Freeport-McMoRan 2010 Annual Report Download - page 34

MANAGEMENT’S DISCUSSION AND ANALYSIS
Provisionally Priced Sales
Under the long-established structure of sales agreements prevalent
in the industry, substantially all of our concentrate and cathode sales
are provisionally priced at the time of shipment. The provisional
prices are finalized in a contractually specified future period (generally
one to four months from the shipment date) based primarily on
quoted LME monthly average spot prices (refer to “Disclosures About
Market Risks — Commodity Price Risk” for further discussion).
Adjustments to the December 31, 2009, provisionally priced copper
sales resulted in a net decrease to consolidated revenues of
$24 million ($10 million to net income attributable to FCX common
stockholders or $0.01 per share) in 2010. Adjustments to the
December 31, 2008, provisionally priced copper sales resulted in a
net increase to consolidated revenues of $132 million ($61 million
to net income attributable to FCX common stockholders or
$0.07 per share) in 2009. Adjustments to the December 31, 2007,
provisionally priced copper sales resulted in an increase of
$268 million ($114 million to net loss attributable to FCX common
stockholders or $0.15 per share) in 2008.
Purchased Copper and Molybdenum
We primarily purchase copper cathode to be processed by our Rod
& Refining segment when production from our North America copper
mines does not meet customer demand. We also purchase
molybdenum concentrates when customer demand requires it. The
decrease in purchased copper and molybdenum for 2009, compared
to 2008, resulted from lower demand.
Atlantic Copper Revenues
The increase in Atlantic Copper’s revenues in 2010, compared with
2009, primarily reflected higher copper revenues associated
with higher prices. Atlantic Copper’s revenues decreased in 2009,
compared with 2008, primarily reflecting lower copper prices.
Production and Delivery Costs
2010 compared with 2009. Consolidated production and delivery
costs totaled $8.4 billion in 2010, compared with $7.0 billion in
2009. Higher production and delivery costs for 2010 primarily
reflect higher input costs at our mining operations and higher costs
of concentrate purchases at Atlantic Copper associated with higher
copper prices.
Consolidated unit site production and delivery costs for our copper
mining operations averaged $1.40 per pound of copper in 2010,
compared with $1.12 per pound of copper in 2009. Higher site
production and delivery costs in 2010 primarily reflected the impact
of lower copper sales volumes and increased input costs, including
materials, labor and energy, higher North America mining rates and
lower volumes at Grasberg. Refer to “Operations — Unit Net Cash
Costs” for further discussion of unit net cash costs associated with
our operating divisions, and to “Product Revenues and Production
Costs” for reconciliations of per pound costs by operating division to
production and delivery costs applicable to sales reported in our
consolidated financial statements.
Our copper mining operations require significant energy, principally
electricity, diesel, coal and natural gas. Energy costs approximated
20 percent of our consolidated copper production costs in 2010
and 2009, and included purchases of approximately 215 million
gallons of diesel fuel; 6,100 gigawatt hours of electricity at our
North America, South America and Africa copper mining operations
(we generate all of our power at our Indonesia mining operation);
800 thousand metric tons of coal for our coal power plant in
Indonesia; and 1 million MMBTU (million British thermal units) of
natural gas at certain of our North America mines. For 2011, we
estimate energy costs will approximate 20 percent of our
consolidated copper production costs.
2009 compared with 2008. Consolidated production and delivery
costs totaled $7.0 billion in 2009, compared with $10.4 billion
in 2008. Lower production and delivery costs for 2009 primarily
reflect the effects of lower operating rates at our North America
copper mines, lower commodity-based input costs and lower purchases
of copper.
Depreciation, Depletion and Amortization
2010 compared with 2009. Consolidated depreciation, depletion
and amortization expense totaled $1.0 billion in 2010 and 2009.
Higher depreciation, depletion and amortization expense in 2010
for a full year of operations at our Tenke mine was offset by lower
expense under the unit-of-production method at our South America and
Grasberg mines.
2009 compared with 2008. Consolidated depreciation, depletion
and amortization expense totaled $1.0 billion in 2009, compared
with $1.8 billion in 2008. The decrease in depreciation, depletion
and amortization expense reflected the impact of long-lived asset
impairments recognized at December 31, 2008, on our depreciable
net book values.
Lower of Cost or Market (LCM) Inventory Adjustments
Inventories are required to be recorded at the lower of cost or
market. In 2009, we recognized charges of $19 million ($15 million
to net income attributable to FCX common stockholders or
$0.02 per share) for LCM molybdenum inventory adjustments.
We recorded no further LCM inventory adjustments subsequent to
first-quarter 2009.
In 2008, we recorded LCM inventory adjustments totaling
$782 million ($479 million to net loss attributable to FCX common
stockholders or $0.63 per share). Inventories acquired in
connection with the acquisition of Phelps Dodge (including long-term
mill and leach stockpiles) were recorded at fair value using
near-term price forecasts reflecting the then-current price
environment and management’s projections for long-term average
metal prices.
FREEPORT-McMoRan COPPER & GOLD INC. 2010 Annual Report
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