and reclamation costs. Any costs in
excess of the $100 million fund would be funded by operational cash
flow or other sources.
Refer to Note 15 for additional information on asset retirement
obligations.
DISCLOSURES ABOUT MARKET RISKS
Commodity Price Risk
Our consolidated revenues include (i) PT Freeport Indonesia’s sale of
copper concentrates, which also contain significant quantities of gold
and silver, (ii) Atlantic Copper’s sale of copper anodes, copper cathodes
and gold in anodes and slimes, and, (iii) beginning March 20, 2007, the
sale of copper, gold, molybdenum and other metals and metal-related
products by Phelps Dodge. Consolidated revenues, net income and cash
flows vary significantly with fluctuations in the market prices of copper,
gold and molybdenum, sales volumes and other factors. Based on
projected 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