Freeport-McMoRan 2008 Annual Report Download - page 23

Management’s Discussion and Analysis
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 21
near and long-term metal price assumptions; estimates of
commodity-based and other input costs; proven and probable
reserve estimates, including any costs to develop the reserves and
the timing of producing the reserves; and the use of appropriate
current escalation and discount rates. Projected long-term average
metal prices represented the most significant assumption used in
the cash flow estimates. In connection with the March 2007
acquisition of Phelps Dodge, we allocated the $25.8 billion
purchase price to the estimated fair values of net assets acquired,
including $6.2 billion for goodwill (refer to Note 18 for a summary
of the final purchase price allocation). Metal price projections used
to value the net assets acquired at the acquisition date ranged
from near-term prices of $2.98 per pound for copper declining over
an eight-year period to $1.20 per pound and $26.20 per pound for
molybdenum declining over a five-year period to $8.00 per pound,
reflecting price expectations at that time. Our December 31, 2008,
impairment evaluations were based on price assumptions
reflecting prevailing copper futures prices for three years, which
ranged from approximately $1.40 per pound to $1.50 per pound,
and a long-term average price of $1.60 per pound. Molybdenum
prices were assumed to average $8.00 per pound.
Our evaluation of long-lived assets, other than goodwill,
resulted in the recognition of asset impairment charges totaling
$10.9 billion ($6.6 billion to net loss or $17.34 per share) for 2008.
Additionally, our annual impairment test of goodwill resulted in
the full impairment of goodwill, resulting in the recognition of
goodwill impairment charges totaling $6.0 billion ($6.0 billion to
net loss or $15.69 per share) for 2008. Neither of these impairment
charges had an impact on our operating cash flows.
We believe events that could result in additional impairment of
our long-lived assets include, but are not limited to, (i) decreases
in future metal prices, (ii) decreases in estimated recoverable
proven and probable reserves and (iii) any event that might
otherwise have a material adverse effect on mine site production
levels or costs.
Mineral Reserves and Depreciation, Depletion and Amortization.
As discussed in Note 1, we depreciate our life-of-mine mining
and milling assets and values assigned to proven and probable
reserves using the unit-of-production method based on our
estimated recoverable proven and probable copper reserves (for
primary copper mines) and estimated recoverable proven and
probable molybdenum reserves (for the primary molybdenum
mine). We have other assets that we depreciate on a straight-line
basis over their estimated useful lives. Our estimates of
recoverable proven and probable copper and molybdenum
reserves and the useful lives of our straight-line assets impact our
depreciation, depletion and amortization expense. These estimates
affect the results of operations of our operating segments.
Accounting for depreciation, depletion and amortization
represents a critical accounting estimate because the
determination of reserves involves uncertainties with respect to
the ultimate geology of our reserves and the assumptions used in
determining the economic feasibility of mining those reserves,
including estimated copper, gold and molybdenum prices and
costs of conducting future mining activities. Additionally,
changes in estimated recoverable proven and probable reserves
and useful asset lives could have a material impact on our results
of operations. We perform annual assessments of our existing
assets, including a review of asset costs and depreciable lives, in
connection with the review of mine operating and development
plans. When we determine that assigned asset lives do not reflect
the expected remaining period of benefit, we make prospective
changes to those depreciable lives.
There are a number of uncertainties inherent in estimating
quantities of reserves, including many factors beyond our control.
Ore reserve estimates are based upon engineering evaluations of
samplings of drill holes, tunnels and other underground
workings. Our estimates of recoverable proven and probable
reserves are prepared by and are the responsibility of our
employees, and a majority of these estimates are reviewed and
verified by independent experts in mining, geology and reserve
determination. At December 31, 2008, consolidated recoverable
reserves include 102.0 billion pounds of copper, 40.0 million
ounces of gold and 2.48 billion pounds of molybdenum. Refer to
Note 20 and “Proven and Probable Reserves” for further details
of estimated recoverable reserves. These estimates involve
assumptions regarding future copper, gold and molybdenum
prices, the geology of our mines, the mining methods we use and
the related costs we incur to develop and mine our reserves.
Changes in these assumptions could result in material
adjustments to our reserve estimates, which could result in
changes to depreciation, depletion and amortization expense in
future periods, with corresponding adjustments to net income. If
estimated copper reserves at our mines were 10 percent higher
at December 31, 2008, based on our current sales projections for
2009, we estimate that our annual depreciation, depletion and
amortization expense for 2009 would decrease by $29 million ($14
million to net income), and a 10 percent decrease would increase
depreciation, depletion and amortization expense by $36 million
($17 million to net income).
As discussed in Note 1, we review and evaluate our long-lived
assets for impairment when events or changes in circumstances
indicate that the related carrying amount of such assets may not
be recoverable. Our long-lived assets include amounts assigned
to proven and probable reserves totaling $4.1 billion at December
31, 2008. Changes to our estimates of recoverable proven and
probable reserves could have an impact on our assessment of
asset impairment. Revisions to our estimates of recoverable
proven and probable copper, gold and molybdenum reserves
could give rise to an impairment of our assets.