Freeport-McMoRan 2008 Annual Report Download - page 47

Management’s Discussion and Analysis
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 45
environmental costs totaled $320 million in 2007, which included
$228 million incurred from March 20, 2007, through December 31,
2007, related to the acquired Phelps Dodge operations, and $63
million in 2006. The increase for 2008, compared with 2007,
primarily related to a full twelve months of Phelps Dodge
expenditures in 2008, plus increased expenditures on accelerated
reclamation and remediation activities. For 2009, we expect to
incur approximately $415 million of aggregate environmental
capital expenditures and other environmental costs, which are
part of our overall 2009 operating budget.
Refer to Note 15 for further information about environmental
regulation, including significant environmental matters.
Asset Retirement Obligations
We recognize AROs as liabilities when incurred, with the initial
measurement at fair value. These liabilities, which are initially
estimated based on discounted cash flow estimates, are accreted
to full value over time through charges to income. Reclamation
costs for future disturbances are recorded as an ARO in the
period of disturbance. Our cost estimates are reflected on a
third-party cost basis and comply with our legal obligation to
retire tangible, long-lived assets. We had $712 million at
December 31, 2008, and $728 million at December 31, 2007,
recorded for AROs in current and long-term liabilities on
the consolidated balance sheets. Refer to Note 15 for further
discussion of reclamation and closure costs.
DISCLOSURES ABOUT MARKET RISKS
Commodity Price Risk
Our consolidated revenues include the sale of copper rod, copper
cathodes, copper concentrates, molybdenum, gold and other
metals by our North and South America copper mines, the sale of
copper concentrates (which also contain significant quantities
of gold and silver) by our Indonesia mining operation, the sale of
molybdenum in various forms by our Molybdenum operations,
and the sale of copper anodes, copper cathodes and gold in
anodes and slimes by Atlantic Copper. Consolidated revenues,
net income and cash flows vary significantly with fluctuations in
the market prices of copper, gold and molybdenum, sales volumes
and other factors. Based on estimated sales volumes for 2009
and assuming average prices of $1.50 per pound of copper, $800
per ounce of gold and $9.00 per pound of molybdenum, our
consolidated operating cash flows for 2009 would approximate
$1.0 billion (which is net of $0.6 billion of working capital
requirements). The impact on our annual cash flow would
approximate $260 million for each $0.10 per pound change in
copper prices, $60 million for each $50 per ounce change in gold
prices and $50 million for each $1 per pound change in
molybdenum prices.
For 2008, more than half of our mined copper was sold in
concentrate, approximately 27 percent as rod (principally from
our North America operations) and approximately 19 percent as
cathodes. Substantially all of our concentrate sales contracts
and some of our cathode sales contracts provide final copper
pricing in a specified future period (generally one to four months
from the 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.
At December 31, 2008, we had provisionally priced copper
sales totaling 508 million pounds (net of minority interests)
recorded at a weighted-average price 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 totaling 402 million pounds (net of minority
interests) recorded at a weighted-average price of $3.02 per
pound. Consolidated revenues for 2008 include net additions
for adjustments related to these prior year copper sales of $268
million ($114 million to net loss or $0.30 per share), compared
with a decrease of $42 million ($18 million to net income or $0.05
per share) in 2007 and an increase of $126 million ($65 million
to net income or $0.29 per share) in 2006. In addition,
adjustments to provisionally priced sales can significantly impact
our quarterly revenues. At September 30, 2008, 467 million
pounds of copper (net of minority interests) were provisionally
priced at $2.89 per pound. Adjustments to these provisionally
priced copper sales decreased consolidated fourth-quarter 2008
revenues by $745 million ($343 million to net loss).
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. In connection with the
acquisition of Phelps Dodge, we assumed the 2007 copper price
protection program, which matured on December 31, 2007, and
settled in January 2008. FCX does not intend to enter into similar
hedging programs in the future.