Freeport-McMoRan 2008 Annual Report Download - page 101

Notes to Consolidated Financial Statements
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 99
Community Development Programs. FCX has adopted policies
that govern its working relationships with the communities
where it operates that are designed to guide its practices and
programs in a manner that respects basic human rights and the
culture of the local people impacted by FCX’s operations. FCX
continues to make significant expenditures on community
development, education, training and cultural programs.
In 1996, PT Freeport Indonesia established the Freeport
Partnership Fund for Community Development (formerly the
Freeport Fund for Irian Jaya Development) through which
PT Freeport Indonesia has made available funding and
technical assistance to support the economic health, education
and social development of the area. PT Freeport Indonesia has
committed through 2011 to provide one percent of its annual
revenue for the development of the local people in its area of
operations through the Freeport Partnership Fund for Community
Development. PT Freeport Indonesia charged $34 million in
2008, $48 million in 2007 and $44 million in 2006 to production
costs for this commitment.
FCX’s Cerro Verde copper mine has provided a variety of
community support projects over the years. During 2006, as a
result of discussions with local mayors in the Arequipa region,
Cerro Verde agreed to contribute to the design and construction
of domestic water and sewage treatment plants for the benefit
of the region. These facilities are being designed in a modular
fashion so that initial installations can be readily expanded in
the future. FCX has funded approximately 150 million Peruvian
nuevo soles (approximately $49 million at December 31, 2008)
to a designated bank account (included in other assets) to be used
for financing Cerro Verde’s share of the construction costs of
these facilities.
During 2006, the Peruvian government announced that all
mining companies operating in Peru will make annual
contributions to local development funds for a five-year period
when copper prices exceed certain levels that are adjusted
annually. The contribution is equal to 3.75 percent of after-tax
profits, of which 2.75 percent is contributed to a local mining fund
and 1.00 percent to a regional mining fund. The charge for
these local mining fund contributions totaled $28 million in 2008
and $49 million in 2007.
Guarantees. FCX provides certain financial guarantees
(including indirect guarantees of the indebtedness of others)
and indemnities.
At its Morenci mine in Arizona, FCX has a venture agreement
dated February 7, 1986, with Sumitomo, which includes a put and
call option guarantee clause. FCX holds an 85 percent undivided
interest in the Morenci complex. Under certain conditions defined
in the venture agreement, Sumitomo has the right to sell its 15
percent share to FCX. Likewise, under certain conditions, FCX
has the right to purchase Sumitomo’s share of the venture. Based
on calculations defined in the venture agreement, at December
31, 2008, the maximum potential payment FCX is obligated to
make to Sumitomo upon exercise of the put option (or FCX’s
exercise of its call option) totaled approximately $166 million.
At December 31, 2008, FCX had not recorded any liability in its
consolidated financial statements in connection with this
guarantee as FCX does not believe, based on information
available, that it is probable that any amounts will be paid under
this guarantee as the fair value of Sumitomo’s 15 percent share is
well in excess of the exercise price.
Prior to its acquisition by FCX, FMC and its subsidiaries have,
as part of merger, acquisition, divestiture and other transactions,
from time to time, indemnified certain sellers, buyers or other
parties related to the transaction from and against certain
liabilities associated with conditions in existence (or claims
associated with actions taken) prior to the closing date of the
transaction. As part of these transactions, FMC indemnified the
counterparty from and against certain excluded or retained
liabilities existing at the time of sale that would otherwise have
been transferred to the party at closing. These indemnity
provisions generally now require FCX to indemnify the party
against certain liabilities that may arise in the future from the
pre-closing activities of FMC for assets sold or purchased. The
indemnity classifications include environmental, tax and certain
operating liabilities, claims or litigation existing at closing and
various excluded liabilities or obligations. Most of these
indemnity obligations arise from transactions that closed many
years ago, and given the nature of these indemnity obligations, it
is impossible to estimate the maximum potential exposure.
Except as described in the following sentence, FCX does not
consider any of such obligations as having a probable likelihood
of payment that is reasonably estimable, and accordingly, has not
recorded any obligations associated with these indemnities. With
respect to FCX’s environmental indemnity obligations, any
expected costs from these guarantees are accrued when potential
environmental obligations are considered by management to be
probable and the costs can be reasonably estimated.
NOTE 17. FINANCIAL INSTRUMENTS
FCX and its subsidiaries do not purchase, hold or sell derivative
financial instruments unless there is an existing asset or
obligation or if FCX anticipates a future activity that is likely to
occur and will result in exposure to market risks. FCX does not
enter into any derivative financial instruments for speculative
purposes. FCX and its subsidiaries have entered into derivative
financial instruments in limited instances to achieve specific
objectives. These objectives principally relate to managing risks
associated with commodity price, foreign currency and interest
rate risks. The fair values of FCX’s financial derivative
instruments are based on derivative pricing models or widely
published market closing prices. As of December 31, 2008, no