Freeport-McMoRan 2012 Annual Report Download - page 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
average contract price of $3.57 per pound, with maturities
through January 2014.
A summary of gains (losses) recognized in revenues for derivative
financial instruments related to commodity contracts that are
designated and qualify as fair value hedge transactions, along
with the unrealized gains (losses) on the related hedged item (firm
sales commitments) for the years ended December 31 follows:
2012 2011 2010
Unrealized gains (losses):
Derivative financial instruments $ 15 $ (28) $ 7
Hedged item (15) 28 (7)
Realized gains (losses):
Matured derivative financial instruments (2) (28) 37
Derivatives Not Designated as Hedging Instruments
Embedded derivatives and derivative financial instruments that
do not meet the criteria to qualify for hedge accounting are
discussed below.
Embedded Derivatives. As described in Note 1 under “Revenue
Recognition,” certain FCX copper concentrate, copper cathode
and gold sales contracts provide for provisional pricing primarily
based on the LME price (copper) or the COMEX price (copper) and
the London PM price (gold) at the time of shipment as specified
in the contract. Similarly, FCX purchases copper under contracts
that provide for provisional pricing. Sales and purchases with a
provisional sales price contain an embedded derivative (i.e., the
price settlement mechanism that is settled after the time of
delivery) that is required to be bifurcated from the host contract.
The host contract is the sale or purchase of the metals contained
in the concentrates or cathodes at the then-current LME or
COMEX price (copper) or the London PM price (gold) as defined
in the contract. Mark-to-market price fluctuations recorded
through the settlement date are reflected in revenues for sales
contracts and in cost of sales as production and delivery costs
for purchase contracts.
A summary of FCX’s embedded derivatives at December 31,
2012, follows:
Average Price
Open Per Unit Maturities
Positions Contract Market Through
Embedded derivatives in
provisional sales contracts:
Copper (millions of pounds) 541 $ 3.57 $ 3.59 May 2013
Gold (thousands of ounces) 104 1,703 1,666 April 2013
Embedded derivatives in
provisional purchase contracts:
Copper (millions of pounds) 203 3.61 3.59 March 2013
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. These 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,
2012, Atlantic Copper held net forward copper purchase
contracts for 13 million pounds at an average contract price of
$3.62 per pound, with maturities through February 2013.
A summary of the realized and unrealized gains (losses)
recognized in income before income taxes and equity in affiliated
companies’ net earnings for commodity contracts that do not
qualify as hedge transactions, including embedded derivatives,
for the years ended December 31 follows:
2012 2011 2010
Embedded derivatives in
provisional sales contracts
a
$ 77 $ (519) $ 619
Embedded derivatives in
provisional purchase contracts
b
— — (2)
Copper forward contracts
b
15 (2) (30)
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 financial
instruments recorded on the consolidated balance sheets follows:
December 31, 2012 2011
Derivatives designated as hedging instruments
Commodity contracts:
Copper futures and swap contracts:
a
Asset position
b
$ 5 $ 3
Liability position
c
1 13
Derivatives not designated as hedging instruments
Commodity contracts:
Embedded derivatives in provisional sales/
purchase contracts:
d
Asset position $ 36 $ 72
Liability position 27 82
Copper forward contracts:
Asset position
b
— 2
a. FCX had paid $7 million to brokers at December 31, 2012, and $31 million at December 31,
2011, for margin requirements (recorded in other current assets). In addition, FCX held
$3 million in margin funding from customers at December 31, 2011 (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 are recorded by counterparty either as a net accounts receivable or a net
accounts payable.
Credit Risk. FCX is exposed to credit loss when financial
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 counterparties that meet certain credit requirements and
periodically reviews the creditworthiness of these counterparties.
FCX does not anticipate that any of the counterparties it deals
with will default on their obligations. As of December 31, 2012,
FCX did not have any significant credit exposure associated with
derivative transactions.
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