Freeport-McMoRan 2011 Annual Report Download - page 107

2011 ANNUAL REPORT | 105
Copper Forward Contracts. Atlantic Copper enters into forward
copper contracts designed to hedge its copper price risk whenever
its physical purchases and sales pricing periods do not match.
ese economic hedge transactions are intended to hedge against
changes in copper prices, with the mark-to-market hedging gains
or losses recorded in cost of sales. At December31,2011, Atlantic
Copper held net forward copper purchase contracts for 18 million
pounds at an average contract price of $3.35 per pound, with
maturities through March 2012.
In April 2009, FCX entered into copper forward sales contracts
to lock in prices at an average of $1.86 per pound on 355 million
pounds of PT Freeport Indonesia’s provisionally priced copper
sales at March 31, 2009, which nal priced from April 2009
through July 2009. ese economic hedge transactions were
intended to reduce short-term price volatility in earnings and cash
ows. Gains and losses for these economic hedge transactions were
recorded in revenues. FCX has not entered into additional forward
sales contracts since April 2009 for its provisionally priced copper
sales, but may enter into future transactions to lock in pricing
on provisionally priced sales from time to time. However, FCX does
not currently intend to change its long-standing policy of not
hedging future copper production.
Copper Futures and Swap Contracts. In addition to the contracts
discussed above that qualify for fair value hedge accounting, FCX
also had similar contracts with some of FMC’s U.S. copper rod
customers that did not qualify for hedge accounting because of
certain terms in the sales contracts prior to 2010. Gains and losses
for these economic hedge transactions were recorded in revenues.
A summary of the realized and unrealized gains (losses)
recognized in income before income taxes and equity in aliated
companies’ net earnings for commodity contracts that do not
qualify as hedge transactions, including embedded derivatives, for
the years ended December31 follows:
2011 2010 2009
Embedded derivatives in
provisional sales contracts
a
$ (519) $ 619 $ 1,393
Embedded derivatives in
provisional purchase contracts
b
— (2) (3)
Copper forward contracts
a
— — (104)
Copper forward contracts
b
(2) (30) 2
Copper futures and swap contracts
a
— — 64
a. Amounts recorded in revenues.
b. Amounts recorded in cost of sales as production and delivery costs.
Unsettled Derivative Financial Instruments
A summary of the fair values of unsettled derivative nancial
instruments recorded on the consolidated balance sheets follows:
December 31, 2011 2010
Derivatives designated as hedging instruments
Commodity contracts:
Copper futures and swap contracts:
a
Asset position
b
$ 3 $ 18
Liability position
c
(13) —
Derivatives not designated as hedging instruments
Commodity contracts:
Embedded derivatives in provisional
sales/purchase contracts:
d
Asset position $ 72 $ 357
Liability position (82) (115)
Copper forward contracts:
Asset position
b
2 —
Liability position
c
— (10)
a. FCX had paid $31 million to brokers at December 31, 2011, and $3 million at
December 31, 2010, for margin requirements (recorded in other current assets). In addition,
FCX held $3 million in margin funding from customers at December 31, 2011, and $8 million
from brokers at December 31, 2010, associated with margin requirements (recorded in
accounts payable and accrued liabilities).
b. Amounts recorded in other current assets.
c. Amounts recorded in accounts payable and accrued liabilities.
d. Amounts recorded either as a net accounts receivable or a net accounts payable.
Foreign Currency Exchange Contracts. As a global company, FCX
transacts business in many countries and currencies. Foreign
currency transactions of FCX’s international subsidiaries increase
its risks because exchange rates can change between the time
agreements are made and the time foreign currency transactions
are settled. FCX may hedge or protect its international subsidiaries’
foreign currency transactions from time to time by entering into
forward exchange contracts to lock in or minimize the eects
of uctuations in exchange rates. FCX had no outstanding foreign
currency exchange contracts at December31,2011.
Interest Rate Swap Contracts. From time to time, FCX or its
subsidiaries may enter into interest rate swaps to manage
its exposure to interest rate changes and to achieve a desired
proportion of xed-rate versus oating-rate debt based on current
and projected market conditions. FCX may enter into xed-to-
oating interest rate swap contracts to protect against changes in
the fair value of the underlying xed-rate debt that result from
market interest rate changes and to take advantage of lower interest
rates. FCX had no outstanding interest rate swap contracts at
December31,2011.
Credit Risk. FCX is exposed to credit loss when nancial
institutions with which FCX has entered into derivative transactions
(commodity, foreign exchange and interest rate swaps) are
unable to pay. To minimize the risk of such losses, FCX uses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS