Freeport-McMoRan 2010 Annual Report Download - page 73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Finished Goods. Finished goods include salable products (e.g.,
copper and molybdenum concentrates, copper anodes, copper
cathodes, copper rod, copper wire, molybdenum oxide, high-purity
molybdenum chemicals and other metallurgical products). Finished
goods are valued based on the weighted-average cost of source
material plus applicable conversion costs relating to associated
process facilities.
Mill and Leach Stockpiles. Mill and leach stockpiles are stated
at the lower of weighted-average cost or market. Both mill and
leach stockpiles generally contain lower grade ores that have been
extracted from the ore body and are available for copper recovery.
For mill stockpiles, recovery is through milling, concentrating,
smelting and refining or, alternatively, by concentrate leaching.
For leach stockpiles, recovery is through exposure to acidic solutions
that dissolve contained copper and deliver it in solution to
extraction processing facilities. The recorded cost of mill and
leach stockpiles includes mining and haulage costs incurred to
deliver ore to stockpiles, depreciation, depletion, amortization and
site overhead costs.
Because it is generally impracticable to determine copper
contained in mill and leach stockpiles by physical count, reasonable
estimation methods are employed. 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 of the
material delivered to 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.
Property, Plant, Equipment and Development Costs. Property, plant,
equipment and development costs are carried at cost. Mineral
exploration costs, as well as drilling and other costs incurred for the
purpose of converting mineral resources to proven and probable
reserves or identifying new mineral resources at development or
production stage properties, are charged to expense as incurred.
Development costs are capitalized beginning after proven and
probable reserves have been established. Development costs include
costs incurred resulting from mine pre-production activities
undertaken to gain access to proven and probable reserves including
shafts, adits, drifts, ramps, permanent excavations, infrastructure
and removal of overburden. Additionally, interest expense allocable to
the cost of developing mining properties and to constructing new
facilities is capitalized until assets are ready for their intended use.
Expenditures for replacements and improvements are capitalized.
Costs related to periodic scheduled maintenance (i.e., turnarounds)
are expensed as incurred. Depreciation for mining and milling
life-of-mine assets, infrastructure and other common costs is
determined using the unit-of-production method based on total
estimated recoverable proven and probable copper reserves (for
primary copper mines) and proven and probable molybdenum
reserves (for the primary molybdenum mine). Development costs and
acquisition costs for proven and probable reserves that relate to a
specific ore body are depreciated using the unit-of-production
method based on estimated recoverable proven and probable
reserves for the ore body benefited. Depreciation, depletion and
amortization using the unit-of-production method is recorded upon
extraction of the recoverable copper or molybdenum from the ore
body, at which time it is allocated to inventory cost and then included
as a component of cost of goods sold. Other assets are depreciated
on a straight-line basis over estimated useful lives of up to 30 years
for buildings and three to 20 years for machinery and equipment, and
mobile equipment.
Included in property, plant, equipment and development costs is
value beyond proven and probable reserves (VBPP) primarily resulting
from FCX’s acquisition of Phelps Dodge Corporation (Phelps Dodge)
in 2007. The concept of VBPP has been interpreted differently by
different mining companies. FCX’s VBPP is attributable to
(i) mineralized material, which includes measured and indicated
amounts, that FCX believes could be brought into production with the
establishment or modification of required permits and should market
conditions and technical assessments warrant, (ii) inferred mineral
resources and (iii) exploration potential, as further defined below.
Mineralized material is a mineralized body that has been
delineated by appropriately spaced drilling and/or underground
sampling to support reported tonnage and average grade of minerals.
Such a deposit does not qualify as proven and probable reserves until
legal and economic feasibility are confirmed based upon a
comprehensive evaluation of development costs, unit costs, grades,
recoveries and other material factors. Inferred mineral resources are
that part of a mineral resource for which the overall tonnages, grades
and mineral contents can be estimated with a reasonable level of
confidence based on geological evidence and apparent geological and
grade continuity after applying economic parameters. An inferred
mineral resource has a lower level of confidence than that applying to
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