Edgar Filing: FREEPORT MCMORAN COPPER & GOLD INC

fcx093007-10q.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from		To
Commission File Number: 1-9916



Freeport-McMoRan Copper & Gold Inc.
(Exact name of registrant as specified in its charter)

Delaware	74-2480931
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

One North Central Avenue
Phoenix, AZ	85004-4414
(Address of principal executive offices)	(Zip Code)


(602) 366-8100
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. R Yes ÿo No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer R Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ÿo Yes R No

On October 31, 2007, there were issued and outstanding 381,921,531 shares of the registrant’s Common Stock, par value $0.10 per share.

FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS


	Page

Part I. Financial Information	3

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets (Unaudited)	3

Condensed Consolidated Statements of Income (Unaudited)	4

Condensed Consolidated Statements of Cash Flows (Unaudited)	5

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)	6

Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Report of Independent Registered Public Accounting Firm	31

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations	32

Item 3. Quantitative and Qualitative Disclosures about Market Risk	85

Item 4. Controls and Procedures	85

Part II. Other Information	86

Item 1. Legal Proceedings	86

Item 1A. Risk Factors	86

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	87

Item 6. Exhibits	87

Signature	88

Exhibit Index	E-1

FREEPORT-McMoRan COPPER & GOLD INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

FREEPORT-McMoRan COPPER & GOLD INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

	September 30,			December 31,
	2007			2006
	(In Millions)
ASSETS
Current assets:
Cash and cash equivalents	$	2,377		$	907
Accounts receivable		2,165			486
Inventories		2,135			724
Mill and leach stockpiles		614			–
Prepaid expenses, restricted cash and other		152			34
Assets held for sale		1,231			–
Total current assets		8,674			2,151
Property, plant, equipment and development costs, net		24,020			3,099
Trust assets		609			–
Long-term mill and leach stockpiles		1,099			–
Goodwill		6,332			–
Other assets		655			140
Total assets	$	41,389		$	5,390

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	2,814		$	789
Accrued income taxes		815			165
Copper price protection program		635			–
Current portion of long-term debt and short-term borrowings		67			19
Liabilities related to assets held for sale		472			–
Total current liabilities		4,803			973
Long-term debt, less current portion:
Senior notes		6,953			620
Term loan		1,550			–
Project financing, equipment loans and other		162			41
Total long-term debt, less current portion		8,665			661
Deferred income taxes		6,816			800
Other liabilities and deferred credits		1,492			298
Total liabilities		21,776			2,732
Minority interests in consolidated subsidiaries		1,699			213
Stockholders’ equity:
5½% Convertible Perpetual Preferred Stock		1,100			1,100
6¾% Mandatory Convertible Preferred Stock		2,875			–
Common stock		50			31
Capital in excess of par value		13,359			2,668
Retained earnings		3,355			1,415
Accumulated other comprehensive loss		(1	)		(20	)
Common stock held in treasury		(2,824	)		(2,749	)
Total stockholders’ equity		17,914			2,445
Total liabilities and stockholders’ equity	$	41,389		$	5,390

The accompanying notes are an integral part of these condensed consolidated financial statements.

FREEPORT-McMoRan COPPER & GOLD INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(In Millions, Except Per Share Amounts)
Revenues	$	5,066		$	1,636		$	12,755		$	4,148
Cost of sales:
Production and delivery		2,662			792			6,105			1,875
Depreciation, depletion and amortization		356			60			846			147
Total cost of sales		3,018			852			6,951			2,022
Exploration and research expenses		40			4			87			9
Selling, general and administrative expenses		131			45			314			111
Total costs and expenses		3,189			901			7,352			2,142
Operating income		1,877			735			5,403			2,006
Interest expense, net		(155	)		(18	)		(386	)		(62	)
Losses on early extinguishment and conversion of debt, net		(36	)		(30	)		(171	)		(32	)
Gains on sales of assets		47			21			85			30
Other income, net		48			6			110			17
Equity in affiliated companies’ net earnings		5			2			17			7
Income from continuing operations before income taxes
and minority interests		1,786			716			5,058			1,966
Provision for income taxes		(653	)		(304	)		(1,875	)		(836	)
Minority interests in net income of consolidated subsidiaries		(307	)		(46	)		(728	)		(115	)
Income from continuing operations		826			366			2,455			1,015
Discontinued operations, net of taxes		12			–			44			–
Net income		838			366			2,499			1,015
Preferred dividends		(63	)		(15	)		(144	)		(45	)
Net income applicable to common stock	$	775		$	351		$	2,355		$	970

Basic net income per share of common stock:
Continuing operations	$	2.00		$	1.85		$	7.06		$	5.14
Discontinued operations		0.03			–			0.13			–
Basic net income per share of common stock	$	2.03		$	1.85		$	7.19		$	5.14

Diluted net income per share of common stock:
Continuing operations	$	1.85		$	1.67		$	6.46		$	4.64
Discontinued operations		0.02			–			0.12			–
Diluted net income per share of common stock	$	1.87		$	1.67		$	6.58		$	4.64

Average common shares outstanding:
Basic		382			190			327			189
Diluted		447			221			380			221

Dividends declared per share of common stock	$	0.3125		$	1.0625		$	0.9375		$	2.9375

The accompanying notes are an integral part of these condensed consolidated financial statements.

FREEPORT-McMoRan COPPER & GOLD INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

		Nine Months Ended
		September 30,
		2007			2006
		(In Millions)
Cash flow from operating activities:
Net income	$	2,499		$	1,015
Adjustments to reconcile net income to net cash provided by operating activities:
Unrealized losses on copper price protection program		212			–
Depreciation, depletion and amortization		864			147
Minority interests in net income of consolidated subsidiaries		738			115
Noncash compensation and benefits		143			51
Losses on early extinguishment and conversion of debt, net		171			32
Gains on sales of assets		(85	)		(30	)
Deferred income taxes		(279	)		13
Other		21			25
(Increases) decreases in working capital, excluding amounts
acquired from Phelps Dodge:
Accounts receivable		(299	)		131
Inventories		358			(182	)
Prepaid expenses, restricted cash and other		–			(24	)
Accounts payable and accrued liabilities		369			(77	)
Accrued income taxes		215			(148	)
Net cash provided by operating activities		4,927			1,068
Cash flow from investing activities:
Acquisition of Phelps Dodge, net of cash acquired		(13,907	)		–
Phelps Dodge capital expenditures		(834	)		–
PT Freeport Indonesia capital expenditures		(273	)		(165	)
Other capital expenditures		(31	)		(13	)
Sales of assets and other		79			31
Net cash used in investing activities		(14,966	)		(147	)
Cash flow from financing activities:
Proceeds from term loans under bank credit facility		12,450			–
Repayments of term loans under bank credit facility		(10,900	)		–
Net proceeds from sales of senior notes		5,880			–
Net proceeds from sale of 6¾% Mandatory Convertible Preferred Stock		2,803			–
Net proceeds from sale of common stock		2,816			–
Proceeds from other debt		412			125
Repayments of other debt		(752	)		(322	)
Purchases of FCX common shares		–			(100	)
Cash dividends paid:
Common stock		(301	)		(559	)
Preferred stock		(112	)		(45	)
Minority interests		(440	)		(114	)
Net (payments for) proceeds from exercised stock options		(15	)		14
Excess tax benefit from exercised stock options		9			21
Bank credit facilities fees and other		(250	)		(6	)
Net cash provided by (used in) financing activities		11,600			(986	)
Cash included in assets held for sale		(91	)		–
Net increase (decrease) in cash and cash equivalents		1,470			(65	)
Cash and cash equivalents at beginning of year		907			764
Cash and cash equivalents at end of period	$	2,377		$	699

The accompanying notes are an integral part of these condensed consolidated financial statements.

FREEPORT-McMoRan COPPER & GOLD INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

	Convertible Perpetual			Mandatory Convertible														Accumulated			Common Stock
	Preferred Stock			Preferred Stock				Common Stock										Other			Held in Treasury
	Number			Number				Number				Capital in						Compre-			Number
	of	At Par		of		At Par		of		At Par		Excess of			Retained			hensive			of		At			Stockholders’
	Shares	Value		Shares		Value		Shares		Value		Par Value			Earnings			Loss			Shares		Cost			Equity
	(In Millions)

Balance at December 31, 2006	1	$	1,100		-	$	-		310	$	31	$	2,668		$	1,415		$	(20	)		113	$	(2,749	)	$	2,445
Sale of 6¾% mandatory convertible
preferred stock	-		-		29		2,875		-		-		(72	)		-			-			-		-			2,803
Common stock issued to acquire
Phelps Dodge	-		-		-		-		137		14		7,767			-			-			-		-			7,781
Sale of common stock	-		-		-		-		47		5		2,811			-			-			-		-			2,816
Conversions of 7% convertible senior notes	-		-		-		-		-		-		6			-			-			-		-			6
Exercised stock options, issued restricted
stock and other	-		-		-		-		2		-		89			-			-			-		-			89
Stock-based compensation costs	-		-		-		-		-		-		83			-			-			-		-			83
Tax benefit for stock option exercises	-		-		-		-		-		-		7			-			-			-		-			7
Tender of shares for exercised stock
options and restricted stock	-		-		-		-		-		-		-			-			-			1		(75	)		(75	)
Adjustment to initially apply FIN 48	-		-		-		-		-		-		-			4			-			-		-			4
Dividends on common stock	-		-		-		-		-		-		-			(419	)		-			-		-			(419	)
Dividends on preferred stock	-		-		-		-		-		-		-			(144	)		-			-		-			(144	)
Comprehensive income (loss):
Net income	-		-		-		-		-		-		-			2,499			-			-		-			2,499
Other comprehensive income
(loss), net of taxes:
Investment adjustment	-		-		-		-		-		-		-			-			2			-		-			2
Translation adjustment	-		-		-		-		-		-		-			-			11			-		-			11
Change in unrealized derivatives’
fair value	-		-		-		-		-		-		-			-			(3	)		-		-			(2	)
Reclass to earnings	-		-		-		-		-		-		-			-			5			-		-			5
Amortization of unrecognized
amounts (SFAS 158)	-		-		-		-		-		-		-			-			4			-		-			3
Other comprehensive income	-		-		-		-		-		-		-			-			19			-		-			19
Total comprehensive income	-		-		-		-		-		-		-			-			-			-		-			2,518
Balance at September 30, 2007	1	$	1,100		29	$	2,875		496	$	50	$	13,359		$	3,355		$	(1	)		114	$	(2,824	)	$	17,914

The accompanying notes are an integral part of these condensed consolidated financial statements.

FREEPORT-McMoRan COPPER & GOLD INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.	GENERAL INFORMATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). Therefore, this information should be read in conjunction with Freeport-McMoRan Copper & Gold Inc.’s (FCX) consolidated financial statements and notes contained in its 2006 Annual Report on Form 10-K. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. With the exception of certain adjustments associated with the acquisition of Phelps Dodge Corporation (Phelps Dodge), all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three and nine-month periods ended September 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

For comparative purposes, certain amounts for the three and nine-month periods ended September 30, 2006, have been reclassified to conform to current period presentation.

As discussed in Note 2, on March 19, 2007, FCX completed its acquisition of Phelps Dodge. Financial results for the first nine months of 2007 include Phelps Dodge’s results beginning March 20, 2007.

As discussed in Note 4, on September 12, 2007, FCX entered into an agreement to sell Phelps Dodge International Corporation (PDIC) to General Cable Corporation (General Cable). As a result, the operating results of PDIC have been reported separately from continuing operations as discontinued operations in the condensed consolidated statements of income. Additionally, the assets and liabilities of PDIC have been presented separately in the condensed consolidated balance sheets as held for sale.

2.	ACQUISITION OF PHELPS DODGE

On March 19, 2007, FCX acquired Phelps Dodge. Phelps Dodge, now a wholly owned subsidiary of FCX, is a fully integrated producer of copper and molybdenum, with mines in North and South America and processing capabilities for other minerals as by-products, such as gold, silver and rhenium, and several development projects, including the Tenke Fungurume mine in the Democratic Republic of Congo (DRC).

In the acquisition, each share of Phelps Dodge common stock was exchanged for 0.67 of a share of FCX common stock and $88.00 in cash. As a result, FCX issued 136.9 million shares and paid $18.0 billion in cash to Phelps Dodge shareholders. The acquisition has been accounted for under the purchase method as required by Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” with FCX as the accounting acquirer.

The initial estimates of the fair value of assets acquired and liabilities assumed and the results of Phelps Dodge’s operations are included in FCX’s condensed consolidated financial statements beginning March 20, 2007.

The following table summarizes the $25.8 billion purchase price, which was funded through a combination of common shares issued, borrowings under an $11.5 billion senior credit facility, proceeds from the offering of $6.0 billion of senior notes (refer to Note 9 for further discussion) and available cash resources (in millions, except exchange ratio):

Phelps Dodge common stock outstanding and issuable at March 19, 2007		204.3
Exchange offer ratio of FCX common stock for each Phelps Dodge common share		0.67
Shares of FCX common stock issued		136.9

Cash consideration of $88.00 for each Phelps Dodge common share	$	17,979	^a
Fair value of FCX common stock issued		7,781	^b
Transaction and change of control costs and related employee benefits		131
Release of FCX deferred tax asset valuation allowances		(90	)^c
Total purchase price	$	25,801

^a.	Cash consideration includes cash paid in lieu of any fractional shares of FCX stock.

b.	Measurement of the common stock component of the purchase price based on a weighted average closing price of FCX’s common stock of $56.85 for the two days prior to through two days after the public announcement of the merger on November 19, 2006.

c.	During second-quarter 2007, FCX determined that, as a result of the acquisition of Phelps Dodge, it will be able to realize certain U.S. tax credits for which it had previously not recognized any benefit. Recognition of these tax credits resulted in a $90 million reduction to the purchase price.

In accordance with the purchase method of accounting, the purchase price paid was determined at the date of the public announcement of the transaction and has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the closing date of March 19, 2007. FCX is continuing to work with third-party consultants to value all assets acquired and liabilities assumed, and there could be additional adjustments to the estimated fair values, which may be significant, until all valuation work is complete. In valuing acquired assets and assumed liabilities, fair values were based on, but not limited to quoted market prices, where available; the intent of FCX with respect to whether the assets purchased are to be held, sold or abandoned; expected future cash flows; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; and appropriate discount rates and growth rates. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill. A significant decline in copper or molybdenum prices from those used to estimate the fair values of the acquired assets could result in impairment to the carrying amounts assigned to inventories; mill and leach stockpiles; property, plant and equipment; and goodwill. A current summary of the preliminary purchase price allocation as of March 19, 2007, follows (in billions):

							Preliminary
							Purchase
	Historical			Fair Value			Price
	Balances			Adjustments			Allocation
Cash and cash equivalents	$	4.2		$	–		$	4.2
Inventories, including mill and leach stockpiles^a		0.9			2.8			3.7
Property, plant and equipment^b		6.0			14.8			20.8
Other assets		3.1			(0.3	)		2.8
Allocation to goodwill^c		–			6.5			6.5	^d
Total assets		14.2			23.8			38.0
Deferred income taxes (current and long-term)^e		(0.7	)		(6.1	)		(6.8	)
Other liabilities		(4.1	)		(0.1	)		(4.2	)
Minority interests		(1.2	)		–			(1.2	)
Total	$	8.2		$	17.6		$	25.8

Inventories and stockpiles were valued based on estimated selling prices less selling and completion costs and a reasonable profit allowance and through the use of estimated discounted cash flows, as applicable. Application of fair value principles to metal inventories and stockpiles resulted in a significantly higher value being applied to inventory compared with the historical cost recorded by Phelps Dodge. Consequently, when

inventory on hand as of the date of acquisition is subsequently sold, FCX will recognize incremental noncash costs and realize a significantly smaller profit margin with respect to this inventory.

During third-quarter 2007, FCX adjusted its preliminary purchase price allocation based on updated valuation models for its mill and leach stockpiles resulting in an increase from initial estimates of approximately $1.0 billion.

Includes amounts based on estimated discounted cash flows from future production of proven and probable reserves and for values of properties beyond proven and probable reserves (VBPP). Carrying amounts assigned to proven and probable reserves are depleted using the unit of production method over the estimated lives of the reserves. Carrying amounts assigned to VBPP are not charged to income until the VBPP becomes associated with additional proven and probable reserves and are being produced or are determined to be impaired.

The concept of VBPP is described in Emerging Issue Task Force (EITF) Issue No. 04-3, “Mining Assets: Impairment and Business Combinations,” and has been interpreted differently by different mining companies. FCX’s preliminary adjustment to property, plant and equipment includes VBPP attributable to mineralized material, which includes measured and indicated amounts, that FCX believes could be brought into production with the establishment or modification of required permits and should market conditions and technical assessments warrant. Mineralized material is a mineralized body that has been delineated by appropriately spaced drilling and/or underground sampling to support reported tonnage and average grade of minerals. Such a deposit may not qualify as proven and probable reserves until legal and economic feasibility are confirmed based upon a comprehensive evaluation of development costs, unit costs, grades, recoveries and other material factors. The carrying amount of VBPP also includes preliminary adjustments attributable to inferred mineral resources and exploration potential. FCX is continuing to analyze VBPP, and the final values may vary significantly from preliminary estimates.

During the second and third quarters of 2007, adjustments to the preliminary fair values assigned to assets acquired and liabilities assumed from Phelps Dodge and adjustments to the purchase price resulted in an approximate $0.9 billion reduction in FCX’s initial estimate of goodwill. Additional adjustments, which could be significant, are expected in future periods until FCX finalizes its valuation of the assets acquired and liabilities assumed. None of the $6.5 billion of goodwill is deductible for tax purposes.

d.	Includes $165 million of goodwill associated with PDIC that has been included in assets held for sale at September 30, 2007 (refer to Note 4 for further discussion).

e.	Deferred income taxes have been recognized based on the estimated fair value adjustments to net assets.

As of September 30, 2007, FCX had not identified any material pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available that an asset existed, a liability had been incurred or an asset had been impaired as of the acquisition date, and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.

FCX paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets acquired for a number of potential strategic and financial benefits that are expected to be realized, including, but not limited to, the following:

·	The combined company’s increased scale of operations, management depth and strengthened cash flow provide an improved platform to capitalize on growth opportunities in the global market.

·	The combined company is well positioned to benefit from the positive copper market at a time when there is a scarcity of large-scale copper development projects combined with strong global demand for copper.

The combined company has long-lived, geographically diverse reserves, totaling approximately 77 billion pounds of copper, 38 million ounces of gold and 2 billion pounds of molybdenum, net of minority interests as of December 31, 2006. Additionally, the combined company has rights to significant mineralized material that could add to reserves.

·	The combined company has exploration rights with significant potential in copper regions around the world.

Pro Forma Financial Information. The following pro forma financial information assumes that FCX acquired Phelps Dodge effective January 1, 2007, for the 2007 periods, and effective January 1, 2006, for the 2006 periods. The most significant adjustments relate to the purchase accounting impacts of increases in the carrying values of acquired metal inventories (including mill and leach stockpiles) and property, plant and equipment (in millions, except per share data):

	Historical
			Phelps		Pro forma			Pro forma
	FCX		Dodge^a		Adjustments			Consolidated
Three Months Ended September 30, 2007
Revenues	$	5,066		N/A	$	–		$	5,066	^b
Operating income	$	1,877		N/A	$	163		$	2,040	^b,c
Income from continuing operations before
income taxes and minority interests	$	1,786		N/A	$	163		$	1,949	^b,c,e,g
Income from continuing operations applicable
to common stock	$	763		N/A	$	103		$	866	^b,c,e,g
Diluted income per share of common stock
from continuing operations	$	1.85		N/A		N/A		$	2.07	^b,c,e,g
Diluted weighted average shares outstanding		447		N/A		N/A			448	^h

Three Months Ended September 30, 2006
Revenues	$	1,636	$	3,143	$	–		$	4,779	^b,f
Operating income	$	735	$	1,319	$	(372	)	$	1,682	^b,c,f
Income from continuing operations before
income taxes and minority interests	$	716	$	1,454	$	(549	)	$	1,621	^b,c,e,f
Income from continuing operations applicable
to common stock	$	351	$	883	$	(443	)	$	791	^b,c,e,f
Diluted income per share of common stock
from continuing operations	$	1.67	$	4.34		N/A		$	1.93	^b,c,e,f
Diluted weighted average shares outstanding		221		204		N/A			445	^h

Nine Months Ended September 30, 2007
Revenues	$	12,755	$	2,294	$	–		$	15,049	^b
Operating income	$	5,403	$	793	$	(182	)	$	6,014	^b,c
Income from continuing operations before
income taxes and minority interests	$	5,058	$	837	$	(249	)	$	5,646	^b,c,d,e,g
Income from continuing operations applicable
to common stock	$	2,311	$	493	$	(219	)	$	2,585	^b,c,d,e,g
Diluted income per share of common stock
from continuing operations	$	6.46		N/A		N/A		$	6.21	^b,c,d,e,g
Diluted weighted average shares outstanding		380		N/A		N/A			447	^h

Historical
	Phelps	Pro forma	Pro forma
FCX	Dodge^a	Adjustments	Consolidated

Nine Months Ended September 30, 2006
Revenues	$	4,148	$	7,828	$	–		$	11,976	^b,f
Operating income	$	2,006	$	2,823	$	(1,729	)	$	3,100	^b,c,f
Income from continuing operations before
income taxes and minority interests	$	1,966	$	3,011	$	(2,322	)	$	2,655	^b,c,e,f
Income from continuing operations applicable
to common stock	$	970	$	1,689	$	(1,771	)	$	888	^b,c,e,f
Diluted income per share of common stock
from continuing operations	$	4.64	$	8.31		N/A		$	2.33	^b,c,e,f
Diluted weighted average shares outstanding		221		203		N/A			406	^h

a.	For the nine months ended September 30, 2007, represents the results of Phelps Dodge’s operations from January 1, 2007, through March 19, 2007. Beginning March 20, 2007, the results of Phelps Dodge’s operations are included in FCX’s consolidated financial information.

Additionally, for comparative purposes the historical Phelps Dodge financial information for the three and nine months ended September 30, 2006, represents results from continuing operations, and therefore, excludes the results of PDIC (i.e., discontinued operations).

Includes charges to revenues for mark-to-market accounting adjustments on copper price protection programs totaling $44 million ($26 million to net income or $0.06 per share) for third-quarter 2007, $232 million ($142 million to net income or $0.32 per share) for the nine months ended September 30, 2007, $145 million ($110 million to net income or $0.25 per share) for third-quarter 2006 and $1.2 billion ($923 million to net income or $2.28 per share) for the nine months ended September 30, 2006.

Includes charges associated with the impact of the increases in the carrying values of acquired metal inventories (including mill and leach stockpiles) and property, plant and equipment totaling $283 million ($179 million to net income or $0.40 per share) for third-quarter 2007, $1.3 billion ($835 million to net income or $1.87 per share) for the nine months ended September 30, 2007, $376 million ($237 million to net income or $0.53 per share) for third-quarter 2006, and $1.7 billion ($1.1 billion to net income or $2.70 per share) for the nine months ended September 30, 2006.

d.	Excludes net losses on early extinguishment of debt totaling $88 million ($75 million to net income or $0.17 per share) for financing transactions related to the acquisition of Phelps Dodge.

Includes net interest expense associated with debt issued in connection with the acquisition of Phelps Dodge totaling $129 million ($109 million to net income or $0.24 per share) for third-quarter 2007, $469 million ($399 million to net income or $0.89 per share) for the nine months ended September 30, 2007, $179 million ($161 million to net income or $0.36 per share) for third-quarter 2006, and $597 million ($537 million to net income or $1.32 per share) for the nine months ended September 30, 2006.

Includes charges to revenues totaling $13 million ($7 million to net income or $0.02 per share) associated with the redemption of FCX’s Silver-Denominated Preferred Stock for third-quarter 2006, and $82 million ($44 million to net income or $0.11 per share) associated with the redemption of FCX’s Gold-Denominated Preferred Stock, Series II and Silver-Denominated Preferred Stock for the nine months ended September 30, 2006.

g.	Includes gains on the sales of marketable securities totaling $47 million ($29 million to net income or $0.06 per share) in third-quarter 2007 and $85 million ($52 million to net income or $0.12 per share) for the nine months ended September 30, 2007.

h.	Estimated pro forma diluted weighted average shares outstanding for the quarters and nine months ended September 30, 2007 and 2006, follow (in millions):

			Nine Months Ended
	Third-Quarter		September 30,
	2007	2006	2007	2006
Average number of basic shares of FCX common stock
outstanding prior to the acquisition of Phelps Dodge	199	190	198	189
Shares of FCX common stock issued in the acquisition	137	137	137	137
Sale of FCX shares^a	47	47	47	47
Mandatory Convertible Preferred Stock^a	39	39	39	–	^b
Other dilutive securities	26	32	26	33
Pro forma average number of common shares outstanding	448	445	447	406

a.	Refer to Notes 9 and 12 for additional information.

b.	Not dilutive for the nine months ended September 30, 2006.

The above pro forma consolidated financial information has been prepared for illustrative purposes only and is not intended to be indicative of the results that would actually have occurred, or the results expected in future periods, had the events reflected herein occurred on the dates indicated.

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As a result of the acquisition of Phelps Dodge, the following summaries of significant accounting policies are in addition to those contained in FCX’s 2006 Annual Report on Form 10-K.

Basis of Presentation. Effective March 20, 2007, FCX began consolidating its wholly owned subsidiary, Phelps Dodge. Phelps Dodge’s financial information consolidates the results of operations and the assets and liabilities of majority-owned subsidiaries and reports the minority interest. FCX’s investment in the Morenci copper mine, an unincorporated joint venture, is reflected using the proportionate consolidation method. All significant intercompany transactions and balances have been eliminated.

Investments in unconsolidated companies owned 20 percent or more are recorded on an equity basis. Investments in companies owned less than 20 percent, and for which FCX does not exercise significant influence, are carried at cost.

Foreign Currencies. Except as noted below, the assets and liabilities of foreign subsidiaries 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 income (loss) within stockholders’ equity. For the translation of the financial statements of certain foreign subsidiaries dealing predominantly in U.S. dollars, assets receivable and liabilities payable in cash are translated at current exchange rates, and inventories and other non-monetary assets and liabilities are translated at historical rates. Gains and losses resulting from translation of such financial statements are included in operating results, as are gains and losses from foreign currency transactions.

Mill and Leach Stockpiles. Mill and leach stockpiles acquired in connection with the Phelps Dodge acquisition are stated at the lower of cost or market. FCX uses the average cost method for recording its mill and leach stockpiles.

Both mill and leach stockpiles generally contain lower-grade ores that have been extracted from the ore body and are available for copper recovery. For mill stockpiles, recovery is through milling, concentrating, smelting and refining or, alternatively, by concentrate leaching. For leach stockpiles, recovery is through exposure to acidic solutions that dissolve contained copper and deliver it in solution to extraction processing facilities. The recorded cost of mill and leach stockpiles includes mining and haulage costs incurred to deliver ore to stockpiles, depreciation, depletion, amortization and overhead costs.

Because it is generally impracticable to determine copper contained in mill and leach stockpiles by physical count, reasonable estimation methods are employed. The quantity of material delivered to mill and leach stockpiles is based on surveyed volumes of mined material and daily production records. Sampling and assaying of blasthole cuttings determine the estimated copper grades of material delivered to mill and leach stockpiles.

Expected copper recovery rates for mill stockpiles are determined by metallurgical testing. The recoverable copper in mill stockpiles can be extracted into copper concentrate almost immediately. Estimates of copper contained in mill stockpiles are adjusted as material is added or removed and fed to the mill.

Expected copper recovery rates for leach stockpiles are determined using small-scale laboratory tests, small- to large-scale column testing (which simulates the production-scale process), historical trends and other factors, including mineralogy of the ore and rock type. Ultimate recovery of copper contained in leach stockpiles can vary significantly from a low percentage to more than 90 percent depending on several variables, including type of copper recovery, mineralogy and particle size of the rock. For newly placed material on active stockpiles as much as 70 percent of the copper ultimately recoverable may be extracted during the first year, the remaining copper is recovered over many years.

Processes and recovery rates are monitored continuously, and recovery rate estimates are adjusted periodically as additional information becomes available and as related technology changes.

Goodwill. Goodwill has an indefinite useful life and is not amortized, but rather is tested for impairment at least annually, unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value of a related reporting unit below its carrying amount.

As of September 30, 2007, goodwill of approximately $6.5 billion was recorded in connection with the Phelps Dodge acquisition, which includes approximately $165 million recorded in assets held for sale related to PDIC (refer to Note 4). This amount represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed and is subject to adjustment as FCX completes its analysis of these fair values, which may take up to one year after the acquisition date. In accordance with accounting rules, goodwill resulting from a business combination is assigned to the acquiring entity's reporting units that are expected to benefit from the business combination, regardless of whether other assets or liabilities of the acquired entity have been assigned to those reporting units. Adjustments to the recorded values of the assets acquired and liabilities assumed in the acquisition of Phelps Dodge will occur until such values are finalized. Accordingly, the allocation of goodwill to reporting units, which will include individual mines, will be completed when FCX finalizes its purchase price allocation.

Intangible Assets. Intangible assets acquired as a result of the Phelps Dodge acquisition include water rights, land easements and trademarks, primarily at the North American mining sites. The principal amortization method for such intangible assets is the computation of an overall unit rate applied to pounds of principal products sold from mine production. As of September 30, 2007, FCX has identified certain intangible assets and liabilities resulting from the acquisition of Phelps Dodge. As FCX completes its identification and valuation, it expects to record additional intangible assets or liabilities, which could include such items as customer relationships and patents.

Environmental Expenditures. Environmental expenditures are expensed or capitalized, depending upon their future economic benefits. Liabilities for such expenditures are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. For closed facilities and closed portions of operating facilities with environmental obligations, an environmental liability is accrued when a decision to close a facility, or a portion of a facility, is made by management and the environmental liability is considered to be probable. Environmental liabilities attributed to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) or analogous state programs are considered probable when a claim is asserted, or is probable of assertion, and FCX, or any of its subsidiaries, have been associated with the site. Other environmental remediation liabilities are considered probable based on specific facts and circumstances. FCX’s estimates of these costs are based on an evaluation of various factors, including currently available facts, existing technology, presently enacted laws and regulations, remediation experience, whether or not FCX is a potentially responsible party (PRP) and the ability of other PRPs to pay their allocated portions. With the exception of those obligations assumed in the acquisition of Phelps Dodge (refer to Note 13), environmental obligations are recorded on an

undiscounted basis. Where the available information is sufficient to estimate the amount of liability, that estimate has been used. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. Possible recoveries of some of these costs from other parties are not recognized in the condensed consolidated financial statements until they become probable. Legal costs associated with environmental remediation, as defined in Statement of Position 96-1, “Environmental Remediation Liabilities,” are included as part of the estimated liability.

4.	DISCONTINUED OPERATIONS

On September 12, 2007, FCX entered into an agreement to sell its international wire and cable business, PDIC, for $735 million (including the acquisition of minority interests) subject to an adjustment that takes into account the net effect of dividends from and contributions to PDIC from March 31, 2007, through the close of the transaction. Under the terms of the agreement, FCX expects to realize net proceeds of approximately $620 million, after taxes and net of transaction related costs. FCX expects to use the net proceeds to repay debt. The transaction was complete on October 31, 2007, and is not expected to result in a material gain or loss, other than transaction and related costs of up to approximately $20 million ($12 million to net income).

As a result of the sale, the operating results of PDIC have been reported separately from continuing operations as discontinued operations in the condensed consolidated statements of income. Selected financial information that has been reported as discontinued operations for the third quarter and first nine months of 2007 (which includes results beginning March 20, 2007), follows (in millions):

		Third-Quarter	Nine Months Ended
		2007	September 30, 2007
Revenues	$	376	$	797
Operating income	$	18	$	70
Provision for income taxes	$	5	$	20
Income from discontinued operations	$	12	$	44

The assets and liabilities of PDIC have been presented separately in the condensed consolidated balance sheets as held for sale. The major classes of these assets and liabilities at September 30, 2007, follow (in millions):

Assets held for sale:
Cash and cash equivalents	$	91
Accounts receivable		273
Inventories		258
Property, plant and equipment, net		234
Intangibles		164
Goodwill		165
Other assets		46
	$	1,231
Liabilities related to assets held for sale:
Accounts payable and accrued liabilities	$	263
Debt and short-term borrowings		71
Deferred income taxes		103
Other liabilities and deferred credits		35
	$	472

Cash flows from discontinued operations for the nine months ended September 30, 2007, have not been separately identified in the condensed consolidated statements of cash flows.

5.	PENSION AND POSTRETIREMENT BENEFITS

As a result of the acquisition of Phelps Dodge, FCX acquired trusteed, non-contributory pension plans covering substantially all of Phelps Dodge’s U.S. employees. The applicable plan design determines the manner in which benefits are calculated for any particular group of employees. For certain of these plans, benefits are calculated based on final average monthly compensation and years of service. In the case of other plans, benefits are calculated based on a fixed amount for each year of service. Participants in the plans generally vest in their accrued benefits after five years of service. At the date of acquisition, Phelps Dodge had both overfunded and underfunded pension plans. The funded status of the overfunded plans was $129 million (representing the fair value of plans assets of approximately $1.36 billion less a projected benefit obligation of approximately $1.23 billion). The funded status of the underfunded plans was $(70) million (representing the fair value of plan assets of $11 million less a projected benefit obligation of $81 million). The majority of plan assets are invested in a diversified portfolio of stocks, bonds and cash and cash equivalents, which consist primarily of equity and fixed-income securities. At March 19, 2007, a discount rate of 5.78 percent and a wage increase assumption of 4.25 percent were used to estimate the projected benefit obligation, and the long-term expected rate of return on plan assets was 8.5 percent.

In addition to the pension benefits, Phelps Dodge provides postretirement medical and life insurance benefits for certain U.S. employees and, in some cases, employees of international subsidiaries. These postretirement benefits vary among plans, and many plans require contributions from retirees. The expected cost of providing such postretirement benefits is accrued during the years employees render the necessary service. At the date of acquisition, the funded status of the Phelps Dodge postretirement medical and life insurance benefits was $(80) million (representing the fair value of plan assets of $173 million less a benefit obligation of $253 million). The plan assets consist of two Voluntary Employees’ Beneficiary Association (VEBA) trusts, which FCX acquired through its acquisition of Phelps Dodge. One trust is dedicated to funding postretirement medical obligations and the other to funding postretirement life insurance obligations for eligible U.S. retirees. The majority of the assets of the VEBA trusts are invested in U.S. fixed-income securities. FCX’s funding policy provides that contributions to the VEBA trusts shall be at least sufficient to pay plan benefits as they come due. Additional contributions may be made from time to time. For participants not eligible to receive payments from the VEBA trusts, FCX’s funding policy provides that contributions shall be at least equal to the cash basis obligations. At March 19, 2007, a discount rate of 5.62 percent was used to estimate the accumulated postretirement benefit obligation for the medical plans and 5.66 percent for the retiree life insurance plan. The long-term expected rate of return on plan assets for the VEBA medical and life insurance trusts was 3.7 percent and 4.5 percent, respectively.

Net periodic benefit cost for pension and postretirement benefits for Phelps Dodge have been included in the condensed consolidated financial statements beginning March 20, 2007. The components of net periodic benefit cost for pension and postretirement benefits for all of FCX’s plans for the third quarters of 2007 and 2006, follow (in millions):

															Phelps
	FCX				PT Freeport Indonesia						Atlantic Copper				Dodge
	2007		2006		2007			2006			2007		2006		2007
Service cost	$	1	$	–	$	1		$	1		$	–	$	–	$	7
Interest cost		–		1		2			2			1		2		22
Expected return on plan assets		–		–		(1	)		(1	)		–		–		(30	)
Amortization of prior service cost		1		1		1			–			–		–		–
Net periodic benefit cost	$	2	$	2	$	3		$	2		$	1	$	2	$	(1	)

The components of net periodic benefit cost for pension and postretirement benefits for all of FCX’s plans for the nine-months ended September 30, 2007 and 2006, follow (in millions):

															Phelps
	FCX				PT Freeport Indonesia						Atlantic Copper				Dodge
	2007		2006		2007			2006			2007		2006		2007
Service cost	$	2	$	–	$	4		$	3		$	–	$	–	$	14
Interest cost		1		2		5			4			3		4		47
Expected return on plan assets		–		–		(3	)		(2	)		–		–		(64	)
Amortization of prior service cost		3		3		1			1			–		–		–
Amortization of net actuarial loss		–		–		–			–			1		1		–
Net periodic benefit cost	$	6	$	5	$	7		$	6		$	4	$	5	$	(3	)

6.	EARNINGS PER SHARE

FCX’s basic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the year. A reconciliation of net income and weighted-average common shares outstanding for purposes of calculating diluted net income per share for the quarters and nine months ended September 30, 2007 and 2006, follows (in millions, except per share amounts):

							Nine Months Ended
	Third-Quarter						September 30,
	2007			2006			2007			2006
Income from continuing operations	$	826		$	366		$	2,455		$	1,015
Preferred dividends		(63	)		(15	)		(144	)		(45	)
Income from continuing operations applicable
to common stock		763			351			2,311			970
Plus income impact of assumed conversion of:
5½% Convertible Perpetual Preferred Stock		15			15			45			45
6¾% Mandatory Convertible Preferred Stock		48			–			99			–
7% Convertible Senior Notes		–			3			–			13
Diluted income from continuing operations applicable
to common stock		826			369			2,455			1,028
Income from discontinued operations		12			–			44			–
Diluted net income applicable to common stock	$	838		$	369		$	2,499		$	1,028

Weighted average common shares outstanding		382			190			327			189
Add shares issuable upon conversion, exercise or vesting of:
5½% Convertible Perpetual Preferred Stock		23			22			23			22
6¾% Mandatory Convertible Preferred Stock		39			–			27			–
7% Convertible Senior Notes		–			7			–			9
Dilutive stock options		2			1			2			1
Restricted stock		1			1			1			–
Weighted average common shares outstanding for purposes
of calculating diluted net income per share		447			221			380			221

Diluted net income per share of common stock:
Continuing operations	$	1.85		$	1.67		$	6.46		$	4.64
Discontinued operations		0.02			–			0.12			–
Diluted net income per share of common stock	$	1.87		$	1.67		$	6.58		$	4.64

Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period are excluded from the computation of diluted net income per share of common stock. FCX’s convertible instruments are also excluded when including the conversion of these instruments increases reported diluted net income per share. A summary of the excluded amounts follows (in thousands, except exercise prices):

					Nine Months Ended
	Third-Quarter				September 30,
	2007		2006		2007		2006
Weighted average outstanding options		–		1,004		389		896
Weighted average exercise price		N/A	$	63.77	$	65.96	$	63.77

7.	INVENTORIES

A summary of inventories, which were recorded using the weighted average cost method (except where otherwise indicated) and include the impact of purchase accounting adjustments (refer to Note 2), follows (in millions):

	September 30,		December 31,
	2007		2006
Mining Operations:
Raw materials	$	1	$	–
Work-in-process		64		11
Finished goods^a		845		4
Mill and leach stockpiles		614		–
Atlantic Copper:
Concentrates – First in, first out (FIFO)		153		189
Work-in-process – FIFO