Freeport-McMoRan 2007 Annual Report Download - page 59

Financial & Operating Information 57
Management’s Discussion and Analysis
$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.
Approximately two-thirds of our copper is sold in concentrate and
cathodes and the remaining one-third is sold primarily as rod
(principally from our North American operations). Substantially all of our
concentrate sales contracts and some of our cathode sales contracts
provide final copper pricing in a specified future period (generally one to
four months from the shipment date) based on quoted LME or COMEX
prices. We ultimately receive market prices based on prices in the
specified future period; however, the accounting rules applied to these
sales result in changes recorded to revenues until the specified future
period. We record revenues and invoice customers at the time of
shipment based on then-current LME or COMEX prices, which results in
an embedded derivative on our provisional priced concentrate and
cathode sales that are adjusted to fair value through earnings each
period until the date of final pricing. To the extent final prices are higher
or lower than what was recorded on a provisional basis, an increase or
decrease to revenues is recorded each reporting period until the date of
final pricing. Accordingly, in times of rising copper prices, our revenues
during a quarter will benefit from higher prices received for contracts
priced at current market rates and also from an increase related to the
final pricing of provisionally priced contracts entered into in prior
periods; in times of falling copper prices, the opposite occurs.
Consolidated revenues for 2007 include net additions for adjustments to
the fair value of embedded copper derivatives in concentrate and
cathode sales contracts of $115 million (net of an adjustment of $43
million related to the final pricing of sales entered into in the prior year),
compared with net additions of $158 million in 2006 (including an
adjustment of $132 million related to the final pricing of sales entered
into in the prior year) and $176 million in 2005 (including an adjustment
of $10 million related to the final pricing of sales entered into in the
prior year).
At December 31, 2007, we had provisionally priced copper sales
totaling 402 million pounds (net of minority interests) recorded at an
average price of $3.02 per pound, subject to final pricing over the
next several months. We estimate that each $0.05 change in the price
realized from the December 31, 2007, pricing would have an
approximate $27 million impact on our 2008 consolidated revenues
($14 million impact to consolidated net income).
On limited past occasions, in response to market conditions, we have
entered into copper and gold price protection contracts for a portion
of our expected future mine production to mitigate the risk of adverse
price fluctuations. In connection with the acquisition of Phelps Dodge,
we assumed the 2007 copper price protection program, which matured
on December 31, 2007, and settled in January 2008 (refer to “Hedging
Activities” and Note 17 for further discussion). FCX does not currently
intend to enter into similar hedging programs in the future.
Foreign Currency Exchange Risk
The functional currency for most of our operations is the U.S. dollar.
All of our revenues and a significant portion of our costs are
denominated in U.S. dollars; however, some costs and certain assets
and liability accounts are denominated in local currencies, including
Indonesian rupiah, Australian dollars, Chilean pesos, Peruvian nuevo
soles and euros. Generally, our results are positively affected when
the U.S. dollar strengthens in relation to those foreign currencies and
adversely affected when the U.S. dollar weakens in relation to those
foreign currencies.
PT Freeport Indonesia’s labor costs are mostly rupiah denominated.
One U.S. dollar was equivalent to 9,390 rupiah at December 31, 2007,
8,989 rupiah at December 31, 2006, and 9,825 rupiah at December
31, 2005. Based on estimated annual payments of 2.1 trillion rupiah for
operating costs and an exchange rate of 9,390 rupiah to one U.S.
dollar, a one-thousand-rupiah increase in the exchange rate would
result in an approximate 22 million decrease in aggregate annual
operating costs; and a one-thousand-rupiah decrease in the exchange
rate would result in an approximate $27 million increase in annual
operating costs.
Approximately 15 percent of PT Freeport Indonesia’s projected
purchases of materials, supplies and services for 2008 are denominated
in Australian dollars. One Australian dollar was equivalent to $0.88 at
December 31, 2007, $0.79 at December 31, 2006, and $0.73 at
December 31, 2005. Based on estimated annual payments of 270 million
Australian dollars and an exchange rate of $0.88 to one Australian dollar,
a $0.01 increase or decrease in the exchange rate would result in an
approximate $3 million change in annual operating costs.
The majority of Atlantic Copper’s revenues are denominated in U.S.
dollars; however, operating costs, other than concentrate purchases,
and certain asset and liability accounts are denominated in euros. Atlantic
Copper’s estimated annual euro payments total approximately 100 million
euros. One euro was equivalent to $1.47 at December 31, 2007, $1.32 at
December 31, 2006, and $1.18 at December 31, 2005. Based on
estimated annual payments of approximately 100 million euros and an
exchange rate of $1.47 to one euro, a $0.05 increase or decrease in
the exchange rate would result in an approximate $5 million change in
annual operating costs.
At our South American mining operations, labor costs and local supply
costs are mostly denominated in the local currencies. One U.S. dollar
was equivalent to 498 Chilean pesos and 3.05 Peruvian nuevo soles at
December 31, 2007, 532 Chilean pesos and 3.20 Peruvian nuevo soles
at December 31, 2006, and 514 Chilean pesos and 3.43 Peruvian nuevo
soles at December 31, 2005. Based on estimated annual payments of
215 billion Chilean pesos for operating costs and an exchange rate of 498