Edgar Filing: FREEPORT MCMORAN COPPER & GOLD INC

fcx1q09_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 March 31, 2009
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 o 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 o 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). ÿ0 Yes R No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ÿo Yes ÿo No

On April 30, 2009, there were issued and outstanding 411,754,522 shares of the registrant’s common stock, par value $0.10 per share.

FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS


	Page
Part I. Financial Information	3

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets (Unaudited)	3

Consolidated Statements of Income (Unaudited)	4

Consolidated Statements of Cash Flows (Unaudited)	5

Consolidated Statement of Equity (Unaudited)	6

Notes to Consolidated Financial Statements (Unaudited)	7

Report of Independent Registered Public Accounting Firm	19

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations	20

Item 3. Quantitative and Qualitative Disclosures About Market Risk	49

Item 4. Controls and Procedures	49

Part II. Other Information	50

Item 1. Legal Proceedings	50

Item 1A. Risk Factors	50

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 6. Exhibits	50

Signature	51

Exhibit Index	E-1

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FREEPORT-McMoRan COPPER & GOLD INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

FREEPORT-McMoRan COPPER & GOLD INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

	March 31,			December 31,
	2009			2008
	(In Millions)

ASSETS
Current assets:
Cash and cash equivalents	$	644		$	872
Trade accounts receivable		880			374
Other accounts receivable		830			838
Product inventories and materials and supplies, net		2,195			2,192
Mill and leach stockpiles		571			571
Other current assets		280			386
Total current assets		5,400			5,233
Property, plant, equipment and development costs, net		16,211			16,002
Long-term mill and leach stockpiles		1,147			1,145
Intangible assets, net		359			364
Trust assets		139			142
Other assets		452			467
Total assets	$	23,708		$	23,353

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	1,941		$	2,766
Accrued income taxes		442			163
Current portion of reclamation and environmental liabilities		178			162
Current portion of long-term debt and short-term borrowings		87			67
Total current liabilities		2,648			3,158
Long-term debt, less current portion:
Senior notes		6,883			6,884
Project financing, equipment loans and other		257			250
Revolving credit facility		–			150
Total long-term debt, less current portion		7,140			7,284
Deferred income taxes		2,471			2,339
Reclamation and environmental liabilities, less current portion		1,967			1,951
Other liabilities		1,400			1,520
Total liabilities		15,626			16,252
Equity:
FCX stockholders’ equity:
5½% Convertible Perpetual Preferred Stock		832			832
6¾% Mandatory Convertible Preferred Stock		2,875			2,875
Common stock		53			51
Capital in excess of par value		14,760			13,989
Accumulated deficit		(8,224	)		(8,267	)
Accumulated other comprehensive loss		(237	)		(305	)
Common stock held in treasury		(3,409	)		(3,402	)
Total FCX stockholders’ equity		6,650			5,773
Noncontrolling interests in subsidiaries		1,432			1,328
Total equity		8,082			7,101
Total liabilities and equity	$	23,708		$	23,353

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

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FREEPORT-McMoRan COPPER & GOLD INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended
	March 31,
	2009			2008
	(In Millions, Except Per
	Share Amounts)

Revenues	$	2,602		$	5,672
Cost of sales:
Production and delivery		1,562			2,721
Depreciation, depletion and amortization		232			418
Lower of cost or market inventory adjustments		19			1
Total cost of sales		1,813			3,140
Selling, general and administrative expenses		62			84
Exploration and research expenses		30			52
Restructuring and other charges		25			–
Total costs and expenses		1,930			3,276
Operating income		672			2,396
Interest expense, net		(131	)		(165	)
Losses on early extinguishment of debt		–			(6	)
Other income and expense, net		(14	)		2
Income before income taxes and equity in affiliated companies’
net earnings		527			2,227
Provision for income taxes		(331	)		(729	)
Equity in affiliated companies’ net earnings		11			7
Net income		207			1,505
Net income attributable to noncontrolling interests in subsidiaries		(104	)		(319	)
Preferred dividends		(60	)		(64	)
Net income applicable to common stock	$	43		$	1,122

Net income per share of common stock attributable to FCX common
stockholders:
Basic	$	0.11		$	2.93
Diluted	$	0.11		$	2.64

Average common shares outstanding:
Basic		400			383
Diluted		401			449

Dividends declared per share of common stock	$	–		$	0.4375

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

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FREEPORT-McMoRan COPPER & GOLD INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended
	March 31,
	2009			2008
	(In Millions)

Cash flow from operating activities:
Net income	$	207		$	1,505
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation, depletion and amortization		232			418
Lower of cost or market inventory adjustments		19			1
Stock-based compensation		33			47
Charges for reclamation and environmental liabilities, including accretion		67			41
Losses on early extinguishment of debt		–			6
Deferred income taxes		73			(48	)
Increase in long-term mill and leach stockpiles		(3	)		(47	)
Amortization of intangible assets/liabilities and other, net		33			48
(Increases) decreases in working capital:
Accounts receivable		(455	)		(950	)
Inventories		(35	)		(81	)
Other current assets		77			1
Accounts payable and accrued liabilities		(731	)		(505	)
Accrued income and other taxes		249			216
Settlement of reclamation and environmental liabilities		(24	)		(37	)
Net cash (used in) provided by operating activities		(258	)		615

Cash flow from investing activities:
Capital expenditures:
North America copper mines		(72	)		(151	)
South America copper mines		(74	)		(63	)
Indonesia		(55	)		(115	)
Africa		(251	)		(143	)
Other		(67	)		(36	)
Proceeds from the sale of assets and other, net		3			21
Net cash used in investing activities		(516	)		(487	)

Cash flow from financing activities:
Net proceeds from sale of common stock		740			–
Proceeds from debt		101			473
Repayments of revolving credit facility and other debt		(225	)		(118	)
Cash dividends paid:
Common stock		–			(169	)
Preferred stock		(60	)		(64	)
Noncontrolling interests		–			(49	)
Net payments for stock-based awards		(7	)		(8	)
Excess tax benefit from stock-based awards		–			12
Bank fees and other		(3	)		–
Net cash provided by financing activities		546			77

Net (decrease) increase in cash and cash equivalents		(228	)		205
Cash and cash equivalents at beginning of year		872			1,626
Cash and cash equivalents at end of period	$	644		$	1,831

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

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FREEPORT-McMoRan COPPER & GOLD INC.

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

Freeport-McMoRan Copper & Gold Inc. Stockholders’ Equity

Convertible Perpetual

Mandatory Convertible

Common Stock

Preferred Stock

Common Stock

Accumulated

Held in Treasury

Noncontrolling

Number

Capital in

Accumu-

Other

Number

Interests

At Par

Excess of

lated

Comprehensive

Total

Value

Par Value

Deficit

Loss

Cost

Subsidiaries

Equity

(In Millions)

Balance at December 31, 2008

832

2,875

505

13,989

(8,267

)

(305

)

121

(3,402

)

1,328

7,101

Sale of common stock

–

738

–

740

Exercised and issued stock-based awards

–

Stock-based compensation costs

–

Tender of shares for stock-based awards

–

)

–

)

Dividends on preferred stock

–

(60

)

–

(60

)

Comprehensive income:

Net income

–

103

–

104

207

Other comprehensive income,

net of taxes:

Unrealized gains on securities

–

Defined benefit plans:

Net gain during period, net of

taxes of $40 million

–

Amortization of unrecognized amounts

–

Other comprehensive income

–

Total comprehensive income

–

275

Balance at March 31, 2009

832

2,875

533

14,760

(8,224

)

(237

)

121

(3,409

)

1,432

8,082

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

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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 2008 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. All such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three-month period ended March 31, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. FCX changed Phelps Dodge Corporation’s (Phelps Dodge) legal name to Freeport-McMoRan Corporation (FMC) in 2008.

2.	RESTRUCTURING AND OTHER CHARGES

During the fourth quarter of 2008, there was a dramatic decline in copper and molybdenum prices. After averaging $3.05 per pound in 2006, $3.23 per pound in 2007 and $3.61 per pound for the first nine months of 2008, London Metal Exchange (LME) spot copper prices declined to a four-year low of $1.26 per pound in December 2008, averaged $1.78 per pound in the fourth quarter of 2008 and closed at $1.32 per pound on December 31, 2008. Additionally, while molybdenum markets have been strong in recent years with prices averaging approximately $25 per pound in 2006, $30 per pound in 2007 and $33 per pound for the first nine months of 2008, molybdenum prices declined significantly to a four-year low of $8.75 per pound in November 2008, averaged approximately $16 per pound in the fourth quarter of 2008 and closed at $9.50 per pound on December 31, 2008.

While FCX’s long-term strategy of developing its resources to their full potential remains in place, the decline in copper and molybdenum prices in the fourth quarter of 2008 and the deterioration of the economic and credit environment have limited FCX’s ability to invest in growth projects and required FCX to make adjustments to its near-term operating plans. FCX responded to the sudden downturn and uncertain near-term outlook by revising its near-term strategy to protect liquidity while preserving its mineral resources and growth options for the longer term. Accordingly, operating plans were revised in the fourth quarter of 2008 and January 2009 to reflect: (i) curtailment of copper production at higher-cost North America operations and of molybdenum production at the Henderson molybdenum mine; (ii) capital cost reductions; (iii) aggressive cost control, including workforce reductions, reduced equipment purchases that were planned to support expansion projects, a reduction in material and supplies inventory and reductions in exploration, research and administrative costs; and (iv) suspension of FCX’s annual common stock dividend.

Charges recognized in first-quarter 2009 in connection with FCX’s revised operating plans in the fourth quarter of 2008 and January 2009 include restructuring charges of $34 million ($31 million to net income applicable to common stock or $0.07 per diluted share) for contract termination costs, other project cancellation costs, employee severance and benefit costs; partially offset by pension and postretirement gains of $9 million ($9 million to net income applicable to common stock or $0.02 per diluted share) for special retirement benefits and curtailments. The restructuring charge reflects workforce reductions (approximately 3,000 employees related to fourth-quarter 2008 revised operating plans and approximately 1,500 employees related to January 2009 revised operating plans) and other charges that reflect an approximate 50 percent total reduction in mining and crushed-leach rates at the Morenci mine in Arizona, an approximate 50 percent reduction in mining and stacking rates at the Safford mine in Arizona, an approximate 50 percent reduction in the mining rate at the Tyrone mine in New Mexico, suspension of mining and milling activities at the Chino mine in New Mexico (with limited residual copper production from leach operations), and an approximate 40 percent reduction in annual production (an approximate 25 percent reduction began in the fourth quarter of 2008) at the Henderson molybdenum mine in Colorado. In addition, the revised operating plans included decisions to defer certain capital projects, including the (i) incremental expansion projects at the Sierrita and Bagdad mines in Arizona, the Cerro Verde mine in Peru and the sulfide project at the El Abra mine in Chile, (ii) the restart of the Miami mine in Arizona and (iii) the restart of the Climax molybdenum mine in Colorado.

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The following table reflects first-quarter 2009 activities associated with the liabilities (included in accounts payable and accrued liabilities) incurred in connection with the fourth quarter of 2008 restructuring (in millions):

	December 31,		Additions/						March 31,
	2008		Adjustments			Payments			2009
North America Copper Mines
Morenci
Employee severance and benefit costs	$	2	$	–		$	(1	)	$	1
Contract cancellation and other costs		–		5	a		(5	)		–
Other mines
Employee severance and benefit costs		12		(2	)		(7	)		3
Contract cancellation and other costs		1		6			(2	)		5
		15		9	a		(15	)		9

South America Copper Mines
Cerro Verde
Contract cancellation and other costs		1		–			(1	)		–
Other mines
Employee severance and benefit costs		6		–			(3	)		3
Contract cancellation and other costs		–		6			(3	)		3
		7		6			(7	)		6

Africa
Employee severance and benefit costs		2		–			–			2

Molybdenum
Employee severance and benefit costs		1		1			(2	)		–

Rod & Refining
Employee severance and benefit costs		4		–			(3	)		1

Corporate & Other
Employee severance and benefit costs		6		–			(5	)		1
Contract cancellation and other costs		3		–			(3	)		–
		9		–			(8	)		1

Total	$	38	$	16	a	$	(35	)	$	19

a.	Excludes $3 million for the write off of other current assets in connection with a lease cancellation.

	2009					March 31,
	Additions		Payments			2009
North America Copper Mines
Morenci
Employee severance and benefit costs	$	12	$	(2	)	$	10
Contract cancellation and other costs		3		(1	)		2
Total	$	15	$	(3	)	$	12

3.	PENSION AND POSTRETIREMENT BENEFITS

During the first quarter of 2009, FCX remeasured its plan assets and benefit obligations for the FMC Retirement Plan and the FMC Retiree Medical Plan as a result of employee reductions caused by FCX’s revised operating plans.

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Information as of and for the three months ended March 31, 2009, on the FMC Retirement Plan and the FMC Retiree Medical Plan follows (in millions):

	FMC			FMC
	Retirement			Retiree
	Plan			Medical Plan
Change in benefit obligation:
Benefit obligation at beginning of period	$	1,289		$	222
Service cost		6			–
Interest cost		19			3
Actuarial gains		(165	)		(9	)
Special retirement benefits and curtailmentsa		(9	)		(3	)
Benefits paid, net of employee contributions and
Medicare Part D subsidy (retiree medical plan)		(29	)		(6	)
Benefit obligation at end of period		1,111			207

Change in plan assets:
Fair value of plan assets at beginning of period		924			–
Actual return on plan assets		(57	)		–
Employer contributions		–			6
Benefits paid, net of employee contributions		(29	)		(6	)
Fair value of plan assets at end of period		838			–

Funded status	$	(273	)	$	(207	)

Discount rate assumption		7.30	%		6.90	%

a.	Resulted from reductions in the workforce caused by the revised mine operating plans (see Note 2 for further discussion).

Following is a reconciliation of the benefit obligation, fair value of plan assets and funded status as of December 31, 2008, for FCX’s pension plans (as reported in FCX’s 2008 Annual Report on Form 10-K) to the FMC Retirement Plan beginning balances shown above (in millions):

				Fair Value
	Benefit			of Plan			Funded
	Obligation			Assets			Status
FCX’s pension plans as reported	$	1,412		$	959		$	(453	)
Less: FMC plans other than the FMC Retirement Plan,
and FCX’s SERP, director and excess benefit plans		(123	)		(35	)		88
FMC Retirement Plan	$	1,289		$	924		$	(365	)

Following is a reconciliation of the benefit obligation, fair value of plan assets and funded status as of December 31, 2008, for FCX’s postretirement medical and life insurance benefit plans (as reported in FCX’s 2008 Annual Report on Form 10-K) to the FMC Retiree Medical Plan beginning balances shown above (in millions):

				Fair Value
	Benefit			of Plan		Funded
	Obligation			Assets		Status
FCX’s postretirement medical and life insurance
benefit plans as reported	$	257		$	–	$	(257	)
Less: FCX’s medical and life insurance benefit plans
other than the FMC Retiree Medical Plan		(35	)		–		35
FMC Retiree Medical Plan	$	222		$	–	$	(222	)

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The components of net periodic benefit cost for pension and postretirement benefits for the three-month periods ended March 31, 2009 and 2008, follow (in millions):

	Three Months Ended
	March 31,
	2009			2008
Service cost	$	9		$	9
Interest cost		27			27
Expected return on plan assets		(20	)		(32	)
Amortization of prior service cost		–			2
Amortization of net actuarial loss		8			–
Curtailments		(4	)		–
Special retirement benefits		(5	)		–
Net periodic benefit costs	$	15		$	6

Net periodic benefit costs increased as a result of a decrease in the expected return on plan assets ($12 million) and amortization of actuarial losses ($8 million) primarily in connection with the losses on plan assets, partially offset by gains on special retirement benefits and curtailments ($9 million) resulting from workforce reductions caused by the revised mine operating plans.

4.	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 months ended March 31, 2009 and 2008 (in millions, except per share amounts):


	Three Months Ended
	March 31,
	2009			2008
Net income	$	207		$	1,505
Net income attributable to noncontrolling interests in
subsidiaries		(104	)		(319	)
Preferred dividends		(60	)		(64	)
Net income applicable to common stock		43			1,122
Plus income impact of assumed conversion of:
6¾% Mandatory Convertible Preferred Stock		–			49
5½% Convertible Perpetual Preferred Stock		–			15
Diluted net income applicable to common stock	$	43		$	1,186

Weighted-average shares of common stock outstanding:		400			383
Add stock issuable upon conversion, exercise or
vesting of:
6¾% Mandatory Convertible Preferred Stocka		–	b		39
5½% Convertible Perpetual Preferred Stock		–	b		23
Dilutive stock options		–			2
Restricted stock		1			2
Weighted-average shares of common stock outstanding
for purposes of calculating diluted net income per share		401			449

Diluted net income per share of common stock
attributable to FCX stockholders	$	0.11		$	2.64

Preferred stock will automatically convert on May 1, 2010, into between approximately 39 million and 47 million shares of FCX common stock at a conversion rate that will be determined based on FCX’s common stock price. Prior to May 1, 2010, holders may convert at a conversion rate of 1.3654 or approximately 39 million shares.

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b.	Potential additional shares of common stock of approximately 39 million shares for the 6¾% Mandatory Convertible Preferred Stock and 18 million shares for the 5½% Convertible Perpetual Preferred Stock were excluded for the three months ended March 31, 2009, because they were anti-dilutive.

FCX’s convertible instruments are excluded from the computation of diluted net income per share of common stock when including the conversion of these instruments results in an anti-dilutive effect on earnings per share (see footnote b above). The quarterly dilution threshold for the 5½% Convertible Perpetual Preferred Stock is $0.64 per share and for the 6¾% Mandatory Convertible Preferred Stock is $1.24 per share. Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period are also excluded from the computation of diluted net income per share of common stock. Excluded amounts were approximately nine million stock options with a weighted-average exercise price of $67.00 for first-quarter 2009. No stock options were excluded for first-quarter 2008.

5.	INVENTORIES, AND MILL AND LEACH STOCKPILES

The components of inventories follow (in millions):

	March 31,		December 31,
	2009		2008
Mining Operations:
Raw materials	$	1	$	1
Work-in-process		145		128
Finished goodsa		700		703
Atlantic Copper:
Raw materials (concentrates)		134		164
Work-in-process		132		71
Finished goods		5		1
Total product inventories		1,117		1,068
Total materials and supplies, netb		1,078		1,124
Total inventories	$	2,195	$	2,192

a.	Primarily includes copper concentrates, anodes, cathodes and rod, and molybdenum.

b.	Materials and supplies inventory is net of obsolescence reserves totaling $21 million at March 31, 2009, and $22 million at December 31, 2008.

The following summarizes mill and leach stockpiles (in millions):

	March 31,		December 31,
	2009		2008
Current:
Mill stockpiles	$	22	$	10
Leach stockpiles		549		561
Total current mill and leach stockpiles	$	571	$	571

Long-terma:
Mill stockpiles	$	333	$	340
Leach stockpiles		814		805
Total long-term mill and leach stockpiles	$	1,147	$	1,145

a.	Metals in stockpiles not expected to be recovered within the next 12 months.

FCX recorded charges for lower of cost or market (LCM) molybdenum inventory adjustments of $19 million ($19 million to net income applicable to common stock or $0.05 per diluted share) in first-quarter 2009 resulting from lower molybdenum prices.

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6.	INCOME TAXES

FCX’s first-quarter 2009 income tax provision resulted from taxes on international operations ($330 million) and U.S. operations ($1 million). FCX’s effective tax rate for 2009 is expected to be highly sensitive to changes in commodity prices and the mix of income between U.S. and international operations. Taxes provided on income generated from FCX’s South America and Indonesia operations are recorded at the applicable statutory rates. However, at certain commodity prices, FCX does not record a tax benefit for losses generated in the U.S., and these losses cannot be used to offset income generated from international operations. These factors have caused FCX’s consolidated effective tax rate of 63 percent to be substantially higher than the U.S. federal statutory rate of 35 percent.

FCX’s first-quarter 2008 income tax provision resulted from taxes on international operations ($579 million) and U.S. operations ($150 million). The difference between FCX’s consolidated effective income tax rate of approximately 33 percent for first-quarter 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.

7.	INTEREST COSTS

Capitalized interest totaled $45 million in first-quarter 2009 and $22 million in first-quarter 2008.

8.	DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT

Derivative Financial Instruments. FCX and its subsidiaries do not purchase, hold or sell derivative financial instruments unless there is an existing asset or obligation or if FCX anticipates a future activity that is likely to occur and will result in exposure to market risks. FCX does not enter into any derivative financial instruments for speculative purposes. FCX and its subsidiaries have entered into derivative financial instruments in limited instances to achieve specific objectives. These objectives principally relate to managing risks associated with commodity price, foreign currency and interest rate risks. The fair values of FCX’s derivative financial instruments are based on widely published market prices.

Summarized below are unrealized gains/losses on derivative financial instruments that are designated and qualify as fair value hedge transactions under Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, for the three months ended March 31, 2009, along with the unrealized gains (losses) on the related hedged item (in millions):

	Derivative		Hedged Item
Commodity contracts:
Copper futures and swap contractsa	$	5	$	(5	)

Gains (losses) on derivative financial instruments as well as the offsetting gains (losses) on the hedged items (unrecognized firm commitments) are recorded in revenues. Additionally, FCX realized gains of $3 million during first-quarter 2009 from matured derivative financial instruments that qualify for hedge accounting.

Summarized below are the realized and unrealized gains recognized in income before income taxes and equity in affiliated companies’ net earnings for derivative financial instruments, including embedded derivatives, which do not qualify for hedge accounting under SFAS No. 133, as amended, for the three months ended March 31, 2009 (in millions):

Commodity contracts:
Embedded derivatives in provisional sales contractsa	$	313
Embedded derivatives in provisional purchase contractsb		1
Copper forward contractsb		4
Copper futures and swap contractsa		32

a.	Amounts recorded in revenues.

b.	Amounts recorded in cost of sales as production and delivery costs.

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Summarized below are the fair values of unsettled derivative financial instruments recorded on the consolidated balance sheet at March 31, 2009 (in millions):

Derivatives designated as hedging instruments under
SFAS No. 133, as amended
Commodity contracts:
Copper futures and swap contracts:
Asset positiona