FCX Q311 10-Q
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, 2011
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: 001-11307-01
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)
 
 
 
333 North Central Avenue
 
Phoenix, AZ
85004-2189
(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.
þ Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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).       þ Yes  ¨ 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 þ         Accelerated filer ¨          Non-accelerated filer ¨         Smaller reporting company ¨

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

On October 31, 2011, there were issued and outstanding 947,911,093 shares of the registrant’s common stock, par value $0.10 per share.
FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
.


2
Table of Contents    


Part I.
FINANCIAL INFORMATION

Item 1.
Financial Statements.

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

 
September 30,
2011
 
December 31,
2010
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,128

 
$
3,738

Trade accounts receivable
1,139

 
2,132

Other accounts receivable
307

 
293

Inventories:
 
 
 
Product
1,231

 
1,409

Materials and supplies, net
1,323

 
1,169

Mill and leach stockpiles
1,167

 
856

Other current assets
413

 
254

Total current assets
10,708

 
9,851

Property, plant, equipment and development costs, net
17,966

 
16,785

Long-term mill and leach stockpiles
1,599

 
1,425

Intangible assets, net
321

 
328

Other assets
1,114

 
997

Total assets
$
31,708

 
$
29,386

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
2,580

 
$
2,441

Dividends payable
240

 
240

Current portion of reclamation and environmental obligations
201

 
207

Accrued income taxes
110

 
648

Rio Tinto's share of joint venture cash flows
46

 
132

Current portion of debt
4

 
95

Total current liabilities
3,181

 
3,763

Long-term debt, less current portion
3,531

 
4,660

Deferred income taxes
3,365

 
2,873

Reclamation and environmental obligations, less current portion
2,139

 
2,071

Other liabilities
1,441

 
1,459

Total liabilities
13,657

 
14,826

Equity:
 
 
 
FCX stockholders’ equity:
 
 
 
Common stock
107

 
107

Capital in excess of par value
18,974

 
18,751

Retained earnings (deficit)
144

 
(2,590
)
Accumulated other comprehensive loss
(314
)
 
(323
)
Common stock held in treasury
(3,554
)
 
(3,441
)
Total FCX stockholders’ equity
15,357

 
12,504

Noncontrolling interests
2,694

 
2,056

Total equity
18,051

 
14,560

Total liabilities and equity
$
31,708

 
$
29,386

 
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
(In millions, except per share amounts)
Revenues
$
5,195

 
$
5,152

 
$
16,718

 
$
13,379

Cost of sales:
 
 
 
 
 
 
 
Production and delivery
2,570

 
2,266

 
7,504

 
6,234

Depreciation, depletion and amortization
257

 
268

 
756

 
788

Total cost of sales
2,827

 
2,534

 
8,260

 
7,022

Selling, general and administrative expenses
102

 
81

 
323

 
277

Exploration and research expenses
78

 
35

 
194

 
104

Environmental obligations and shutdown costs
38

 
3

 
98

 
5

Total costs and expenses
3,045

 
2,653

 
8,875

 
7,408

Operating income
2,150

 
2,499

 
7,843

 
5,971

Interest expense, net
(78
)
 
(103
)
 
(250
)
 
(370
)
Losses on early extinguishment of debt
—

 
—

 
(68
)
 
(77
)
Other income (expense), net
28

 
(19
)
 
40

 
2

Income before income taxes and equity in affiliated companies’
     net earnings
2,100

 
2,377

 
7,565

 
5,526

Provision for income taxes
(808
)
 
(845
)
 
(2,698
)
 
(1,956
)
Equity in affiliated companies’ net earnings
2

 
1

 
14

 
10

Net income
1,294

 
1,533

 
4,881

 
3,580

Net income attributable to noncontrolling interests
(241
)
 
(355
)
 
(961
)
 
(793
)
Preferred dividends
—

 
—

 
—

 
(63
)
Net income attributable to FCX common stockholders
$
1,053

 
$
1,178

 
$
3,920

 
$
2,724

Net income per share attributable to FCX common stockholders:
 
 
 
 
 
 
 
Basic
$
1.11

 
$
1.25

 
$
4.14

 
$
3.01

Diluted
$
1.10

 
$
1.24

 
$
4.10

 
$
2.94

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
948

 
941

 
947

 
906

Diluted
955

 
947

 
955

 
947

Dividends declared per share of common stock
$
0.25

 
$
0.15

 
$
1.25

 
$
0.375

 
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)
 
Nine Months Ended
 
September 30,
 
2011
 
2010
 
(In millions)
Cash flow from operating activities:
 
 
 
Net income
$
4,881

 
$
3,580

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
756

 
788

Stock-based compensation
92

 
93

Charges for reclamation and environmental obligations, including accretion
144

 
117

Payments of reclamation and environmental obligations
(131
)
 
(139
)
Losses on early extinguishment of debt
68

 
77

Deferred income taxes
419

 
252

Increase in long-term mill and leach stockpiles
(174
)
 
(73
)
Changes in other assets and liabilities
(34
)
 
16

Other, net
(21
)
 
36

(Increases) decreases in working capital:
 
 
 
Accounts receivable
1,034

 
(391
)
Inventories
(266
)
 
(189
)
Other current assets
(152
)
 
(13
)
Accounts payable and accrued liabilities
(101
)
 
156

Accrued income and other taxes
(641
)
 
(92
)
Net cash provided by operating activities
5,874

 
4,218

 
 
 
 
Cash flow from investing activities:
 
 
 
Capital expenditures:
 
 
 
North America copper mines
(342
)
 
(140
)
South America
(431
)
 
(283
)
Indonesia
(463
)
 
(311
)
Africa
(89
)
 
(59
)
Molybdenum
(317
)
 
(34
)
Other
(107
)
 
(50
)
Other, net
24

 
20

Net cash used in investing activities
(1,725
)
 
(857
)
 
 
 
 
Cash flow from financing activities:
 
 
 
Proceeds from debt
37

 
52

Repayments of debt
(1,303
)
 
(1,678
)
Cash dividends and distributions paid:
 
 
 
Common stock
(1,186
)
 
(272
)
Preferred stock
—

 
(95
)
Noncontrolling interests
(350
)
 
(330
)
Contributions from noncontrolling interests
27

 
24

Net proceeds from (payments for) stock-based awards
2

 
(3
)
Excess tax benefit from stock-based awards
23

 
5

Other, net
(9
)
 
—

Net cash used in financing activities
(2,759
)
 
(2,297
)
 
 
 
 
Net increase in cash and cash equivalents
1,390

 
1,064

Cash and cash equivalents at beginning of year
3,738

 
2,656

Cash and cash equivalents at end of period
$
5,128

 
$
3,720


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)

 
FCX Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
Accumu-
lated
Other Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total FCX
Stock-holders' Equity
 
 
 
 
 
Number
of
Shares
 
At Par
Value
 
Capital in
Excess of
Par Value
 
Retained
Earnings (Deficit)

 
 
Number
of
Shares
 
At
Cost
 
 
Non-
controlling
Interests
 
Total
Equity
 
(In millions)
Balance at December 31, 2010
1,067

 
$
107

 
$
18,751

 
$
(2,590
)
 
$
(323
)
 
122

 
$
(3,441
)
 
$
12,504

 
$
2,056

 
$
14,560

Exercised and issued stock-based awards
4

 
—

 
48

 
—

 
—

 
—

 
—

 
48

 
—

 
48

Stock-based compensation
—

 
—

 
92

 
—

 
—

 
—

 
—

 
92

 
—

 
92

Tax benefit for stock-based awards
—

 
—

 
16

 
—

 
—

 
—

 
—

 
16

 
—

 
16

Tender of shares for stock-based awards
—

 
—

 
67

 
—

 
—

 
1

 
(113
)
 
(46
)
 
—

 
(46
)
Dividends on common stock
—

 
—

 
—

 
(1,186
)
 
—

 
—

 
—

 
(1,186
)
 
—

 
(1,186
)
Dividends and distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(350
)
 
(350
)
Contributions from noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
27

 
27

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
3,920

 
—

 
—

 
—

 
3,920

 
961

 
4,881

Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized losses on securities
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
(1
)
 
—

 
(1
)
Translation adjustment
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
(1
)
 
—

 
(1
)
Defined benefit plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of unrecognized amounts
—

 
—

 
—

—

—

 
11

 
—

 
—

 
11

 
—

 
11

Other comprehensive income
—

 
—

 
—

 
—

 
9

 
—

 
—

 
9

 
—

 
9

Total comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,929

 
961

 
4,890

Balance at September 30, 2011
1,071

 
$
107

 
$
18,974

 
$
144

 
$
(314
)
 
123

 
$
(3,554
)
 
$
15,357

 
$
2,694

 
$
18,051

 
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 2010 Annual Report on Form 10-K. The information furnished herein reflects all adjustments that 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 and nine-month periods ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

In December 2010, FCX’s Board of Directors declared a two-for-one split of its common stock in the form of a stock dividend on issued and outstanding shares, with the additional shares issued on February 1, 2011, to common shareholders of record at the close of business on January 15, 2011. All references to shares of common stock and per share amounts have been retroactively adjusted to reflect the two-for-one stock split.

2.
EARNINGS PER SHARE
FCX’s basic net income per share of common stock was calculated by dividing net income attributable to common stock by the weighted-average shares of common stock outstanding during the period. Following is a reconciliation of net income and weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share (in millions, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2011
 
2010
 
2011
 
2010
 
Net income
$
1,294

 
$
1,533

 
$
4,881

 
$
3,580

 
Net income attributable to noncontrolling interests
(241
)
 
(355
)
 
(961
)
 
(793
)
 
Preferred dividends
—

 
—

 
—

 
(63
)
 
Net income attributable to FCX common stockholders
1,053

 
1,178

 
3,920

 
2,724

 
Plus income impact of assumed conversion of 6¾%
     Mandatory Convertible Preferred Stocka
—

 
—

 
—

 
63

 
Diluted net income attributable to FCX common
     stockholders
$
1,053

 
$
1,178

 
$
3,920

 
$
2,787

 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding
948

 
941

 
947

 
906

 
Add stock issuable upon conversion, exercise or vesting of:
 
 
 
 
 
 
 
 
6¾% Mandatory Convertible Preferred Stocka
—

 
—

 
—

 
34

 
 Dilutive stock optionsb
6

 
4

 
7

 
5

 
 Restricted stock
1

 
2

 
1

 
2

 
Weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share
955

 
947

 
955

 
947

 
Diluted net income per share attributable to FCX
     common stockholders
$
1.10

 
$
1.24

 
$
4.10

 
$
2.94

 
a.
All outstanding 6¾% Mandatory Convertible Preferred Stock automatically converted on May 1, 2010, into FCX common stock.
b.
Potential additional shares of common stock that were anti-dilutive totaled approximately three million for the three months ended September 30, 2011, none for the three months ended September 30, 2010, and two million for the nine months ended September 30, 2011 and 2010.

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. Excluded amounts were approximately 5 million stock options with a weighted-average exercise price of $55.57 per option for third-quarter 2011 and approximately 3 million stock options with a weighted-average exercise price of $55.74 for the nine months ended September 30, 2011. Stock options for approximately 19 million shares with a weighted-average exercise price of $37.78 were excluded for third-quarter 2010, and stock options for approximately 14

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million shares with a weighted-average exercise price of $38.32 were excluded for the nine months ended September 30, 2010.

3.
PENSION AND POSTRETIREMENT BENEFITS
The components of net periodic benefit costs for pension and postretirement benefits follow (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Service cost
$
9

 
$
8

 
$
29

 
$
26

Interest cost
27

 
27

 
81

 
80

Expected return on plan assets
(24
)
 
(23
)
 
(72
)
 
(70
)
Amortization of net actuarial loss
6

 
6

 
18

 
17

Net periodic benefit costs
$
18

 
$
18

 
$
56

 
$
53


4.
INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES
The components of inventories follow (in millions):
 
September 30,
2011
 
December 31, 2010
Mining Operations:
 
 
 
Raw materials
$
1

 
$
1

Work-in-process
77

 
93

Finished goodsa
758

 
704

Atlantic Copper, S.A. (Atlantic Copper):
 
 
 
Raw materials (concentrates)
146

 
336

Work-in-process
247

 
266

Finished goods
2

 
9

Total product inventories
1,231

 
1,409

Total materials and supplies, netb
1,323

 
1,169

Total inventories, less current portion of mill and leach stockpiles
$
2,554

 
$
2,578

a.
Primarily includes molybdenum concentrates, and copper concentrates, anodes, cathodes and rod.
b.
Materials and supplies inventory is net of obsolescence reserves totaling $26 million at September 30, 2011, and December 31, 2010.

A summary of mill and leach stockpiles follows (in millions):
 
September 30,
2011
 
December 31, 2010
Current:
 
 
 
Mill stockpiles
$
21

 
$
35

Leach stockpiles
1,146

 
821

Total current mill and leach stockpiles
$
1,167

 
$
856

Long-term:a
 
 
 
Mill stockpiles
$
518

 
$
470

Leach stockpiles
1,081

 
955

Total long-term mill and leach stockpiles
$
1,599

 
$
1,425

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


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5.
INCOME TAXES
Geographic sources of FCX's provision for income taxes follow (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
United States operations
$
163

 
$
73

 
$
421

 
$
205

International operations
645

 
772

 
2,277

 
1,751

Total
$
808

 
$
845

 
$
2,698

 
$
1,956


FCX’s consolidated effective income tax rate totaled 36 percent for the first nine months of 2011 and 35 percent for the first nine months of 2010. Variations in the relative proportions of jurisdictional income can result in fluctuations to FCX’s consolidated effective income tax rate.

6.
DEBT AND EQUITY TRANSACTIONS
On April 1, 2011, FCX redeemed its remaining $1.1 billion of outstanding 8.25% Senior Notes due 2015, for which holders received 104.125 percent of the principal amount together with accrued and unpaid interest. As a result of this redemption, FCX recorded a loss on early extinguishment of debt totaling $55 million ($49 million to net income attributable to FCX common stockholders or $0.05 per diluted share) for the first nine months of 2011.

During the second quarter of 2011, FCX purchased in the open market $35 million of its 9.5% Senior Notes due 2031 for $49 million, which resulted in losses on early extinguishment of debt totaling $6 million ($5 million to net income attributable to FCX common stockholders or $0.01 per diluted share) for the first nine months of 2011.

FCX entered into a new senior unsecured revolving credit facility on March 30, 2011, which replaced the existing revolving credit facilities that were scheduled to mature on March 19, 2012. FCX recognized a loss on early extinguishment of debt totaling $7 million ($6 million to net income attributable to FCX common shareholders or $0.01 per diluted share) for the first nine months of 2011 associated with this transaction. The new revolving credit facility is available until March 30, 2016, in an aggregate principal amount of $1.5 billion, with $500 million available to PT Freeport Indonesia. At September 30, 2011, FCX had no borrowings and $44 million of letters of credit issued under the revolving credit facility, resulting in availability of approximately $1.5 billion.

Interest on the revolving credit facility is generally based on the London Interbank Offered Rate (LIBOR) plus 2 percent, subject to an increase or decrease in the interest rate margin based on the credit ratings assigned to FCX’s senior unsecured debt by Standard & Poor’s Rating Services and Moody’s Investors Service.

The obligations of FCX and PT Freeport Indonesia under the revolving credit facility are not guaranteed by any subsidiaries and are unsecured; however, FCX may at any time designate any subsidiary (other than PT Freeport Indonesia) as a subsidiary guarantor. The revolving credit facility and FCX’s senior notes contain certain restrictive covenants that vary among the instruments, but include limitations on the incurrence of debt, liens and certain asset sales.

During the first nine months of 2010, FCX purchased in the open market $218 million of its 8.25% Senior Notes for $237 million and $329 million of its 8.375% Senior Notes for $358 million, which resulted in losses on early extinguishment of debt totaling $55 million ($48 million to net income attributable to FCX common stockholders or $0.05 per diluted share).

On April 1, 2010, FCX redeemed all of its $1 billion of outstanding Senior Floating Rates Notes due 2015, for which holders received 101 percent of the principal amount together with accrued and unpaid interest. As a result of this redemption, FCX recorded a loss on early extinguishment of debt totaling $22 million ($19 million to net income attributable to FCX common stockholders or $0.02 per diluted share) for the first nine months of 2010.


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Consolidated interest expense (excluding capitalized interest) totaled $105 million in third-quarter 2011, $126 million in third-quarter 2010, $325 million for the first nine months of 2011 and $409 million for the first nine months of 2010. Capitalized interest totaled $27 million in third-quarter 2011, $23 million in third-quarter 2010, $75 million for the first nine months of 2011 and $39 million for the first nine months of 2010.

On September 29, 2011, FCX's Board of Directors declared a quarterly dividend of $0.25 per share, which was paid on November 1, 2011, to common shareholders of record at the close of business on October 15, 2011.

On May 1, 2010, the outstanding shares of FCX’s 6¾% Mandatory Convertible Preferred Stock were automatically converted into shares of FCX common stock (refer to Note 11 in FCX’s 2010 Annual Report on Form 10-K for further discussion).

Total comprehensive income attributable to FCX common stockholders totaled $1.1 billion in third-quarter 2011, $1.2 billion in third-quarter 2010, $3.9 billion for the first nine months of 2011 and $2.8 billion for the first nine months of 2010.

7. 
FINANCIAL INSTRUMENTS
FCX does not purchase, hold or sell derivative financial instruments unless there are market risks associated with an existing asset or obligation or if it anticipates a future activity that is likely to occur and will result in exposure to market risks and FCX intends to offset or mitigate such risks. FCX does not enter into any derivative financial instruments for speculative purposes, but has 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.

Commodity Contracts.  From time to time, FCX has entered into forward, futures and swap contracts to hedge the market risk associated with fluctuations in the prices of commodities it purchases and sells. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As of September 30, 2011, FCX had no price protection contracts relating to its mine production. A discussion of FCX’s derivative commodity contracts and programs follows.

Derivatives Designated as Hedging Instruments – Fair Value Hedges
Copper Futures and Swap Contracts. Some of FCX’s U.S. copper cathode and rod customers request a fixed market price instead of the New York Mercantile Exchange (COMEX) average copper price in the month of shipment. FCX hedges this price exposure in a manner that allows it to receive the COMEX average price in the month of shipment while the customers pay the fixed price they requested. FCX accomplishes this by entering into copper futures and swap contracts and then liquidating the copper futures contracts and settling the copper swap contracts during the month of shipment, which generally results in FCX receiving the COMEX average copper price in the month of shipment. Hedge gains or losses from these copper futures and swap contracts are recorded in revenues. FCX did not have any significant gains or losses during the three-month and nine-month periods ended September 30, 2011 and 2010, resulting from hedge ineffectiveness. At September 30, 2011, FCX held copper futures and swap contracts that qualified for hedge accounting for 73 million pounds at an average contract price of $3.90 per pound, with maturities through December 2012.

A summary of gains (losses) recognized in revenues for derivative financial instruments related to commodity contracts that are designated and qualify as fair value hedge transactions, along with the unrealized gains (losses) on the related hedged item (firm sales commitments) follows (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Copper futures and swap contracts:
 
 
 
 
 
 
 
Unrealized gains (losses):
 
 
 
 
 
 
 
Derivative financial instruments
$
(62
)
 
$
19

 
$
(72
)
 
$
1

Hedged item
62

 
(19
)
 
72

 
(1
)
 
 
 
 
 
 
 
 
Realized gains (losses):
 
 
 
 
 
 
 
Matured derivative financial instruments
(10
)
 
15

 
(4
)
 
16



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Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. As described in Note 1 to FCX’s 2010 Annual Report on Form 10-K under “Revenue Recognition,” certain FCX copper concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on London Metal Exchange (LME) or COMEX prices at the time of shipment as specified in the contract. Similarly, FCX purchases copper and molybdenum under contracts that provide for provisional pricing (molybdenum purchases are based on an average Metals Week Molybdenum Dealer Oxide price). FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host sales agreements since the contracts do not allow for net settlement and always result in physical delivery. Sales and purchases with a provisional sales price contain an embedded derivative (i.e., the price settlement mechanism that is settled after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale or purchase of the metals contained in the concentrates or cathodes at the then-current LME or COMEX price (copper), London Bullion Market Association price (gold) or the average Metals Week Molybdenum Dealer Oxide price (molybdenum) as defined in the contract. Mark-to-market price fluctuations recorded through the settlement date are reflected in revenues for sales contracts and in cost of sales as production and delivery costs for purchase contracts.

A summary of FCX’s embedded derivatives at September 30, 2011, follows:
 
Open
 
Average Price
Per Unit
 
Maturities
 
Positions
 
Contract
 
Market
 
Through
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
598

 
$
4.08

 
$
3.18

 
February 2012
Gold (thousands of ounces)
216

 
1,802

 
1,626

 
January 2012
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
193

 
4.11

 
3.18

 
January 2012

Copper Forward Contracts. Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain, enters into forward copper contracts designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match. These transactions are intended to provide economic hedges against changes in copper prices, with the mark-to-market hedging gains or losses recorded in cost of sales. At September 30, 2011, Atlantic Copper held net forward copper purchase contracts for 3 million pounds at an average contract price of $3.38 per pound, with maturities through October 2011.

A summary of the realized and unrealized gains (losses) recognized in income before income taxes and equity in affiliated companies’ net earnings for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, follows (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Embedded derivatives in provisional sales
     contractsa
$
(624
)
 
$
376

 
$
(660
)
 
$
177

Embedded derivatives in provisional purchase
     contractsb
—

 
—

 
—

 
(1
)
Copper forward contractsb
4

 
(10
)
 
(2
)
 
(8
)
Copper futures and swap contractsa
—

 
1

 
—

 
—

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


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Unsettled Derivative Financial Instruments
A summary of the fair values of unsettled derivative financial instruments recorded on the consolidated balance sheets follows (in millions):
 
September 30,
2011
 
December 31, 2010
Derivatives designated as hedging instruments
 
 
 
Commodity contracts:
 
 
 
Copper futures and swap contracts:a
 
 
 
Asset positionb
$
—

 
$
18

Liability positionc
(54
)
 
—

 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
Commodity contracts:
 
 
 
Embedded derivatives in provisional sales/purchases contracts:d
 
 
 
Asset position
$
179

 
$
357

Liability position
(581
)
 
(115
)
Copper forward contracts:
 
 
 
Liability positionc
(1
)
 
(10
)
a.
FCX had paid $55 million to brokers at September 30, 2011, and $3 million at December 31, 2010, for margin requirements (recorded in other current assets). In addition, FCX held $28 million in margin funding from customers at September 30, 2011, and $8 million from brokers at December 31, 2010, associated with margin requirements (recorded in accounts payable and accrued liabilities).
b.
Amounts recorded in other current assets. 
c.
Amounts recorded in accounts payable and accrued liabilities. 
d.
Amounts recorded either as a net accounts receivable or a net accounts payable.

Foreign Currency Exchange Contracts.  As a global company, FCX transacts business in many countries and in many currencies. Foreign currency transactions at FCX’s international subsidiaries increase its risks because exchange rates can change between the time agreements are made and the time foreign currency transactions are settled. FCX may hedge or protect its international subsidiaries’ foreign currency transactions from time to time by entering into forward exchange contracts to lock in or minimize the effects of fluctuations in exchange rates. FCX had no outstanding foreign currency exchange contracts at September 30, 2011.

Interest Rate Swap Contracts.  From time to time, FCX or its subsidiaries may enter into interest rate swaps to manage its exposure to interest rate changes and to achieve a desired proportion of fixed-rate versus floating-rate debt based on current and projected market conditions. FCX may enter into fixed-to-floating interest rate swap contracts to protect against changes in the fair value of the underlying fixed-rate debt that result from market interest rate changes and to take advantage of lower interest rates. FCX had no outstanding interest rate swap contracts at September 30, 2011.

Credit Risk.  FCX is exposed to credit loss when counterparties with which FCX has entered into derivative transactions (commodity, foreign exchange and interest rate swaps) are unable to pay. To minimize the risk of such losses, FCX uses counterparties that meet certain credit requirements and periodically reviews the creditworthiness of these counterparties. FCX does not anticipate that any of the counterparties it deals with will default on their obligations. As of September 30, 2011, FCX did not have any significant credit exposure associated with derivative transactions.

Other Financial Instruments.  Other financial instruments include cash and cash equivalents, accounts receivable, trust assets, available-for-sale securities, accounts payable and accrued liabilities, dividends payable, Rio Tinto's share of joint venture cash flows and long-term debt. Refer to Note 8 for the fair values of these financial instruments.

Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued Liabilities, Dividends Payable and Rio Tinto's Share of Joint Venture Cash Flows. The financial statement amount is a reasonable estimate of the fair value because of the short maturity of these instruments and generally negligible credit losses.

Trust Assets and Available-for-Sale Securities. The financial statement amount represents the fair value of trust assets and available-for-sale securities.

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Long-Term Debt. The financial statement amount represents cost except for long-term debt acquired in the Phelps Dodge Corporation (Phelps Dodge) acquisition, which was recorded at fair value at the acquisition date.

8.
FAIR VALUE MEASUREMENT
Fair value accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). FCX did not have any significant transfers in or out of Levels 1, 2, or 3 for the third quarter of 2011.

A summary of FCX’s financial assets and liabilities measured at fair value on a recurring basis follows (in millions):
 
Fair Value at September 30, 2011
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
4,828

 
$
4,828

 
$
—

 
$
—

Time deposits
201

 
201

 
—

 
—

Total cash equivalents
5,029

 
5,029

 
—

 
—

 
 
 
 
 
 
 
 
Trust assets (current and long-term):
 
 
 
 
 
 
 
U.S. core fixed income funds
46

 
—

 
46

 
—

Government mortgage-backed securities
40

 
—

 
40

 
—

Government bonds and notes
22

 
—

 
22

 
—

Corporate bonds
18

 
—

 
18

 
—

Asset-backed securities
15

 
—

 
15

 
—

Money market funds
11

 
11

 
—

 
—

Municipal bonds
1

 
—

 
1

 
—

Total trust assets
153

 
11

 
142

 
—

 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Time deposits
15

 
15

 
—

 
—

Equity securities
8

 
8

 
—

 
—

Money market funds
2

 
2

 
—

 
—

Total available-for-sale securities
25

 
25

 
—

 
—

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchases
179

 
179

 
—

 
—

 
 
 
 
 
 
 
 
Total assets
$
5,386

 
$
5,244

 
$
142

 
$
—

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchases
$
(581
)
 
$
(581
)
 
$
—

 
$
—

Copper futures and swap contracts
(54
)
 
(54
)
 
—

 
—

Copper forward contracts
(1
)
 
(1
)
 
—

 
—

Total derivative liabilities
$
(636
)
 
$
(636
)
 
$
—

 
$
—



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Table of Contents    


Valuation Techniques

Money market funds and time deposits are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Fixed income securities (government and agency securities, corporate bonds, asset-backed securities and U.S. core fixed income funds) are valued using a bid evaluation or a mid evaluation. A bid evaluation is an estimated price at which a dealer would pay for a security. A mid evaluation is the average of the estimated price at which a dealer would sell a security and the estimated price at which a dealer would pay for a security. These evaluations are based on quoted prices, if available, or models that use observable inputs and, as such, are classified within Level 2 of the fair value hierarchy.

Equity securities are valued at the closing price reported on the active market on which the individual securities are traded and as such are classified within Level 1 of the fair value hierarchy.

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using quoted market prices based on the forward LME or COMEX prices (copper) and the London Bullion Market Association price (gold) and, as such, are classified within Level 1 of the fair value hierarchy. FCX’s embedded derivatives on provisional molybdenum purchases are valued based on the latest average weekly Metals Week Molybdenum Dealer Oxide prices and, as such, are classified within Level 1 of the fair value hierarchy.

FCX’s derivative financial instruments for copper futures and swap contracts and forward contracts are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets (refer to Note 7 for further discussion).

The techniques described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while FCX believes its valuation techniques are appropriate and consistent with other market participants, the use of different techniques or assumptions to determine fair value of certain financial instruments could result in a different fair value measured at the reporting date. There have been no changes in the techniques used at September 30, 2011.

The carrying value for certain FCX financial instruments (i.e., accounts receivable, accounts payable and accrued liabilities, dividends payable, and Rio Tinto’s share of joint venture cash flows) approximate fair value and, therefore, have been excluded from the table below. A summary of the carrying amount and fair value of FCX’s other financial instruments follows (in millions):
 
At September 30, 2011
 
At December 31, 2010
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalentsa
$
5,128

 
$
5,128

 
$
3,738

 
$
3,738

McMoRan Exploration Co. investmentb
482

 
445

 
500

 
623

Net embedded derivatives included in accounts receivable or payablea
(402
)
 
(402
)
 
242

 
242

Trust assets (current and long-term)a, c
153

 
153

 
148

 
148

Available-for-sale securities (current and long-term)a, c
25

 
25

 
34

 
34

Derivative assetsa, d
—

 
—

 
18

 
18

Derivative liabilities (current and long-term)a, e
(55
)
 
(55
)
 
(10
)
 
(10
)
Long-term debt (including amounts due within one year)f
(3,535
)
 
(3,830
)
 
(4,755
)
 
(5,146
)
 
a.
Recorded at fair value. 
b.
Recorded at cost and included in other assets. At December 31, 2010, fair value was based on a bid evaluation, which was an estimated price at which a dealer would pay for a security. At September 30, 2011, these securities were not actively trading; as such, fair value was based on a convertible pricing model using McMoRan Exploration Co.'s publicly traded common stock as the principle variable.
c.
Current portion included in other current assets and long-term portion included in other assets. 
d.
Included in other current assets. 
e.
Current portion included in accounts payable and accrued liabilities and long-term portion included in other liabilities.

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f.
Recorded at cost except for long-term debt acquired in the Phelps Dodge acquisition, which was recorded at fair value at the acquisition date. Fair value of substantially all of FCX’s long-term debt is estimated based on quoted market prices.

9.
NEW ACCOUNTING STANDARDS
In May 2011, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) in connection with guidance for fair value measurements and disclosures. This ASU clarifies the FASB's intent on current guidance, modifies and changes certain guidance and principles, and expands disclosures concerning Level 3 fair value measurements in the fair value hierarchy (including quantitative information about significant unobservable inputs within Level 3 of the fair value hierarchy). In addition, this ASU requires disclosure of the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position, but whose fair value is required to be disclosed. This ASU is effective for interim and annual reporting periods beginning after December 15, 2011, and early application is not permitted.

In June 2011, FASB issued an ASU in connection with guidance on the presentation of comprehensive income. The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This ASU requires an entity to present the components of net income and other comprehensive income and total comprehensive income (includes net income) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of equity, but does not change the items that must be reported in other comprehensive income. This ASU is effective for interim and annual reporting periods beginning after December 15, 2011, and early adoption is permitted. FCX is in the process of determining which presentation it will choose (single statement or two separate statements) and when it will adopt this ASU.

10.
SUBSEQUENT EVENTS
FCX evaluated events after September 30, 2011, and through the date the consolidated financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these consolidated financial statements.

11.
BUSINESS SEGMENTS
FCX has organized its operations into five primary divisions – North America copper mines, South America mining, Indonesia mining, Africa mining and Molybdenum operations. Notwithstanding this structure, FCX internally reports information on a mine-by-mine basis. Therefore, FCX concluded that its operating segments include individual mines. Operating segments that meet certain thresholds are reportable segments.

Intersegment Sales. Intersegment sales between FCX’s operations are based on similar arms-length transactions with third parties at the time of the sale. Intersegment sales 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 expenditures to its operating divisions and individual segments. However, not all costs and expenses applicable to a mine or operation are allocated. U.S. federal and state income taxes are recorded and managed at the corporate level, whereas international income taxes are recorded and managed within the applicable country. In addition, most exploration and research activities are managed at the corporate level, and those costs along with some selling, general and administrative 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.





15
Table of Contents    


Business Segments
(In millions)
North America Copper Mines
 
South America
 
Indonesia
 
Africa
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Atlantic
 
Corporate,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Copper
 
Other &
 
 
 
 
 
Other
 
 
 
Cerro
 
Other
 
 
 
 
 
 
 
Molyb-
 
Rod &
 
Smelting
 
Elimi-
 
FCX
 
Morenci
 
Mines
 
Total
 
Verde
 
Mines
 
Total
 
Grasberg
 
Tenke
 
denum
 
Refining
 
& Refining
 
nations
 
Total
Three Months Ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
78

 
$
44

 
$
122

 
$
396

 
$
570

 
$
966

 
$
1,275

a 
$
275

 
$
332

 
$
1,389

 
$
834

 
$
2

 
$
5,195

Intersegment
450

 
847

 
1,297

 
105

 
(18
)
 
87

 
87

 
1

 
—

 
7

 
3

 
(1,482
)
 
—

Production and delivery
252

 
412

 
664

 
196

 
282

 
478

 
503

 
142

 
260

 
1,390

 
826

 
(1,693
)
 
2,570

Depreciation, depletion and amortization
27

 
40

 
67

 
32

 
32

 
64

 
62

 
32

 
14

 
2

 
11

 
5

 
257

Selling, general and administrative expenses
—

 
1

 
1

 
1

 
1

 
2

 
29

 
1

 
3

 
—

 
5

 
61

 
102

Exploration and research expenses
3

 
—

 
3

 
—

 
—

 
—

 
—

 
—

 
1

 
—

 
—

 
74

 
78

Environmental obligations and shutdown costs
1

 
(15
)
 
(14
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
52

 
38

Operating income (loss)
245

 
453

 
698

 
272

 
237

 
509

 
768

 
101

 
54

 
4

 
(5
)
 
21

 
2,150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
—

 
1

 
1

 
—

 
—

 
—

 
7

 
2

 
—

 
—

 
4

 
64

 
78

Provision for income taxes
—

 
—

 
—

 
154

 
48

 
202

 
342

 
20

 
—

 
—

 
—

 
244

 
808

Total assets at September 30, 2011
1,981

 
4,966

 
6,947

 
4,886

 
3,475

 
8,361

 
5,437

 
3,791

 
2,342

 
323

 
955

 
3,552

 
31,708

Capital expenditures
21

 
117

 
138

 
64

 
110

 
174

 
162

 
49

 
155

 
2

 
5

 
32

 
717

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
10

 
$
15

 
$
25

 
$
606

 
$
696

 
$
1,302

 
$
1,458

a 
$
307

 
$
293

 
$
1,174

 
$
592

 
$
1

 
$
5,152

Intersegment
364

 
609

 
973

 
84

 
79

 
163

 
416

 
—

 
—

 
7

 
3

 
(1,562
)
 
—

Production and delivery
185

 
351

 
536

 
194

 
268

 
462

 
528

 
141

 
199

 
1,172

 
590

 
(1,362
)
 
2,266

Depreciation, depletion and amortization
33

 
34

 
67

 
42

 
24

 
66

 
72

 
34

 
13

 
2

 
9

 
5

 
268

Selling, general and administrative expenses
—

 
—

 
—

 
—

 
—

 
—

 
25

 
—

 
2

 
—

 
4

 
50

 
81

Exploration and research expenses
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
—

 
—

 
34

 
35

Environmental obligations and shutdown costs
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
—

 
2

 
3

Operating income (loss)
156

 
239

 
395

 
454

 
483

 
937

 
1,249

 
132

 
78

 
6

 
(8
)
 
(290
)
 
2,499

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
1

 
2

 
3

 
—

 
—

 
—

 
—

 
2

 
—

 
—

 
2

 
96

 
103

Provision for income taxes
—

 
—

 
—

 
147

 
151

 
298

 
499

 
32

 
—

 
—

 
—

 
16

 
845

Total assets at September 30, 2010
1,919

 
4,271

 
6,190

 
4,308

 
3,245

 
7,553

 
5,712

 
3,540

 
1,837

 
335

 
1,201

 
1,583

 
27,951

Capital expenditures
13

 
46

 
59

 
32

 
97

 
129

 
116

 
9

 
22

 
2

 
4

 
9

 
350

a.
Includes PT Freeport Indonesia’s sales to PT Smelting totaling $665 million in third-quarter 2011 and $603 million in third-quarter 2010.


16
Table of Contents    


Business Segments (Continued)
(In millions)
North America Copper Mines
 
South America
 
Indonesia
 
Africa