Freeport-McMoRan 2010 Annual Report Download - page 99

FREEPORT-McMoRan COPPER & GOLD INC. 2010 Annual Report
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
above 200,000 metric tons of ore per day. The additional royalty for
copper equals the Contract of Work royalty rate, and for gold and
silver equals twice the Contract of Work royalty rates. Therefore,
PT Freeport Indonesia’s royalty rate on copper net revenues from
production above the agreed levels is double the Contract of Work
royalty rate, and the royalty rates on gold and silver sales from
production above the agreed levels are triple the Contract of Work
royalty rates.
The combined royalties, including the additional royalties that
became effective January 1, 1999, totaled $156 million in 2010,
$147 million in 2009 and $113 million in 2008.
In 2008, the Government of Indonesia enacted a new mining law,
which will operate under a licensing system as opposed to the
contract of work system that applies to PT Freeport Indonesia. In
2010, the Government of Indonesia promulgated regulations
under the 2008 mining law and certain provisions address existing
contracts of work. The regulations provide that contracts of work will
continue to be honored until their expiration. However, the regulations
attempt to apply certain provisions of the new law to contracts of
work and that any extension periods would be pursuant to the new
licensing system even though PT Freeport Indonesia’s Contract of
Work provides for two 10-year extension periods under the existing
terms of its Contract of Work.
Africa. FCX is entitled to mine in the DRC under the Amended and
Restated Mining Convention (ARMC) between Tenke Fungurume
Mining S.A.R.L. (TFM) and the Government of the DRC. The original
Mining Convention was entered into in 1996 and was replaced
with the ARMC in 2005. The current ARMC will remain in effect for
as long as the Tenke Fungurume concession is exploitable. The
royalty rate payable by TFM under the ARMC is 2 percent of net
revenue. These mining royalties totaled $20 million in 2010 and
$7 million in 2009.
In February 2008, the Ministry of Mines, Government of the DRC,
sent a letter seeking comment on proposed material modifications
to the mining contracts for the Tenke Fungurume concession,
including the amount of transfer payments payable to the government,
the government’s percentage ownership and involvement
in the management of the mine, regularization of certain matters
under Congolese law and the implementation of social plans. In
October 2010, the government of the DRC announced the conclusion
of the review of TFM’s mining contracts. The conclusion of the review
process confirmed that TFM’s existing mining contracts are in good
standing and acknowledged the rights and benefits granted under
those contracts. TFM’s key fiscal terms, including a 30 percent
income tax rate, a 2 percent mining royalty rate and a 1 percent
export fee, will continue to apply and are consistent with the rates
in the DRC’s current Mining Code. In connection with the review,
TFM made several commitments, which have been reflected in
amendments to its mining contracts, including (1) an increase in the
ownership interest of La Générale des Carrières et des Mines’
(Gécamines), which is wholly owned by the government of the DRC,
from 17.5 percent (non-dilutable) to 20.0 percent (non-dilutable),
resulting in a decrease of FCX’s effective ownership interest from
57.75 percent to 56.0 percent and Lundin Mining Corporation’s
effective ownership interest from 24.75 percent to 24.0 percent;
(2) an additional royalty of $1.2 million for each 100,000 metric
tons of proven and probable copper reserves above 2.5 million metric
tons at the time new reserves are established by FCX; (3) additional
payments totaling $30 million to be paid in six equal installments
of $5 million upon reaching certain production milestones;
(4) conversion of $50 million in intercompany loans to equity;
(5) a payment of approximately $5 million for surface area fees and
ongoing surface area fees of approximately $0.8 million annually;
(6) incorporating clarifying language stating that TFM’s rights and
obligations are governed by its ARMC; and (7) expanding Gécamines’
participation in TFM management. TFM has also reiterated its
commitment to the use of local services and Congolese employment.
In connection with the modifications, the annual interest rate on
advances from TFM shareholders increases from a rate of LIBOR plus
2 percent to LIBOR plus 6 percent. In December 2010, the addenda
to TFM’s ARMC and Amended and Restated Shareholders’
Agreement were signed by the parties and are pending a Presidential
Decree. TFM’s existing mining contracts will be in effect until the
Presidential Decree is obtained. In addition, the change in FCX’s
effective ownership interest in Tenke Fungurume and the conversion
of intercompany loans to equity will be effected after obtaining
approval of the modifications to TFM’s bylaws. In December 2010,
TFM made payments totaling $26.5 million, which have been
recorded as prepaid contract costs at December 31, 2010 (included
in other current assets).
Community Development Programs. FCX has adopted policies that
govern its working relationships with the communities where it
operates that are designed to guide its practices and programs in a
manner that respects basic human rights and the culture of the
local people impacted by FCX’s operations. FCX continues to make
significant expenditures on community development, education,
training and cultural programs.
In 1996, PT Freeport Indonesia established the Freeport
Partnership Fund for Community Development (formerly the Freeport
Fund for Irian Jaya Development) through which PT Freeport
Indonesia has made available funding and technical assistance to
support the economic health, education and social development
of the area. PT Freeport Indonesia has committed through 2011 to
provide one percent of its annual revenue for the development of the
local people in its area of operations through the Freeport
Partnership Fund for Community Development. PT Freeport
Indonesia charged $64 million in 2010, $59 million in 2009 and
$34 million in 2008 to cost of sales for this commitment.