Freeport-McMoRan 2012 Annual Report Download - page 36

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MANAGEMENT’S DISCUSSION AND ANALYSIS
Environmental Obligations and Shutdown Costs
Environmental obligation costs (credits) reflect net revisions to
our long-term environmental obligations, which will vary from
period to period because of changes to environmental laws and
regulations, the settlement of environmental matters and/or
circumstances affecting our operations that could result in
significant changes in our estimates (refer to “Critical Accounting
Estimates — Environmental Obligations” for further discussion).
Shutdown costs include care and maintenance costs and any
litigation, remediation or related expenditures associated with
closed facilities or operations.
Environmental obligations and shutdown costs totaled a net
credit of $(22) million in 2012, and net charges of $134 million in
2011 and $19 million in 2010. Refer to Note 13 for further
discussion of environmental obligations and litigation matters.
Gain on Insurance Settlement
Gain on insurance settlement totaled $59 million ($31 million
to net income attributable to common stockholders or $0.03 per
share) and reflected the settlement of the insurance claim for
business interruption and property damage relating to the 2011
incidents affecting PT Freeport Indonesia's concentrate pipelines.
Interest Expense, Net
Consolidated interest expense (excluding capitalized interest)
totaled $267 million in 2012, $421 million in 2011 and $528 million
in 2010. The reduction in interest expense primarily reflects
the impact of the first-quarter 2012 refinancing transaction and
the impact of debt repayments during 2011 and 2010 (refer to
Note 9 for discussion of debt repayments).
Capitalized interest is primarily related to our development
projects and totaled $81 million in 2012, $109 million in 2011 and
$66 million in 2010. Refer to “Operations” for further discussion of
current development projects.
Losses on Early Extinguishment of Debt
During 2012, we recorded losses on early extinguishment of debt
totaling $168 million ($149 million to net income attributable
to common stockholders or $0.16 per share) associated with the
redemption of our remaining 8.375% Senior Notes.
During 2011, we recorded losses on early extinguishment of
debt totaling $68 million ($60 million to net income attributable
to common stockholders or $0.06 per share) associated with
the redemption of our 8.25% Senior Notes, the revolving credit
facilities that were replaced in March 2011 and open-market
purchases of our 9.50% Senior Notes.
During 2010, we recorded losses on early extinguishment of
debt totaling $81 million ($71 million to net income attributable to
common stockholders or $0.07 per share) associated with the
redemption of our Senior Floating Rate Notes and open-market
purchases of our 8.25%, 8.375% and 9.50% Senior Notes.
Refer to Note 9 for further discussion of these transactions.
Provision for Income Taxes
Following is a summary of the approximate amounts in the
calculation of our consolidated provision for income taxes for the
year ended December 31 (in millions, except percentages):
2012
Income Tax
Effective (Provision)
Income
a
Tax Rate Benefit
U.S. $ 1,539 23% $ (350)
South America 2,211 36% (791)
b
Indonesia 1,287 39% (497)
Africa 357 31% (112)
Eliminations and other 93 N/A 6
5,487 32%
d
(1,744)
Deferred tax liability adjustment
c
N/A N/A 234
Consolidated FCX $ 5,487 28% $ (1,510)
a. Represents income by geographic location before income taxes and equity in affiliated
companies’ net earnings.
b. In July 2012, Sociedad Minera Cerro Verde S.A.A. (Cerro Verde) signed a new 15-year
mining stability agreement with the Peruvian government, which is expected to become
effective when the current mining stability agreement expires on December 31, 2013. In
connection with the new mining stability agreement, Cerro Verde’s income tax rate will
increase from 30 percent to 32 percent. As a result of the change in the income tax rate,
we recognized additional deferred tax expense of $29 million ($25 million net of
noncontrolling interests) in 2012, which relates primarily to the assets recorded in
connection with the 2007 acquisition of FMC.
c. With the exception of Tenke Fungurume Mining S.A.R.L. (TFM), we have not elected
to permanently reinvest earnings from our foreign subsidiaries, and we have recorded
deferred tax liabilities for foreign earnings that are available to be repatriated to
the U.S. Cerro Verde previously recorded deferred Peruvian income tax liabilities for
income taxes that would become payable if the reinvested profits used to fund
the initial Cerro Verde sulfide expansion are distributed prior to the expiration of
Cerro Verde's current stability agreement on December 31, 2013. Because reinvested
profits at Cerro Verde are not expected to be distributed prior to December 31, 2013,
a net deferred tax liability totaling $234 million ($123 million net of noncontrolling
interests) was reversed and recognized as an income tax benefit in 2012.
d. Our consolidated effective income tax rate is a function of the combined effective tax
rates for the jurisdictions in which we operate. Accordingly, variations in the relative
proportions of jurisdictional income can result in fluctuations to our consolidated effective
income tax rate. Assuming average prices of $3.65 per pound for copper, $1,700 per ounce
for gold, $11 per pound for molybdenum and achievement of current sales volume and
cost estimates, we estimate our annual consolidated effective tax rate for 2013 (excluding
impacts from the pending acquisitions) will approximate 34 percent to 35 percent.