FCX Q114 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 March 31, 2014
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 April 30, 2014, there were issued and outstanding 1,038,713,778 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)
 
March 31,
2014
 
December 31,
2013
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,342

 
$
1,985

Trade accounts receivable
1,511

 
1,728

Other accounts receivable
866

 
834

Inventories:
 
 
 
Mill and leach stockpiles
1,772

 
1,705

Materials and supplies, net
1,744

 
1,730

Product
1,704

 
1,583

Other current assets
491

 
407

Total current assets
9,430

 
9,972

Property, plant, equipment and mining development costs, net
24,729

 
24,042

Oil and gas properties - full cost method
 
 
 
Subject to amortization, less accumulated amortization
12,562

 
12,472

Not subject to amortization
10,775

 
10,887

Long-term mill and leach stockpiles
2,472

 
2,386

Goodwill
1,916

 
1,916

Other assets
1,959

 
1,798

Total assets
$
63,843

 
$
63,473

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
3,543

 
$
3,708

Current portion of debt
1,091

 
312

Dividends payable
333

 
333

Current portion of environmental and asset retirement obligations
254

 
236

Accrued income taxes
162

 
184

Total current liabilities
5,383

 
4,773

Long-term debt, less current portion
19,759

 
20,394

Deferred income taxes
7,504

 
7,410

Environmental and asset retirement obligations, less current portion
3,276

 
3,259

Other liabilities
1,695

 
1,690

Total liabilities
37,617

 
37,526

 
 
 
 
Redeemable noncontrolling interest
743

 
716

 
 
 
 
Equity:
 
 
 
FCX stockholders’ equity:
 
 
 
Common stock
117

 
117

Capital in excess of par value
22,192

 
22,161

Retained earnings
2,926

 
2,742

Accumulated other comprehensive loss
(402
)
 
(405
)
Common stock held in treasury
(3,683
)
 
(3,681
)
Total FCX stockholders’ equity
21,150

 
20,934

Noncontrolling interests
4,333

 
4,297

Total equity
25,483

 
25,231

Total liabilities and equity
$
63,843

 
$
63,473

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,
 
 
2014
 
2013
 
 
(In millions, except per share amounts)
Revenues
$
4,985

 
$
4,583

 
Cost of sales:
 
 
 
 
Production and delivery
2,737

 
2,719

 
Depreciation, depletion and amortization
966

 
329

 
Total cost of sales
3,703

 
3,048

 
Selling, general and administrative expenses
135

 
113

 
Mining exploration and research expenses
30

 
52

 
Environmental obligations and shutdown costs
6

 
15

 
Total costs and expenses
3,874

 
3,228

 
Operating income
1,111

 
1,355

 
Interest expense, net
(161
)
 
(57
)
 
Losses on early extinguishment of debt
—

 
(45
)
 
Other income (expense), net
33

 
(3
)
 
Income before income taxes and equity in affiliated companies' net earnings
983

 
1,250

 
Provision for income taxes
(357
)
 
(428
)
 
Equity in affiliated companies’ net earnings
—

 
2

 
Net income
626

 
824

 
Net income attributable to noncontrolling interests
(106
)
 
(176
)
 
Preferred dividends attributable to redeemable noncontrolling interest
(10
)
 
—

 
Net income attributable to FCX common stockholders
$
510

 
$
648

 
 
 
 
 
 
Net income per share attributable to FCX common stockholders:
 
 
 
 
Basic
$
0.49

 
$
0.68

 
Diluted
$
0.49

 
$
0.68

 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
Basic
1,038

 
950

 
Diluted
1,044

 
953

 
 
 
 
 
 
Dividends declared per share of common stock
$
0.3125

 
$
0.3125

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


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FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
 
 
(In millions)
 
Net income
$
626

 
$
824

 
 
 
 
 
 
Other comprehensive income, net of taxes:
 
 
 
 
Defined benefit plans:
 
 
 
 
Amortization of unrecognized amounts included in net periodic benefit costs
3

 
7

 
Unrealized losses on securities arising during the period
—

 
(1
)
 
Other comprehensive income
3

 
6

 
 
 
 
 
 
Total comprehensive income
629

 
830

 
Total comprehensive income attributable to noncontrolling interests
(106
)
 
(176
)
 
Preferred dividends attributable to redeemable noncontrolling interest
(10
)
 
—

 
Total comprehensive income attributable to FCX common stockholders
$
513

 
$
654

 

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,
 
2014
 
2013
 
(In millions)
Cash flow from operating activities:
 
 
 
Net income
$
626

 
$
824

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
966

 
329

Net losses on crude oil and natural gas derivative contracts
50

 
—

Stock-based compensation
28

 
41

Pension plans contributions
(9
)
 
(22
)
Net charges for environmental and asset retirement obligations, including accretion
46

 
34

Payments for environmental and asset retirement obligations
(45
)
 
(36
)
Losses on early extinguishment of debt
—

 
45

Deferred income taxes
90

 
136

Increase in long-term mill and leach stockpiles
(86
)
 
(126
)
Other, net
(52
)
 
36

(Increases) decreases in working capital and changes in other tax payments, excluding amounts from acquisition:
 
 
 
Accounts receivable
179

 
(113
)
Inventories
(180
)
 
(67
)
Other current assets
(34
)
 
(48
)
Accounts payable and accrued liabilities
(362
)
 
(201
)
Accrued income taxes and other tax payments
(16
)
 
(1
)
Net cash provided by operating activities
1,201

 
831

 
 
 
 
Cash flow from investing activities:
 
 
 
Capital expenditures:
 
 
 
North America copper mines
(303
)
 
(257
)
South America
(423
)
 
(226
)
Indonesia
(236
)
 
(191
)
Africa
(31
)
 
(57
)
Molybdenum mines
(19
)
 
(40
)
U.S. oil and gas operations
(579
)
 
—

Other
(21
)
 
(34
)
Acquisition of cobalt chemical business, net of cash acquired
—

 
(321
)
Other, net
7

 
14

Net cash used in investing activities
(1,605
)
 
(1,112
)
 
 
 
 
Cash flow from financing activities:
 
 
 
Proceeds from debt
1,149

 
6,615

Repayments of debt
(987
)
 
(39
)
Cash dividends and distributions paid:
 
 
 
Common stock
(326
)
 
(297
)
Noncontrolling interests
(77
)
 
(35
)
Contributions from noncontrolling interests
24

 
—

Debt financing costs
(25
)
 
(72
)
Stock-based awards net proceeds (payments), including excess tax benefit
3

 
(1
)
Net cash (used in) provided by financing activities
(239
)
 
6,171

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(643
)
 
5,890

Cash and cash equivalents at beginning of year
1,985

 
3,705

Cash and cash equivalents at end of period
$
1,342

 
$
9,595

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 EQUITY (Unaudited)

 
FCX Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
Retained
Earnings
 
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
 
 
 
Number
of
Shares
 
At
Cost
 
 
Non-
controlling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Balance at December 31, 2013
1,165

 
$
117

 
$
22,161

 
$
2,742

 
$
(405
)
 
127

 
$
(3,681
)
 
$
20,934

 
$
4,297

 
$
25,231

Exercised and issued stock-based awards
1

 
—

 
5

 
—

 
—

 
—

 
—

 
5

 
—

 
5

Stock-based compensation
—

 
—

 
26

 
—

 
—

 
—

 
—

 
26

 
—

 
26

Tender of shares for stock-based awards
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
 
—

 
(2
)
Dividends on common stock
—

 
—

 
—

 
(326
)
 
—

 
—

 
—

 
(326
)
 
—

 
(326
)
Dividends to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(70
)
 
(70
)
Net income attributable to FCX common stockholders
—

 
—

 
—

 
510

 
—

 
—

 
—

 
510

 
—

 
510

Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
106

 
106

Other comprehensive income
—

 
—

 
—

 
—

 
3

 
—

 
—

 
3

 
—

 
3

Balance at March 31, 2014
1,166

 
$
117

 
$
22,192

 
$
2,926

 
$
(402
)
 
127

 
$
(3,683
)
 
$
21,150

 
$
4,333

 
$
25,483

 
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)

NOTE 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 annual report on Form 10-K for the year ended December 31, 2013. 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 period ended March 31, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

As further discussed in Note 2, FCX completed its acquisitions of Plains Exploration & Production Company (PXP) on May 31, 2013, and McMoRan Exploration Co. (MMR) on June 3, 2013, collectively known as FCX Oil & Gas Inc. (FM O&G). The results included in these financial statements for the three months ended March 31, 2013, do not include PXP's or MMR's results.

NOTE 2. ACQUISITIONS
Oil and Gas. The second-quarter 2013 acquisitions of PXP and MMR added a portfolio of oil and gas assets to FCX's global mining business, creating a U.S.-based natural resources company. The acquisitions have been accounted for under the acquisition method, with FCX as the acquirer. As further discussed in Note 6, FCX issued $6.5 billion of unsecured senior notes in March 2013 for net proceeds of $6.4 billion, which was used, together with borrowings under a $4.0 billion unsecured five-year bank term loan, to fund the cash portion of the merger consideration for both transactions, to repay certain indebtedness of PXP and for general corporate purposes.

There were no changes during the first quarter of 2014 to the preliminary purchase price allocations; however, the final valuation of assets acquired, liabilities assumed and redeemable noncontrolling interest is not complete and the net adjustments to those values may result in changes to goodwill and other carrying amounts initially assigned to the assets, liabilities and redeemable noncontrolling interest based on the preliminary fair value analysis. The principal remaining items to be valued are tax assets and liabilities, and any related valuation allowances, which will be finalized in the second quarter of 2014 in connection with the filing of related tax returns.

For further discussion of the acquisitions, refer to Note 2 in FCX's annual report on Form 10-K for the year ended December 31, 2013.

Unaudited Pro Forma Consolidated Financial Information. The following unaudited pro forma financial information has been prepared to reflect the acquisitions of PXP and MMR. The unaudited pro forma financial information combines the historical statements of income of FCX, PXP and MMR (including the pro forma effects of PXP's Deepwater Gulf of Mexico (GOM) acquisition that was completed on November 30, 2012) for the three months ended March 31, 2013, giving effect to the mergers as if they had occurred on January 1, 2012. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the acquisitions.
 
 
Three Months
 
 
 
 Ended
 
 
 
March 31, 2013
 
 
 
(in millions, except per share amounts)
 
 
 
 
 
Revenues
 
$
5,695

 
Operating income
 
1,580

 
Income from continuing operations
 
913

 
Net income attributable to FCX common stockholders
 
728

 
 
 
 
 
Net income per share attributable to FCX common stockholders:
 
 
 
Basic
 
$
0.70

 
Diluted
 
0.70

 


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The unaudited pro forma consolidated information has been prepared for illustrative purposes only and is not intended to be indicative of the results of operations that actually would have occurred, or the results of operations expected in future periods, had the events reflected herein occurred on the dates indicated. The most significant pro forma adjustment to income from continuing operations for the three months ended March 31, 2013, was to exclude a $77 million gain on the sale of MMR oil and gas properties because of the application of the full cost method of accounting.

Cobalt Chemical Refinery Business. On March 29, 2013, FCX, through a newly formed consolidated joint venture, completed the acquisition of a cobalt chemical refinery in Kokkola, Finland, and the related sales and marketing business. The acquisition provides direct end-market access for the cobalt hydroxide production from FCX's Africa mining operations. For further discussion of this acquisition, refer to Note 2 in FCX’s annual report on Form 10-K for the year ended December 31, 2013.

NOTE 3. EARNINGS PER SHARE
FCX uses the two-class method to calculate earnings per share. Under the two-class method, net income is allocated to each class of common stock and participating securities as if all of the earnings for the period had been distributed. FCX’s participating securities consist of vested restricted stock units (RSUs) for which the underlying common shares are not yet issued and entitle holders to non-forfeitable dividends.

FCX’s basic net income per share of common stock was computed by dividing net income attributable to FCX common stockholders by the weighted-average of common stock outstanding during the period. Diluted net income per share of common stock was computed using the most dilutive of (a) the two-class method or (b) the treasury stock method.

The following table sets forth the computation of basic and diluted net income per share (in millions, except per share amounts):
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
 
Net income
$
626

 
$
824

 
Net income attributable to noncontrolling interests
(106
)
 
(176
)
 
Preferred dividends on redeemable noncontrolling interest
(10
)
 
—

 
Undistributed earnings allocated to participating securities
(1
)
 
—

 
Net income attributable to FCX common stockholders
$
509

 
$
648

 
 
 
 
 
 
Basic weighted-average shares of common stock outstanding
1,038

 
950

 
Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units
6

a 
3

 
Diluted weighted-average shares of common stock outstanding
1,044

 
953

 
 
 
 
 
 
Basic net income per share attributable to FCX common stockholders
$
0.49

 
$
0.68

 
Diluted net income per share attributable to FCX common stockholders
$
0.49

 
$
0.68

 
a.
Excluded shares of common stock associated with outstanding stock options with exercise prices less than the average market price of FCX's common stock that were anti-dilutive totaled approximately two million for first-quarter 2014.

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 stock options totaled 30 million with a weighted-average exercise price of $41.04 per option for first-quarter 2014 and 29 million with a weighted-average exercise price of $41.35 per option for first-quarter 2013.


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NOTE 4. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES
The components of inventories follow (in millions):
 
March 31,
2014
 
December 31, 2013
 
Current inventories:
 
 
 
 
Raw materials (primarily concentrates)
$
247

 
$
238

 
Work-in-processa
188

 
199

 
Finished goodsb
1,269

 
1,146

 
Total product inventories
$
1,704

 
$
1,583

 
 
 
 
 
 
Mill stockpiles
$
90

 
$
91

 
Leach stockpiles
1,682

 
1,614

 
Total current mill and leach stockpiles
$
1,772

 
$
1,705

 
 
 
 
 
 
Total materials and supplies, netc
$
1,744

 
$
1,730

 
 
 
 
 
 
Long-term inventories:
 
 
 
 
Mill stockpiles
$
730

 
$
698

 
Leach stockpiles
1,742

 
1,688

 
Total long-term mill and leach stockpilesd
$
2,472

 
$
2,386

 
a.
FCX's mining operations also have work-in-process inventories that are reflected as mill and leach stockpiles.
b.
Primarily included molybdenum concentrates; copper concentrates, anodes, cathodes and rod; and various cobalt products.
c.
Materials and supplies inventory was net of obsolescence reserves totaling $21 million at March 31, 2014, and $24 million at December 31, 2013.
d.
Estimated metals in stockpiles not expected to be recovered within the next 12 months.

NOTE 5. INCOME TAXES
Geographic sources of FCX's provision for income taxes follow (in millions):
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
 
United States operations
$
136

 
$
76

 
International operations
221

 
352

 
Total
$
357

 
$
428

 

FCX’s consolidated effective income tax rate was 36 percent for first-quarter 2014 and 34 percent for first-quarter 2013. Variations in the relative proportions of jurisdictional income result in fluctuations to FCX’s consolidated effective income tax rate.

NOTE 6. DEBT AND EQUITY TRANSACTIONS
In March 2014, FCX announced that FM O&G would redeem on April 30, 2014, a total of $210 million of the aggregate principal amount of the outstanding 6.625% Senior Notes due 2021. In accordance with the terms of the senior notes, the redemption was funded with cash contributions to FM O&G by FCX in exchange for additional equity, which is eliminated in the consolidated financial statements. FCX funded its contributions with its revolving credit facility. Holders of these senior notes received the principal amount together with the redemption premium and accrued and unpaid interest to the redemption date. As a result of the redemption, FCX recorded a gain on early extinguishment of debt of $6 million in the second quarter of 2014.

In the first quarter of 2014, FCX borrowed $115 million on its short-term lines of credit. FCX has uncommitted lines of credit with certain financial institutions for up to $450 million. These unsecured lines of credit allow FCX to borrow at a spread over the London Interbank Offered Rate (LIBOR) or the respective financial institution's cost of funds with terms and pricing that are more favorable than FCX's revolving credit facility. The effective interest rate on the lines of credit was 1.19 percent at March 31, 2014.


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In March 2014, Sociedad Minera Cerro Verde S.A.A. (Cerro Verde, FCX's mining subsidiary in Peru) entered into a five-year, $1.8 billion senior unsecured credit facility that is nonrecourse to FCX and the other shareholders of Cerro Verde. The credit facility allows for term loan borrowings up to the full amount of the facility, less any amounts issued and outstanding under a $500 million letter of credit sublimit. Interest on amounts drawn under the term loan is based on LIBOR plus a spread (currently 1.90 percent) based on Cerro Verde’s total net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio as defined in the agreement. Amounts may be drawn or letters of credit may be issued over a two-year period to fund a portion of Cerro Verde’s expansion project and for Cerro Verde's general corporate purposes. The credit facility amortizes in three installments in amounts necessary for the aggregate borrowings and outstanding letters of credit not to exceed 85 percent of the $1.8 billion commitment on September 30, 2017, 70 percent on March 31, 2018, and 35 percent on September 30, 2018, with the remaining balance due on the maturity date of March 10, 2019. At March 31, 2014, there were no borrowings and no letters of credit issued under Cerro Verde’s credit facility.

In February 2013, FCX entered into an agreement for a $4.0 billion unsecured term loan (the Term Loan) in connection with the second-quarter 2013 acquisitions of PXP and MMR. Upon closing the PXP acquisition, FCX borrowed $4.0 billion under the Term Loan, and Freeport-McMoRan Oil & Gas LLC (FM O&G LLC, a wholly owned subsidiary of FM O&G and the successor entity of PXP) joined the Term Loan as a borrower. Interest on the Term Loan (currently LIBOR plus 1.50 percent or the alternate base rate (ABR) plus 0.50 percent) is determined by reference to FCX's credit rating. The effective interest rate on the Term Loan was 1.65 percent at March 31, 2014.

In February 2013, FCX and PT Freeport Indonesia (PT-FI) entered into a new senior unsecured $3.0 billion revolving credit facility, which replaced FCX's existing revolving credit facility (scheduled to mature on March 30, 2016) upon completion of the acquisition of PXP on May 31, 2013. In connection with the PXP acquisition, FM O&G LLC joined the revolving credit facility as a borrower. The new revolving credit facility is available until May 31, 2018, with $500 million available to PT-FI. At March 31, 2014, there were no borrowings and $46 million of letters of credit issued under the revolving credit facility, resulting in availability of approximately $3.0 billion, of which $1.5 billion could be used for additional letters of credit.

In March 2013, in connection with the financing of FCX's second-quarter 2013 acquisitions of PXP and MMR, FCX issued $6.5 billion of unsecured senior notes in four tranches. FCX sold $1.5 billion of 2.375% Senior Notes due March 2018, $1.0 billion of 3.100% Senior Notes due March 2020, $2.0 billion of 3.875% Senior Notes due March 2023 and $2.0 billion of 5.450% Senior Notes due March 2043 for total net proceeds of $6.4 billion.

FCX recorded a loss on early extinguishment of debt of $45 million ($40 million to net income attributable to FCX common stockholders) in first-quarter 2013 for financing costs incurred for the terminated $9.5 billion acquisition bridge loan facility, which was entered into in December 2012 to provide interim financing for the second-quarter 2013 acquisitions of PXP and MMR.

Consolidated interest expense (excluding capitalized interest) totaled $224 million in first-quarter 2014 and $75 million in first-quarter 2013. Capitalized interest totaled $63 million in first-quarter 2014 ($40 million included in property, plant, equipment and mining development costs, net, and $23 million included in oil and gas properties not subject to amortization) and $18 million in first-quarter 2013 (included in property, plant, equipment and mining development costs, net).

On March 26, 2014, FCX's Board of Directors declared a quarterly dividend of $0.3125 per share, which was paid on May 1, 2014, to common shareholders of record at the close of business on April 15, 2014.


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NOTE 7. FINANCIAL INSTRUMENTS
FCX does not purchase, hold or sell derivative financial instruments unless there is an existing asset or obligation, or it anticipates a future activity that is likely to occur and will result in exposure to market risks, which FCX intends to offset or mitigate. 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 changes, foreign currency exchange rates and interest rates.

Commodity Contracts.  From time to time, FCX has entered into derivative contracts to hedge the market risk associated with fluctuations in the prices of commodities it purchases and sells. As a result of the acquisition of PXP, FCX assumed a variety of crude oil and natural gas commodity derivatives to hedge the exposure to the volatility of crude oil and natural gas commodity prices. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As of March 31, 2014 and 2013, FCX had no price protection contracts relating to its mine production. A discussion of FCX’s derivative contracts and programs follows.

Derivatives Designated as Hedging Instruments – Fair Value Hedges
Copper Futures and Swap Contracts. Some of FCX’s U.S. copper rod customers request a fixed market price instead of the Commodity Exchange Inc. (COMEX), a division of the New York Mercantile Exchange (NYMEX), 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 or swap contracts. Hedging 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 periods ended March 31, 2014 and 2013, resulting from hedge ineffectiveness. At March 31, 2014, FCX held copper futures and swap contracts that qualified for hedge accounting for 63 million pounds at an average contract price of $3.13 per pound, with maturities through March 2015.

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 follows (in millions):
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
 
Copper futures and swap contracts:
 
 
 
 
Unrealized (losses) gains:
 
 
 
 
Derivative financial instruments
$
(12
)
 
$
(12
)
 
Hedged item – firm sales commitments
12

 
12

 
 
 
 
 
 
Realized losses:
 
 
 
 
Matured derivative financial instruments
(2
)
 
(2
)
 

Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. As described in Note 1 to FCX's annual report on Form 10-K for the year ended December 31, 2013, under “Revenue Recognition,” certain FCX copper concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on the London Metal Exchange (LME) copper price or the COMEX copper price and the London Bullion Market Association (London) gold price at the time of shipment as specified in the contract. Similarly, FCX purchases copper under contracts that provide for provisional pricing. 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 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 copper price or the London gold price 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.


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A summary of FCX’s embedded commodity derivatives at March 31, 2014, follows:
 
Open Positions
 
Average Price
Per Unit
 
Maturities Through
 
 
Contract
 
Market
 
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
487

 
$
3.21

 
$
3.01

 
August 2014
Gold (thousands of ounces)
55

 
1,314

 
1,293

 
June 2014
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
66

 
3.15

 
3.02

 
July 2014

Crude Oil and Natural Gas Contracts. As a result of the acquisition of PXP, FCX has derivative contracts for 2014 and 2015 that consist of crude oil options and natural gas swaps. These crude oil and natural gas derivatives are not designated as hedging instruments and are recorded at fair value with the mark-to-market gains and losses recorded in revenues.

The crude oil options were entered into by PXP to protect the realized price of a portion of expected future sales in order to limit the effects of crude oil price decreases. At March 31, 2014, these contracts are composed of crude oil put spreads consisting of put options with a floor limit. The premiums associated with put options are deferred until the settlement period. At March 31, 2014, the deferred option premiums and accrued interest associated with the crude oil option contracts totaled $387 million, which was included as a component of the fair value of the crude oil options contracts. At March 31, 2014, the outstanding crude oil option contracts, all of which settle monthly, follow:

 
 
 
 
 
 
Average Strike Price (per barrel)a
 
 
 
 
Period
 
Instrument Type
 
Daily Volumes (thousand barrels)
 
Floor
 
Floor Limit
 
Average Deferred Premium
 (per barrel)
 
Index
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
Apr - Dec
 
Put optionsb
 
75

 
$
90

 
$
70

 
$
5.74

 
Brent
Apr - Dec
 
Put optionsb
 
30

 
95

 
75

 
6.09

 
Brent
Apr - Dec
 
Put optionsb
 
5

 
100

 
80

 
7.11

 
Brent
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
Jan - Dec
 
Put optionsb
 
84

 
90

 
70

 
6.89

 
Brent
 
 
 
 
 
 
 
 
 
 
 
 
 
a.
The average strike prices do not reflect any premiums to purchase the put options.
b.
If the index price is less than the per barrel floor, FCX receives the difference between the per barrel floor and the index price up to a maximum of $20 per barrel less the option premium. If the index price is at or above the per barrel floor, FCX pays the option premium and no cash settlement is received.

In addition, at March 31, 2014, outstanding natural gas swaps with a weighted-average fixed swap price of $4.09 per million British thermal units (MMBtu) cover approximately 28 million MMBtu of natural gas, with maturities through December 2014 (on daily volumes of 100,000 MMBtu). If the Henry Hub index price is less than the fixed price, FCX receives the difference between the fixed price and the Henry Hub index price. FCX pays the difference between the index price and the fixed price if the Henry Hub index price is greater than the fixed price.

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 economic hedge transactions are intended to hedge against changes in copper prices, with the mark-to-market hedging gains or losses recorded in cost of sales. At March 31, 2014, Atlantic Copper held net forward copper purchase contracts for 7 million pounds at an average contract price of $3.01 per pound, with maturities through April 2014.


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Summary of Gains (Losses). 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
 
 
March 31,
 
 
2014
 
2013
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales contractsa
$
(169
)
 
$
(83
)
 
Crude oil optionsa
(36
)
 
—

 
Natural gas swapsa
(14
)
 
—

 
Copper forward contractsb
1

 
3

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

Unsettled Derivative Financial Instruments
A summary of the fair values of unsettled commodity derivative financial instruments follows (in millions):
 
 
March 31,
2014
 
December 31, 2013
Commodity Derivative Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contracts:a
 
$
2

 
$
6

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
13

 
63

Total derivative assets
 
$
15

 
$
69

 
 
 
 
 
Commodity Derivative Liabilities:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contractsa
 
$
8

 
$
—

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
99

 
16

Crude oil optionsb
 
288

 
309

Natural gas swaps
 
10

 
4

Copper forward contracts
 
—

 
1

Total derivative liabilities
 
$
405

 
$
330

a.
FCX paid $11 million to brokers at March 31, 2014, and $1 million at December 31, 2013, for margin requirements (recorded in other current assets).
b.
Included $387 million at March 31, 2014, and $444 million at December 31, 2013, for deferred premiums and accrued interest.

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FCX's commodity contracts have netting arrangements with counterparties with which the right of offset exists, and it is FCX's policy to offset balances by counterparty on the balance sheet. FCX's embedded derivatives on provisional sales/purchases are netted with the corresponding outstanding receivable/payable balances. A summary of these unsettled commodity contracts that are offset in the balance sheet follows (in millions):
 
 
Assets
 
Liabilities
 
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
December 31, 2013
 
 
 
 
 
 
 
 
 
Gross amounts recognized:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives on provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
$
13

 
$
63

 
$
99

 
$
16

Crude oil and natural gas derivatives
 
—

 
—

 
298

 
313

Copper derivatives
 
2

 
6

 
8

 
1

 
 
15

 
69

 
405

 
330

 
 
 
 
 
 
 
 
 
Less gross amounts of offset:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives on provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
2

 
10

 
2

 
10

Crude oil and natural gas derivatives
 
—

 
—

 
—

 
—

Copper derivatives
 
2

 
—

 
2

 
—

 
 
4

 
10

 
4

 
10

 
 
 
 
 
 
 
 
 
Net amounts presented in balance sheet:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives on provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
11

 
53

 
97

 
6

Crude oil and natural gas derivatives
 
—

 
—

 
298

 
313

Copper derivatives
 
—

 
6

 
6

 
1

 
 
$
11

 
$
59

 
$
401

 
$
320

 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
 
 
 
Trade accounts receivable
 
$
7

 
$
53

 
$
—

 
$
—

Other current assets
 
—

 
6

 
—

 
—

Accounts payable and accrued liabilities
 
4

 
—

 
302

 
205

Other liabilities
 
—

 
—

 
99

 
115

 
 
$
11

 
$
59

 
$
401

 
$
320


Credit Risk.  FCX is exposed to credit loss when financial institutions 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 March 31, 2014, the maximum amount of credit exposure associated with derivative transactions was $11 million.

Other Financial Instruments.  Other financial instruments include cash and cash equivalents, accounts receivable, investment securities, legally restricted funds, accounts payable and accrued liabilities, dividends payable and long-term debt. The carrying value for cash and cash equivalents (which included time deposits of $39 million at March 31, 2014, and $211 million at December 31, 2013), accounts receivable, accounts payable and accrued liabilities, and dividends payable approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 8 for the fair values of investment securities, legally restricted funds and long-term debt).

In addition, FCX has non-detachable warrants, which are considered to be embedded derivative instruments, associated with FM O&G's Plains Offshore Operations Inc. (Plains Offshore) 8% Convertible Preferred Stock (Preferred Stock) (refer to Note 8 for the fair value of these instruments).


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NOTE 8. FAIR VALUE MEASUREMENT
Fair value accounting guidance includes a 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 recognizes transfers between levels at the end of the reporting period. FCX did not have any significant transfers in or out of Level 1, 2 or 3 for first-quarter 2014.

A summary of the carrying amount and fair value of FCX’s financial instruments, other than cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and dividends payable (refer to Note 7), follows (in millions):
 
At March 31, 2014
 
Carrying
 
Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Investment securities (current and long-term):a,b
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
22

 
$
22

 
$
—

 
$
22

 
$
—

Money market funds
18

 
18

 
18

 
—

 
—

Equity securities
4

 
4

 
4

 
—

 
—

Total
44

 
44

 
22

 
22

 
—

 
 
 
 
 
 
 
 
 
 
Legally restricted funds (long-term):a,b,c
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
49

 
49

 
—

 
49

 
—

Government bonds and notes
34

 
34

 
—

 
34

 
—

Government mortgage-backed securities
32

 
32

 
—

 
32

 
—

Corporate bonds
27

 
27

 
—

 
27

 
—

Money market funds
26

 
26

 
26

 
—

 
—

Asset-backed securities
15

 
15

 
—

 
15

 
—

Municipal bonds
1

 
1

 
—

 
1

 
—

Total
184

 
184

 
26

 
158

 
—

 
 
 
 
 
 
 
 
 
 
Derivatives:a, d
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross asset position
13

 
13

 
—

 
13

 
—

Copper futures and swap contracts
2

 
2

 
1

 
1

 
—

Total
15

 
15

 
1

 
14

 
—

 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
243

 
$
49

 
$
194

 
$
—

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivatives:a
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross liability positiond
$
99

 
$
99

 
$
—

 
$
99

 
$
—

Crude oil optionsd
288

 
288

 
—

 
—

 
288

Natural gas swapsd
10

 
10

 
—

 
10

 
—

Copper futures and swap contractsd
8

 
8

 
7

 
1

 
—

Plains Offshore warrantse
1

 
1

 
—

 
—

 
1

Total
406

 
406

 
7

 
110

 
289

 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portionf
20,850

 
20,741

 
—

 
20,741

 
—

 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
$
21,147

 
$
7

 
$
20,851

 
$
289




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At December 31, 2013
 
Carrying
 
Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Investment securities (current and long-term):a,b
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
21

 
$
21

 
$
—

 
$
21

 
$
—

Money market funds
18

 
18

 
18

 
—

 
—

Equity securities
5

 
5

 
5

 
—

 
—

Total
44

 
44

 
23

 
21

 
—

 
 
 
 
 
 
 
 
 
 
Legally restricted funds (long-term):a,b,c
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
48

 
48

 
—

 
48

 
—

Government mortgage-backed securities
34

 
34

 
—

 
34

 
—

Corporate bonds
28

 
28

 
—

 
28

 
—

Government bonds and notes
28

 
28

 
—

 
28

 
—

Money market funds
28

 
28

 
28

 
—

 
—

Asset-backed securities
15

 
15

 
—

 
15

 
—

Municipal bonds
1

 
1

 
—

 
1

 
—

Total
182

 
182

 
28

 
154

 
—

 
 
 
 
 
 
 
 
 
 
Derivatives:a, d
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross asset position
63

 
63

 
—

 
63

 
—

Copper futures and swap contracts
6

 
6

 
5

 
1

 
—

Total
69

 
69

 
5

 
64

 
—

 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
295

 
$
56

 
$
239

 
$
—

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivatives:a
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross liability positiond
$
16

 
$
16

 
$
—

 
$
16

 
$
—

Crude oil optionsd
309

 
309

 
—

 
—

 
309

Natural gas swapsd
4

 
4

 
—

 
4

 
—

Copper forward contractsd
1

 
1

 
1

 
—

 
—

Plains Offshore warrantse
2

 
2

 
—

 
—

 
2

Total
332

 
332

 
1

 
20

 
311

 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portionf
20,706

 
20,487

 
—

 
20,487

 
—

 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
$
20,819

 
$
1

 
$
20,507

 
$
311

a.
Recorded at fair value. 
b.
Current portion included in other current assets and long-term portion included in other assets.
c.
Legally restricted funds excluded $210 million of time deposits (which approximated fair value) at March 31, 2014, and December 31, 2013, associated with the Cerro Verde royalty dispute.
d.
Refer to Note 7 for further discussion and balance sheet classifications. Crude oil options are net of $387 million at March 31, 2014, and $444 million at December 31, 2013, for deferred premiums and accrued interest.
e.
Included in other liabilities.
f.
Recorded at cost except for debt assumed in acquisitions, which were recorded at fair value at the respective acquisition dates.


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

Fixed income securities (U.S. core fixed income funds, government securities, corporate bonds, asset-backed securities and municipal bonds) are valued using a bid evaluation price or a mid-evaluation price. A bid evaluation price is an estimated price at which a dealer would pay for a security. A mid-evaluation price 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 have critical inputs of quoted monthly LME or COMEX copper forward prices and the London gold forward price at each reporting date based on the month of maturity; however, FCX's contracts themselves are not traded on an exchange. As a result, these derivatives are classified within Level 2 of the fair value hierarchy.

FCX's derivative financial instruments for crude oil options are valued using an option pricing model, which uses various inputs including IntercontinentalExchange, Inc. crude oil prices, volatilities, interest rates and contract terms. FCX's derivative financial instruments for natural gas swaps are valued using a pricing model that has various inputs including NYMEX price quotations, interest rates and contract terms. Valuations are adjusted for credit quality, using the counterparties' credit quality for asset balances and FCX's credit quality for liability balances (which considers the impact of netting agreements on counterparty credit risk, including whether the position with the counterparty is a net asset or net liability). For asset balances, FCX uses the credit default swap value for counterparties when available or the spread between the risk-free interest rate and the yield rate on the counterparties' publicly traded debt for similar instruments. The 2014 natural gas swaps are classified within Level 2 of the fair value hierarchy because the inputs used in the valuation models are directly or indirectly observable for substantially the full term of the instruments. The 2014 and 2015 crude oil options are classified within Level 3 of the fair value hierarchy because the inputs used in the valuation models are not observable for substantially the full term of the instruments. The significant unobservable inputs used in the fair value measurement of the crude oil options are implied volatilities and deferred premiums. Significant increases (decreases) in implied volatilities in isolation would result in a significantly higher (lower) fair value measurement. The implied volatilities ranged from 16 percent to 38 percent, with a weighted average of 21 percent. The deferred premiums ranged from $5.15 per barrel to $7.22 per barrel, with a weighted average of $6.40 per barrel. Refer to Note 7 for further discussion of these derivative financial instruments.

FCX’s derivative financial instruments for copper futures and swap contracts and copper forward contracts that are traded on the respective exchanges are classified within Level 1 of the fair value hierarchy because they are valued using quoted monthly COMEX or LME prices at each reporting date based on the month of maturity (refer to Note 7 for further discussion). Certain of these contracts are traded on the over-the-counter market and are classified within Level 2 of the fair value hierarchy based on COMEX and LME forward prices.

The fair value of warrants associated with the Plains Offshore Preferred Stock was determined with an option pricing model that used unobservable inputs. The inputs used in the valuation model are the estimated fair value of the underlying Plains Offshore common stock, expected exercise price, expected term, expected volatility and risk-free interest rate. The assumptions used in the valuation model are highly subjective because the common stock of Plains Offshore is not publicly traded. As a result, these warrants are classified within Level 3 of the fair value hierarchy.

Long-term debt, including the current portion, is not actively traded and is valued using prices obtained from a readily available pricing source and, as such, is classified within Level 2 of the fair value hierarchy.



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A summary of the changes in the fair value of FCX's Level 3 instruments follows (in millions):
 
Crude Oil
 
Plains Offshore
 
 
Options
 
Warrants
 
Fair value at December 31, 2013
$
(309
)
 
$
(2
)
 
Net realized losses
(1
)
a 
—

 
Net unrealized (losses) gains included in earnings related to assets and liabilities still held at the end of the period
(36
)
b 
1

c 
Settlement payments
58

 
—

 
Fair value at March 31, 2014
$
(288
)
 
$
(1
)
 
a.
Recorded in revenues.
b.
Included net unrealized losses of $35 million recorded in revenues and $1 million of interest expense associated with the deferred premiums.
c.
Recorded in other income (expense), net.

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 measurement at the reporting date. There have been no changes in the techniques used at March 31, 2014.

NOTE 9. CONTINGENCIES AND COMMITMENTS
Environmental. On March 31, 2014, the lawsuit titled Municipality of Tierra Amarilla v. Compania Contractual Minera Candelaria, Second Environmental Court, Santiago, Chile, filed December 12, 2013, was withdrawn. Refer to Note 12 of FCX’s annual report on Form 10-K for the year ended December 31, 2013, for further discussion.

Litigation. The following information includes a discussion of updates to previously reported legal proceedings included in Note 12 of FCX’s annual report on Form 10-K for the year ended December 31, 2013.

Shareholder Litigation. On March 12, 2014, oral arguments were held in the Delaware Chancery Court on the motion to dismiss filed by FCX and the other defendants on October 10, 2013, in In Re Freeport-McMoRan Copper & Gold, Inc. Derivative Litigation, No. 8145-VCN. On April 4, 2014, the complaint titled Stephen Blau MD Money Purchase Pension Plan Trust v. Moffett et al., No. 8389-VCN filed in the Delaware Court of Chancery on March 5, 2013, was consolidated with In Re Freeport-McMoRan Copper & Gold Inc. Derivative Litigation, No. 8145-VCN. FCX continues to vigorously defend itself in this action.

Tax and Other Matters. There were no significant changes to the Cerro Verde royalty dispute and Indonesia tax matters during the first quarter of 2014 (refer to Note 12 of FCX’s annual report on Form 10-K for the year ended December 31, 2013, for further discussion of these matters).

NOTE 10. BUSINESS SEGMENTS
FCX has organized its operations into six primary divisions – North America copper mines, South America mining, Indonesia mining, Africa mining, Molybdenum mines and U.S. oil and gas operations. Notwithstanding this structure, FCX internally reports information on a mine-by-mine basis for its mining operations. Therefore, FCX concluded that its operating segments include individual mines or operations relative to its mining operations. For oil and gas operations, FCX determines its operating segments on a country-by-country basis. Operating segments that meet certain thresholds are reportable segments.

Intersegment Sales. Intersegment sales between FCX’s mining 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.

FCX defers recognizing profits on sales from its mining operations to other divisions, including Atlantic Copper and on 25 percent of PT-FI's sales to PT Smelting until final sales to third parties occur. Quarterly variations in ore grades, the timing of intercompany shipments and changes in product prices result in variability in FCX's net deferred profits and quarterly earnings.

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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 an operation are allocated. U.S. federal and state income taxes are recorded and managed at the corporate level, whereas foreign income taxes are recorded and managed at the applicable country level. In addition, most mining exploration and research activities are managed on a consolidated basis, and those costs along with some selling, general and administrative costs are not allocated to the operating divisions or individual 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.



20
Table of Contents                 


Business Segments
(In millions)
Mining Operations
 
 
 
 
 
 
 
North America Copper Mines
 
South America
 
Indonesia
 
Africa
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Atlantic
 
Other
 
 
 
 
 
Corporate,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Molyb-
 
 
 
Copper
 
Mining
 
 
 
U.S.
 
Other
 
 
 
 
 
Other
 
 
 
Cerro
 
Candel-
 
Other
 
 
 
 
 
 
 
denum
 
Rod &
 
Smelting
 
& Elimi-
 
Total
 
Oil & Gas
 
& Elimi-
 
FCX
 
Morenci
 
Mines
 
Total
 
Verde
 
aria
 
Mines
 
Total
 
Grasberg
 
Tenke
 
Mines
 
Refining
 
& Refining
 
nations
 
Mining
 
Operations
 
nations
 
Total
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
23

 
$
61

 
$
84

 
$
280

 
$
128

 
$
294

 
$
702

 
$
462

a 
$
306

 
$
—

 
$
1,146

 
$
588

 
$
436

b 
$
3,724

 
$
1,261

c 
$
—

 
$
4,985

Intersegment
444

 
758

 
1,202

 
64

 
128

 
4

 
196

 
8

 
21

 
126

 
8

 
5

 
(1,566
)
 
—

 
—

 
—

 
—

Production and delivery
283

 
503

 
786

 
165

 
150

 
161