Freeport-McMoRan 2008 Annual Report Download - page 41

Management’s Discussion and Analysis
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 39
Costs” for a reconciliation of unit net cash costs per pound to
revenues and production and delivery costs included in FCX’s
pro forma consolidated financial statements (refer to Note 18) for
the year ended December 31, 2007, and as reported in Phelps
Dodge’s Form 10-K for the year ended December 31, 2006. As the
pre-acquisition data represents the results of these operations
under Phelps Dodge management, such combined data is
not necessarily indicative of what past results would have been
under FCX management or of future operating results.
2007
a
2006
a
Revenues $ 26.10 $ 22.14
Site production and delivery, before net noncash
and nonrecurring costs $ 4.32 $ 3.71
Combined unit net cash costs $ 4.32 $ 3.71
Molybdenum sales (millions of recoverable pounds)
b
39 37
a. For comparative purposes, 2007 combines our historical data beginning March 20,
2007, with Phelps Dodge pre-acquisition data through March 19, 2007, and 2006
reflects Phelps Dodge pre-acquisition data. As the pre-acquisition data represents
the results of these operations under Phelps Dodge management, such combined
data is not necessarily indicative of what past results would have been under FCX
management or of future operating results.
b. Reflects molybdenum produced by the Henderson molybdenum mine.
Henderson’s unit net cash costs were $4.32 per pound
of molybdenum in 2007, compared with $3.71 per pound of
molybdenum in 2006. Higher costs in 2007 primarily reflected
higher input costs, including labor, supplies and service costs,
and higher taxes, partly offset by lower energy costs resulting
from energy credits received during 2007.
Rod & Refining
The Rod & Refining operations consist of copper conversion
facilities located in North America, including a refinery, three rod
mills and a specialty copper products facility. These operations
process copper produced at our North America mines and
purchased copper into copper cathode, rod and custom copper
shapes. At times these operations refine copper and produce
copper rod and shapes for customers on a toll basis. Toll
arrangements require the tolling customer to deliver appropriate
copper-bearing material to our facilities for processing into a
product that is returned to the customer, who pays us for
processing their material into the specified products.
In response to the significant decrease in copper prices and
weak conditions in the rod market, our revised operating plans
included a decision in late 2008 to permanently close one of our
rod mills.
Atlantic Copper Smelting & Refining
Atlantic Copper is our wholly owned subsidiary located in Spain.
Atlantic Copper’s operations involve the smelting and refining
of copper concentrates and the marketing of refined copper and
precious metals in slimes. Our investment in smelters serves an
important role in our concentrate marketing strategy. PT Freeport
Indonesia generally sells, under long-term contracts,
approximately one-half of its concentrate production to its
affiliated smelters, Atlantic Copper and PT Smelting, and the
remainder to other customers. Additionally, beginning in 2008,
certain of our South America mining operations began selling
a portion of their copper concentrate and cathode inventories to
Atlantic Copper. Treatment charges for smelting and refining
copper concentrates represent a cost to PT Freeport Indonesia
and our South America mining operations and income to Atlantic
Copper and PT Smelting. Through downstream integration, we
are assured placement of a significant portion of our concentrate
production. Smelting and refining charges consist of a base
rate and, in certain contracts, price participation based on copper
prices. Higher treatment and refining charges benefit our smelter
operations at Atlantic Copper and adversely affect our mining
operations in Indonesia and South America. Our North America
copper mines are not significantly affected by changes in
treatment and refining charges because these operations are
fully integrated with our Miami smelter located in Arizona.
Atlantic Copper has a labor contract covering certain
employees, which expired in December 2007. During 2008, we
continued efforts to negotiate a new agreement; however, to
date, we have been unable to successfully negotiate a new labor
contract. During January 2009, the union went on strike, which
has not materially impacted Atlantic Copper’s operations.
We defer recognizing profits on PT Freeport Indonesia’s and
our South America copper mines’ sales to Atlantic Copper and on
25 percent of PT Freeport Indonesia’s sales to PT Smelting
(PT Freeport Indonesia’s 25-percent owned copper smelter and
refinery in Indonesia – refer to Note 3 for further discussion) until
final sales to third parties occur. Changes in these net deferrals
resulted in net additions to net income totaling $65 million ($0.17
per share) in 2008, $8 million ($0.02 per share) in 2007 and
$17 million ($0.08 per share) in 2006. At December 31, 2008, our
net deferred profits on PT Freeport Indonesia’s and the South
America copper mines’ inventories at Atlantic Copper and
PT Smelting to be recognized in future periods’ net income after
taxes and minority interests totaled $28 million.
DEVELOPMENT PROJECTS
We have several projects and potential opportunities to expand our
production volumes, extend our mine lives and develop large-scale
ore bodies. In response to the declines in copper and molybdenum
prices and the deterioration of the economic environment during
fourth-quarter 2008, we have deferred most of our project
development activities, including incremental expansions in North
and South America; the planned restart of the Miami mine;
development of the El Abra sulfide project; and the restart of the
Climax molybdenum mine. Current major development projects
include underground development in the Grasberg minerals
district and the Tenke Fungurume project in the DRC, although we
have reduced capital spending on these projects.