Freeport-McMoRan 2007 Annual Report Download - page 76

FREEPORT-McMoRan COPPER & GOLD INC.
2007 Annual Report
74 Financial & Operating Information
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements of
Freeport-McMoRan Copper & Gold Inc. (FCX) include the accounts of those
subsidiaries where FCX directly or indirectly has more than 50 percent of
the voting rights and has the right to control significant management
decisions. The most significant entities that FCX consolidates include its
90.64 percent-owned subsidiary PT Freeport Indonesia and its wholly
owned subsidiaries, Phelps Dodge Corporation (Phelps Dodge) and Atlantic
Copper, S.A. (Atlantic Copper). FCX acquired Phelps Dodge on March 19, 2007.
FCX’s results of operations include Phelps Dodge’s results beginning
March 20, 2007 (see Note 2). FCX’s unincorporated joint ventures with Rio
Tinto plc (Rio Tinto) and Sumitomo Metal Mining Arizona, Inc. (Sumitomo)
are reflected using the proportionate consolidation method (see Note 3). All
significant intercompany transactions have been eliminated. Dollar amounts
in tables are stated in millions, except per share amounts.
Investments in unconsolidated companies owned 20 percent or more
are recorded using the equity method. Investments in companies owned
less than 20 percent, and for which FCX does not exercise significant
influence, are carried at cost.
Use of Estimates. The preparation of FCX’s financial statements in
conformity with accounting principles generally accepted in the United
States (U.S.) requires management to make estimates and assumptions
that affect the amounts reported in these financial statements and
accompanying notes. The more significant areas requiring the use of
management estimates include fair values of assets acquired and liabilities
assumed in the acquisition of Phelps Dodge; mineral reserve estimation;
useful asset lives for depreciation, depletion and amortization; reclamation
and closure costs; environmental obligations; estimates of recoverable
copper in mill and leach stockpiles; pension, postretirement, postemployment
and other employee benefits; deferred taxes and valuation allowances;
reserves for contingencies and litigation; future cash flows associated with
assets; and the estimated average ratio of overburden removed to ore
mined over the life of the open-pit mine (through December 31, 2005).
Actual results could differ from those estimates.
Foreign Currencies. For foreign subsidiaries whose functional currency
is the local currency, assets and liabilities are translated at current
exchange rates, while revenues and expenses are translated at average
rates in effect for the period. The related translation gains and losses
are included in accumulated other comprehensive income (loss) within
stockholders’ equity.
For foreign subsidiaries whose functional currency is the U.S. dollar,
assets receivable and liabilities payable in cash are translated at current
exchange rates, and inventories and other non-monetary assets and
liabilities are translated at historical rates. Gains and losses resulting from
translation of such account balances are included in operating results, as
are gains and losses from foreign currency transactions.
Cash Equivalents. Highly liquid investments purchased with
maturities of three months or less are considered cash equivalents.
Inventories. As shown in Note 5, the largest components in inventories
include finished goods (concentrates and cathodes) at mining operations,
concentrates and work-in-process at Atlantic Copper’s smelting and
refining operations, and materials and supplies inventories. Inventories of
materials and supplies, as well as salable products, are stated at the
lower of weighted average cost or market. Costs of finished goods and
work-in-process (i.e., not materials and supplies) inventories include labor
and benefits, supplies, energy, depreciation, depletion, amortization, site
overhead costs, and other necessary costs associated with the extraction
and processing of ore, including, depending on the process, mining,
haulage, milling, concentrating, smelting, leaching, solution extraction,
refining, roasting and chemical processing. General and administrative
costs for corporate offices are not included in inventory costs.
Work-in-Process. In-process inventories represent materials that are
currently in the process of being converted to a salable product. Conversion
processes for mining operations vary depending on the nature of the
copper ore and the specific mining operation. For sulfide ores, processing
includes milling and concentrating and results in the production of copper
and molybdenum concentrates or, alternatively, copper cathode by
concentrate leaching. For oxide ores and certain secondary sulfide ores,
processing includes leaching of stockpiles, solution extraction and
electrowinning and results in the production of copper cathodes. In-process
material is measured based on assays of the material included in these
processes and projected recoveries. In-process inventories are valued
based on the costs incurred to various points in the process, including
depreciation relating to associated process facilities. For Atlantic Copper,
in-process inventories represent copper concentrates at various stages of
conversion into anodes and cathodes. Atlantic Copper’s in-process
inventories are valued at the weighted average cost of the material fed to
the smelting and refining process plus in-process conversion costs.
Finished Goods. Finished goods include salable products (e.g., copper
and molybdenum concentrates, copper anodes, copper cathodes, copper
rod, copper wire, molybdenum oxide, high-purity molybdenum chemicals
and other metallurgical products). Finished goods are valued based
on the weighted average cost of source material plus applicable conversion
costs relating to associated process facilities.
In November 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 151,
“Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151
clarifies that abnormal amounts of idle facility expense, freight handling
costs and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. FCX adopted SFAS No. 151 on January 1, 2006, which did not
have a material impact on its accounting for inventory costs.
Mill and Leach Stockpiles. Mill and leach stockpiles are stated at the
lower of weighted average cost or market.