Freeport-McMoRan 2010 Annual Report Download - page 100

FREEPORT-McMoRan COPPER & GOLD INC. 2010 Annual Report
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FCX’s Cerro Verde copper mine has provided a variety of
community support projects over the years. During 2006, as a result
of discussions with local mayors in the Arequipa region, Cerro Verde
agreed to contribute to the design and construction of domestic
water and sewage treatment plants for the benefit of the region.
These facilities are being designed in a modular fashion so that
initial installations can be readily expanded in the future. FCX
charged cost of sales in 2008 and funded approximately $49 million
to a designated bank account that is being used for financing
Cerro Verde’s share of the construction costs of these facilities.
During 2006, the Peruvian government announced that all mining
companies operating in Peru would make annual contributions to
local development funds for a five-year period (covering the years
2006 through 2010) when copper prices exceed certain levels that
are adjusted annually. The contribution is equal to 3.75 percent of
after-tax profits, of which 2.75 percent is contributed to a local
mining fund and 1.00 percent to a regional mining fund. The charge
to cost of sales for these local mining fund contributions totaled
$41 million in 2010 and $28 million in 2009 and 2008. It is not
certain whether the contribution will be extended, abandoned,
or replaced by a tax or different mechanism. FCX will continue to
monitor the activity associated with this matter.
Tenke Fungurume has committed to assist the communities living
within its concession in the Katanga province of the DRC. Tenke
Fungurume will contribute 0.3 percent of net sales revenue from
production to a community development fund to assist the local
communities with development of local infrastructure and related
services, such as those pertaining to health, education and economic
development. Tenke Fungurume charged $3 million in 2010 and
$1 million in 2009 to cost of sales for this commitment.
Guarantees. FCX provides certain financial guarantees (including
indirect guarantees of the indebtedness of others) and indemnities.
At its Morenci mine in Arizona, FCX has a venture agreement dated
February 7, 1986, with Sumitomo, which includes a put and call
option guarantee clause. FCX holds an 85 percent undivided interest
in the Morenci complex. Under certain conditions defined in the
venture agreement, Sumitomo has the right to sell its 15 percent
share to FCX. Likewise, under certain conditions, FCX has the right to
purchase Sumitomo’s share of the venture. At December 31, 2010,
the maximum potential payment FCX is obligated to make to
Sumitomo upon exercise of the put option (or FCX’s exercise of its
call option) totaled approximately $132 million based on calculations
defined in the venture agreement. At December 31, 2010, FCX had
not recorded any liability in its consolidated financial statements
in connection with this guarantee as FCX does not believe, based on
information available, that it is probable that any amounts will be
paid under this guarantee as the fair value of Sumitomo’s 15 percent
share is in excess of the exercise price.
Prior to its acquisition by FCX, FMC and its subsidiaries have, as
part of merger, acquisition, divestiture and other transactions, from
time to time, indemnified certain sellers, buyers or other parties
related to the transaction from and against certain liabilities
associated with conditions in existence (or claims associated with
actions taken) prior to the closing date of the transaction. As part of
these transactions, FMC indemnified the counterparty from and
against certain excluded or retained liabilities existing at the time of
sale that would otherwise have been transferred to the party at
closing. These indemnity provisions generally now require FCX to
indemnify the party against certain liabilities that may arise in the
future from the pre-closing activities of FMC for assets sold or
purchased. The indemnity classifications include environmental, tax
and certain operating liabilities, claims or litigation existing at closing
and various excluded liabilities or obligations. Most of these indemnity
obligations arise from transactions that closed many years ago, and
given the nature of these indemnity obligations, it is impossible to
estimate the maximum potential exposure. Except as described in the
following sentence, FCX does not consider any of such obligations as
having a probable likelihood of payment that is reasonably estimable,
and accordingly, has not recorded any obligations associated with
these indemnities. With respect to FCX’s environmental indemnity
obligations, any expected costs from these guarantees are accrued
when potential environmental obligations are considered by
management to be probable and the costs can be reasonably estimated.
NOTE 15. Financial Instruments
FCX does not purchase, hold or sell derivative financial instruments
unless there is an existing asset or obligation or if it anticipates
a future activity that is likely to occur and will result in exposure to
market risks and FCX intends to offset or mitigate such risks.
FCX does not enter into any derivative financial instruments for
speculative purposes, but has entered into derivative financial
instruments in limited instances to achieve specific objectives. These
objectives principally relate to managing risks associated with
commodity price, foreign currency and interest rate risks. The fair
values of FCX’s financial derivative instruments are based on widely
published market closing prices.
A summary of unrealized gains recognized in income (loss) before
income taxes and equity in affiliated companies’ net earnings for
derivative financial instruments that are designated and qualify as fair
value hedge transactions, along with the unrealized losses on the
related hedged item (firm sales commitments) for the years ended
December 31 follows:
2010 2009 2008
Commodity contracts:
FMC’s copper futures and swap contracts
a
Derivative financial instruments $ 7 $ 11 $ —
Hedged item
(7) (11) —
a. Amounts are recorded in revenues.