Freeport-McMoRan 2013 Annual Report Download - page 49

MANAGEMENT’S DISCUSSION AND ANALYSIS
2013 ANNUAL REPORT | 47
which cannot be withheld or delayed unreasonably), authorizes it
to export concentrates and specifies the taxes and other fiscal
terms available to its operations. The COW states that PT-FI shall
not be subject to taxes, duties or fees subsequently imposed or
approved by the Indonesian government except as expressly
provided in the COW. Additionally, PT-FI complied with the
requirements of its COW for local processing by arranging for the
construction and commissioning of Indonesia’s only copper
smelter and refinery, which is owned by PT Smelting. During 2014,
approximately 40 percent of PT-FI’s production is expected to be
shipped to PT Smelting, with the balance of its concentrates
expected to be sold pursuant to long-term contracts with other
international smelters.
The January 2014 regulations conflict with PT-FI’s contractual
rights under its COW. We are working with the Indonesian
government to clarify the situation and to defend PT-FI’s rights
under its COW. PT-FI is also seeking to obtain the required
administrative permits for 2014 exports, which have been delayed
as a result of the new regulations.
PT-FI’s 2014 copper and gold sales estimates discussed below
assume no changes to planned 2014 concentrate shipments. As of
February 21, 2014, PT-FI has not obtained administrative approval
for 2014 exports. PT-FI has implemented near-term changes to its
operations to coordinate its concentrate production with PT
Smelting’s operating plans. These changes will reduce PT-FI’s
monthly copper and gold production by an estimated 40 million
pounds of copper and 80 thousand ounces of gold pending
resolution of these matters. Since mid-January 2014, PT-FI’s
milling rate has averaged approximately 112,000 metric tons of
ore per day, which is approximately half of normal rates. PT-FI is
engaging with the government of Indonesia to reach a resolution
that would enable PT-FI to resume normal operations as soon as
possible. In the event that PT-FI is unable to resume normal
operations for an extended period, we plan to consider further
actions, including constraining operating costs, deferring capital
Unit net cash costs (net of by-product credits) for our South
America mining operations increased to $1.50 per pound of copper
in 2012, compared with $1.20 per pound in 2011, primarily
reflecting higher mining and input costs, lower by-product credits
and lower sales volumes.
Indonesia Mining
Indonesia mining includes PT-FI’s Grasberg minerals district.
We own 90.64 percent of PT-FI, including 9.36 percent owned
through our wholly owned subsidiary, PT Indocopper Investama
(refer to Notes 3 and 13).
PT-FI produces copper concentrates, which contain significant
quantities of gold and silver. Substantially all of PT-FI’s copper
concentrates are sold under long-term contracts, of which
approximately one-half is sold to Atlantic Copper and PT Smelting,
and the remainder to other third-party customers.
PT-FI proportionately consolidates certain unincorporated joint
ventures with Rio Tinto plc (Rio Tinto), under which Rio Tinto
has a 40 percent interest in certain assets and future production
exceeding specified annual amounts of copper, gold and silver.
Refer to Note 3 for further discussion of our joint ventures with
Rio Tinto. Refer to “Regulatory Matters” below and Note 13 for
further discussion of PT-FI’s COW with the Indonesian government.
Refer to “Risk Factors” contained in Part I, Item 1A of our annual
report on Form 10-K for the year ended December 31, 2013,
for discussion of risks associated with operations in Indonesia.
Regulatory Matters. In January 2014, the Indonesian
government published regulations providing that holders of
contracts of work with existing processing facilities in Indonesia
may continue to export product through January 12, 2017, but
established new requirements for the continued export of copper
concentrates, including the imposition of a progressive export
duty on copper concentrates in the amount of 25 percent in 2014,
rising to 60 percent by mid-2016. PT-FI’s COW, which has a
primary term through 2021 and allows for two 10-year extensions
through 2041 (subject to approval by the Indonesian government,
2012 2011
By-Product Co-Product By-Product Co-Product
Method Method Method Method
Revenues, excluding adjustments $ 3.58 $ 3.58 $ 3.77 $ 3.77
Site production and delivery, before net noncash
and other costs shown below 1.60
a
1.49 1.38
a
1.27
By-product credits (0.26) — (0.35) —
Treatment charges 0.16 0.16 0.17 0.17
Unit net cash costs 1.50 1.65 1.20 1.44
Depreciation, depletion and amortization 0.23 0.22 0.20 0.18
Noncash and other costs, net 0.09 0.06 0.06 0.05
Total unit costs 1.82 1.93 1.46 1.67
Revenue adjustments, primarily for pricing on
prior period open sales 0.09 0.09 0.01 —
Gross profit per pound $ 1.85 $ 1.74 $ 2.32 $ 2.10
Copper sales (millions of recoverable pounds) 1,245 1,245 1,322 1,322
a. Includes labor agreement costs totaling $16 million ($0.01 per pound) at Candelaria in 2012 and $50 million ($0.04 per pound) at Cerro Verde and El Abra in 2011.