Freeport-McMoRan 2010 Annual Report Download - page 29

MANAGEMENT’S DISCUSSION AND ANALYSIS
discussed below and in Note 1, we review and evaluate our long-lived
assets for impairment when events or changes in circumstances
indicate that the related carrying amount of such assets may not be
recoverable, and changes to our estimates of recoverable proven
and probable reserves could have an impact on our assessment of
asset recoverability.
Recoverable Copper. We record, as inventory, applicable costs for
copper contained in mill and leach stockpiles that are expected to
be processed in the future based on proven processing technologies.
Mill and leach stockpiles are evaluated periodically to ensure that
they are stated at the lower of cost or market. Accounting for
recoverable copper from mill and leach stockpiles represents a
critical accounting estimate because (i) it is generally impracticable
to determine copper contained in mill and leach stockpiles by
physical count, which requires management to employ reasonable
estimation methods and (ii) recovery rates from leach stockpiles can
vary significantly. The quantity of material delivered to mill and
leach stockpiles is based on surveyed volumes of mined material and
daily production records. Sampling and assaying of blasthole
cuttings determine the estimated copper grade contained in the
material delivered to the mill and leach stockpiles.
Expected copper recovery rates for mill stockpiles are determined
by metallurgical testing. The recoverable copper in mill stockpiles,
once entered into the production process, can be produced into
copper concentrate almost immediately.
Expected copper recovery rates for leach stockpiles are determined
using small-scale laboratory tests, small- to large-scale column
testing (which simulates the production-scale process), historical
trends and other factors, including mineralogy of the ore and rock
type. Ultimate recovery of copper contained in leach stockpiles can
vary significantly from a low percentage to more than 90 percent
depending on several variables, including type of copper recovery,
mineralogy and particle size of the rock. For newly placed material
on active stockpiles, as much as 70 percent of the copper
ultimately recoverable may be extracted during the first year, and the
remaining copper may be recovered over many years.
Processes and recovery rates are monitored regularly, and recovery
rate estimates are adjusted periodically as additional information
becomes available and as related technology changes. During
fourth-quarter 2010, revised recovery rate estimates at El Abra
resulted in a reduction of 163 million pounds in leach stockpiles.
At December 31, 2010, estimated recoverable copper was 2.6 billion
pounds in leach stockpiles (with a carrying value of $1.8 billion)
and 1.3 billion pounds in mill stockpiles (with a carrying value of
$505 million).
Environmental Obligations. Our mining, exploration, production
and historical operating activities are subject to stringent laws and
regulations governing the protection of the environment, and
compliance with those laws requires significant expenditures.
Environmental expenditures for closed facilities and closed portions
of operating facilities are expensed or capitalized depending upon
their future economic benefits. The general guidance provided by
U.S. GAAP requires that liabilities for contingencies be recorded
when it is probable that a liability has been incurred and the amount
can be reasonably estimated. Refer to Note 1 for discussion of our
accounting policy for environmental expenditures.
Accounting for environmental obligations represents a critical
accounting estimate because changes to environmental laws and
regulations and/or circumstances affecting our operations could
result in significant changes to our estimates, which could have a
significant impact on our results of operations. We review changes
in facts and circumstances associated with our environmental
obligations on a quarterly basis. Judgments and estimates are based
upon available facts, existing technology, presently enacted laws
and regulations, remediation experience, whether or not we are a
potentially responsible party (PRP), the ability of other PRPs to pay
their allocated portions and take into consideration reasonably
possible outcomes. Our cost estimates can change substantially as
additional information becomes available regarding the nature
or extent of site contamination, required remediation methods and
actions by or against governmental agencies or private parties.
At December 31, 2010, environmental obligations recorded in our
consolidated balance sheets totaled approximately $1.4 billion,
which reflect obligations for environmental liabilities attributed to the
Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) or analogous state programs and for
estimated future costs associated with environmental matters at
closed facilities and closed portions of certain operating facilities.
Following is a summary of changes in our estimated
environmental obligations for the years ended December 31
(in millions):
2010 2009 2008
Balance at beginning of year $ 1,464 $ 1,401 $ 1,268
Liabilities assumed in the acquisition
of Phelps Dodge
— — 117
Accretion expense
a
97 102 95
Additions
19 40 36
Reductions
— (3) (1)
Spending
(158) (76) (114)
Balance at end of year
$ 1,422 $ 1,464 $ 1,401
a. Represents accretion of the fair value of environmental obligations assumed in the
acquisition of Phelps Dodge, which were determined on a discounted cash flow basis.
Refer to Note 13 for further discussion of environmental obligations.
FREEPORT-McMoRan COPPER & GOLD INC. 2010 Annual Report
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