Freeport-McMoRan 2012 Annual Report Download - page 75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements of
Freeport-McMoRan Copper & Gold Inc. (FCX) include the accounts
of those subsidiaries where FCX directly or indirectly has more
than 50 percent of the voting rights and has the right to control
significant management decisions. The most significant entities
that FCX consolidates include its 90.64 percent-owned subsidiary
PT Freeport Indonesia and its wholly owned subsidiaries,
Freeport-McMoRan Corporation (FMC) and Atlantic Copper, S.L.U.
(Atlantic Copper). FCX’s unincorporated joint ventures with
Rio Tinto plc (Rio Tinto) and Sumitomo Metal Mining Arizona, Inc.
(Sumitomo) are reflected using the proportionate consolidation
method (refer to Note 2 for further discussion). All significant
intercompany transactions have been eliminated. Dollar amounts
in tables are stated in millions, except per share amounts.
Investments in unconsolidated companies owned 20 percent or
more are recorded using the equity method. Investments in
companies owned less than 20 percent, and for which FCX does
not exercise significant influence, are carried at cost.
Proposed Acquisitions. On December 5, 2012, FCX announced
definitive agreements to acquire, in separate transactions,
Plains Exploration & Production Company (PXP) and McMoRan
Exploration Co. (MMR). PXP per-share consideration is equivalent
to 0.6531 shares of FCX's common stock and $25.00 in cash
(approximately $3.4 billion in cash and 91 million shares of FCX
common stock). MMR per-share consideration consists of
$14.75 in cash (approximately $3.4 billion in cash, or $2.1 billion
net of MMR interests owned by FCX and PXP) and 1.15 units
of a royalty trust, which will hold a five percent overriding royalty
interest in future production from MMR's existing shallow water
ultra-deep prospects. As further discussed in Note 20, FCX has
$5.5 billion in interim financing commitments and $4.0 billion
available under a five-year bank term loan to fund the cash
portion of the merger consideration for both transactions and
repay certain of PXP's and MMR's outstanding debt. FCX is
pursuing permanent financing for an additional $5.5 billion to
replace the remaining interim financing commitments.
Completion of each transaction is subject to receipt of PXP and
MMR stockholder approval of their respective transactions,
regulatory approvals (including the United States (U.S.) antitrust
clearance under the Hart-Scott-Rodino Act) and other customary
conditions. On December 26, 2012, the U.S. Federal Trade
Commission granted early termination of the Hart-Scott-Rodino
waiting period with respect to both transactions. The PXP
transaction is not conditioned on the closing of the MMR transaction,
and the MMR transaction is not conditioned on the closing
of the PXP transaction. PXP and MMR shareholder meetings to
approve the respective transactions will be scheduled upon the
effectiveness of the respective registration statements filed with
the U.S. Securities and Exchange Commission. The transactions
are expected to close in second-quarter 2013, subject to satisfaction
of all conditions to closing.
Additionally in January 2013, FCX, through a newly formed joint
venture, entered into a definitive agreement to acquire a cobalt
chemical refinery in Kokkola, Finland, and the related sales and
marketing business (refer to Note 20 for further discussion).
The information contained in the consolidated financial
statements and the notes herein does not reflect FCX’s acquisition
of PXP, MMR or the cobalt chemical business.
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. Notwithstanding 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 (refer to Note 17 for further discussion).
Use of Estimates. The preparation of FCX’s financial statements
in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the amounts reported in these financial statements and
accompanying notes. The more significant areas requiring the use
of management estimates include mineral reserve estimation;
useful asset lives for depreciation, depletion and amortization;
environmental obligations; reclamation and closure costs;
estimates of recoverable copper in mill and leach stockpiles;
pension, postretirement, postemployment and other employee
benefits; deferred taxes and valuation allowances; reserves for
contingencies and litigation; and asset impairment, including
estimates used to derive future cash flows associated with those
assets. Actual results could differ from those estimates.
Foreign Currencies. For foreign subsidiaries whose functional
currency is the U.S. dollar, monetary assets and liabilities
denominated in the local currency are translated at current
exchange rates, and non-monetary assets and liabilities, such as
inventories, property, plant, equipment and development
costs, are translated at historical rates. Gains and losses resulting
from translation of such account balances are included in
operating results, as are gains and losses from foreign currency
transactions.
For foreign subsidiaries whose functional currency is the local
currency, assets and liabilities are translated at current exchange
rates, while revenues and expenses are translated at average
rates in effect for the period. The related translation gains and
losses are included in accumulated other comprehensive loss
within equity.
Cash Equivalents. Highly liquid investments purchased with
maturities of three months or less are considered cash equivalents.
Inventories. The components of inventories include mill and
leach stockpiles, materials and supplies, and product inventories.
Product inventories mostly include finished goods (primarily
concentrates and cathodes) at mining operations, and
concentrates and work-in-process at Atlantic Copper’s smelting
73