fcx2q08-10q.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 June 30, 2008
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
(I.R.S. 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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer R   Accelerated filer oÿ Non-accelerated filer oÿ Smaller reporting company oÿ

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 July 31, 2008, there were issued and outstanding 383,957,306 shares of the registrant’s Common Stock, par value $0.10 per share.

 
 

FREEPORT-McMoRan COPPER & GOLD INC.

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Table of Contents
FREEPORT-McMoRan COPPER & GOLD INC.
PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements.

FREEPORT-McMoRan COPPER & GOLD INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

   
June 30,
    
December 31,
  
   
2008
    
2007
  
   
(In Millions)
  
                 
ASSETS
                
Current assets:
                
    Cash and cash equivalents
  
$
1,648
    
$
1,626
  
Trade accounts receivable
    
1,964
      
1,099
  
Other accounts receivable
    
247
      
196
  
Product inventories and materials and supplies, net
    
2,365
      
2,178
  
Mill and leach stockpiles
    
866
      
707
  
Prepaid expenses and other current assets
    
81
      
97
  
Total current assets
    
7,171
      
5,903
  
Property, plant, equipment and development costs, net
    
26,129
      
25,715
  
Goodwill
    
6,048
      
6,105
  
Long-term mill and leach stockpiles
    
1,215
      
1,106
  
Trust assets
    
598
      
606
  
Intangible assets, net
    
448
      
472
  
Other assets and deferred charges
    
739
      
754
  
Total assets
  
$
42,348
    
$
40,661
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable and accrued liabilities
  
$
2,405
    
$
2,345
  
Accrued income taxes
    
288
      
420
  
Current portion of reclamation and environmental liabilities
    
247
      
263
  
Dividends payable
    
213
      
212
  
Current portion of long-term debt and short-term borrowings
    
31
      
31
  
Copper price protection program
    
–
      
598
  
Total current liabilities
    
3,184
      
3,869
  
Long-term debt, less current portion:
                
Senior notes
    
6,886
      
6,928
  
Project financing, equipment loans and other
    
357
      
252
  
Revolving credit facility
    
90
      
–
  
Total long-term debt, less current portion
    
7,333
      
7,180
  
Deferred income taxes
    
6,986
      
7,300
  
Reclamation and environmental liabilities, less current portion
    
1,937
      
1,733
  
Other liabilities
    
1,120
      
1,106
  
Total liabilities
    
20,560
      
21,188
  
Minority interests in consolidated subsidiaries
    
1,616
      
1,239
  
Stockholders’ equity:
                
5½% Convertible Perpetual Preferred Stock
    
1,100
      
1,100
  
6¾% Mandatory Convertible Preferred Stock
    
2,875
      
2,875
  
Common stock
    
50
      
50
  
Capital in excess of par value
    
13,675
      
13,407
  
Retained earnings
    
5,332
      
3,601
  
Accumulated other comprehensive income
    
42
      
42
  
Common stock held in treasury
    
(2,902
)
    
(2,841
)
Total stockholders’ equity
    
20,172
      
18,234
  
Total liabilities and stockholders’ equity
  
$
42,348
    
$
40,661
  
                 

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

 
3
 
Table of Contents
FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


                         
 
Three Months Ended
  
Six Months Ended
  
 
June 30,
  
June 30,
  
 
2008
  
2007
  
2008
  
2007
  
 
(In Millions, Except Per Share Amounts)
                         
Revenues
$
5,441
  
$
5,443
  
$
11,113
  
$
7,689
  
Cost of sales:
                        
Production and delivery
  
2,720
    
2,540
    
5,442
    
3,443
  
Depreciation, depletion and amortization
  
462
    
374
    
880
    
490
  
Total cost of sales
  
3,182
    
2,914
    
6,322
    
3,933
  
Selling, general and administrative expenses
  
126
    
135
    
210
    
183
  
Exploration and research expenses
  
80
    
40
    
132
    
47
  
Total costs and expenses
  
3,388
    
3,089
    
6,664
    
4,163
  
Operating income
  
2,053
    
2,354
    
4,449
    
3,526
  
Interest expense, net
  
(140
)
  
(179
)
  
(305
)
  
(231
)
Losses on early extinguishment of debt
  
–
    
(47
)
  
(6
)
  
(135
)
Gains on sales of assets
  
13
    
38
    
13
    
38
  
Other income, net
  
9
    
38
    
11
    
62
  
Equity in affiliated companies’ net earnings
  
7
    
7
    
14
    
12
  
Income from continuing operations before income
                        
taxes and minority interests
  
1,942
    
2,211
    
4,176
    
3,272
  
Provision for income taxes
  
(658
)
  
(764
)
  
(1,387
)
  
(1,222
)
Minority interests in net income of consolidated
                        
subsidiaries
  
(274
)
  
(307
)
  
(593
)
  
(421
)
Income from continuing operations
  
1,010
    
1,140
    
2,196
    
1,629
  
Income from discontinued operations, net of taxes
  
–
    
28
    
–
    
32
  
Net income
  
1,010
    
1,168
    
2,196
    
1,661
  
Preferred dividends
  
(63
)
  
(64
)
  
(127
)
  
(81
)
Net income applicable to common stock
$
947
  
$
1,104
  
$
2,069
  
$
1,580
  
                         
Basic net income per share of common stock:
                        
Continuing operations
$
2.47
  
$
2.83
  
$
5.40
  
$
5.16
  
Discontinued operations
  
–
    
0.07
    
–
    
0.11
  
Basic net income per share of common stock
$
2.47
  
$
2.90
  
$
5.40
  
$
5.27
  
                         
Diluted net income per share of common stock:
                        
Continuing operations
$
2.25
  
$
2.56
  
$
4.89
  
$
4.71
  
Discontinued operations
  
–
    
0.06
    
–
    
0.09
  
Diluted net income per share of common stock
$
2.25
  
$
2.62
  
$
4.89
  
$
4.80
  
                         
Average common shares outstanding:
                        
Basic
  
384
    
381
    
383
    
300
  
Diluted
  
450
    
446
    
449
    
346
  
                         
Dividends declared per share of common stock
$
0.4375
  
$
0.3125
  
$
0.875
  
$
0.625
  

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

 
4
 
Table of Contents
FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

   
Six Months Ended
  
   
June 30,
  
   
2008
    
2007
  
   
(In Millions)
  
Cash flow from operating activities:
                
Net income
  
$
2,196
    
$
1,661
  
Adjustments to reconcile net income to net cash provided by
                
operating activities:
                
Depreciation, depletion and amortization
    
880
      
495
  
Minority interests in net income of consolidated subsidiaries
    
593
      
427
  
Stock-based compensation
    
92
      
80
  
Accretion of reclamation and environmental liabilities
    
74
      
12
  
Unrealized losses on copper price protection program
    
–
      
168
  
Losses on early extinguishment of debt
    
6
      
135
  
Deferred income taxes
    
(114
)
    
(102
)
Increase in long-term mill and leach stockpiles
    
(109
)
    
(101
)
Increase in other long-term liabilities
    
71
      
68
  
Other, net
    
41
      
(4
)
(Increases) decreases in working capital, excluding amounts
                
acquired from Phelps Dodge:
                
Accounts receivable
    
(921
)
    
(557
)
Inventories
    
(371
)
    
298
  
Prepaid expenses and other
    
9
      
16
  
Accounts payable and accrued liabilities
    
(525
)
    
210
  
Accrued income taxes
    
(212
)
    
(20
)
Settlement of reclamation and environmental liabilities
    
(86
)
    
(36
)
Net cash provided by operating activities
    
1,624
      
2,750
  
                 
Cash flow from investing activities:
                
North America capital expenditures
    
(367
)
    
(353
)
South America capital expenditures
    
(166
)
    
(36
)
Indonesia capital expenditures
    
(223
)
    
(175
)
Africa capital expenditures
    
(384
)
    
(76
)
Other capital expenditures
    
(23
)
    
(32
)
Acquisition of Phelps Dodge, net of cash acquired
    
(1
)
    
(13,906
)
Proceeds from the sale of assets and other, net
    
56
      
90
  
Net cash used in investing activities
    
(1,108
)
    
(14,488
)
                 
Cash flow from financing activities:
                
Proceeds from term loans under bank credit facility
    
–
      
10,000
  
Repayments of term loans under bank credit facility
    
–
      
(7,550
)
Net proceeds from sales of senior notes
    
–
      
5,880
  
Net proceeds from sale of common stock
    
–
      
2,816
  
Net proceeds from sale of 6¾% Mandatory Convertible Preferred Stock
    
–
      
2,803
  
Proceeds from revolving credit facility and other debt
    
524
      
227
  
Repayments of revolving credit facility and other debt
    
(384
)
    
(481
)
Cash dividends paid:
                
Common stock
    
(337
)
    
(182
)
Preferred stock
    
(127
)
    
(30
)
Minority interests
    
(280
)
    
(314
)
Net proceeds from (payments for) exercised stock options
    
22
      
(24
)
Excess tax benefit from exercised stock options
    
25
      
7
  
Bank credit facilities fees and other, net
    
63
      
(243
)
Net cash (used in) provided by financing activities
    
(494
)
    
12,909
  
                 
Net increase in cash and cash equivalents
    
22
      
1,171
  
Cash and cash equivalents at beginning of year
    
1,626
      
907
  
Cash and cash equivalents at end of period
  
$
1,648
    
$
2,078
  

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

 
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Table of Contents
FREEPORT-McMoRan COPPER & GOLD INC.
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
  
Income
  
Shares
  
Cost
  
Equity
  
   
(In Millions)
  
Balance at December 31, 2007
  
1
  
$
1,100
    
29
  
$
2,875
    
497
  
$
50
  
$
13,407
  
$
3,601
  
$
42
    
114
  
$
(2,841
)
$
18,234
  
Exercised stock options, issued
                                                                        
restricted stock and other
  
–
    
–
    
–
    
–
    
2
    
–
    
203
    
–
    
–
    
–
    
–
    
203
  
Stock-based compensation costs
  
–
    
–
    
–
    
–
    
–
    
–
    
56
    
–
    
–
    
–
    
–
    
56
  
Tax benefit for stock option
                                                                        
exercises and restricted stock
  
–
    
–
    
–
    
–
    
–
    
–
    
9
    
–
    
–
    
–
    
–
    
9
  
Tender of shares for exercised
                                                                        
stock options and restricted
                                                                        
stock
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
1
    
(61
)
  
(61
)
Dividends on common stock
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
(338
)
  
–
    
–
    
–
    
(338
)
Dividends on preferred stock
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
(127
)
  
–
    
–
    
–
    
(127
)
Comprehensive income:
                                                                        
Net income
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
2,196
    
–
    
–
    
–
    
2,196
  
Other comprehensive income,
                                                                        
net of taxes:
                                                                        
Unrealized losses on
                                                                        
    securities
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
(3
)
  
–
    
–
    
(3
)
Defined benefit plans:
                                                                        
Amortization of
                                                                        
unrecognized amounts
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
3
    
–
    
–
    
3
  
Other comprehensive income
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
  
Total comprehensive income
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
2,196
  
Balance at June 30, 2008
  
1
  
$
1,100
    
29
  
$
2,875
    
499
  
$
50
  
$
13,675
  
$
5,332
  
$
42
    
115
  
$
(2,902
)
$
20,172
  
                                                                         

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

 
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Table of Contents
FREEPORT-McMoRan COPPER & GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.  
GENERAL INFORMATION
The accompanying unaudited 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 2007 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-month and six-month periods ended June 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

As further discussed in Note 2, on March 19, 2007, FCX acquired Phelps Dodge. The six months ended June 30, 2007, financial results include Phelps Dodge’s results beginning March 20, 2007. Additionally, Phelps Dodge had an international wire and cable business, Phelps Dodge International Corporation (PDIC), which FCX sold on October 31, 2007. As a result of the sale, Phelps Dodge’s three-month and six-month periods ended June 30, 2007, operating results have been restated to remove PDIC from continuing operations and report PDIC as discontinued operations in the consolidated statements of income (see Note 3).

2.  
ACQUISITION OF PHELPS DODGE
On March 19, 2007, Phelps Dodge became a wholly owned subsidiary of FCX. The estimated fair value of assets acquired and liabilities assumed and the results of Phelps Dodge’s operations are included in FCX’s consolidated financial statements beginning March 20, 2007.

The acquisition was 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. 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 stockholders for total consideration of $25.8 billion.

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 was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the closing date of March 19, 2007. In valuing acquired assets and assumed liabilities, fair values were based on, but were not limited to: quoted market prices, where available; the intent of FCX with respect to whether the assets purchased were 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. A 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. At the date of acquisition of Phelps Dodge, price projections used to value the assets acquired ranged from a near-term price of $2.98 per pound for copper and $26.20 per pound for molybdenum to a long-term average price of $1.20 per pound for copper and $8.00 per pound for molybdenum.
 
 
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Table of Contents
 
A summary of the final purchase price allocation as of March 19, 2007, follows (in billions):

         
Purchase
  
 
Historical
  
Fair Value
  
Price
  
 
Balances
  
Adjustments
  
Allocation
  
Cash and cash equivalents
$
4.2
  
$
–
  
$
4.2
  
Inventories, including mill and leach stockpiles
  
0.9
    
2.8
    
3.7
  
Property, plant and equipmenta
  
6.0
    
16.2
    
22.2
  
Other assets
  
3.1
    
0.2
    
3.3
  
Allocation to goodwill
  
–
    
6.2
    
6.2
b
Total assets
  
14.2
    
25.4
    
39.6
  
Deferred income taxes (current and long-term)c
  
(0.7
)
  
(6.3
)
  
(7.0
)
Other liabilities
  
(4.1
)
  
(1.5
)
  
(5.6
)
Minority interests
  
(1.2
)
  
–
    
(1.2
)
Total
$
8.2
  
$
17.6
  
$
25.8
  
                   
 
a.  
Includes amounts for proven and probable reserves and values assigned to value beyond proven and probable reserves (VBPP).
 
b.  
Includes $160 million of goodwill associated with PDIC, which was sold in the fourth quarter of 2007.
 
c.  
Deferred income taxes have been recognized based on the difference between the tax basis and the fair values assigned to net assets.

Goodwill arising from the acquisition of Phelps Dodge was $6.2 billion, which primarily related to the requirement to recognize a deferred tax liability for the difference between the assigned values and the tax bases of assets acquired and liabilities assumed in a business combination. FCX allocated goodwill to the individual mines it believes have contributed to the excess purchase price and also included consideration of the mines’ potential for future growth (see Note 10 for the allocation of goodwill to FCX’s reportable segments).

Pro Forma Financial Information.  The following pro forma information assumes that FCX acquired Phelps Dodge effective January 1, 2007. The most significant adjustments relate to the purchase accounting impacts on the carrying values of acquired metal inventories (including mill and leach stockpiles) and property, plant and equipment using March 19, 2007, metal prices and assumptions (in millions, except per share data):

 
Historical
          
       
Phelps
  
Pro Forma
  
Pro Forma
  
Six months ended June 30, 2007
FCX
  
Dodgea
  
Adjustments
  
Consolidated
  
Revenues
$
7,689
  
$
2,294
  
$
60
  
$
10,043
b
Operating income
$
3,526
  
$
793
  
$
(356
)
$
3,963
b,c
Income from continuing operations before
                        
income taxes and minority interests
$
3,272
  
$
837
  
$
(472
)
$
3,637
b,c,d,e
Net income from continuing operations
                        
applicable to common stock
$
1,548
  
$
493
  
$
(346
)
$
1,695
b,c,d,e
Diluted net income per share of common
                        
stock from continuing operations
$
4.71
    
N/A
    
N/A
  
$
4.08
b,c,d,e
Diluted weighted-average shares of
                        
common stock outstanding
  
346
    
N/A
    
N/A
    
446
f
                         
 
a.  
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 statements.
 
Additionally, for comparative purposes, the historical Phelps Dodge financial information for the six months ended June 30, 2007, represents results from continuing operations, and therefore, excludes the results of PDIC (i.e., discontinued operations).

 
8
 
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b.  
Includes charges to revenues for mark-to-market accounting adjustments on the copper price protection program totaling $188 million ($115 million to net income or $0.26 per share). Also includes pro forma credits for amortization of acquired intangible liabilities totaling $60 million ($37 million to net income or $0.08 per share).
 
c.  
Includes charges associated with the impacts of the increases in the carrying values of acquired metal inventories (including mill and leach stockpiles) and property, plant and equipment, and also includes the amortization of intangible assets and liabilities resulting from the acquisition totaling $1.1 billion ($679 million to net income or $1.52 per share).
 
d.  
Excludes net losses on early extinguishment of debt totaling $88 million ($69 million to net income or $0.15 per share) for financing transactions related to the acquisition of Phelps Dodge.
 
e.  
Includes interest expense from the debt issued in connection with the acquisition of Phelps Dodge totaling $341 million ($266 million to net income or $0.60 per share). Also includes accretion on the fair value of environmental liabilities resulting from the acquisition totaling $48 million ($29 million to net income or $0.07 per share).
 
f.  
Estimated pro forma diluted weighted-average shares of common stock outstanding for the six months ended June 30, 2007, follow (in millions):

Average number of basic shares of FCX common stock
      
outstanding prior to the acquisition of Phelps Dodge
  
198
  
Shares of FCX common stock issued in the acquisition
  
137
  
Sale of shares of FCX common stock
  
47
  
Assumed conversion of Mandatory Convertible Preferred Stock
  
39
  
Assumed conversion of other dilutive securities
  
25
  
Pro forma weighted-average shares of FCX common stock outstanding
  
446
  
       
The above pro forma consolidated 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.  
DISCONTINUED OPERATIONS
On October 31, 2007, FCX sold its international wire and cable business, PDIC, for $735 million, which resulted in a net loss of $14 million ($9 million to net income) for transaction-related costs. The transaction generated after-tax proceeds of approximately $650 million (net proceeds of $597 million after taxes, transaction-related costs and PDIC cash).

As a result of the sale, the operating results of PDIC have been removed from continuing operations in the consolidated statements of income. Selected financial information related to discontinued operations for the three months ended June 30, 2007, and for the period March 20, 2007 through June 30, 2007, follows (in millions):

 
Three Months
  
March 20, 2007
  
 
Ended
  
Through
  
 
June 30, 2007
  
June 30, 2007
  
Revenues
$
364
  
$
421
  
Operating income
  
45
    
52
  
Provision for income taxes
  
13
    
15
  
Income from discontinued operations
  
28
    
32
  
             


 
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4.  
PENSION AND POSTRETIREMENT BENEFITS
The components of net periodic benefit cost for pension and postretirement benefits for the three-month and six-month periods ended June 30, 2008 and 2007 (six months ended June 30, 2007 includes Phelps Dodge’s plans for the period March 20, 2007, through June 30, 2007) follow (in millions):

   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
2008
  
2007
  
2008
  
2007
  
Service cost
  
$
9
  
$
9
  
$
18
  
$
11
  
Interest cost
    
27
    
25
    
54
    
31
  
Expected return on plan assets
    
(32
)
  
(32
)
  
(64
)
  
(36
)
Amortization of prior service cost
    
1
    
1
    
3
    
2
  
Amortization of net actuarial loss
    
1
    
1
    
1
    
1
  
Net periodic benefit cost
  
$
6
  
$
4
  
$
12
  
$
9
  
                           
The increase in service and interest costs and the expected return on plan assets for the six months ended June 30, 2008, resulted primarily from the impact of the Phelps Dodge plans for the full six months in 2008.

5.  
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 shares of common stock outstanding during the period. The following is a reconciliation of net income and weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share for the three-month and six-month periods ended June 30, 2008 and 2007 (in millions, except per share amounts):

                           
   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
2008
  
2007
  
2008
  
2007
  
Income from continuing operations
  
$
1,010
  
$
1,140
  
$
2,196
  
$
1,629
  
Preferred dividends
    
(63
)
  
(64
)
  
(127
)
  
(81
)
Income from continuing operations applicable
                          
to common stock
    
947
    
1,076
    
2,069
    
1,548
  
Plus income impact of assumed conversion of:
                          
6¾% Mandatory Convertible Preferred Stock
    
48
    
49
    
97
    
51
  
5½% Convertible Perpetual Preferred Stock
    
15
    
15
    
30
    
30
  
Diluted net income from continuing operations
                          
applicable to common stock
    
1,010
    
1,140
    
2,196
    
1,629
  
Income from discontinued operations
    
–
    
28
    
–
    
32
  
Diluted net income applicable to common stock
  
$
1,010
  
$
1,168
  
$
2,196
  
$
1,661
  
                           
Weighted-average shares of common stock outstanding:
    
384
    
381
    
383
    
300
  
Add stock issuable upon conversion, exercise or
                          
vesting of:
                          
6¾% Mandatory Convertible Preferred Stock
    
39
    
39
    
39
    
21
  
5½% Convertible Perpetual Preferred Stock
    
23
    
23
    
23
    
23
  
Dilutive stock options
    
3
    
2
    
3
    
1
  
Restricted stock
    
1
    
1
    
1
    
1
  
Weighted-average shares of common stock outstanding
                          
for purposes of calculating diluted net income per share
    
450
    
446
    
449
    
346
  
                           
Diluted net income per share of common stock:
                          
Continuing operations
  
$
2.25
  
$
2.56
  
$
4.89
  
$
4.71
  
Discontinued operations
    
–
    
0.06
    
–
    
0.09
  
Diluted net income per share of common stock
  
$
2.25
  
$
2.62
  
$
4.89
  
$
4.80
  
                           
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
 
10
 
convertible instruments are also excluded when including the conversion of these instruments increases reported diluted net income per share. Excluded amounts were approximately 150,000 stock options with a weighted-average exercise price of $112.82 for second-quarter 2008 and approximately 75,000 stock options with a weighted-average exercise price of $112.82 for the six months ended June 30, 2008. Excluded amounts were approximately 169,000 stock options with a weighted-average exercise price of $78.92 for second-quarter 2007 and approximately 568,000 stock options with a weighted-average exercise price of $67.71 for the six months ended June 30, 2007.

6.  
INVENTORIES, AND MILL AND LEACH STOCKPILES
The components of inventories follow (in millions):
 
   
June 30,
  
December 31,
  
   
2008
  
2007
  
Mining Operations:
              
Raw materials
  
$
20
  
$
1
  
Work-in-process
    
111
    
71
  
Finished goodsa
    
813
    
898
  
Atlantic Copper:
              
Raw materials (concentrates)
    
212
    
164
  
Work-in-process
    
215
    
220
  
Finished goods
    
9
    
6
  
Total product inventories
    
1,380
    
1,360
  
Total materials and supplies, netb
    
985
    
818
  
Total inventories
  
$
2,365
  
$
2,178
  
               
a.  
Primarily includes copper concentrates, anodes, cathodes and rod, and molybdenum.
 
b.  
Materials and supplies inventory is net of obsolescence reserves totaling $18 million at June 30, 2008, and $16 million at December 31, 2007.

The following is a detail of mill and leach stockpiles (in millions):

   
June 30,
  
December 31,
  
   
2008
  
2007
  
Current:
              
Mill stockpiles
  
$
4
  
$
6
  
Leach stockpiles
    
862
    
701
  
Total current mill and leach stockpiles
  
$
866
  
$
707
  
               
Long-terma:
              
Mill stockpiles
  
$
314
  
$
248
  
Leach stockpiles
    
901
    
858
  
Total long-term mill and leach stockpiles
  
$
1,215
  
$
1,106
  
               
 
a.  
Metals in stockpiles not expected to be recovered within the next 12 months.


 
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7.  
INCOME TAXES
FCX’s second-quarter 2008 income tax provision from continuing operations resulted from taxes on international operations ($546 million) and U.S. taxes ($112 million). FCX’s income tax provision for the first six months of 2008 included taxes on international operations ($1.1 billion) and U.S. taxes ($262 million). The difference between FCX’s consolidated effective income tax rate of approximately 33 percent for the first six months of 2008 and the U.S. federal statutory rate of 35 percent primarily was attributable to a U.S. benefit for percentage depletion, partially offset by withholding taxes and incremental U.S. income tax accrued on foreign earnings.

FCX’s second-quarter 2007 income tax provision from continuing operations resulted from taxes on earnings at international operations ($626 million) and U.S. taxes ($138 million). FCX’s income tax provision for the first six months of 2007 included taxes on international operations ($1.1 billion) and U.S. taxes ($92 million). The difference between FCX’s consolidated effective income tax rate of approximately 37 percent for the first six months of 2007 and the U.S. federal statutory rate of 35 percent primarily was attributable to (i) withholding taxes incurred in connection with earnings from Indonesia and South America operations, (ii) income taxes incurred by PT Indocopper Investama, a wholly owned subsidiary of FCX whose only asset is its investment in PT Freeport Indonesia and (iii) a U.S. foreign tax credit limitation; partly offset by a U.S. benefit for percentage depletion.

8.  
INTEREST COSTS
Capitalized interest totaled $33 million in second-quarter 2008, $50 million in second-quarter 2007, $55 million for the first six months of 2008 and $57 million for the first six months of 2007.

9.  
NEW ACCOUNTING STANDARDS
Fair Value Measurements. In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 does not require any new fair value measurements under U.S. GAAP but rather establishes a common definition of fair value, provides a framework for measuring fair value under U.S. GAAP and expands disclosure requirements about fair value measurements. In February 2008, FASB issued FASB Staff Position (FSP) No. FAS 157-2, which delays the effective date of SFAS No. 157 for nonfinancial assets or liabilities that are not required or permitted to be measured at fair value on a recurring basis to fiscal years beginning after November 15, 2008, and interim periods within those years. Effective January 1, 2008, FCX adopted SFAS No. 157 for financial assets and liabilities recognized at fair value on a recurring basis. This partial adoption of SFAS No. 157 did not have a material impact on our financial reporting and disclosures as FCX’s financial assets are measured using quoted market prices, or Level 1 inputs. FCX is currently evaluating the impact that the adoption of SFAS No. 157 will have on its financial reporting and disclosures for pension and postretirement related financial assets and nonfinancial assets or liabilities not valued on a recurring basis (at least annually).

Disclosures about Derivative Instruments and Hedging Activities. In March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS No. 161 amends the disclosure requirements for derivative instruments and hedging activities contained in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Under SFAS No. 161, entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require disclosure for earlier periods presented for comparative purposes at initial adoption. The adoption of SFAS No. 161 will not affect FCX’s accounting for derivative financial instruments; however, FCX is currently evaluating the impact on its related disclosures.

The Hierarchy of Generally Accepted Accounting Principles. In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which identifies the sources of accounting and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS No. 162 is effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Presenting Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of SFAS No. 162 is not expected to result in a change in FCX’s accounting practices.
 
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Table of Contents
 
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion. In May 2008, FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” which will change the accounting treatment for convertible debt securities that the issuer may settle fully or partially in cash. FSP No. APB 14-1 requires bifurcation of convertible debt instruments into a debt component that is initially recorded at fair value and an equity component, which represents the difference between the initial proceeds from issuance of the instrument and the fair value allocated to the debt component. The debt component is subsequently accreted (as a component of interest expense) to par value over its expected life. FSP No. APB 14-1 is effective for fiscal years and interim periods beginning after December 15, 2008, and must be retrospectively applied to all prior periods presented, even if an instrument has matured, converted, or otherwise been extinguished as of the FSP’s effective date. FCX will adopt FSP No. APB 14-1 on January 1, 2009, and will be required to retrospectively apply its provisions to its 7% Convertible Senior Notes. FCX is currently evaluating the impact that the adoption of FSP No. APB 14-1 will have on its consolidated financial statements.

10.  
BUSINESS SEGMENTS
FCX has a regional approach to the management of its operations. FCX has organized its operations geographically into three primary operating divisions – North America, South America and Indonesia. Notwithstanding this geographic structure, FCX internally reports information on a mine-by-mine basis. Therefore, in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” FCX concluded that its operating segments include individual mines. Operating segments that meet SFAS No. 131 thresholds are reportable segments. FCX has revised its segment disclosures for second-quarter 2007 to conform with the current year presentation. Further discussion of the reportable segments included in FCX’s primary operating divisions, as well as FCX’s other reportable segment – Atlantic Copper Smelting & Refining, follows.

North America.  North America operations are comprised of copper operations from mining through rod production, molybdenum operations from mining through conversion to chemical and metallurgical products, and the marketing and sale of both product lines. FCX has seven operating copper mines in North America – Morenci, Bagdad, Sierrita, Safford and Miami in Arizona and Chino and Tyrone in New Mexico, as well as one operating molybdenum mine – Henderson in Colorado. The North America division includes the Morenci copper mine, Rod & Refining operations and Molybdenum operations as reportable segments.

Morenci. The Morenci open-pit mine, located in southeastern Arizona, primarily produces copper cathodes and copper concentrates. In addition to copper, the Morenci mine produces molybdenum concentrates as a by-product. FCX owns an 85 percent undivided interest in Morenci via an unincorporated joint venture.

Rod & Refining. The Rod & Refining segment consists of copper conversion facilities, including a refinery, four rod mills and a specialty copper products facility. This segment processes copper produced at FCX’s North America mines and purchased copper into copper anode, cathode, rod and custom copper shapes. At times this segment refines copper and produces copper rod and shapes for customers on a toll basis. Toll arrangements require the tolling customer to deliver appropriate copper-bearing material to FCX’s facilities for processing into a product that is returned to the customer, who pays FCX for processing its material into the specified products.

Molybdenum. The Molybdenum segment includes FCX’s wholly owned Henderson molybdenum mine in Colorado and related conversion facilities. The Henderson underground mine produces high-purity, chemical-grade molybdenum concentrates, which are typically further processed into value-added molybdenum chemical products. This segment is an integrated producer of molybdenum, with mining, roasting and processing facilities that produce high-purity, molybdenum-based chemicals, molybdenum metal powder and metallurgical products, which are sold to customers around the world. This segment also includes a sales company that purchases and sells molybdenum from Henderson as well as from FCX’s North America and South America copper mines that produce molybdenum as a by-product. In addition, at times this segment roasts and/or processes material on a toll basis. Toll arrangements require the tolling customer to deliver appropriate molybdenum-bearing material to FCX’s facilities for processing into a product that is returned to the customer, who pays FCX for processing its material into the specified products.

The Molybdenum segment also includes FCX’s wholly owned Climax molybdenum mine in Colorado, which has been on care-and-maintenance status since 1995. FCX is currently undertaking a project to restart the Climax mine with start up expected in 2010.

13
 
Other North America. Other North America operations include FCX’s other operating southwestern U.S. copper mines – Bagdad, Sierrita, Safford, Miami, Chino and Tyrone. In addition to copper, the Bagdad, Sierrita and Chino mines produce molybdenum, gold and silver. Other North America operations also include the Miami smelter, which processes our North America concentrates and provides a significant source of sulfuric acid for the various North America leaching operations; and a sales company, which functions as an agent to purchase metals, primarily copper from the North and South America operations, and sells to Atlantic Copper, S.A. (Atlantic Copper) and third parties.

South America.  FCX has four operating copper mines in South America – Cerro Verde in Peru, and Candelaria, Ojos del Salado and El Abra in Chile. These operations include open-pit and underground mining, sulfide ore concentrating, leaching, solution extraction and electrowinning (SX/EW). The South America division includes the Cerro Verde copper mine as a reportable segment.

Cerro Verde. The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces copper cathodes and copper concentrates. In addition to copper, the Cerro Verde mine produces molybdenum concentrates. FCX owns a 53.56 percent interest in Cerro Verde.

Other South America. Other South America operations include FCX’s Chilean copper mines – Candelaria, Ojos del Salado and El Abra – which include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations. In addition to copper, the Candelaria and Ojos del Salado mines produce gold and silver. FCX owns an 80 percent interest in both the Candelaria and Ojos del Salado mines, and owns a 51 percent interest in the El Abra mine.

Indonesia.  Indonesia operations include PT Freeport Indonesia’s Grasberg copper and gold mining operations and PT Puncakjaya Power’s power-generating operations (after eliminations with PT Freeport Indonesia). FCX owns 90.64 percent of PT Freeport Indonesia, including 9.36 percent owned through PT Indocopper Investama. In 1996, FCX established an unincorporated joint venture with Rio Tinto, which covers PT Freeport Indonesia’s mining operations in Block A and gives Rio Tinto, through 2021, a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver. After 2021, Rio Tinto will have a 40 percent interest in all production from Block A.

Atlantic Copper Smelting & Refining.  Atlantic Copper, FCX’s wholly owned smelting unit in Spain, smelts and refines copper concentrates and markets refined copper and precious metals in slimes.

Other. Intersegment sales by the Indonesia and South America mines are based on similar arms-length transactions with third parties at the time of the sale. Intersegment sales of any individual mine may not be reflective of the actual prices ultimately realized because of a variety of factors, including additional processing, timing of sales to unaffiliated customers and transportation premiums.

FCX allocates certain operating costs, expenses and capital to the operating divisions and individual segments. However, not all costs and expenses applicable to a mine or operation are allocated. All federal and state income taxes are recorded and managed at the corporate level with the exception of foreign income taxes, which are generally recorded and managed at the applicable mine or operation. In addition, most exploration and research activities are managed at the corporate level, and those costs are not allocated to the operating divisions or segments. Accordingly, the following segment information reflects management determinations that may not be indicative of what the actual financial performance of each operating division or segment would be if it was an independent entity.


 
14
 
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Business Segments
(In Millions)
North America
  
South America
  
Indonesia
              
                                           
Atlantic
  
Corporate,
      
               
Other
      
Total
      
Other
  
Total
      
Copper
  
Other &
      
       
Rod &
  
Molyb-
  
North
  
Elimi-
  
North
  
Cerro
  
South
  
South
      
Smelting
  
Elimi-
  
FCX
  
Second-Quarter 2008
Morenci
  
Refining
  
denum
  
America
  
nations
  
America
  
Verde
  
America
  
America
  
Grasberg
  
& Refining
  
nations
  
Total
  
Revenues:
                                                      
Unaffiliated customersb
$
46
  
$
1,675
  
$
715
  
$
572
  
$
–
  
$
3,008
  
$
428
  
$
468
  
$
896
  
$
811
a
$
724
  
$
2
  
$
5,441
  
Intersegment
  
569
  
8
  
–
  
1,131
  
(1,571
)
137
  
262
  
251
  
513
  
205
  
–
  
(855
)
–
  
Production and deliveryb
  
294
  
1,677
  
421
  
1,161
  
(1,590
)
1,963
  
206
  
256
  
462
  
439
  
698
  
(842
)
2,720
  
Depreciation, depletion and amortizationb
  
79
  
1
  
69
  
122
  
–
  
271
  
46
  
81
  
127
  
48
  
9
  
7
  
462
  
Selling, general and administrative expenses
  
–
  
–
  
5
  
2
  
–
  
7
  
–
  
–
  
–
  
47
  
6
  
66
  
126
  
Exploration and research expenses
  
–
  
–
  
1
  
–
  
–
  
1
  
–
  
–
  
–
  
–
  
–
  
79
  
80
  
Operating incomeb
  
242
  
5
  
219
  
418
  
19
  
903
  
438
  
382
  
820
  
482
  
11
  
(163
)
2,053
  
                                                       
Interest expense, net
  
–
  
1
  
–
  
10
  
(1
)
10
  
1
  
(2
)
(1
)
2
  
2
  
127
  
140
  
Provision for income taxes
  
–
  
–
  
–
  
–
  
–
  
–
  
154
  
121
  
275
  
205
  
–
  
178
  
658
  
Goodwill at June 30, 2008
  
1,912
  
–
  
703
  
2,299
  
–
  
4,914
  
763
  
366
  
1,129
  
–
  
–
  
5
  
6,048
  
Total assets at June 30, 2008
  
7,000
  
605
  
4,156
  
13,712
  
(805
)
24,668
  
5,247
  
4,967
  
10,214
  
4,066
  
1,059
  
2,341
  
42,348
  
Capital expenditures
  
82
  
1
  
32
  
77
  
–
  
192
  
45
  
58
  
103
  
108
  
7
  
245
  
655
  
                                                       
Second-Quarter 2007
                                                      
Revenues:
                                                      
Unaffiliated customers
  
23
  
1,826
  
463
  
367
  
–
  
2,679
  
157
  
572
  
729
  
1,415
a
619
  
1
  
5,443
  
Intersegment
  
519
  
11
  
–
  
733
  
(1,259
)
4
  
298
  
205
  
503
  
347
  
–
  
(854
)
–
  
Production and deliveryb
  
304
  
1,825
  
406
  
763
  
(1,194
)
2,104
  
100
  
203
  
303
  
390
  
608
  
(865
)
2,540
  
Depreciation, depletion and amortizationb
  
69
  
3
  
22
  
74
  
–
  
168
  
35
  
101
  
136
  
56
  
9
  
5
  
374
  
Selling, general and administrative expenses
  
–
  
–
  
5
  
2
  
–
  
7
  
–
  
–
  
–
  
45
  
6
  
77
  
135
  
Exploration and research expenses
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
40
  
40
  
Operating income (loss)b
  
169
  
9
  
30
  
261
  
(65
)
404
  
320
  
473
  
793
  
1,271
  
(4
)
(110
)
2,354
  
                                                       
Interest expense, net
  
–
  
1
  
–
  
1
  
(1
)
1
  
4
  
(1
)
3
  
3
  
7
  
165
  
179
  
Provision for income taxes
  
–
  
–
  
–
  
–
  
–
  
–
  
123
  
156
  
279
  
559
  
–
  
(74
)
764
  
Total assets at June 30, 2007
  
4,737
  
670
  
1,894
  
9,462
  
(736
)
16,027
  
4,294
  
4,339
  
8,633
  
4,352
  
1,062
  
10,560
c
40,634
  
Capital expenditures
  
60
  
1
  
11
  
228
  
–
  
300
  
17
  
17
  
34
  
101