Freeport-McMoRan 2008 Annual Report Download - page 28

Management’s Discussion and Analysis
shipment date) based primarily on quoted LME prices. We
receive market prices based on prices in the specified future
period, and 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 prices, which results in an
embedded derivative on our provisional priced concentrate and
cathode sales that is 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 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
sales pursuant to contracts entered into in prior years; in times
of falling copper prices, the opposite occurs.
LME spot copper prices averaged $3.15 per pound in 2008,
compared with our average recorded price of $2.69 per pound. At
December 31, 2008, we had provisionally priced copper sales
totaling 508 million pounds of copper (net of minority interests)
recorded at an average of $1.39 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, 2008,
provisional price recorded would impact our 2009 consolidated
revenues by $33 million ($16 million to net income).
At December 31, 2007, we had provisionally priced copper
sales of 402 million pounds of copper (net of minority interests)
recorded at an average of $3.02 per pound. Higher prices during
the first half of 2008 resulted in adjustments to these prior year
copper sales and increased consolidated revenues by $268 million
($114 million to net loss or $0.30 per share) in 2008, compared
with a decrease of $42 million ($18 million to net income or $0.05
per share) in 2007 from adjustments to prior year copper sales.
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. Also, in connection with
the Phelps Dodge acquisition, we assumed the 2007 copper price
protection program, which resulted in charges to revenues in
2007 totaling $175 million ($106 million to net income or $0.27 per
share). The 2007 copper price protection program matured
on December 31, 2007. We do not intend to enter into similar
hedging programs in the future.
2007 Compared with 2006
Consolidated sales volumes in 2007 totaled 3.4 billion pounds of
copper, 2.3 million ounces of gold and 52 million pounds of
molybdenum, compared with 1.2 billion pounds of copper and
1.7 million ounces of gold in 2006. Higher copper and molybdenum
sales volumes in 2007 reflected sales at our North and South
America copper mines and Molybdenum operations beginning
March 20, 2007. Sales from these operations from March 20, 2007,
through December 31, 2007, totaled approximately 2.2 billion
pounds of copper and 52 million pounds of molybdenum. The
increase in gold sales volumes for 2007, compared with 2006, was
related to higher grades and recovery rates at the Grasberg
mine in Indonesia.
Realized copper and gold prices improved in 2007 to an average
of $3.34 per pound for copper (excluding the impact from the 2007
copper price protection program) and $682 per ounce for gold,
compared with $3.13 per pound for copper and $606 per ounce for
gold (excluding adjustments associated with the redemption of
our Gold-Denominated Preferred Stock, Series II) in 2006.
Adjustments to prior year copper sales decreased consolidated
revenues by $42 million ($18 million to net income or $0.05
per share) in 2007, compared with an increase of $126 million
($65 million to net income or $0.29 per share) in 2006.
The 2007 copper price protection program resulted in charges
to revenues totaling $175 million ($106 million to net income or
$0.27 per share) in 2007.
Production and Delivery Costs
2008 Compared with 2007
Consolidated production and delivery costs totaled $10.4 billion
in 2008 compared with $8.5 billion in 2007. Higher production and
delivery costs for 2008 reflect a full year of costs associated
with our acquired copper and molybdenum operations in North
and South America and the impact of higher costs, principally for
commodity-based input costs such as energy and sulfuric acid.
Partly offsetting these higher costs were $656 million of lower
purchase accounting impacts associated with increased
inventory values that were mostly realized in 2007.
Consolidated unit net cash costs related to our copper mining
operations totaled $1.16 per pound of copper in 2008, compared
with $0.76 per pound of copper in 2007 (for reconciliations of
per pound costs by operating division to production and delivery
costs applicable to sales reported in our consolidated financial
statements, refer to “Operations – Unit Net Cash Costs” and to
“Product Revenues and Production Costs”). The increase in unit
net cash costs in 2008 primarily reflected higher commodity-
based input costs, principally related to energy and sulfuric acid,
and also reflected lower by-product credits mostly associated
with lower gold volumes in 2008.
Energy costs approximated 25 percent of our consolidated
copper production costs in 2008 (compared with approximately
20 percent in 2007) and included purchases of approximately
230 million gallons of diesel fuel, 800 thousand metric tons of
coal, 6,500 gigawatt hours of electricity and 3 million MMBTU
(million british thermal units) of natural gas. Commodity-based
input costs have declined dramatically in late 2008, and we
expect to realize the benefits of these declines in 2009 (refer to
26 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report