Document



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, 2018
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
fcx_logoa01a01a03a09.jpg
Freeport-McMoRan 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  o 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  o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ   
 
 
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

On April 30, 2018, there were issued and outstanding 1,448,794,207 shares of the registrant’s common stock, par value $0.10 per share.


FREEPORT-McMoRan INC.

TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents             

Part I.
FINANCIAL INFORMATION

Item 1.
Financial Statements.

FREEPORT-McMoRan INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)

 
March 31,
2018
 
December 31,
2017
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,702

 
$
4,447

Trade accounts receivable
1,222

 
1,246

Income and other tax receivables
222

 
325

Inventories:
 
 
 
Materials and supplies, net
1,335

 
1,305

Mill and leach stockpiles
1,448

 
1,422

Product
1,102

 
1,166

Other current assets
367

 
270

Assets held for sale
708

 
598

Total current assets
10,106

 
10,779

Property, plant, equipment and mine development costs, net
22,792

 
22,844

Long-term mill and leach stockpiles
1,387

 
1,409

Other assets
2,352

 
2,270

Total assets
$
36,637

 
$
37,302

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
2,209

 
$
2,321

Accrued income taxes
749

 
565

Current portion of debt
483

 
1,414

Current portion of environmental and asset retirement obligations
396

 
388

Dividends payable
72

 
—

Liabilities held for sale
435

 
350

Total current liabilities
4,344

 
5,038

Long-term debt, less current portion
11,123

 
11,703

Deferred income taxes
3,642

 
3,622

Environmental and asset retirement obligations, less current portion
3,630

 
3,631

Other liabilities
1,972

 
2,012

Total liabilities
24,711

 
26,006

 
 
 
 
Equity:
 
 
 
Stockholders’ equity:
 
 
 
Common stock
158

 
158

Capital in excess of par value
26,729

 
26,751

Accumulated deficit
(14,030
)
 
(14,722
)
Accumulated other comprehensive loss
(475
)
 
(487
)
Common stock held in treasury
(3,726
)
 
(3,723
)
Total stockholders’ equity
8,656

 
7,977

Noncontrolling interests
3,270

 
3,319

Total equity
11,926

 
11,296

Total liabilities and equity
$
36,637

 
$
37,302


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

3
Table of Contents             

FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(In millions, except per share amounts)
Revenues
$
4,868

 
$
3,341

Cost of sales:
 
 
 
Production and delivery
2,808

 
2,188

Depreciation, depletion and amortization
451

 
389

Total cost of sales
3,259

 
2,577

Selling, general and administrative expenses
131

 
151

Mining exploration and research expenses
21

 
14

Environmental obligations and shutdown costs
9

 
25

Net gain on sales of assets
(11
)
 
(23
)
Total costs and expenses
3,409

 
2,744

Operating income
1,459

 
597

Interest expense, net
(151
)
 
(167
)
Other income, net
28

 
8

Income from continuing operations before income taxes and equity in affiliated companies’ net (losses) earnings
1,336

 
438

Provision for income taxes
(506
)
 
(174
)
Equity in affiliated companies’ net (losses) earnings
(2
)
 
4

Net income from continuing operations
828

 
268

Net (loss) income from discontinued operations
(11
)
 
38

Net income
817

 
306

Net income attributable to noncontrolling interests:
 
 
 
Continuing operations
(125
)
 
(75
)
Discontinued operations
—

 
(3
)
Net income attributable to common stockholders
$
692

 
$
228

 
 
 
 
Basic and diluted net income (loss) per share attributable to common stockholders:
 
 
 
Continuing operations
$
0.48

 
$
0.13

Discontinued operations
(0.01
)
 
0.03

 
$
0.47

 
$
0.16

 
 
 
 
Weighted-average common shares outstanding:
 
 
 
Basic
1,449

 
1,446

 
 
 
 
Diluted
1,458

 
1,454

 
 
 
 
Dividends declared per share of common stock
$
0.05

 
$
—

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


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Table of Contents             

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

 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(In millions)
Net income
$
817

 
$
306

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

 
1

Defined benefit plans:
 
 
 
Amortization of unrecognized amounts included in net periodic benefit costs
12

 
11

Foreign exchange losses
(1
)
 
(1
)
Other comprehensive income
11

 
11

 
 
 
 
Total comprehensive income
828

 
317

Total comprehensive income attributable to noncontrolling interests
(124
)
 
(78
)
Total comprehensive income attributable to common stockholders
$
704

 
$
239


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




5
Table of Contents             

FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
 
 
(In millions)
 
Cash flow from operating activities:
 
 
 
 
Net income
$
817

 
$
306

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
451

 
389

 
Net gain on sales of assets
(11
)
 
(23
)
 
Stock-based compensation
49

 
34

 
Payments for Cerro Verde royalty dispute
(10
)
 
(11
)
 
Net charges for environmental and asset retirement obligations, including accretion
53

 
71

 
Payments for environmental and asset retirement obligations
(38
)
 
(33
)
 
Net charges for defined pension and postretirement plans
18

 
33

 
Pension plan contributions
(24
)
 
(30
)
 
Deferred income taxes
22

 
20

 
Loss (gain) on disposal of discontinued operations
11

 
(32
)
 
Decrease in long-term mill and leach stockpiles
22

 
8

 
Oil and gas contract settlement payments
—

 
(70
)
 
Other, net
30

 
(59
)
 
Changes in working capital and other tax payments:
 
 
 
 
Accounts receivable
136

 
623

 
Inventories
(142
)
 
(135
)
 
Other current assets
(42
)
 
(13
)
 
Accounts payable and accrued liabilities
(96
)
 
(433
)
 
Accrued income taxes and timing of other tax payments
123

 
147

 
Net cash provided by operating activities
1,369

 
792

 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
Capital expenditures:
 
 
 
 
North America copper mines
(92
)
 
(28
)
 
South America
(67
)
 
(15
)
 
Indonesia
(203
)
 
(244
)
 
Molybdenum mines
(1
)
 
(1
)
 
Other
(39
)
 
(56
)
 
Intangible water rights and other, net
(90
)
 
(17
)
 
Net cash used in investing activities
(492
)
 
(361
)
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
Proceeds from debt
122

 
157

 
Repayments of debt
(1,633
)
 
(815
)
 
Cash dividends paid:
 
 
 
 
Common stock
—

 
(1
)
 
Noncontrolling interests
(80
)
 
(15
)
 
Stock-based awards net proceeds (payments)
3

 
(5
)
 
Net cash used in financing activities
(1,588
)
 
(679
)
 
 
 
 
 
 
Net decrease in cash, cash equivalents, restricted cash and restricted cash equivalents
(711
)
 
(248
)
 
Decrease in cash and cash equivalents in assets held for sale
32

 
8

 
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year
4,631

 
4,403

 
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
3,952

 
$
4,163

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

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Table of Contents             

FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

 
Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
Accum-ulated Deficit
 
Accumu-
lated
Other Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total
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, 2017
1,578

 
$
158

 
$
26,751

 
$
(14,722
)
 
$
(487
)
 
130

 
$
(3,723
)
 
$
7,977

 
$
3,319

 
$
11,296

Exercised and issued stock-based awards
1

 
—

 
6

 
—

 
—

 
—

 
—

 
6

 
—

 
6

Stock-based compensation, including the tender of shares
—

 
—

 
44

 
—

 
—

 
—

 
(3
)
 
41

 
—

 
41

Dividends
—

 
—

 
(72
)
 
—

 
—

 
—

 
—

 
(72
)
 
(173
)
 
(245
)
Net income attributable to common stockholders
—

 
—

 
—

 
692

 
—

 
—

 
—

 
692

 
—

 
692

Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
125

 
125

Other comprehensive income
—

 
—

 
—

 
—

 
12

 
—

 
—

 
12

 
(1
)
 
11

Balance at March 31, 2018
1,579

 
$
158

 
$
26,729

 
$
(14,030
)
 
$
(475
)
 
130

 
$
(3,726
)
 
$
8,656

 
$
3,270

 
$
11,926

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


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Table of Contents             

FREEPORT-McMoRan 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 Inc.’s (FCX) consolidated financial statements and notes contained in its annual report on Form 10-K for the year ended December 31, 2017. 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. With the exception of the accounting for discontinued operations and assets held for sale, all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three-month period ended March 31, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

NOTE 2. EARNINGS PER SHARE

FCX calculates its basic net income per share of common stock under the two-class method and calculates its diluted net income per share of common stock using the more dilutive of the two-class method or the treasury-stock method. Basic net income per share of common stock was computed by dividing net income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. Diluted net income per share of common stock was calculated by including the basic weighted-average shares of common stock outstanding adjusted for the effects of all potential dilutive shares of common stock, unless their effect would be anti-dilutive. Reconciliations of net income and weighted-average shares of common stock outstanding for purposes of calculating basic and diluted net income per share follow (in millions, except per share amounts):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Net income from continuing operations
$
828

 
$
268

Net income from continuing operations attributable to noncontrolling interests
(125
)
 
(75
)
Undistributed earnings allocated to participating securities
(4
)
 
(3
)
Net income from continuing operations attributable to common stockholders
$
699

 
$
190

 
 
 
 
Net (loss) income from discontinued operations
$
(11
)
 
$
38

Net income from discontinued operations attributable to noncontrolling interests
—

 
(3
)
Net (loss) income from discontinued operations attributable to common stockholders
$
(11
)
 
$
35

 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
688

 
$
225

 
 
 
 
 
 
 
 
Basic weighted-average shares of common stock outstanding
1,449

 
1,446

Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units
9

a 
8

Diluted weighted-average shares of common stock outstanding
1,458

 
1,454

 
 
 
 
Basic and diluted net income (loss) per share attributable to common stockholders:
 
 
 
Continuing operations
$
0.48

 
$
0.13

Discontinued operations
(0.01
)
 
0.03

 
$
0.47

 
$
0.16

a.
Excludes approximately 4 million 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.

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. Stock options for 33 million shares of common stock were excluded for first-quarter 2018 and 44 million for first-quarter 2017.

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Table of Contents             

NOTE 3. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES

The components of inventories follow (in millions):
 
March 31,
2018
 
December 31, 2017
 
Current inventories:
 
 
 
 
Total materials and supplies, neta
$
1,335

 
$
1,305

 
 
 
 
 
 
Mill stockpiles
$
330

 
$
360

 
Leach stockpiles
1,118

 
1,062

 
Total current mill and leach stockpiles
$
1,448

 
$
1,422

 
 
 
 
 
 
Raw materials (primarily concentrate)
$
284

 
$
265

 
Work-in-process
138

 
154

 
Finished goods
680

 
747

 
Total product inventories
$
1,102

 
$
1,166

 
 
 
 
 
 
Long-term inventories:
 
 
 
 
Mill stockpiles
$
308

 
$
300

 
Leach stockpiles
1,079

 
1,109

 
Total long-term mill and leach stockpiles
$
1,387

 
$
1,409

 
a.
Materials and supplies inventory was net of obsolescence reserves totaling $25 million at March 31, 2018, and $29 million at December 31, 2017.

NOTE 4. INCOME TAXES

Variations in the relative proportions of jurisdictional income result in fluctuations to FCX’s consolidated effective income tax rate. FCX’s consolidated effective income tax rate was 38 percent for first-quarter 2018 and 40 percent for first-quarter 2017. Geographic sources of FCX’s (provision for) benefit from income taxes follow (in millions):
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
 
U.S. operations
$
3

 
$
(7
)
 
International operations
(509
)
 
(167
)
 
Total
$
(506
)
 
$
(174
)
 

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017, and includes significant modifications to existing U.S. tax laws and creates many new complex tax provisions. As of December 31, 2017, FCX recorded provisional impacts of the tax effects related to specific provisions and continues to evaluate other provisions of the Act. During the three months ended March 31, 2018, no adjustments were made to the provisional amounts recorded at December 31, 2017, as FCX has not fully completed its analysis of the Act. During the remainder of 2018, FCX will continue to refine its calculations as it gains a more thorough understanding of the Act.



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Table of Contents             

NOTE 5. DEBT AND EQUITY

The components of debt follow (in millions):
 
 
March 31,
2018
 
December 31, 2017
Senior notes and debentures:
 
 
 
 
Issued by FCX
 
$
10,020

 
$
11,429

Issued by Freeport Minerals Corporation
 
358

 
358

Issued by Freeport-McMoRan Oil & Gas LLC (FM O&G LLC)
 
54

 
54

Cerro Verde credit facility
 
1,170

 
1,269

Other
 
4

 
7

Total debta
 
11,606

 
13,117

Less current portion of debt
 
(483
)
 
(1,414
)
Long-term debt
 
$
11,123

 
$
11,703

a.
Includes additions for unamortized fair value adjustments totaling $93 million at March 31, 2018 ($97 million at December 31, 2017), and is net of reductions for unamortized net discounts and unamortized debt issuance costs totaling $81 million at March 31, 2018 ($85 million at December 31, 2017).

Revolving Credit Facility. At March 31, 2018, there were no borrowings outstanding and $13 million in letters of credit issued under FCX’s revolving credit facility, resulting in availability of approximately $3.5 billion, of which approximately $1.5 billion could be used for additional letters of credit.

In April 2018, FCX, PT Freeport Indonesia (PT-FI) and FM O&G LLC entered into a new $3.5 billion, five-year, unsecured revolving credit facility, which replaced FCX’s prior revolving credit facility (scheduled to mature on May 31, 2019). The new revolving credit facility is available until April 20, 2023, with $500 million available to PT-FI, and has substantially similar structure and terms as the prior revolving credit facility. Interest on loans made under the new revolving credit facility will, at the option of FCX, be determined based on the adjusted London Interbank Offered rate or the alternate base rate (each as defined in the new revolving credit facility) plus a spread to be determined by reference to FCX’s credit ratings. The new revolving credit facility contains customary affirmative covenants and representations, and also contains a number of negative covenants that, among other things, restrict, subject to certain exceptions, the ability of FCX's subsidiaries that are not borrowers or guarantors to incur additional indebtedness (including guarantee obligations) and FCX's or its subsidiaries’ ability to: create liens on assets; enter into sale and leaseback transactions; engage in mergers, liquidations and dissolutions; and sell assets. FCX’s new revolving credit facility also contains financial ratios governing maximum total leverage and the minimum interest expense coverage ratio. FCX’s total leverage ratio (ratio of total debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the credit agreement) cannot exceed 3.75x, and the minimum interest expense coverage ratio (ratio of consolidated EBITDA to consolidated cash interest expense, as defined in the credit agreement) is 2.25x.
 
Senior Notes.  In March 2018, FCX’s 2.375% Senior Notes matured, and the $1.4 billion outstanding principal balance was repaid.

On April 4, 2018, FCX redeemed $454 million of aggregate principal amount of outstanding senior notes, consisting of $404 million of FCX 6.75% Senior Notes due 2022 and $50 million of FM O&G LLC 67/8% Senior Notes due 2023. Holders of these senior notes received the principal amount together with the redemption premium and accrued and unpaid interest up to the redemption date. As a result of these redemptions, FCX will record a gain on early extinguishment of debt of $10 million in second-quarter 2018.
Cerro Verde Credit Facility. In March 2018, Cerro Verde prepaid $100 million under its credit facility.

Interest Expense, Net. Consolidated interest costs (before capitalized interest) totaled $176 million in first-quarter 2018 and $195 million in first-quarter 2017. Capitalized interest added to property, plant, equipment and mine development costs, net, totaled $25 million in first-quarter 2018 and $28 million in first-quarter 2017.

Common Stock.  In February 2018, FCX’s Board of Directors (the Board) reinstated a cash dividend on FCX’s common stock. On March 28, 2018, the Board declared a quarterly cash dividend of $0.05 per share, which was paid on May 1, 2018, to common stockholders of record as of April 13, 2018.
 
 
 
 
 
 
 
 
 
 

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Table of Contents             

NOTE 6. 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. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As of March 31, 2018, and December 31, 2017, 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) 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 resulting from hedge ineffectiveness during the three-month periods ended March 31, 2018 and 2017. At March 31, 2018, FCX held copper futures and swap contracts that qualified for hedge accounting for 57 million pounds at an average contract price of $3.10 per pound, with maturities through September 2019.

A summary of (losses) gains 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 (losses) gains on the related hedged item follows (in millions):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Copper futures and swap contracts:
 
 
 
Unrealized (losses) gains:
 
 
 
Derivative financial instruments
$
(15
)
 
$
(2
)
Hedged item – firm sales commitments
15

 
2

 
 
 
 
Realized gains:
 
 
 
Matured derivative financial instruments
2

 
8


Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. Certain FCX concentrate and cathode contracts are provisionally priced at the time of shipment. The provisional prices are finalized in a specified future month (generally one to four months from the shipment date) based on quoted monthly average spot copper prices on the London Metal Exchange (LME) or COMEX and the London Bullion Market Association (London) gold price at the time of shipment as specified in the contract. FCX receives market prices based on prices in the specified future month, which results in price fluctuations until the date of settlement. Similarly, FCX purchases copper and cobalt 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 concentrate or cathode at the then-current metal price as defined in the contract. Mark-to-market price fluctuations from these embedded derivatives are recorded through the settlement date and are reflected in revenues for sales contracts and in inventory for purchase contracts.


11
Table of Contents             

A summary of FCX’s embedded derivatives at March 31, 2018, follows:
 
Open Positions
 
Average Price
Per Unit
 
Maturities Through
 
 
Contract
 
Market
 
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
518

 
$
3.13

 
$
3.04

 
August 2018
Gold (thousands of ounces)
311

 
1,325

 
1,327

 
July 2018
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
104

 
3.13

 
3.04

 
July 2018
Cobalt (millions of pounds)a
8

 
30.19

 
33.88

 
June 2018
a.
Relates to assets held for sale. 

Copper Forward Contracts. Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain, enters into copper forward 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, 2018, Atlantic Copper held net copper forward sales contracts for 3 million pounds at an average contract price of $3.09 per pound, with maturities through May 2018.

Summary of (Losses) Gains. A summary of the realized and unrealized (losses) gains recognized in operating income for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, follows (in millions):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Embedded derivatives in provisional sales contracts:a
 
 
 
Copper
$
(135
)
 
$
107

Gold and other metals
18

 
19

Copper forward contractsb
2

 
(1
)
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,
2018
 
December 31, 2017
Commodity Derivative Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contracts
 
$
2

 
$
11

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
11

 
155

Copper forward contracts
 
—

 
1

Total derivative assets
 
$
13

 
$
167

 
 
 
 
 
Commodity Derivative Liabilities:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contracts
 
$
5

 
$
—

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
48

 
31

Copper forward contracts
 
—

 
2

Total derivative liabilities
 
$
53

 
$
33



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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 generally offset balances by counterparty on its balance sheet. FCX’s embedded derivatives on provisional sales/purchase contracts are netted with the corresponding outstanding receivable/payable balances. A summary of these unsettled commodity contracts that are offset in the balance sheets follows (in millions):
 
 
Assets
 
Liabilities
 
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
 
 
 
 
Gross amounts recognized:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
$
11

 
$
155

 
$
48

 
$
31

Copper derivatives
 
2

 
12

 
5

 
2

 
 
13

 
167

 
53

 
33

 
 
 
 
 
 
 
 
 
Less gross amounts of offset:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
1

 
—

 
1

 
—

Copper derivatives
 
—

 
1

 
—

 
1

 
 
1

 
1

 
1

 
1

 
 
 
 
 
 
 
 
 
Net amounts presented in balance sheet:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
10

 
155

 
47

 
31

Copper derivatives
 
2

 
11

 
5

 
1

 
 
$
12

 
$
166

 
$
52

 
$
32

 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
 
 
 
Trade accounts receivable
 
$
—

 
$
151

 
$
41

 
$
—

Other current assets
 
2

 
11

 
—

 
—

Accounts payable and accrued liabilities
 
10

 
4

 
11

 
32

 
 
$
12

 
$
166

 
$
52

 
$
32


The table above excludes $30 million of embedded derivatives in provisional cobalt purchase contracts at March 31, 2018, and $24 million at December 31, 2017, which are reflected in liabilities held for sale.

Credit Risk. FCX is exposed to credit loss when financial institutions with which it 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, 2018, the maximum amount of credit exposure associated with derivative transactions was $11 million.


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Other Financial Instruments. Other financial instruments include cash and cash equivalents, accounts receivable, restricted cash, restricted cash equivalents, investment securities, legally restricted funds, accounts payable and accrued liabilities, and long-term debt. The carrying value for cash and cash equivalents (which included time deposits of $2.8 billion at March 31, 2018, and $2.9 billion at December 31, 2017), accounts receivable, restricted cash, restricted cash equivalents, and accounts payable and accrued liabilities approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 7 for the fair values of investment securities, legally restricted funds and long-term debt).

In addition, as of March 31, 2018, FCX has contingent consideration assets related to certain 2016 asset sales (refer to Note 7 for the related fair values and to Note 2 of FCX’s annual report on Form 10-K for the year ended December 31, 2017, for further discussion of these instruments).

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents. The following table provides a reconciliation of total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows to the components presented in the consolidated balance sheets (in millions):
 
 
March 31, 2018
 
December 31, 2017
Balance sheet components:
 
 
 
 
Cash and cash equivalents
 
$
3,702

 
$
4,447

Restricted cash and restricted cash equivalents included in:
 
 
 
 
Other current assets
 
123

 
52

Other assets
 
127

 
132

Total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows
 
$
3,952

 
$
4,631


FCX’s restricted cash and restricted cash equivalents are primarily related to PT-FI’s commitment for smelter development in Indonesia; guarantees and commitments for certain mine closure and reclamation obligations, and customs duty taxes; and funds held as cash collateral for surety bonds related to plugging and abandonment obligations of certain oil and gas properties. Restricted cash and restricted cash equivalents are classified as a current or long-term asset based on the timing and nature of when or how the cash is expected to be used or when the restrictions are expected to lapse. Restricted cash and restricted cash equivalents are comprised of time deposits and money market funds.


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NOTE 7. 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) and the lowest priority to unobservable inputs (Level 3). 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 2018.

FCX’s financial instruments are recorded on the consolidated balance sheets at fair value except for contingent consideration associated with the sale of the Deepwater Gulf of Mexico (GOM) oil and gas properties (which was recorded under the loss recovery approach) and debt. A summary of the carrying amount and fair value of FCX’s financial instruments (including those measured at net asset value (NAV) as a practical expedient), other than cash and cash equivalents, accounts receivable, restricted cash, restricted cash equivalents, and accounts payable and accrued liabilities (refer to Note 6) follows (in millions):
 
At March 31, 2018
 
Carrying
 
Fair Value
 
Amount
 
Total
 
NAV
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
25

 
$
25

 
$
25

 
$
—

 
$
—

 
$
—

Equity securities
5

 
5

 
—

 
5

 
—

 
—

Total
30

 
30

 
25

 
5

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
54

 
54

 
54

 
—

 
—

 
—

Government bonds and notes
42

 
42

 
—

 
—

 
42

 
—

Corporate bonds
29

 
29

 
—

 
—

 
29

 
—

Government mortgage-backed securities
25

 
25

 
—

 
—

 
25

 
—

Asset-backed securities
13

 
13

 
—

 
—

 
13

 
—

Money market funds
8

 
8

 
—

 
8

 
—

 
—

Collateralized mortgage-backed securities
7

 
7

 
—

 
—

 
7

 
—

Municipal bonds
1

 
1

 
—

 
—

 
1

 
—

Total
179

 
179

 
54

 
8

 
117

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/
 
 
 
 
 
 
 
 
 
 
 
purchase contracts in a gross asset positionc
11

 
11

 
—

 
—

 
11

 
—

Copper futures and swap contractsc
2

 
2

 
—

 
1

 
1

 
—

Contingent consideration for the sales of
 
 
 
 
 
 
 
 
 
 
 
TF Holdings Limited (TFHL) and onshore
 
 
 
 
 
 
 
 
 
 
 
California oil and gas propertiesa
110

 
110

 
—

 
—

 
110

 
—

Total
123

 
123

 
—

 
1

 
122

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration for the sale of the
 
 
 
 
 
 
 
 
 
 
 
Deepwater GOM oil and gas propertiesa
150

 
132

 
—

 
—

 
—

 
132

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives:c
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/
 
 
 
 
 
 
 
 
 
 
 
purchase contracts in a gross liability positiond
$
48

 
$
48

 
$
—

 
$
—

 
$
48

 
$
—

Copper futures and swap contracts
5

 
5

 
—

 
4

 
1

 
—

Total
53

 
53

 
—

 
4

 
49

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portione
11,606

 
11,406

 
—

 
—

 
11,406

 
—

 
 
 
 
 
 
 
 
 
 
 
 



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Table of Contents             

 
At December 31, 2017
 
Carrying
 
Fair Value
 
Amount
 
Total
 
NAV
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
25

 
$
25

 
$
25

 
$
—

 
$
—

 
$
—

Equity securities
5

 
5

 
—

 
5

 
—

 
—

Total
30

 
30

 
25

 
5

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
55

 
55

 
55

 
—

 
—

 
—

Government bonds and notes
40

 
40

 
—

 
—

 
40

 
—

Corporate bonds
32

 
32

 
—

 
—

 
32

 
—

Government mortgage-backed securities
27

 
27

 
—

 
—

 
27

 
—

Asset-backed securities
15

 
15

 
—

 
—

 
15

 
—

Money market funds
11

 
11

 
—

 
11

 
—

 
—

Collateralized mortgage-backed securities
8

 
8

 
—

 
—

 
8

 
—

Municipal bonds
1

 
1

 
—

 
—

 
1

 
—

Total
189

 
189

 
55

 
11

 
123

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/
 
 
 
 
 
 
 
 
 
 
 
purchase contracts in a gross asset positionc
155

 
155

 
—

 
—

 
155

 
—

Copper futures and swap contractsc
11

 
11

 
—

 
9

 
2

 
—

Copper forward contractsc
1

 
1

 
—

 
—

 
1

 
—

Contingent consideration for the sales of TFHL
 
 
 
 
 
 
 
 
 
 
 
   and onshore California oil and gas propertiesa
108

 
108

 
—

 
—

 
108

 
—

Total
275

 
275

 
—

 
9

 
266

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration for the sale of the
 
 
 
 
 
 
 
 
 
 
 
   Deepwater GOM oil and gas propertiesa
150

 
134

 
—

 
—

 
—

 
134

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives:c
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/
 
 
 
 
 
 
 
 
 
 
 
purchase contracts in a gross liability positiond
$
31

 
$
31

 
$
—

 
$
—

 
$
31

 
$
—

Copper forward contracts
2

 
2

 
—

 
1

 
1

 
—

Total
33

 
33

 
—

 
1

 
32

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portione
13,117

 
13,269

 
—

 
—

 
13,269

 
—

 
 
 
 
 
 
 
 
 
 
 
 
a.
Current portion included in other current assets and long-term portion included in other assets.
b.
Excludes time deposits (which approximated fair value) included in (i) other current assets of $123 million at March 31, 2018, and $52 million at December 31, 2017, primarily associated with PT-FI’s mine closure and reclamation guarantees and its disputed incremental export duty and (ii) other assets of $125 million at March 31, 2018, and $123 million at December 31, 2017, primarily associated with an assurance bond to support PT-FI’s commitment for smelter development in Indonesia.
c.
Refer to Note 6 for further discussion and balance sheet classifications.
d.
Excludes embedded derivatives in provisional cobalt purchase contracts of $30 million at March 31, 2018, and $24 million at December 31, 2017 (refer to Note 6 for further discussion).
e.
Recorded at cost except for debt assumed in acquisitions, which were recorded at fair value at the respective acquisition dates. In addition, debt excludes $112 million at March 31, 2018, and December 31, 2017, related to assets held for sale (which approximated fair value).

Valuation Techniques. The U.S. core fixed income fund is valued at NAV. The fund strategy seeks total return consisting of income and capital appreciation primarily by investing in a broad range of investment-grade debt securities, including U.S. government obligations, corporate bonds, mortgage-backed securities, asset-backed securities and money market instruments. There are no restrictions on redemptions (which are usually within one business day of notice).


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Table of Contents             

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

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.

Fixed income securities (government securities, corporate bonds, asset-backed securities, collateralized mortgage-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.

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using only quoted monthly LME or COMEX copper forward prices and the London gold forward price at each reporting date based on the month of maturity (refer to Note 6 for further discussion); 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 embedded derivatives on provisional cobalt purchases, included in assets held for sale, are valued using quoted monthly LME cobalt forward prices or average published Metals Bulletin cobalt prices, subject to certain adjustments as specified by the terms of the contracts, at each reporting date based on the month of maturity (Level 2).

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 6 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.

As reported in Note 2 of FCX’s annual report on Form 10-K for the year ended December 31, 2017, in November 2016, FCX’s sale of its interest in TFHL included contingent consideration of up to $120 million in cash, consisting of $60 million if the average copper price exceeds $3.50 per pound and $60 million if the average cobalt price exceeds $20 per pound, both during calendar years 2018 and 2019. Also in 2016, FCX Oil & Gas LLC’s (FM O&G) sale of its onshore California oil and gas properties included contingent consideration of up to $150 million, consisting of $50 million per year for 2018, 2019 and 2020 if the price of Brent crude oil averages over $70 per barrel in each of these calendar years. Future changes in the fair value of the contingent consideration derivative for the sale of TFHL will continue to be recorded in discontinued operations and for the onshore California oil and gas properties will continue to be recorded in operating income. The fair value of the contingent consideration derivative was (i) $65 million at March 31, 2018, and $74 million at December 31, 2017, associated with the sale of TFHL and (ii) $45 million at March 31, 2018, and $34 million at December 31, 2017, associated with the sale of the onshore California oil and gas properties. The contingent consideration derivative was included in other assets in the consolidated balance sheets except for $18 million included in other current assets at March 31, 2018. These fair values were calculated based on average commodity price forecasts through applicable maturity dates using a Monte Carlo simulation model. The models use various observable inputs, including Brent crude oil forward prices, historical copper and cobalt prices, volatilities, discount rates and settlement terms. As a result, these contingent consideration assets are classified within Level 2 of the fair value hierarchy.

As reported in Note 2 of FCX’s annual report on Form 10-K for the year ended December 31, 2017, in December 2016, FM O&G’s sale of its Deepwater GOM oil and gas properties included up to $150 million in contingent consideration that was recorded at the total amount under the loss recovery approach. The contingent consideration will be received over time as future cash flows are realized in connection with a third-party production handling agreement for an offshore platform. The contingent consideration included in (i) other current assets totaled $21 million at March 31, 2018, and $24 million at December 31, 2017, and (ii) other assets totaled $129 million at March 31, 2018, and $126 million at December 31, 2017. The fair value of this contingent consideration was calculated based on a discounted cash flow model using inputs that include third-party estimates for reserves, production rates and production timing, and discount rates. Because significant inputs are not observable in the market, the contingent consideration is classified within Level 3 of the fair value hierarchy.


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Table of Contents             

Long-term debt, including current portion, is valued using available market quotes and, as such, is classified within Level 2 of the fair value hierarchy.

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, 2018, as compared to those techniques used at December 31, 2017.

A summary of the changes in the fair value of FCX’s Level 3 instrument, contingent consideration for the sale of the Deepwater GOM oil and gas properties, during the first three months of 2018 follows (in millions):
Fair value at January 1, 2018
$
134

 
Net unrealized loss related to assets still held at the end of the period
(2
)
 
Fair value at March 31, 2018
$
132

 

NOTE 8. CONTINGENCIES AND COMMITMENTS

Litigation
During first-quarter 2018, there were no significant 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, 2017, other than the matter below.

On April 1, 2016, a purported class action titled David Garcia v. Freeport-McMoRan Oil & Gas LLC was filed in the Superior Court of the State of California for the County of Santa Barbara (Case No. 16CV01305) against FM O&G LLC, an indirect wholly owned subsidiary of FCX. A former FM O&G LLC employee filed the case, which alleges violations of various California employment laws and seeks relief for past wages, overtime, penalties, interest and attorney’s fees. The primary issue underlying the claims is whether compensation must be paid to non-exempt shift workers on platforms located offshore California on the outer-continental shelf for sleep time and other non-working time. In June 2016, FM O&G LLC removed the case to the U.S. District Court for the Central District of California, Santa Barbara (the District Court). In September 2016, the court dismissed the complaint on the grounds that all four FM O&G LLC platforms potentially involved are located in federal waters, that federal law, not state law, applies, and that federal law does not require an employer to compensate for non-work time. In October 2016, the plaintiff appealed the dismissal to the U.S. Court of Appeals for the Ninth Circuit. In June 2017, the Ninth Circuit stayed the Garcia case pending its decision in another case involving essentially the same legal issues, titled Newton v. Parker Drilling Management Services, Ltd. In February 2018, a three-judge panel of the Ninth Circuit ruled in favor of the plaintiffs in the Newton case. Because that decision conflicts with longstanding precedent in the Fifth Circuit and could set a precedent that will result in a reversal of the dismissal in the Garcia case, FM O&G LLC and others filed amicus briefs in April 2018 in support of Parker Drilling’s petition for an en banc rehearing in the Newton case. The Ninth Circuit denied that request on April 27, 2018, but modified its original opinion noting that the question of whether the Ninth Circuit’s holding should be applied retrospectively is reserved for the District Court’s consideration on remand.

The amount of the exposure in Garcia is uncertain because FM O&G LLC has potential defenses to the claims even if state law would be applied; however, absent success on those defenses, FCX estimates that the exposure could be in the range of approximately $50 million to $80 million if California wage and hour law is applied retroactively to FM O&G LLC’s operations offshore California. FCX has not established a reserve for this contingency because it believes that its legal position is correct and does not believe a loss is probable. FCX intends to vigorously defend this matter.

Tax and Other Matters
Cerro Verde Royalty Dispute and Other Peru Tax Matters
During first-quarter 2018, there were no significant changes to the Cerro Verde royalty dispute and other Peru tax matters included in Note 12 of FCX’s annual report on Form 10-K for the year ended December 31, 2017.


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Table of Contents             

Indonesia Tax Matters
The following information includes a discussion of updates to previously reported Indonesia tax matters included in Note 12 of FCX’s annual report on Form 10-K for the year ended December 31, 2017.

PT-FI received assessments from the local regional tax authority in Papua, Indonesia, for additional taxes and penalties related to surface water taxes for the period from January 2011 through March 2018. PT-FI has filed or will file appeals of these assessments with the Indonesia Tax Court. During first-quarter 2018, the Indonesia Tax Court ruled partially in favor of PT-FI with respect to assessments for the period January 2016 through April 2016 by reducing these assessments to $13 million, including penalties (based on the exchange rate at March 31, 2018), or an approximate 40 percent reduction. Hearings in the Indonesia Tax Court are currently underway related to assessments for the period from May 2016 through April 2017.

During 2017, PT-FI filed petitions to the Indonesia Supreme Court with respect to assessments for the period from January 2011 through December 2015. In April 2018, the Indonesia Supreme Court posted on its website summaries of favorable decisions relating to surface water tax assessments for the period January 2011 through July 2015. PT-FI began receiving the official written decisions on April 18, 2018. The Supreme Court ruling concluded that PT-FI and the Indonesian government are bound by PT-FI’s Contract of Work (COW), which is lex specialis, and prevails as the law for the parties to the COW that should be carried out in good faith. The Supreme Court decisions for the period January 2011 through July 2015 reduce the total remaining exposure for the period from August 2015 through March 2018 to $161 million, including $81 million in penalties. As of March 31, 2018, no charges have been recorded for any assessments because PT-FI believes its COW exempts it from these payments. As of May 4, 2018, PT-FI has not paid and does not intend to pay these assessments.

Indonesia Mining Contract. The following is the latest information related to PT-FI’s COW (refer to Note 13 of FCX’s annual report on Form 10-K for the year ended December 31, 2017, for further discussion).

In August 2017, FCX and the Indonesian government reached an understanding on a framework that would replace the COW while providing PT-FI with long-term mining rights. This framework includes (i) conversion from the COW to a special license (IUPK) providing PT-FI with long-term mining rights through 2041; (ii) Indonesian government certainty of fiscal and legal terms during the term of the IUPK; (iii) PT-FI commitment to construct a new smelter in Indonesia within five years of reaching a definitive agreement; and (iv) divestment of 51 percent of the project area interests to Indonesian participants at fair market value, structured so that FCX retains control over operations and governance of PT-FI. Execution of a definitive agreement will require approval by the Board and PT-FI’s joint venture partner, Rio Tinto, as well as the modification or revocation of current regulations and the implementation of new regulations by the Indonesian government. FCX cannot currently predict whether there will be any material accounting and tax impacts associated with the divestment.

In late 2017, the Indonesian government (including the regional government of Papua Province and Mimika Regency) and PT Indonesia Asahan Aluminium (Inalum), a state-owned enterprise, which leads the Indonesian government’s consortium of investors, formed a special purpose company to acquire Grasberg project area interests. Inalum is wholly owned by the Indonesian government and currently holds 9.36 percent of PT-FI’s outstanding common stock. FCX continues to engage with Inalum and Rio Tinto on potential arrangements that would result in the Inalum consortium acquiring interests that would meet the Indonesian government’s 51 percent ownership objective in a manner satisfactory to all parties, and in a structure that would provide for continuity of FCX’s management of PT-FI’s operations and governance of the business. The parties continue to negotiate documentation on a comprehensive agreement for PT-FI’s extended operations and to reach agreement on timing, process and governance matters relating to the divestment. The parties have a mutual objective of completing negotiations and the required documentation as soon as possible.


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In October 2017, Indonesia’s Ministry of Environment and Forestry (the Ministry) notified PT-FI of administrative sanctions related to certain activities the Ministry indicated are not reflected in PT-FI’s environmental permit. The Ministry also notified PT-FI that certain operational activities were inconsistent with factors set forth in PT-FI’s environmental permitting studies and that additional monitoring and improvements need to be undertaken related to air quality, water drainage, treatment and handling of certain wastes, and tailings management. PT-FI has been engaged in a process to update its permits through submissions and dialogue with the Ministry that began in late 2014, and PT-FI believes that it has submitted the required documentation to update such permits. In April 2018, the Ministry issued decrees imposing unattainable environmental standards related to PT-FI’s controlled riverine tailings management system. The decrees include a six-month transition period and conflict with PT-FI’s approved environmental management programs and existing environmental permits. PT-FI is engaged in discussions with the Ministry regarding these actions, which PT-FI believes are contrary to the Indonesian government’s obligations under PT-FI’s COW. Resolution of these matters is a requirement for concluding a comprehensive agreement for PT-FI’s extended operations.

In December 2017, the Indonesian government extended PT-FI’s temporary IUPK to June 30, 2018, to enable normal operations to continue during the negotiation period. In February 2018, PT-FI’s export license was extended to February 15, 2019. On February 28, 2018, PT Smelting (PT-FI’s 25-percent-owned smelter and refinery in Indonesia) received an extension of its anode slimes export license through February 26, 2019.

Until a definitive agreement is reached, PT-FI has reserved all rights under its COW, including dispute resolution procedures. FCX cannot predict whether PT-FI will be successful in reaching a satisfactory agreement on the terms of its long-term mining rights. If PT-FI is unable to reach a definitive agreement with the Indonesian government on its long-term mining rights, FCX intends to reduce or defer investments significantly in its underground development projects and will pursue dispute resolution procedures under the COW.

NOTE 9. BUSINESS SEGMENTS
FCX has organized its mining operations into four primary divisions – North America copper mines, South America mining, Indonesia mining and Molybdenum mines, and operating segments that meet certain thresholds are reportable segments. Separately disclosed in the following tables are FCX’s reportable segments, which include the Morenci, Cerro Verde and Grasberg (Indonesia Mining) copper mines, the Rod & Refining operations and Atlantic Copper Smelting & Refining.
 
Intersegment sales between FCX’s business segments are based on terms similar to 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 mines to other divisions, including Atlantic Copper (FCX’s wholly owned smelter and refinery in Spain) 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.
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 (included in Corporate, Other & Eliminations), 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.


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Product Revenues. FCX’s revenues attributable to the products it produced for the first quarters of 2018 and 2017 follow (in millions):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Copper:
 
 
 
Concentrate
$
1,647

 
$
981

Cathode
1,423

 
1,041

Rod and other refined copper products
670

 
624

Gold
808

 
268

Molybdenum
286

 
209

Othera
398

 
231

Adjustments to revenue:
 
 
 
Treatment charges
(132
)
 
(103
)
Royalty expenseb
(69
)
 
(22
)
Export dutiesc
(46
)
 
(14
)
Revenue from contracts with customers
4,985

 
3,215

Embedded derivativesd
(117
)
 
126

Total consolidated revenues
$
4,868

 
$
3,341

a.
Primarily includes revenues associated with cobalt, silver, oil, gas and natural gas liquids.
b.
Reflects royalties for sales from PT-FI and Cerro Verde that will vary with the volume of metal sold and the prices of copper and gold.
c.
Reflects export duties paid by PT-FI.
d.
Refer to Note 6 for discussion of embedded derivatives related to FCX’s provisionally priced concentrate and cathode sales contracts.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Financial Information by Business Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Atlantic
 
Corporate,
 
 
 
 
North America Copper Mines
 
South America Mining
 
 
 
 
 
 
 
Copper
 
Other
 
 
 
 
 
 
 
 
 
 
Cerro
 
 
 
 
 
Indonesia
 
Molybdenum
 
Rod &
 
Smelting
 
& Elimi-
 
FCX
 
 
Morenci
 
Other
 
Total
 
Verde
 
Other
 
Total
 
Mining
 
Mines
 
Refining
 
& Refining
 
nationsa
 
Total
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
3

 
$
15

 
$
18

 
$
625

 
$
150

 
$
775

 
$
1,521

b 
$
—

 
$
1,385

 
$
577

 
$
592

c 
$
4,868

 
Intersegment
601

 
689

 
1,290

 
102

 
—

 
102

 
52

 
95