Freeport-McMoRan 2014 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS
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The following table summarizes changes in our estimated
consolidated recoverable proven and probable copper, gold and
molybdenum reserves during 2014 and 2013:
Copper
a
Gold Molybdenum
(billion (million (billion
pounds) ounces) pounds)
Consolidated reserves at
December 31, 2012 116.5 32.5 3.42
Net additions/revisions (1.2) — (0.07)
Production (4.1) (1.2) (0.09)
Consolidated reserves at
December 31, 2013 111.2 31.3 3.26
Net additions/revisions (0.1) (0.6) (0.05)
Production (3.9) (1.2) (0.10)
Sale of Candelaria/Ojos (3.7) (1.0) —
Consolidated reserves at
December 31, 2014 103.5 28.5 3.11
a. Includes estimated recoverable metals contained in stockpiles. See below for
additional discussion of recoverable copper in stockpiles.
Refer to Note 20 for further information regarding estimated
recoverable proven and probable mineral reserves.
As discussed in Note 1, we depreciate our life-of-mine mining
and milling assets and values assigned to proven and probable
mineral reserves using the unit-of-production (UOP) method
based on our estimated recoverable proven and probable mineral
reserves. Because the economic assumptions used to estimate
mineral reserves may change from period to period and
additional geological data is generated during the course of
operations, estimates of reserves may change, which could have
a significant impact on our results of operations, including
changes to prospective depreciation rates and impairments of
asset carrying values. Excluding impacts associated with changes
in the levels of finished goods inventories and based on projected
copper sales volumes for 2015, if estimated copper reserves at
our mines were 10 percent higher at December 31, 2014, we
estimate that our annual depreciation, depletion and amortization
expense for 2015 would decrease by $59 million ($30 million to
net income attributable to common stockholders), and a 10
percent decrease in copper reserves would increase depreciation,
depletion and amortization expense by $77 million ($40 million to
net income attributable to common stockholders). We perform
annual assessments of our existing assets in connection with the
review of mine operating and development plans. If it is
determined that assigned asset lives do not reflect the expected
remaining period of benefit, any change could affect prospective
depreciation rates.
As discussed below and in Note 1, we review and evaluate our
long-lived assets for impairment when events or changes in
circumstances indicate that the related carrying amount of such
assets may not be recoverable, and changes to our estimates
of recoverable proven and probable mineral reserves could have
an impact on our assessment of asset recoverability.
Recoverable Copper in Stockpiles. We record, as inventory,
applicable costs for copper contained in mill and leach stockpiles
that are expected to be processed in the future based on proven
processing technologies. Accounting for recoverable copper from
mill and leach stockpiles represents a critical accounting estimate
because (i) it is generally impracticable to determine copper
contained in mill and leach stockpiles by physical count, thus
requiring management to employ reasonable estimation methods
and (ii) recovery rates from leach stockpiles can vary significantly.
Refer to Note 1 for further discussion of our accounting policy for
recoverable copper in stockpiles.
At December 31, 2014, estimated consolidated recoverable
copper was 3.6 billion pounds in leach stockpiles (with a carrying
value of $3.6 billion) and 0.9 billion pounds in mill stockpiles (with
a carrying value of $446 million), compared with 3.3 billion
pounds in leach stockpiles (with a carrying value of $3.3 billion)
and 1.4 billion pounds in mill stockpiles (with a carrying value of
$789 million) at December 31, 2013.
Oil and Natural Gas Reserves. Proved reserves are those
quantities of oil and natural gas, which, by analysis of geoscience
and engineering data, can be estimated with reasonable certainty
to be economically producible from a given date forward, from
known reservoirs, and under existing economic conditions,
operating methods and government regulations. The term
“reasonable certainty“ implies a high degree of confidence that
the quantities of oil and natural gas actually recovered will equal
or exceed the estimate. Engineering estimates of proved oil and
natural gas reserves directly impact financial accounting
estimates, including depreciation, depletion and amortization, and
the ceiling limitation under the full cost method. Estimates of
total proved reserves are determined using methods prescribed
by the U.S. Securities and Exchange Commission (SEC), which
require the use of an average reference price calculated as the
twelve-month average of the first-day-of-the-month historical
market prices for crude oil and natural gas. At December 31, 2014,
our estimates were based on reference prices of $94.99 per barrel
(West Texas Intermediate) and $4.35 per MMBtu (Henry Hub spot
natural gas) as adjusted for location and quality differentials,
which are held constant throughout the lives of the oil and gas
properties, except where such guidelines permit alternate
treatment, including the use of fixed and determinable contractual
price escalations, but excluding derivatives. Actual future prices
and costs may be materially higher or lower than the average
prices and costs as of the date of the estimate.
There are numerous uncertainties inherent in estimating
quantities and values of proved oil and natural gas reserves and in
projecting future rates of production and the amount and timing
of development expenditures, including many factors beyond our
control. Future development and abandonment costs are
determined annually for each of our properties based upon its