Freeport-McMoRan 2011 Annual Report Download - page 32

30 | FREEPORT-McMoRan COPPER & GOLD INC.
Reclamation and Closure Costs. Reclamation is an ongoing
activity that occurs throughout the life of a mine. We record the
fair value of our estimated asset retirement obligations (AROs)
associated with tangible long-lived assets in the period incurred.
Fair value is measured as the present value of cash ow estimates
aer considering ination and then applying a market risk
premium. Our cost estimates are reected on a third-party cost
basis and comply with our legal obligation to retire tangible
long-lived assets in the period incurred. ese cost estimates may
dier from nancial assurance cost estimates for reclamation
activities because of a variety of factors, including obtaining updated
cost estimates for reclamation activities, the timing of reclamation
activities, changes in scope and the exclusion of certain costs not
considered reclamation and closure costs. Refer to Note 1 for
further discussion of our accounting policy for reclamation and
closure costs.
Generally, ARO activities are specied by regulations or in
permits issued by the relevant governing authority, and
management judgment is required to estimate the extent and
timing of expenditures based on life-of-mine planning.
Accounting for reclamation and closure costs represents a critical
accounting estimate because (i) we will not incur most of these
costs for a number of years, requiring us to make estimates over a
long period, (ii) reclamation and closure laws and regulations
could change in the future and/or circumstances aecting our
operations could change, either of which could result in signicant
changes to our current plans, (iii) calculating the fair value of our
AROs requires management to estimate projected cash ows, make
long-term assumptions about ination rates, determine our
credit-adjusted, risk-free interest rates and determine market risk
premiums that are appropriate for our operations and (iv) given the
magnitude of our estimated reclamation and closure costs, changes
in any or all of these estimates could have a signicant impact on
our results of operations.
At least annually, we review our ARO estimates for changes in
the projected timing of certain reclamation costs, changes in cost
estimates and additional AROs incurred during the period.
Following is a summary of changes in our AROs for the years
ended December 31 (in millions):
2011 2010 2009
Balance at beginning of year $ 856 $ 731 $ 712
Liabilities incurred 9 5 12
Revisions to cash flow estimates 48
a
105
a
(17)
Accretion expense 58 54 52
Spending
(49) (38) (28)
Foreign currency translation adjustment (1) (1) —
Balance at end of year $ 921 $ 856 $ 731
a. During 2011 and 2010 the revisions to cash flow estimates primarily related to increased
costs of near-term closure activities at our Chino mine. Additionally, accelerated timing of
closure activities at the Chino mine resulted in revisions to cash flow estimates during 2010.
Refer to Note 13 for further discussion of reclamation and closure costs.
Deferred Taxes. In preparing our annual consolidated nancial
statements, we estimate the actual amount of taxes currently
payable or receivable as well as deferred tax assets and liabilities
attributable to temporary dierences between the nancial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary dierences are
expected to be recovered or settled. e eect on deferred tax
assets and liabilities of a change in tax rates or laws is recognized in
income in the period in which such changes are enacted.
A valuation allowance is provided for those deferred tax assets
for which it is more likely than not that the related benets will not
be realized. In determining the amount of the valuation allowance,
we consider estimated future taxable income as well as feasible tax
planning strategies in each jurisdiction. If we determine that we
will not realize all or a portion of our deferred tax assets, we will
increase our valuation allowance. Conversely, if we determine that
we will ultimately be able to realize all or a portion of the related
benets for which a valuation allowance has been provided, all or a
portion of the related valuation allowance will be reduced.
Our valuation allowances totaled $2.4 billion at December 31, 2011,
and $2.2 billion at December 31, 2010, and covered all of our U.S.
foreign tax credit carryforwards, and a portion of our foreign net
operating loss carryforwards, U.S. state net operating loss
carryforwards and U.S. minimum tax credit carryforwards. ese
valuation allowances include $80 million at December 31, 2011,
and $59 million at December 31, 2010, for tax benets that,
if recognized, would be credited directly to other comprehensive
income. e $167 million increase in the valuation allowance
during 2011 was primarily the result of an increase in foreign tax
credit carryforwards, partially oset by a decrease in minimum
tax credit carryforwards.
Refer to Note 12 for further discussion.
Impairment of Assets. We evaluate our long-lived assets (to be
held and used) for impairment when events or changes in
circumstances indicate that the related carrying amount of such
assets may not be recoverable. In evaluating our long-lived assets for
recoverability, estimates of aer-tax undiscounted future cash
ows of our individual mining operations are used, with impairment
losses measured by reference to fair value. As quoted market prices
are unavailable for our individual mining operations, fair value is
determined through the use of discounted estimated future cash
ows. e estimated cash ows used to assess recoverability of our
long-lived assets and measure fair value of our mining operations
are derived from current business plans, which are developed
using near-term price forecasts reective of the current price
MANAGEMENT’S DISCUSSION AND ANALYSIS