Freeport-McMoRan 2008 Annual Report Download - page 43

Management’s Discussion and Analysis
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 41
of cobalt. The initial project is based on mining and processing
ore reserves approximating 119 million metric tons with average
ore grades of 2.6 percent copper and 0.35 percent cobalt (5.9
billion pounds of recoverable copper and 0.7 billion pounds of
recoverable cobalt). We expect the results of drilling activities will
enable future expansion of initial production rates. The timing of
these expansions will depend on a number of factors, including
general economic and market conditions.
Refer to Note 16 for further discussion of the February 2008
letter received from the Ministry of Mines, Government of the
DRC, seeking comment on proposed material modifications to the
mining contracts for the Tenke Fungurume concession.
Molybdenum
Climax. We have suspended construction activities associated
with the project to restart the Climax molybdenum mine near
Leadville, Colorado. Reclamation and environmental projects will
continue, and we will preserve the significant Climax reserves
and resources for better market conditions. We had previously
estimated capital costs of approximately $500 million for the
project to restart Climax. Approximately $180 million in project
costs have been incurred through December 31, 2008, and
remaining near-term commitments total $12 million. The project
was previously expected to commence production in 2010
ramping up to expected annual production of 30 million pounds
of molybdenum per year. Once a decision is made to resume
construction activities, the project would be capable of starting
up within a 12- to 18-month timeframe.
PROVEN AND PROBABLE RESERVES
Recoverable proven and probable reserves are estimated metal
quantities from which we expect to be paid after application of
estimated metallurgical recovery rates and smelter recovery
rates, where applicable. Recoverable reserves are that part of a
mineral deposit that can be economically and legally extracted
or produced at the time of the reserve determination. FCX’s
estimated consolidated recoverable reserves include 102.0 billion
pounds of copper, 40.0 million ounces of gold and 2.48 billion
pounds of molybdenum. Estimated recoverable reserves were
determined using long-term average prices of $1.60 per pound
for copper, $550 per ounce for gold and $8.00 per pound for
molybdenum, compared with our 2007 assumptions of $1.20 per
pound for copper, $450 per ounce for gold, and $6.50 per pound
for molybdenum. The London spot metal prices for the past three
years averaged $3.15 per pound for copper and $724 per ounce
for gold, and the molybdenum prices for the past three years
averaged approximately $28 per pound.
The following table summarizes the changes in our estimated
consolidated recoverable proven and probable copper, gold and
molybdenum reserves for 2008:
Copper Gold Molybdenum
(billion (million (billion
pounds) ounces) pounds)
Reserves at December 31, 2007 93.2 41.0 2.04
Net additions/revisions 12.8 0.3 0.51
Production (4.0) (1.3) (0.07)
Reserves at December 31, 2008 102.0 40.0 2.48
Net additions to recoverable copper reserves totaled
approximately 12.8 billion pounds, including additions of 3.9
billion pounds at our North America copper mines, 7.5 billion
pounds at the Cerro Verde mine in South America and 1.6 billion
pounds at the Tenke Fungurume project in the DRC. These
additions reflect positive results of drilling programs undertaken
during 2007 and 2008, and have replaced over 300 percent
of our 2008 copper production and 700 percent of our 2008
molybdenum production.
Refer to Note 20 for further information regarding estimated
recoverable proven and probable reserves.
CAPITAL RESOURCES AND LIQUIDITY
As a result of weak economic conditions, there is significant
uncertainty about the near-term price outlook for our principal
products. While we view the long-term outlook for our business
positively, supported by limitations on supplies of copper and
by the requirements for copper in the world’s economy, we have
responded to the sudden downturn and uncertain near-term
outlook and will continue to adjust our operating strategy as
market conditions change. Operating plans were revised to
curtail production at high-cost operations, defer or eliminate
capital projects and target reductions in costs, including reduced
exploration, research and administrative costs. We also
suspended our annual common stock dividend.
At December 31, 2008, we had $150 million of borrowings
and $74 million of letters of credit issued under our $1.5 billion
revolving credit facilities, resulting in availability of
approximately $1.3 billion ($926 million of which could be used
for additional letters of credit). During 2009, we may use the
facilities from time to time for working capital and short-term
funding requirements but do not intend to use the facilities for
long-term funding items. In addition, in February 2009 we
completed a public offering of 26.8 million shares of FCX common
stock and realized net proceeds of approximately $740 million,
which will be used for general corporate purposes (refer to
“Financing Activities” for further discussion).
Based on current mine plans and subject to future copper, gold
and molybdenum prices, we expect estimated 2009 cash flows
combined with net proceeds from the equity offering discussed
above and borrowings under our revolving credit facilities during
2009 to be greater than our budgeted capital expenditures,
scheduled debt maturities, minority interest distributions,
preferred dividends and other cash requirements.