Freeport-McMoRan 2010 Annual Report Download - page 97

FREEPORT-McMoRan COPPER & GOLD INC. 2010 Annual Report
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 12, 2010, FCX was notified by the U.S. Department of
Justice, acting at the request of EPA, that the U.S. was preparing to
file suit in federal court against two of its wholly owned subsidiaries
(Cyprus Mines Corporation and Cyprus Amax Minerals Company, Inc.)
and several other parties to recover costs incurred or to be incurred
by the U.S. in responding to the release or threatened release of
hazardous substances at the Gilt Edge Mine Site in Lawrence County,
South Dakota. The letter stated that the U.S. would assert that the
Cyprus entities are jointly and severally liable with the other parties
for all response costs incurred by the U.S. at this site under CERCLA.
The letter asserted that the U.S. had incurred approximately
$91 million in response costs and expected to incur significant
additional response costs in the future. FCX does not know whether
the other parties could contribute materially to reimbursement of
these response costs.
FCX has conducted a detailed investigation of this site and has
concluded that the Cyprus entities were engaged only in exploration
at the site and were not involved in the large-scale mining operation
that left the site in its current condition. FCX believes there is a
reasonable basis for apportioning the response costs based on
historical records of activities at the site, so that the liability of the
Cyprus entities should be proportional to the actual harm done,
rather than joint and several, as the government asserts. FCX is
engaged in discussions with the U.S. and FCX intends to vigorously
defend this matter if the government files suit.
Columbian Chemicals Company (Columbian), formerly a subsidiary
of Phelps Dodge, has notified FCX of various indemnification claims
arising out of the 2005 agreement pursuant to which Columbian was
sold. The principal outstanding claims relate to (1) litigation pending
against Columbian in West Virginia state court for alleged personal
injury and property damage resulting from exposure to carbon black
(the carbon black matter) and (2) an investigation being conducted
by EPA of potential Clean Air Act violations during the period
Columbian was owned by Phelps Dodge (the Clean Air Act matter).
FCX believes that its indemnity obligations, if any, for both of these
matters are subject to an aggregate limit under the 2005 agreement
of approximately $110 million. FCX believes that Columbian’s
exposure, if any, for the Clean Air Act matter is below that aggregate
limit, but FCX cannot estimate Columbian’s exposure for the carbon
black matter. Columbian has asserted in a suit filed in New York state
court in April 2010 entitled Columbian Chemicals Company and
Columbian Chemicals Acquisition LLC v. Freeport-McMoRan
Corporation f/k/a Phelps Dodge Corporation, County of New York,
Supreme Court of the State of New York, Index No. 600999/2010,
that the carbon black matter is not subject to that limit, and FCX is
opposing that assertion. FCX intends to meet its obligations under the
2005 agreement, but will vigorously defend against any effort by
Columbian to expansively interpret those obligations.
Letters of Credit, Bank Guarantees and Surety Bonds. Letters of
credit and bank guarantees totaled $97 million at December 31, 2010,
primarily for reclamation and environmental obligations, workers’
compensation insurance programs, tax and customs obligations,
and other commercial obligations. In addition, FCX had surety bonds
totaling $123 million at December 31, 2010, associated with
reclamation and closure ($101 million — see discussion above),
self-insurance bonds primarily for workers’ compensation ($19 million)
and other bonds ($3 million).
Insurance. FCX purchases a variety of insurance products to
mitigate potential losses. The various insurance products typically
have specified deductible amounts or self-insured retentions and
policy limits. FCX generally is self-insured for U.S. workers’
compensation, but purchases excess insurance up to statutory limits.
An actuarial analysis is performed twice a year for various FCX
casualty programs, including workers’ compensation, to estimate
required insurance reserves. Insurance reserves totaled $67 million
at December 31, 2010, which consisted of a current portion of
$9 million (included in accounts payable and accrued liabilities) and
a long-term portion of $58 million (included in other liabilities).
Other. In October 2010, PT Freeport Indonesia received from the
Indonesian tax authorities an assessment for additional taxes
approximating $106 million and interest approximating $52 million
related to various audit exceptions for 2005. PT Freeport Indonesia
has filed objections to these assessments because it believes that
it has properly paid taxes for the year 2005 and is working with the
Indonesian tax authorities to resolve this matter.
In December 2009, PT Freeport Indonesia was notified by the
Large Taxpayer’s Office of the Government of Indonesia that
PT Freeport Indonesia is obligated to pay value added taxes on
certain goods imported after the year 2000. The amount of taxes
and penalties would be significant. PT Freeport Indonesia believes
that, pursuant to the terms of its Contract of Work, it is only required
to pay value added taxes on these types of goods imported after
December 30, 2009. PT Freeport Indonesia has not received an
assessment and is working with the applicable government
authorities to resolve this matter.
In December 2008, Cerro Verde was notified by SUNAT, the
Peruvian national tax authority, of its intent to assess mining royalties
related to the minerals processed by the Cerro Verde concentrator,
which was added to Cerro Verde’s processing facilities in late 2006.
In August 2009, Cerro Verde received an assessment approximating
$34 million in connection with its alleged obligations for mining
royalties and penalties for the period from October 2006 to
December 2007. In April 2010, SUNAT issued a ruling denying
Cerro Verde’s protest of the assessment, and in May 2010,
Cerro Verde appealed this decision to the Tax Court. Cerro Verde
also received an assessment approximating $41 million in mining
royalties and penalties for the year 2008 (refer to Note 21 for a
discussion of the ruling on this matter in February 2011) and a
request for information for mining royalties covering the year 2009.
SUNAT may continue to assess mining royalties annually until this