Freeport-McMoRan 2012 Annual Report Download - page 107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FCX’s embedded derivatives on provisional copper concentrate,
copper cathode and gold purchases and sales have critical
inputs of quoted monthly LME or COMEX copper forward prices
and the London PM gold forward price at each reporting
date based on the month of maturity; however, FCX’s contracts
themselves are not traded on an exchange. As a result, these
derivatives are classified within Level 2 of the fair value hierarchy.
FCX’s derivative financial instruments for copper futures and
swap contracts and copper forward contracts that are traded on
the respective exchanges are classified within Level 1 of the fair
value hierarchy because they are valued using quoted monthly
COMEX or LME forward prices at each reporting date based
on the month of maturity (refer to Note 15 for further discussion).
Certain of these contracts are traded on the over-the-counter
market and are classified within Level 2 of the fair value hierarchy.
Long-term debt, including current portion, is not actively traded
and is valued using prices obtained from a readily available
pricing source and, as such, is classified within Level 2 of the fair
value hierarchy.
The techniques described above may produce a fair value
calculation that may not be indicative of net realizable value or
reflective of future fair values. Furthermore, while FCX believes its
valuation techniques are appropriate and consistent with other
market participants, the use of different techniques or assumptions
to determine fair value of certain financial instruments could result
in a different fair value measured at the reporting date. There
have been no changes in the techniques used at December 31, 2012.
NOTE 17. BUSINESS SEGMENTS
FCX has organized its operations into five primary divisions —
North America copper mines, South America mining, Indonesia
mining, Africa mining and Molybdenum operations. Notwith-
standing this structure, FCX internally reports information on a
mine-by-mine basis. Therefore, FCX concluded that its operating
segments include individual mines or operations. Operating
segments that meet certain thresholds are reportable segments.
Further discussion of the reportable segments included in FCX’s
primary operating divisions, as well as FCX’s other reported
segments — Rod & Refining and Atlantic Copper Smelting &
Refining — follows. Refer to Note 2 for information on FCX’s
ownership interests.
Intersegment Sales. Intersegment sales between FCX’s
operations are based on similar arms-length transactions with
third parties at the time of the sale. Intersegment sales may not
be reflective of the actual prices ultimately realized because of a
variety of factors, including additional processing, timing of sales
to unaffiliated customers and transportation premiums.
FCX defers recognizing profits on sales from its mining
operations to Atlantic Copper and on 25 percent of Indonesia
mining sales to PT Smelting until final sales to third parties occur.
Quarterly variations in ore grades, the timing of intercompany
shipments and changes in product prices result in variability in
FCX’s net deferred profits and quarterly earnings.
Allocations. FCX allocates certain operating costs, expenses
and capital expenditures to the operating divisions and individual
segments. However, not all costs and expenses applicable to
a mine or operation are allocated. U.S. federal and state income
taxes are recorded and managed at the corporate level,
whereas foreign income taxes are recorded and managed at the
applicable country. In addition, most exploration and research
activities are managed at the corporate level, and those costs along
with some selling, general and administrative costs are not
allocated to the operating divisions or segments. Accordingly,
the following segment information reflects management
determinations that may not be indicative of what the actual
financial performance of each operating division or segment
would be if it was an independent entity.
North America Copper Mines. FCX has seven operating copper
mines in North America — Morenci, Bagdad, Safford, Sierrita and
Miami in Arizona, and Tyrone and Chino in New Mexico. The North
America copper mines include open-pit mining, sulfide ore
concentrating, leaching and SX/EW operations. A majority of the
copper produced at the North America copper mines is cast into
copper rod by FCX’s Rod & Refining operations. The North
America copper mines include the Morenci copper mine as a
reportable segment.
Morenci. The Morenci open-pit mine, located in southeastern
Arizona, produces copper cathodes and copper concentrates. In
addition to copper, the Morenci mine also produces molybdenum
concentrates. The Morenci mine produced 39 percent of FCX’s
North America copper during 2012.
Other Mines. Other mines include FCX’s other operating
southwestern U.S. copper mines — Bagdad, Safford, Sierrita,
Miami, Tyrone and Chino. In addition to copper, certain of
these mines (Sierrita, Bagdad and Chino) also produce
molybdenum concentrates.
South America. South America mining includes four operating
copper mines — Cerro Verde in Peru, and El Abra, Candelaria
and Ojos del Salado in Chile. These operations include open-pit
and underground mining, sulfide ore concentrating, leaching and
SX/EW operations. South America mining includes the Cerro
Verde copper mine as a reportable segment.
Cerro Verde. The Cerro Verde open-pit copper mine, located
near Arequipa, Peru, produces copper cathodes and copper
concentrates. In addition to copper, the Cerro Verde mine also
produces molybdenum concentrates. The Cerro Verde mine
produced 47 percent of FCX’s South America copper during 2012.
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