fcx3q08_10-q.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, 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 ÿo                                   Non-accelerated filer  o                                       Smaller reporting company ÿo

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

On October 31, 2008, there were issued and outstanding 377,652,970 shares of the registrant’s Common Stock, par value $0.10 per share.

 
 

FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS

   
 
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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)

   
September 30,
    
December 31,
  
   
2008
    
2007
  
   
(In Millions)
  
                 
ASSETS
                
Current assets:
                
Cash and cash equivalents
  
$
1,202
    
$
1,626
  
Trade accounts receivable
    
1,236
      
1,099
  
Other accounts receivable
    
427
      
196
  
Product inventories and materials and supplies, net
    
2,520
      
2,178
  
Mill and leach stockpiles
    
910
      
707
  
Other current assets
    
153
      
97
  
Total current assets
    
6,448
      
5,903
  
Property, plant, equipment and development costs, net
    
26,482
      
25,715
  
Goodwill
    
6,048
      
6,105
  
Long-term mill and leach stockpiles
    
1,260
      
1,106
  
Trust assets
    
549
      
606
  
Intangible assets, net
    
447
      
472
  
Other assets
    
772
      
754
  
Total assets
  
$
42,006
    
$
40,661
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable and accrued liabilities
  
$
2,739
    
$
2,345
  
Current portion of reclamation and environmental liabilities
    
282
      
263
  
Accrued income taxes
    
261
      
420
  
Dividends payable
    
235
      
212
  
Current portion of long-term debt and short-term borrowings
    
23
      
31
  
Copper price protection program
    
–
      
598
  
Total current liabilities
    
3,540
      
3,869
  
Long-term debt, less current portion:
                
Senior notes
    
6,885
      
6,928
  
Project financing, equipment loans and other
    
301
      
252
  
Total long-term debt, less current portion
    
7,186
      
7,180
  
Deferred income taxes
    
6,757
      
7,300
  
Reclamation and environmental liabilities, less current portion
    
1,974
      
1,733
  
Other liabilities
    
1,093
      
1,106
  
Total liabilities
    
20,550
      
21,188
  
Minority interests in consolidated subsidiaries
    
1,429
      
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
    
13,697
      
13,407
  
Retained earnings
    
5,666
      
3,601
  
Accumulated other comprehensive income
    
41
      
42
  
Common stock held in treasury
    
(3,402
)
    
(2,841
)
Total stockholders’ equity
    
20,027
      
18,234
  
Total liabilities and stockholders’ equity
  
$
42,006
    
$
40,661
  
                 

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 STATEMENTS OF INCOME (Unaudited)


                         
 
Three Months Ended
  
Nine Months Ended
  
 
September 30,
  
September 30,
  
 
2008
  
2007
  
2008
  
2007
  
 
(In Millions, Except Per Share Amounts)
                         
Revenues
$
4,616
  
$
5,066
  
$
15,729
  
$
12,755
  
Cost of sales:
                        
Production and delivery
  
2,874
    
2,662
    
8,316
    
6,105
  
Depreciation, depletion and amortization
  
442
    
356
    
1,322
    
846
  
Total cost of sales
  
3,316
    
3,018
    
9,638
    
6,951
  
Selling, general and administrative expenses
  
90
    
131
    
300
    
314
  
Exploration and research expenses
  
77
    
40
    
209
    
87
  
Total costs and expenses
  
3,483
    
3,189
    
10,147
    
7,352
  
Operating income
  
1,133
    
1,877
    
5,582
    
5,403
  
Interest expense, net
  
(139
)
  
(155
)
  
(444
)
  
(386
)
Losses on early extinguishment of debt
  
–
    
(36
)
  
(6
)
  
(171
)
Gains on sales of assets
  
–
    
47
    
13
    
85
  
Other income and expense, net
  
(14
)
  
48
    
(3
)
  
110
  
Income from continuing operations before income
                        
taxes, minority interests and equity in affiliated
                        
companies’ net earnings
  
980
    
1,781
    
5,142
    
5,041
  
Provision for income taxes
  
(240
)
  
(653
)
  
(1,627
)
  
(1,875
)
Minority interests in net income of consolidated
                        
subsidiaries
  
(155
)
  
(307
)
  
(748
)
  
(728
)
Equity in affiliated companies’ net earnings
  
2
    
5
    
16
    
17
  
Income from continuing operations
  
587
    
826
    
2,783
    
2,455
  
Income from discontinued operations, net of taxes
  
–
    
12
    
–
    
44
  
Net income
  
587
    
838
    
2,783
    
2,499
  
Preferred dividends
  
(64
)
  
(63
)
  
(191
)
  
(144
)
Net income applicable to common stock
$
523
  
$
775
  
$
2,592
  
$
2,355
  
                         
Basic net income per share of common stock:
                        
Continuing operations
$
1.37
  
$
2.00
  
$
6.78
  
$
7.06
  
Discontinued operations
  
–
    
0.03
    
–
    
0.13
  
Basic net income per share of common stock
$
1.37
  
$
2.03
  
$
6.78
  
$
7.19
  
                         
Diluted net income per share of common stock:
                        
Continuing operations
$
1.31
  
$
1.85
  
$
6.20
  
$
6.46
  
Discontinued operations
  
–
    
0.02
    
–
    
0.12
  
Diluted net income per share of common stock
$
1.31
  
$
1.87
  
$
6.20
  
$
6.58
  
                         
Average common shares outstanding:
                        
Basic
  
382
    
382
    
383
    
327
  
Diluted
  
447
    
447
    
449
    
380
  
                         
Dividends declared per share of common stock
$
0.50
  
$
0.3125
  
$
1.375
  
$
0.9375
  

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 STATEMENTS OF CASH FLOWS (Unaudited)

   
Nine Months Ended
  
   
September 30,
  
   
2008
    
2007
  
   
(In Millions)
  
Cash flow from operating activities:
                
Net income
  
$
2,783
    
$
2,499
  
Adjustments to reconcile net income to net cash provided by
                
operating activities:
                
Depreciation, depletion and amortization
    
1,322
      
864
  
Minority interests in net income of consolidated subsidiaries
    
748
      
738
  
Stock-based compensation
    
113
      
115
  
Charges for reclamation and environmental liabilities, including accretion
    
141
      
22
  
Unrealized losses on copper price protection program
    
–
      
212
  
Losses on early extinguishment of debt
    
6
      
171
  
Gain on sales of assets
    
(13
)
    
(85
)
Deferred income taxes
    
(347
)
    
(279
)
Increase in long-term mill and leach stockpiles
    
(154
)
    
(23
)
Increase in other long-term liabilities
    
78
      
64
  
Other, net
    
24
      
1
  
(Increases) decreases in working capital, excluding amounts
                
acquired from Phelps Dodge:
                
Accounts receivable
    
(198
)
    
(299
)
Inventories
    
(558
)
    
358
  
Other current assets
    
(58
)
    
–
  
Accounts payable and accrued liabilities
    
(152
)
    
427
  
Accrued income taxes
    
(424
)
    
215
  
Settlement of reclamation and environmental liabilities
    
(142
)
    
(73
)
Net cash provided by operating activities
    
3,169
      
4,927
  
                 
Cash flow from investing activities:
                
North America capital expenditures
    
(648
)
    
(601
)
South America capital expenditures
    
(229
)
    
(65
)
Indonesia capital expenditures
    
(332
)
    
(273
)
Africa capital expenditures
    
(699
)
    
(151
)
Other capital expenditures
    
(21
)
    
(48
)
Acquisition of Phelps Dodge, net of cash acquired
    
(1
)
    
(13,907
)
Proceeds from the sale of assets and other, net
    
59
      
79
  
Net cash used in investing activities
    
(1,871
)
    
(14,966
)
                 
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 common stock
    
–
      
2,816
  
Net proceeds from sale of 6¾% Mandatory Convertible Preferred Stock
    
–
      
2,803
  
Proceeds from other debt
    
183
      
412
  
Repayments of other debt
    
(198
)
    
(752
)
Purchases of FCX common stock
    
(500
)
    
–
  
Cash dividends paid:
                
Common stock
    
(504
)
    
(301
)
Preferred stock
    
(191
)
    
(112
)
Minority interests
    
(714
)
    
(440
)
Net proceeds from (payments for) exercised stock options
    
22
      
(15
)
Excess tax benefit from exercised stock options
    
25
      
9
  
Bank credit facilities fees and other, net
    
155
      
(250
)
Net cash (used in) provided by financing activities
    
(1,722
)
    
11,600
  
                 
Cash included with assets held for sale
    
–
      
(91
)
                 
Net (decrease) increase in cash and cash equivalents
    
(424
)
    
1,470
  
Cash and cash equivalents at beginning of year
    
1,626
      
907
  
Cash and cash equivalents at end of period
  
$
1,202
    
$
2,377
  

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
    
–
    
208
    
–
    
–
    
–
    
–
    
208
  
Stock-based compensation costs
  
–
    
–
    
–
    
–
    
–
    
–
    
73
    
–
    
–
    
–
    
–
    
73
  
Tax benefit for stock option
                                                                        
exercises and restricted stock
  
–
    
–
    
–
    
–
    
–
    
–
    
9
    
–
    
–
    
–
    
–
    
9
  
Tender of shares for exercised
                                                                        
stock options and restricted
                                                                        
stock
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
1
    
(61
)
  
(61
)
Shares purchased
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
6
    
(500
)
  
(500
)
Dividends on common stock
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
(527
)
  
–
    
–
    
–
    
(527
)
Dividends on preferred stock
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
(191
)
  
–
    
–
    
–
    
(191
)
Comprehensive income:
                                                                        
Net income
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
2,783
    
–
    
–
    
–
    
2,783
  
Other comprehensive income,
                                                                        
net of taxes:
                                                                        
Unrealized losses on
                                                                        
securities
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
(7
)
  
–
    
–
    
(7
)
Translation adjustments
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
2
    
–
    
–
    
2
  
Defined benefit plans:
                                                                        
Amortization of
                                                                        
unrecognized amounts
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
4
    
–
    
–
    
4
  
Other comprehensive loss
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
(1
)
  
–
    
–
    
(1
)
Total comprehensive income
  
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
–
    
2,782
  
Balance at September 30, 2008
  
1
  
$
1,100
    
29
  
$
2,875
    
499
  
$
50
  
$
13,697
  
$
5,666
  
$
41
    
121
  
$
(3,402
)
$
20,027
  
                                                                         

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 nine-month periods ended September 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 nine months ended September 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, FCX’s three-month and nine-month periods ended September 30, 2007, report PDIC as discontinued operations in the consolidated statements of income (see Note 3).

Recent Events.  During September and October 2008, global economic conditions weakened and markets experienced a sharp decline in commodity prices. Copper prices fell from $3.98 per pound at June 30, 2008, to $2.91 per pound at September 30, 2008, and further to $1.81 per pound at October 31, 2008.

In connection with the March 2007 acquisition of Phelps Dodge (refer to Note 2), acquired inventories, including mill and leach stockpiles, were recorded at fair value based on market prices and the outlook for future prices at the acquisition date. As a result of declines in copper prices and increased input costs, FCX recorded charges to operating income for lower-of-cost or market (LCM) inventory adjustments at certain of its North America copper mines in third-quarter 2008 (refer to Note 6). Subsequent to September 30, 2008, copper prices have further declined, and if current weak economic conditions continue, additional charges for LCM inventory adjustments are likely to be recorded in fourth-quarter 2008.

Additionally, during fourth-quarter 2008, FCX will undertake a review to assess other long-lived asset carrying values, including goodwill associated with the acquisition of Phelps Dodge. FCX’s impairment test for goodwill requires it to make several assumptions in determining the fair value of reporting units to which it has allocated goodwill, including near and long-term metal price assumptions (primarily for copper and molybdenum); estimates of commodity-based input costs such as energy, labor and sulfuric acid; proven and probable reserve estimates, including any costs to develop the reserves and the timing of producing the reserves; and the use of appropriate current discount rates. If current weak economic conditions continue, FCX may be required to record significant impairments of goodwill in fourth-quarter 2008.

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
 
7
 
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 near-term prices of $2.98 per pound for copper and $26.20 per pound for molybdenum to long-term average prices of $1.20 per pound for copper and $8.00 per pound for molybdenum.

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
  
Nine months ended September 30, 2007
FCX
  
Dodgea
  
Adjustments
  
Consolidated
  
Revenues
$
12,755
  
$
2,294
  
$
90
  
$
15,139
b
Operating income
$
5,403
  
$
793
  
$
(131
)
$
6,065
b,c
Income from continuing operations before
                        
income taxes, minority interests and equity
                        
in affiliated companies’ net earnings
$
5,041
  
$
836
  
$
(271
)
$
5,606
b,c,d,e
Net income from continuing operations
                        
applicable to common stock
$
2,311
  
$
493
  
$
(224
)
$
2,580
b,c,d,e
Diluted net income per share of common
                        
stock from continuing operations
$
6.46
    
N/A
    
N/A
  
$
6.20
b,c,d,e
Diluted weighted-average shares of
                        
common stock outstanding
  
380
    
N/A
    
N/A
    
447
f
 
8
 
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 nine months ended September 30, 2007, represents results from continuing operations, and therefore, excludes the results of PDIC (i.e., discontinued operations).
 
b. 
Includes charges to revenues for mark-to-market accounting adjustments on the copper price protection program totaling $232 million ($142 million to net income or $0.32 per share). Also includes pro forma credits for amortization of acquired intangible liabilities totaling $90 million ($55 million to net income or $0.12 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 $1.4 billion ($831 million to net income or $1.86 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 $469 million ($366 million to net income or $0.82 per share). Also includes accretion on the fair value of environmental liabilities resulting from the acquisition totaling $72 million ($44 million to net income or $0.10 per share).
 
f. 
Estimated pro forma diluted weighted-average shares of common stock outstanding for the nine months ended September 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
  
26
  
Pro forma weighted-average shares of FCX common stock outstanding
  
447
  
       
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 September 30, 2007, and for the period March 20, 2007 through September 30, 2007, follows (in millions):

 
Three Months
  
March 20, 2007
  
 
Ended
  
Through
  
 
September 30,
  
September 30,
  
 
2007
  
2007
  
Revenues
$
376
  
$
797
  
Operating income
  
18
    
70
  
Provision for income taxes
  
5
    
20
  
Income from discontinued operations
  
12
    
44
  
 
9
 
 4.
PENSION AND POSTRETIREMENT BENEFITS
 
The components of net periodic benefit cost for pension and postretirement benefits for the three-month and nine-month periods ended September 30, 2008 and 2007 (nine months ended September 30, 2007 includes Phelps Dodge’s plans for the period March 20, 2007, through September 30, 2007) follow (in millions):

   
Three Months Ended
  
Nine Months Ended
  
   
September 30,
  
September 30,
  
   
2008
  
2007
  
2008
  
2007
  
Service cost
  
$
9
  
$
9
  
$
27
  
$
20
  
Interest cost
    
27
    
25
    
81
    
56
  
Expected return on plan assets
    
(31
)
  
(31
)
  
(95
)
  
(67
)
Amortization of prior service cost
    
1
    
2
    
4
    
4
  
Amortization of net actuarial loss
    
–
    
–
    
1
    
1
  
Net periodic benefit cost
  
$
6
  
$
5
  
$
18
  
$
14
  
                           
The increase in service and interest costs and the expected return on plan assets for the nine months ended September 30, 2008, resulted primarily from the impact of the Phelps Dodge plans for the full nine 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 nine-month periods ended September 30, 2008 and 2007 (in millions, except per share amounts):
                           
   
Three Months Ended
  
Nine Months Ended
  
   
September 30,
  
September 30,
  
   
2008
  
2007
  
2008
  
2007
  
Income from continuing operations
  
$
587
  
$
826
  
$
2,783
  
$
2,455
  
Preferred dividends
    
(64
)
  
(63
)
  
(191
)
  
(144
)
Income from continuing operations applicable
                          
to common stock
    
523
    
763
    
2,592
    
2,311
  
Plus income impact of assumed conversion of:
                          
6¾% Mandatory Convertible Preferred Stock
    
49
    
48
    
146
    
99
  
5½% Convertible Perpetual Preferred Stock
    
15
    
15
    
45
    
45
  
Diluted net income from continuing operations
                          
applicable to common stock
    
587
    
826
    
2,783
    
2,455
  
Income from discontinued operations
    
–
    
12
    
–
    
44
  
Diluted net income applicable to common stock
  
$
587
  
$
838
  
$
2,783
  
$
2,499
  
                           
Weighted-average shares of common stock outstanding:
    
382
    
382
    
383
    
327
  
Add stock issuable upon conversion, exercise or
                          
vesting of:
                          
6¾% Mandatory Convertible Preferred Stocka
    
39
    
39
    
39
    
27
  
5½% Convertible Perpetual Preferred Stock
    
24
    
23
    
24
    
23
  
Dilutive stock options
    
1
b
  
2
    
2
    
2
  
Restricted stock
    
1
    
1
    
1
    
1
  
Weighted-average shares of common stock outstanding
                          
for purposes of calculating diluted net income per share
    
447
    
447
    
449
    
380
  
                           
Diluted net income per share of common stock:
                          
Continuing operations
  
$
1.31
  
$
1.85
  
$
6.20
  
$
6.46
  
Discontinued operations
    
–
    
0.02
    
–
    
0.12
  
Diluted net income per share of common stock
  
$
1.31
  
$
1.87
  
$
6.20
  
$
6.58
  
                           
 
a.
Preferred stock will automatically convert on May 10, 2010, into between approximately 39 million to 47 million shares of FCX common stock at a conversion rate that will be determined based on FCX’s common
 
10
 
  stock price or other certain events. Prior to May 10, 2010, holders may convert at a conversion rate of 1.3605 or approximately 39 million shares.
 
b.
Potential additional shares of common stock of approximately 1 million were anti-dilutive in the three months ended September 30, 2008.

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. Excluded amounts were approximately 299,000 stock options with a weighted-average exercise price of $113.44 for third-quarter 2008 and approximately 150,000 stock options with a weighted-average exercise price of $113.23 for the nine months ended September 30, 2008. No stock options were excluded for third-quarter 2007, and approximately 389,000 stock options with a weighted-average exercise price of $65.96 were excluded for the nine months ended September 30, 2007.

6. 
INVENTORIES, AND MILL AND LEACH STOCKPILES
The components of inventories follow (in millions):

   
September 30,
  
December 31,
  
   
2008
  
2007
  
Mining Operations:
              
Raw materials
  
$
1
  
$
1
  
Work-in-process
    
148
    
71
  
Finished goodsa
    
919
    
898
  
Atlantic Copper:
              
Raw materials (concentrates)
    
184
    
164
  
Work-in-process
    
123
    
220
  
Finished goods
    
7
    
6
  
Total product inventories    
 1,382
    
   1,360
  
Total materials and supplies, netb
    
1,138
    
818
  
Total inventories
  
$
2,520
  
$
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 September 30, 2008, and $16 million at December 31, 2007.

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

   
September 30,
  
December 31,
  
   
2008
  
2007
  
Current:
              
Mill stockpiles
  
$
2
  
$
6
  
Leach stockpiles
    
908
    
701
  
Total current mill and leach stockpiles
  
$
910
  
$
707
  
               
Long-terma:
              
Mill stockpiles
  
$
332
  
$
248
  
Leach stockpiles
    
928
    
858
  
Total long-term mill and leach stockpiles
  
$
1,260
  
$
1,106
  
               
 
a. 
Metals in stockpiles not expected to be recovered within the next 12 months.

FCX recorded charges for lower-of-cost or market inventory adjustments primarily at FCX’s Tyrone copper mine of $16 million ($11 million to net income or $0.02 per share) in third-quarter 2008 and $22 million ($14 million to net income or $0.03 per share) for the nine months ended September 30, 2008.


 
11
 
Table of Contents

 
7. 
INCOME TAXES
FCX’s third-quarter 2008 income tax provision from continuing operations resulted from taxes on international operations ($268 million), partially offset by a benefit on U.S. operations ($28 million). Because of the recent decline in copper prices and changes in PT Freeport Indonesia’s sales projections, FCX’s projected consolidated annual tax rate for 2008 has decreased from approximately 34 percent to approximately 32 percent. FCX’s third-quarter 2008 effective tax rate of approximately 24 percent reflects the cumulative impact of this reduced annual tax rate.

FCX’s income tax provision for the first nine months of 2008 resulted from taxes on international operations ($1.4 billion) and U.S. operations ($234 million). The difference between FCX’s consolidated effective income tax rate of approximately 32 percent for the first nine 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 third-quarter 2007 income tax provision from continuing operations resulted from taxes on international operations ($584 million) and U.S. operations ($69 million). FCX’s income tax provision from continuing operations for the first nine months of 2007 resulted from taxes on international operations ($1.7 billion) and U.S. operations ($161 million). The difference between FCX’s consolidated effective income tax rate of approximately 37 percent for the first nine months of 2007 and the U.S. federal statutory rate of 35 percent primarily was attributable to withholding taxes related to earnings from Indonesia and South America operations and a U.S. foreign tax credit limitation, partly offset by a U.S. benefit for percentage depletion.

8. 
INTEREST COSTS
Capitalized interest totaled $35 million in third-quarter 2008, $51 million in third-quarter 2007, $90 million for the first nine months of 2008 and $108 million for the first nine 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.


 
12
 
Table of Contents
 
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.

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 organized its operations into four primary operating divisions – North America copper mines, South America copper mines, Indonesia and Molybdenum. Notwithstanding this 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. During third-quarter 2008, FCX revised its presentation of the operating divisions to better reflect management’s view of the consolidated FCX operations, but did not change its reportable segments. Accordingly, FCX has revised its segment disclosures for the three-month and nine-month periods ended September 30, 2007, to conform with the current period presentation. Further discussion of the reportable segments included in FCX’s primary operating divisions, as well as FCX’s other reportable segments – Rod & Refining and Atlantic Copper Smelting & Refining – follows.

North America Copper Mines.  FCX has six operating copper mines in North America – Morenci, Bagdad, Sierrita and Safford in Arizona and Chino and Tyrone in New Mexico. These operations include open-pit mining, sulfide ore concentrating, leaching, solution extraction and electrowinning (SX/EW). The North America mines division includes the Morenci copper mine as a reportable segment.

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 a small amount of molybdenum concentrates as a by-product. FCX owns an 85 percent undivided interest in Morenci through an unincorporated joint venture.

Other Mines. Other mines include FCX’s other operating southwestern U.S. copper mines – Bagdad, Sierrita, Safford, Chino and Tyrone. In addition to copper, the Bagdad, Sierrita and Chino mines produce molybdenum, gold and silver as by-products.

South America Copper Mines.  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 and SX/EW operations. The South America mines 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 as a by-product. FCX owns a 53.56 percent interest in Cerro Verde.

13
 
Other Mines. Other mines 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 as by-products. 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 mining includes PT Freeport Indonesia’s Grasberg copper and gold mining operations. 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.

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 the Henderson mine 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.
 
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.

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

Intersegment Sales. Intersegment sales by the North America, South America and Indonesia 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.

Allocations. 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
 
Table of Contents
 
Business Segments
 

(In Millions)
North America Copper Mines
  
South America Copper Mines
  
Indonesia
                      
                                       
Atlantic
  
Corporate,
      
                                       
Copper
  
Other &
      
       
Other
      
Cerro
  
Other
          
Molyb-
  
Rod &
  
Smelting
  
Elimi-
  
FCX
  
Third-Quarter 2008
Morenci
  
Mines
  
Total
  
Verde
  
Mines
  
Total
  
Grasberg
  
denum
  
Refining
  
& Refining
  
nations
  
Total
  
Revenues:
                                                  
Unaffiliated customersb
$
86
  
$
97
  
$
183
  
$
315
  
$
578
  
$
893
  
$
754
a
$
683
  
$
1,477
  
$
625
  
$
1
  
$
4,616
  
Intersegment
  
425
  
794
  
1,219
  
94
  
21
  
115
  
48
  
–
  
8
  
–
  
(1,390
)
–
  
Production and deliveryb
  
347
  
500
  
847
  
161
  
336
  
497
  
470
  
417
  
1,478
  
611
  
(1,446
)
2,874
  
Depreciation, depletion and amortizationb
  
81
  
113
  
194
  
42
  
81
  
123
  
52
  
52
  
2
  
9
  
10
  
442
  
Selling, general and administrative expenses
  
–
  
–
  
–
  
–
  
–
  
–
  
20
  
3
  
–
  
4
  
63
  
90
  
Exploration and research expenses
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
77
  
77
  
Operating income (loss)b
  
83
  
278
  
361
  
206
  
182
  
388
  
260
  
211
  
5
  
1
  
(93
)
1,133
  
                                                   
Interest expense, net
  
1
  
3
  
4
  
–
  
4
  
4
  
(1
)
–
  
1
  
3
  
128
  
139
  
Provision for income taxes
  
–
  
–
  
–
  
56
  
53
  
109
  
114
  
–
  
–
  
–
  
17
  
240
  
Goodwill at September 30, 2008
  
1,912
  
2,299
  
4,211
  
763
  
366
  
1,129
  
–
  
703
  
–
  
–
  
5
  
6,048
  
Total assets at September 30, 2008
  
7,130
  
12,222
  
19,352
  
4,933
  
4,350
  
9,283
  
4,121
  
4,181
  
493
  
856
  
3,720
  
42,006
  
Capital expenditures
  
85
  
110
  
195
  
26
  
37
  
63
  
109
  
60
  
2
  
7
  
330
  
766
  
                                                   
Third-Quarter 2007
                                                  
Revenues:
                                                  
Unaffiliated customers
  
145
  
113
  
258
  
555
  
724
  
1,279
  
570
a
519
  
1,725
  
688
  
27
  
5,066
  
Intersegment
  
544
  
724
  
1,268
  
66
  
23
  
89
  
267
  
–
  
11
  
–
  
(1,635
)
–
  
Production and deliveryb
  
379
  
408
  
787
  
199
  
256
  
455
  
351
  
380
  
1,726
  
674
  
(1,711
)
2,662
  
Depreciation, depletion and amortizationb
  
92
  
86
  
178
  
41
  
53
  
94
  
43
  
22
  
3
  
8
  
8
  
356
  
Selling, general and administrative expenses
  
–
  
–
  
–
  
–
  
–
  
–
  
44
  
4
  
–
  
5
  
78
  
131
  
Exploration and research expenses
  
–
  
–
  
–
  
–
  
–
  
–
  
–
  
1
  
–
  
–
  
39
  
40
  
Operating income (loss)b
  
218
  
343
  
561
  
381
  
438
  
819
  
399
  
112
  
7
  
1
  
(22
)
1,877
  
                                                   
Interest expense, net
  
–
  
–
  
–
  
3
  
–
  
3
  
3
  
–
  
2
  
6
  
141
  
155
  
Provision for income taxes
  
–
  
–
  
–
  
121
  
143
  
264
  
254
  
–
  
–
  
–