Freeport-McMoRan 2012 Annual Report Download - page 35

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MANAGEMENT’S DISCUSSION AND ANALYSIS
Atlantic Copper Revenues
The decrease in Atlantic Copper’s revenues in 2012, compared
with 2011, primarily reflected lower gold volumes. The increase in
Atlantic Copper’s revenues in 2011, compared with 2010,
primarily reflected higher copper and gold revenues associated
with higher prices.
Production and Delivery Costs
2012 compared with 2011. Consolidated production and delivery
costs totaled $10.4 billion in 2012, compared with $9.9 billion in
2011. Higher production and delivery costs for 2012 primarily
reflected higher costs at our mining operations, partly offset by
lower costs of concentrate purchases at Atlantic Copper
associated with lower copper prices and lower volumes, and
lower costs of cathode purchases in North America.
Consolidated unit site production and delivery costs, before net
noncash and other costs, for our copper mining operations
averaged $2.00 per pound of copper in 2012, compared with
$1.72 per pound of copper in 2011. Higher unit site production and
delivery costs in 2012 primarily reflected lower copper sales
volumes in Indonesia and higher mining costs in North and South
America. Assuming achievement of current 2013 volume and
cost estimates, consolidated unit site production and delivery
costs are expected to average $1.89 per pound of copper for 2013.
Lower projected unit site production and delivery costs for 2013,
compared to 2012, primarily reflect the benefit of increased
projected copper volumes at Grasberg. Refer to “Operations —
Unit Net Cash Costs” for further discussion of unit net cash costs
associated with our operating divisions, and to “Product Revenues
and Production Costs” for reconciliations of per pound costs by
operating division to production and delivery costs applicable to
sales reported in our consolidated financial statements.
Our copper mining operations require significant energy,
principally diesel, electricity, coal and natural gas. Energy costs
approximated 21 percent of our consolidated copper production
costs in 2012, and included purchases of approximately 255 million
gallons of diesel fuel; 6,800 gigawatt hours of electricity at our
North America, South America and Africa copper mining
operations (we generate all of our power at our Indonesia mining
operation); 700 thousand metric tons of coal for our coal power
plant in Indonesia; and 1 million MMBTU (million British thermal
units) of natural gas at certain of our North America mines. For
2013, we estimate energy costs will approximate 21 percent of our
consolidated copper production costs.
2011 compared with 2010. Consolidated production and delivery
costs totaled $9.9 billion in 2011, compared with $8.3 billion in
2010. Higher production and delivery costs for 2011 primarily
reflect increased mining and milling activities in North America,
higher input costs at our mining operations, higher costs of
concentrate purchases at Atlantic Copper associated with higher
copper and gold prices, and higher costs of copper cathode
purchases in North America associated with higher copper prices.
Consolidated unit site production and delivery costs, before
net noncash and other costs, for our copper mining operations
averaged $1.72 per pound of copper in 2011, compared with
$1.40 per pound of copper in 2010. Higher unit site production and
delivery costs in 2011 primarily reflected lower copper sales
volumes in Indonesia and increased mining and input costs in
North and South America and Africa. Consolidated site production
and delivery costs in 2011 also included $116 million ($0.03 per
pound) primarily related to bonuses for new labor agreements and
other employee costs in Indonesia and South America.
Depreciation, Depletion and Amortization
Consolidated depreciation, depletion and amortization expense
totaled $1.2 billion in 2012 and $1.0 billion in 2011 and 2010.
Depreciation will vary under the UOP method as a result of
changes in sales volumes and the related UOP rates at our
individual mines. Higher depreciation, depletion and amortization
expense in 2012 primarily reflected additions of assets depreciated
on a straight-line basis in North and South America.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses totaled
$431 million in 2012, $415 million in 2011 and $381 million in 2010.
Higher selling, general and administrative expenses in 2012,
compared with 2011, primarily reflected transaction costs
associated with pending acquisitions. Higher selling, general and
administrative expenses in 2011, compared with 2010, primarily
reflected higher charitable contributions.
Exploration and Research Expenses
Consolidated exploration and research expenses totaled
$285 million in 2012, $271 million in 2011 and $143 million in 2010.
We are actively conducting exploration activities near our
existing mines with a focus on opportunities to expand reserves
that will support additional future production capacity in the
large mineral districts where we currently operate. Favorable
exploration results indicate opportunities for what we believe
could be significant future potential reserve additions in North
and South America and in the Tenke minerals district. The drilling
data in North America continues to indicate the potential for
expanded sulfide production.
For 2013, exploration and research expenditures are expected
to total approximately $275 million, including approximately
$235 million for exploration. Exploration activities will continue to
focus primarily on the potential for future reserve additions in
our existing minerals districts. Approximately one third of the
2013 budget is associated with greenfield exploration projects.