Freeport-McMoRan 2012 Annual Report Download - page 103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exceeded certain levels that were adjusted annually. The
contribution, which expired in 2010, was equal to 3.75 percent of
after-tax profits, of which 2.75 percent was contributed to a local
mining fund and 1.00 percent to a regional mining fund. The
charge to cost of sales for these local mining fund contributions
totaled $41 million in 2010. Cerro Verde’s final contribution to
these funds was made in early 2011.
TFM has committed to assist the communities living within
its concession in the Katanga province of the DRC. TFM will
contribute 0.3 percent of net sales revenue from production to
a community development fund to assist the local communities
with development of local infrastructure and related services,
such as those pertaining to health, education and economic
development. TFM charged $4 million in both 2012 and 2011, and
$3 million in 2010 to cost of sales for this commitment.
Guarantees. FCX provides certain financial guarantees
(including indirect guarantees of the indebtedness of others)
and indemnities.
At its Morenci mine in Arizona, FCX has a venture agreement
dated February 7, 1986, with Sumitomo, which includes a put and
call option guarantee clause. FCX holds an 85 percent undivided
interest in the Morenci complex. Under certain conditions defined
in the venture agreement, Sumitomo has the right to sell its
15 percent share to FCX. Likewise, under certain conditions, FCX
has the right to purchase Sumitomo’s share of the venture. At
December 31, 2012, the maximum potential payment FCX is
obligated to make to Sumitomo upon exercise of the put option
(or FCX’s exercise of its call option) totaled approximately
$143 million based on calculations defined in the venture
agreement. At December 31, 2012, FCX had not recorded any
liability in its consolidated financial statements in connection with
this guarantee as FCX does not believe, based on information
available, that it is probable that any amounts will be paid under
this guarantee as the fair value of Sumitomo’s 15 percent share
is in excess of the exercise price.
Prior to its acquisition by FCX, FMC and its subsidiaries have,
as part of merger, acquisition, divestiture and other transactions,
from time to time, indemnified certain sellers, buyers or other
parties related to the transaction from and against certain
liabilities associated with conditions in existence (or claims
associated with actions taken) prior to the closing date of the
transaction. As part of these transactions, FMC indemnified the
counterparty from and against certain excluded or retained
liabilities existing at the time of sale that would otherwise have
been transferred to the party at closing. These indemnity
provisions generally now require FCX to indemnify the party
against certain liabilities that may arise in the future from the
pre-closing activities of FMC for assets sold or purchased. The
indemnity classifications include environmental, tax and certain
operating liabilities, claims or litigation existing at closing and
various excluded liabilities or obligations. Most of these
indemnity obligations arise from transactions that closed many
years ago, and given the nature of these indemnity obligations,
it is not possible to estimate the maximum potential exposure.
Except as described in the following sentence, FCX does not
consider any of such obligations as having a probable likelihood
of payment that is reasonably estimable, and accordingly, has
not recorded any obligations associated with these indemnities.
With respect to FCX’s environmental indemnity obligations, any
expected costs from these guarantees are accrued when potential
environmental obligations are considered by management to be
probable and the costs can be reasonably estimated.
NOTE 15. FINANCIAL INSTRUMENTS
FCX does not purchase, hold or sell derivative financial
instruments unless there is an existing asset or obligation, or it
anticipates a future activity that is likely to occur and will result in
exposure to market risks, which FCX intends to offset or mitigate.
FCX does not enter into any derivative financial instruments for
speculative purposes, but has entered into derivative financial
instruments in limited instances to achieve specific objectives.
These objectives principally relate to managing risks associated
with commodity price changes, foreign currency exchange
rates and interest rates.
Commodity Contracts. From time to time, FCX has entered into
forward, futures and swap contracts to hedge the market risk
associated with fluctuations in the prices of commodities it
purchases and sells. Derivative financial instruments used by FCX
to manage its risks do not contain credit risk-related contingent
provisions. As of December 31, 2012 and 2011, FCX had no price
protection contracts relating to its mine production. A summary
of FCX’s derivative contracts and programs follows.
Derivatives Designated as Hedging Instruments —
Fair Value Hedges
Copper Futures and Swap Contracts. Some of FCX’s U.S. copper
rod customers request a fixed market price instead of the COMEX
average copper price in the month of shipment. FCX hedges this
price exposure in a manner that allows it to receive the COMEX
average price in the month of shipment while the customers pay
the fixed price they requested. FCX accomplishes this by entering
into copper futures and swap contracts and then liquidating the
copper futures contracts and settling the copper swap contracts
during the month of shipment, which generally results in FCX
receiving the COMEX average copper price in the month of
shipment. Hedging gains or losses from these copper futures
and swap contracts are recorded in revenues. FCX did not have
any significant gains or losses during the three years ended
December 31, 2012, resulting from hedge ineffectiveness. At
December 31, 2012, FCX held copper futures and swap contracts
that qualified for hedge accounting for 52 million pounds at an
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