Freeport-McMoRan 2007 Annual Report Download - page 77

Financial & Operating Information 75
Notes to Consolidated Financial Statements
Both mill and leach stockpiles generally contain lower-grade ores that
have been extracted from the ore body and are available for copper
recovery. For mill stockpiles, recovery is through milling, concentrating,
smelting and refining or, alternatively, by concentrate leaching. For leach
stockpiles, recovery is through exposure to acidic solutions that dissolve
contained copper and deliver it in solution to extraction processing
facilities. The recorded cost of mill and leach stockpiles includes mining
and haulage costs incurred to deliver ore to stockpiles, depreciation,
depletion, amortization and site overhead costs.
Because it is generally impracticable to determine copper contained in
mill and leach stockpiles by physical count, reasonable estimation
methods are employed. The quantity of material delivered to mill and
leach stockpiles is based on surveyed volumes of mined material and
daily production records. Sampling and assaying of blasthole cuttings
determine the estimated copper grade of the material delivered to mill
and leach stockpiles.
Expected copper recovery rates for mill stockpiles are determined
by metallurgical testing. The recoverable copper in mill stockpiles, once
entered into the production process, can be produced into copper
concentrate almost immediately.
Expected copper recovery rates for leach stockpiles are determined
using small-scale laboratory tests, small- to large-scale column testing
(which simulates the production-scale process), historical trends and
other factors, including mineralogy of the ore and rock type. Ultimate
recovery of copper contained in leach stockpiles can vary significantly
from a low percentage to more than 90 percent depending on several
variables, including type of copper recovery, mineralogy and particle size
of the rock. For newly placed material on active stockpiles, as much as 70
percent of the copper ultimately recoverable may be extracted during the
first year, and the remaining copper may be recovered over many years.
Processes and recovery rates are monitored continuously, and
recovery rate estimates are adjusted periodically as additional information
becomes available and as related technology changes.
Property, Plant, Equipment and Development Costs. Property, plant,
equipment and development costs are carried at cost. Mineral exploration
costs, as well as drilling and other costs incurred for the purpose of
converting mineral resources to proven and probable reserves or identifying
new mineral resources at development or production stage properties,
are charged to expense as incurred. Development costs are capitalized
beginning after proven and probable reserves have been established.
Development costs include costs incurred resulting from mine pre-
production activities undertaken to gain access to proven and probable
reserves including shafts, adits, drifts, ramps, permanent excavations,
infrastructure and removal of overburden. Additionally, interest expense
allocable to the cost of developing mining properties and to constructing new
facilities is capitalized until assets are ready for their intended use.
Expenditures for replacements and improvements are capitalized. Costs
related to periodic scheduled maintenance (i.e., turnarounds) are expensed
as incurred. Depreciation for mining and milling life-of-mine assets,
infrastructure and other common costs is determined using the unit-of-
production method based on total estimated recoverable proven and
probable copper reserves (for primarily copper mines) and proven and
probable molybdenum reserves (for primarily molybdenum mines).
Development costs and acquisition costs for proven and probable reserves
that relate to a specific ore body are depreciated using the unit-of-production
method based on estimated recoverable proven and probable reserves for
the ore body benefited. Depreciation, depletion and amortization using the
unit-of-production method is recorded upon extraction of the recoverable
copper or molybdenum from the ore body, at which time it is allocated
to inventory cost and then included as a component of cost of goods sold.
Other assets are depreciated on a straight-line basis over estimated
useful lives of up to 30 years for buildings, three to 25 years for machinery
and equipment, and three to 20 years for mobile equipment.
Included in property, plant, equipment and development costs is value
beyond proven and probable reserves (VBPP) resulting from FCX’s
acquisition of Phelps Dodge. The concept of VBPP is described in FASB
Emerging Issues Task Force (EITF) Issue No. 04-3, “Mining Assets:
Impairment and Business Combinations,” and has been interpreted
differently by different mining companies. FCX’s preliminary adjustment
to property, plant and equipment includes VBPP attributable to
(i) mineralized material, which includes measured and indicated amounts,
that FCX believes could be brought into production with the
establishment or modification of required permits and should market
conditions and technical assessments warrant, (ii) inferred mineral
resources and (iii) exploration potential.
Mineralized material is a mineralized body that has been delineated by
appropriately spaced drilling and/or underground sampling to support
reported tonnage and average grade of minerals. Such a deposit does
not qualify as proven and probable reserves until legal and economic
feasibility are confirmed based upon a comprehensive evaluation
of development costs, unit costs, grades, recoveries and other material
factors. Inferred mineral resources is that part of a mineral resource
for which the overall tonnages, grades and mineral contents can be
estimated with a reasonable level of confidence based on geological
evidence and apparent geological and grade continuity after applying
economic parameters. An inferred mineral resource has a lower
level of confidence than that applying to an indicated mineral resource.
Exploration potential is the estimated value of potential mineral deposits
that FCX has the legal right to access. The value assigned to exploration
potential was determined by interpreting the known exploration
information and exploration results, including geological data and/or
geological information, that were available as of the acquisition date.
Carrying amounts assigned to VBPP are not charged to expense until
the VBPP becomes associated with additional proven and probable
reserves and they are produced or the VBPP is determined to be impaired.
Additions to proven and probable reserves for properties with VBPP will
carry with them the value assigned to VBPP at the date FCX acquired
Phelps Dodge.