XMEX:FCX Freeport-McMoRan Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
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 July 31, 2012, there were issued and outstanding 949,247,847 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)

 
June 30,
2012
 
December 31,
2011
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,508

 
$
4,822

Trade accounts receivable
1,052

 
892

Other accounts receivable
263

 
250

Inventories:
 
 
 
Mill and leach stockpiles
1,466

 
1,289

Materials and supplies, net
1,377

 
1,354

Product
1,182

 
1,226

Other current assets
328

 
214

Total current assets
10,176

 
10,047

Property, plant, equipment and development costs, net
19,613

 
18,449

Long-term mill and leach stockpiles
1,848

 
1,686

Long-term receivables
860

 
675

Intangible assets, net
324

 
325

Other assets
868

 
888

Total assets
$
33,689

 
$
32,070

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
2,364

 
$
2,297

Dividends payable
299

 
240

Current portion of reclamation and environmental obligations
227

 
236

Accrued income taxes
48

 
163

Current portion of debt
4

 
4

Total current liabilities
2,942

 
2,940

Deferred income taxes
3,550

 
3,255

Long-term debt, less current portion
3,519

 
3,533

Reclamation and environmental obligations, less current portion
2,235

 
2,138

Other liabilities
1,553

 
1,651

Total liabilities
13,799

 
13,517

Equity:
 
 
 
FCX stockholders’ equity:
 
 
 
Common stock
107

 
107

Capital in excess of par value
19,068

 
19,007

Retained earnings
1,426

 
546

Accumulated other comprehensive loss
(448
)
 
(465
)
Common stock held in treasury
(3,575
)
 
(3,553
)
Total FCX stockholders’ equity
16,578

 
15,642

Noncontrolling interests
3,312

 
2,911

Total equity
19,890

 
18,553

Total liabilities and equity
$
33,689

 
$
32,070

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

3

Table of Contents                 

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions, except per share amounts)
Revenues
$
4,475

 
$
5,814

 
$
9,080

 
$
11,523

Cost of sales:
 
 
 
 
 
 
 
Production and delivery
2,622

 
2,557

 
5,050

 
4,934

Depreciation, depletion and amortization
291

 
267

 
558

 
499

Total cost of sales
2,913

 
2,824

 
5,608

 
5,433

Selling, general and administrative expenses
97

 
107

 
201

 
221

Exploration and research expenses
73

 
66

 
135

 
116

Environmental obligations and shutdown costs
81

 
60

 
91

 
60

Total costs and expenses
3,164

 
3,057

 
6,035

 
5,830

Operating income
1,311

 
2,757

 
3,045

 
5,693

Interest expense, net
(43
)
 
(74
)
 
(106
)
 
(172
)
Losses on early extinguishment of debt

 
(61
)
 
(168
)
 
(68
)
Other income, net
51

 
2

 
38

 
12

Income before income taxes and equity in affiliated
 
 
 
 
 
 
 
companies’ net (losses) earnings
1,319

 
2,624

 
2,809

 
5,465

Provision for income taxes
(422
)
 
(906
)
 
(913
)
 
(1,890
)
Equity in affiliated companies’ net (losses) earnings
(3
)
 
8

 
(1
)
 
12

Net income
894

 
1,726

 
1,895

 
3,587

Net income attributable to noncontrolling interests
(184
)
 
(358
)
 
(421
)
 
(720
)
Net income attributable to FCX common stockholders
$
710

 
$
1,368

 
$
1,474

 
$
2,867

 
 
 
 
 
 
 
 
Net income per share attributable to FCX common stockholders:
 
 
 
 
 
 
 
Basic
$
0.75

 
$
1.44

 
$
1.55

 
$
3.03

Diluted
$
0.74

 
$
1.43

 
$
1.55

 
$
3.00

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
949

 
947

 
949

 
947

Diluted
953

 
956

 
954

 
956

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.3125

 
$
0.75

 
$
0.625

 
$
1.00

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


4

Table of Contents                 

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions)
 
 
 
 
 
 
 
 
Net income
$
894

 
$
1,726

 
$
1,895

 
$
3,587

 
 
 
 
 
 
 
 
Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
Unrealized losses on securities arising during the period
(1
)
 
(1
)
 
(1
)
 

Translation adjustments arising during the period
(1
)
 

 
(1
)
 
1

Defined benefit plans:
 
 
 
 
 
 
 
Amortization of unrecognized amounts included in net
 
 
 
 
 
 
 
periodic benefit costs
8

 
3

 
15

 
6

Adjustment to deferred tax valuation allowance

 

 
5

 

Other comprehensive income
6

 
2

 
18

 
7

 
 
 
 
 
 
 
 
Total comprehensive income
900

 
1,728

 
1,913

 
3,594

Total comprehensive income attributable to noncontrolling
 
 
 
 
 
 
 
interests
(185
)
 
(358
)
 
(422
)
 
(720
)
Total comprehensive income attributable to FCX common
 
 
 
 
 
 
 
 stockholders
$
715

 
$
1,370

 
$
1,491

 
$
2,874


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




5

Table of Contents                 

FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended
 
June 30,
 
2012
 
2011
 
(In millions)
Cash flow from operating activities:
 
 
 
Net income
$
1,895

 
$
3,587

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
558

 
499

Stock-based compensation
54

 
69

Pension plans contributions
(75
)
 

Charges for reclamation and environmental obligations, including accretion
112

 
79

Payments of reclamation and environmental obligations
(98
)
 
(88
)
Losses on early extinguishment of debt
168

 
68

Deferred income taxes
288

 
337

Increase in long-term mill and leach stockpiles
(162
)
 
(98
)
Other, net
17

 
(32
)
(Increases) decreases in working capital and other tax payments:
 
 
 
Accounts receivable
(182
)
 
577

Inventories
(160
)
 
(346
)
Other current assets
(11
)
 

Accounts payable and accrued liabilities
(117
)
 
(184
)
Accrued income taxes and other tax payments
(304
)
 
(429
)
Net cash provided by operating activities
1,983

 
4,039

 
 
 
 
Cash flow from investing activities:
 
 
 
Capital expenditures:
 
 
 
North America copper mines
(297
)
 
(204
)
South America
(392
)
 
(257
)
Indonesia
(387
)
 
(301
)
Africa
(297
)
 
(40
)
Molybdenum
(153
)
 
(162
)
Other
(21
)
 
(68
)
Other, net
(4
)
 
19

Net cash used in investing activities
(1,551
)
 
(1,013
)
 
 
 
 
Cash flow from financing activities:
 
 
 
Proceeds from debt
3,016

 
23

Repayments of debt
(3,171
)
 
(1,288
)
Cash dividends paid:
 
 
 
Common stock
(535
)
 
(949
)
Noncontrolling interests
(38
)
 
(195
)
Contributions from noncontrolling interests

 
13

Net payments for stock-based awards
(3
)
 
(3
)
Excess tax benefit from stock-based awards
7

 
22

Other, net
(22
)
 
(9
)
Net cash used in financing activities
(746
)
 
(2,386
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(314
)
 
640

Cash and cash equivalents at beginning of year
4,822

 
3,738

Cash and cash equivalents at end of period
$
4,508

 
$
4,378

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

6

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, 2011
1,071

 
$
107

 
$
19,007

 
$
546

 
$
(465
)
 
123

 
$
(3,553
)
 
$
15,642

 
$
2,911

 
$
18,553

Exercised and issued stock-based awards
2

 

 
13

 

 

 

 

 
13

 

 
13

Stock-based compensation

 

 
54

 

 

 

 

 
54

 

 
54

Tax benefit for stock-based awards

 

 
5

 

 

 

 

 
5

 

 
5

Tender of shares for stock-based awards

 

 
6

 

 

 
1

 
(22
)
 
(16
)
 

 
(16
)
Dividends on common stock

 

 

 
(594
)
 

 

 

 
(594
)
 

 
(594
)
Dividends to noncontrolling interests

 

 

 

 

 

 

 

 
(38
)
 
(38
)
Change in ownership interests

 

 
(17
)
 

 

 

 

 
(17
)
 
17

 

Total comprehensive income

 

 

 
1,474

 
17

 

 

 
1,491

 
422

 
1,913

Balance at June 30, 2012
1,073

 
$
107

 
$
19,068

 
$
1,426

 
$
(448
)
 
124

 
$
(3,575
)
 
$
16,578

 
$
3,312

 
$
19,890

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


7

Table of Contents                 

FREEPORT-McMoRan COPPER & GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.
GENERAL INFORMATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). Therefore, this information should be read in conjunction with Freeport-McMoRan Copper & Gold Inc.’s (FCX) consolidated financial statements and notes contained in its 2011 Annual Report on Form 10-K. The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. All such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three-month and six-month periods ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

2.
EARNINGS PER SHARE
FCX’s basic net income per share of common stock was calculated by dividing net income attributable to common stock by the weighted-average shares of common stock outstanding during the period. Following is a reconciliation of net income and weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share (in millions, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Net income
$
894

 
$
1,726

 
$
1,895

 
$
3,587

 
Net income attributable to noncontrolling interests
(184
)
 
(358
)
 
(421
)
 
(720
)
 
Net income attributable to FCX common stockholders
$
710

 
$
1,368

 
$
1,474

 
$
2,867

 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding
949

 
947

 
949

 
947

 
Add shares issuable upon exercise or vesting of:
 
 
 
 
 
 
 
 
 Dilutive stock options
3

 
8

 
4

a 
8

 
 Restricted stock units
1

 
1

 
1

 
1

 
Weighted-average shares of common stock outstanding
 
 
 
 
 
 
 
 
 for purposes of calculating diluted net income per share
953

 
956

 
954

 
956

 
 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to FCX
     common stockholders
$
0.74

 
$
1.43

 
$
1.55

 
$
3.00

 
a.
Excluded approximately one million shares of common stock with exercise prices less than the average market price of FCX's common stock during the period that were anti-dilutive based on the treasury stock method.

Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period are excluded from the computation of diluted net income per share of common stock. Excluded amounts were approximately 25 million stock options with a weighted-average exercise price of $42.53 per option for second-quarter 2012 and approximately 17 million stock options with a weighted average exercise price of $44.73 for the six months ended June 30, 2012. Stock options for approximately 5 million shares with a weighted-average exercise price of $55.77 were excluded for second-quarter 2011, and stock options for approximately 2 million shares with a weighted-average exercise price of $55.90 were excluded for the six months ended June 30, 2011.

8

Table of Contents                 


3.
INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES
The components of inventories follow (in millions):
 
June 30,
2012
 
December 31, 2011
Mining operations:a
 
 
 
Raw materials
$
1

 
$
1

Finished goodsb
748

 
769

Atlantic Copper, S.L.U. (Atlantic Copper):
 
 
 
Raw materials (concentrates)
245

 
260

Work-in-process
161

 
187

Finished goods
27

 
9

Total product inventories
1,182

 
1,226

Total materials and supplies, netc
1,377

 
1,354

Total inventories, less current portion of mill and leach stockpiles
$
2,559

 
$
2,580

a.
FCX's mining operations also have work-in-process inventories (i.e., mill and leach stockpiles), which are summarized below.
b.
Primarily includes molybdenum concentrates and copper concentrates, anodes, cathodes and rod.
c.
Materials and supplies inventory is net of obsolescence reserves totaling $27 million at June 30, 2012, and $26 million at December 31, 2011.

A summary of mill and leach stockpiles follows (in millions):
 
June 30,
2012
 
December 31, 2011
Current:
 
 
 
Mill stockpiles
$
89

 
$
69

Leach stockpiles
1,377

 
1,220

Total current mill and leach stockpiles
$
1,466

 
$
1,289

Long-term:a
 
 
 
Mill stockpiles
$
572

 
$
535

Leach stockpiles
1,276

 
1,151

Total long-term mill and leach stockpiles
$
1,848

 
$
1,686

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

4.
INCOME TAXES
Geographic sources of FCX's provision for income taxes follow (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
United States operations
$
110

 
$
120

 
$
193

 
$
258

International operations
312

 
786

 
720

 
1,632

Total
$
422

 
$
906

 
$
913

 
$
1,890


FCX’s consolidated effective income tax rate was 33 percent for the first six months of 2012 and 35 percent for the first six months of 2011. Variations in the relative proportions of jurisdictional income can result in fluctuations to FCX’s consolidated effective income tax rate.


9

Table of Contents                 

With the exception of Tenke Fungurume S.A.R.L. (TFM), FCX has not elected to permanently reinvest earnings from its foreign subsidiaries, and has recorded deferred tax liabilities for foreign earnings that are available to be repatriated to the U.S. Cerro Verde previously recorded deferred Peruvian income tax liabilities of $240 million for income taxes that would become payable if the reinvested profits used to fund the initial Cerro Verde sulfide expansion are distributed prior to the expiration of Cerro Verde's current stability agreement on December 31, 2013. FCX is currently reviewing Cerro Verde's future cash requirements, including funding for the potential large-scale concentrator expansion to determine whether it believes that the reinvested profits will be distributed prior to December 31, 2013. This review and a decision to proceed with the expansion project may result in all or a part of the $240 million deferred income tax liability being reversed and recognized as an income tax benefit in future periods. 

5.
DEBT AND EQUITY TRANSACTIONS
In February 2012, FCX sold $500 million of 1.40% Senior Notes due 2015, $500 million of 2.15% Senior Notes due 2017 and $2.0 billion of 3.55% Senior Notes due 2022 for total net proceeds of $2.97 billion. Interest on the 1.40% Senior Notes is payable semiannually on February 13 and August 13 commencing on August 13, 2012. Interest on the 2.15% Senior Notes and the 3.55% Senior Notes is payable semiannually on March 1 and September 1 commencing on September 1, 2012. These unsecured senior notes rank equally with FCX's other existing and future unsecured and unsubordinated indebtedness.

On March 14, 2012, FCX redeemed the remaining $3.0 billion of its outstanding 8.375% Senior Notes due 2017 for which holders received 104.553 percent of the principal amount together with the accrued and unpaid interest. As a result of this redemption, FCX recorded a loss on early extinguishment of debt of $168 million ($149 million to net income attributable to FCX common stockholders or $0.16 per diluted share) for the first six months of 2012.

During the first quarter of 2011, FCX entered into a new senior unsecured revolving credit facility, which replaced the revolving credit facilities that were scheduled to mature on March 19, 2012. FCX recognized a loss on early extinguishment of debt totaling $7 million ($6 million to net income attributable to FCX common shareholders or $0.01 per diluted share) for the first six months of 2011 associated with this transaction.

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

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

Consolidated interest expense (excluding capitalized interest) totaled $55 million in second-quarter 2012, $97 million in second-quarter 2011, $154 million for the first six months of 2012 and $220 million for the first six months of 2011. Capitalized interest totaled $12 million in second-quarter 2012, $23 million in second-quarter 2011 and $48 million for the first six months of 2012 and 2011.

On February 7, 2012, the Board of Directors authorized an increase in the cash dividend on FCX's common stock from an annual rate of $1.00 per share to $1.25 per share. On June 27, 2012, FCX's Board of Directors declared a quarterly dividend of $0.3125 per share, which was paid on August 1, 2012, to common shareholders of record at the close of business on July 13, 2012.

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 that 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.


10

Table of Contents                 

Commodity Contracts.  From time to time, FCX has entered into forward, futures and swap contracts to hedge the market risk associated with fluctuations in the prices of commodities it purchases and sells. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As of June 30, 2012, FCX had no price protection contracts relating to its mine production. A discussion of FCX’s derivative commodity contracts and programs follows.

Derivatives Designated as Hedging Instruments – Fair Value Hedges
Copper Futures and Swap Contracts. Some of FCX's U.S. copper rod customers request a fixed market price instead of the New York Mercantile Exchange (COMEX) average copper price in the month of shipment. FCX hedges this price exposure in a manner that allows it to receive the COMEX average price in the month of shipment while the customers pay the fixed price they requested. FCX accomplishes this by entering into copper futures and swap contracts and then liquidating the copper futures contracts and settling the copper swap contracts during the month of shipment, which generally results in FCX receiving the COMEX average copper price in the month of shipment. Hedge gains or losses from these copper futures and swap contracts are recorded in revenues. FCX did not have any significant gains or losses during the three-month and six-month periods ended June 30, 2012 and 2011, resulting from hedge ineffectiveness. At June 30, 2012, FCX held copper futures and swap contracts that qualified for hedge accounting for 65 million pounds at an average contract price of $3.55 per pound, with maturities through December 2013.

A summary of gains (losses) recognized in revenues for derivative financial instruments related to commodity contracts that are designated and qualify as fair value hedge transactions, along with the unrealized gains (losses) on the related hedged item (firm sales commitments) follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Copper futures and swap contracts:
 
 
 
 
 
 
 
Unrealized gains (losses):
 
 
 
 
 
 
 
Derivative financial instruments
$
(11
)
 
$
5

 
$
7

 
$
(10
)
Hedged item
11

 
(5
)
 
(7
)
 
10

 
 
 
 
 
 
 
 
Realized gains (losses):
 
 
 
 
 
 
 
Matured derivative financial instruments
(14
)
 
(6
)
 
(4
)
 
6


Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. As described in Note 1 to FCX’s 2011 Annual Report on Form 10-K under “Revenue Recognition,” certain FCX copper concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on London Metal Exchange (LME) or COMEX prices (copper) and the London Bullion Market Association (London PM) price (gold) at the time of shipment as specified in the contract. Similarly, FCX purchases copper and molybdenum under contracts that provide for provisional pricing (molybdenum purchases are generally based on an average Metals Week Molybdenum Dealer Oxide price). FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host sales agreements since the contracts do not allow for net settlement and always result in physical delivery. Sales and purchases with a provisional sales price contain an embedded derivative (i.e., the price settlement mechanism that is settled after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale or purchase of the metals contained in the concentrates or cathodes at the then-current LME or COMEX price (copper), London PM price (gold) or the average Metals Week Molybdenum Dealer Oxide price (molybdenum) as defined in the contract. Mark-to-market price fluctuations recorded through the settlement date are reflected in revenues for sales contracts and in cost of sales as production and delivery costs for purchase contracts.


11

Table of Contents                 

A summary of FCX’s embedded derivatives at June 30, 2012, follows:
 
Open Positions
 
Average Price
Per Unit
 
Maturities Through
 
 
Contract
 
Market
 
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
484

 
$
3.62

 
$
3.48

 
November 2012
Gold (thousands of ounces)
96

 
1,600

 
1,585

 
September 2012
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
282

 
3.57

 
3.49

 
October 2012

Copper Forward Contracts. Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain, enters into forward copper contracts designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match. These 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 June 30, 2012, Atlantic Copper held net forward copper purchase contracts for 23 million pounds at an average contract price of $3.36 per pound, with maturities through August 2012.

A summary of the realized and unrealized gains (losses) recognized in income before income taxes and equity in affiliated companies’ net (losses) earnings for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Embedded derivatives in provisional sales contractsa
$
(160
)
 
$
22

 
$
24

 
$
(25
)
Copper forward contractsb
1

 
(6
)
 
12

 
(6
)
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 derivative financial instruments recorded on the consolidated balance sheets follows (in millions):
 
June 30,
2012
 
December 31, 2011
Derivatives designated as hedging instruments
 
 
 
Commodity contracts:
 
 
 
Copper futures and swap contracts:a
 
 
 
Asset positionb
$
4

 
$
3

Liability positionc
(8
)
 
(13
)
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
Commodity contracts:
 
 
 
Embedded derivatives in provisional sales/purchase contracts:d
 
 
 
Asset position
$
53

 
$
72

Liability position
(95
)
 
(82
)
Copper forward contracts:
 
 
 
Asset positionb
3

 
2

a.
FCX had paid $25 million to brokers as of June 30, 2012, and $31 million as of December 31, 2011, for margin requirements (recorded in other current assets). In addition, FCX held $4 million in margin funding from customers as of June 30, 2012, and $3 million as of December 31, 2011, associated with margin requirements (recorded in accounts payable and accrued liabilities).
b.
Amounts recorded in other current assets. 
c.
Amounts recorded in accounts payable and accrued liabilities. 
d.
Amounts recorded either as a net accounts receivable or a net accounts payable.


12

Table of Contents                 

Foreign Currency Exchange Contracts.  As a global company, FCX transacts business in many countries and in many currencies. Foreign currency transactions of FCX’s international subsidiaries increase its risks because exchange rates can change between the time agreements are made and the time foreign currency transactions are settled. FCX may hedge or protect its international subsidiaries’ foreign currency transactions from time to time by entering into forward exchange contracts to lock in or minimize the effects of fluctuations in exchange rates. FCX had no outstanding foreign currency exchange contracts at June 30, 2012.

Interest Rate Swap Contracts.  From time to time, FCX or its subsidiaries may enter into interest rate swaps to manage its exposure to interest rate changes and to achieve a desired proportion of fixed-rate versus floating-rate debt based on current and projected market conditions. FCX may enter into fixed-to-floating interest rate swap contracts to protect against changes in the fair value of the underlying fixed-rate debt that result from market interest rate changes and to take advantage of lower interest rates. FCX had no outstanding interest rate swap contracts at June 30, 2012.

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 June 30, 2012, FCX did not have any significant credit exposure associated with derivative transactions.

Other Financial Instruments.  Other financial instruments include cash and cash equivalents, accounts receivable, trust assets, investment securities, accounts payable and accrued liabilities, dividends payable and long-term debt. Refer to Note 7 for the fair values of these financial instruments.

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

Trust Assets and Investment Securities. The financial statement amount represents the fair value of trust assets and investment securities except for the investment in McMoRan Exploration Co.'s (MMR) 5¾% Convertible Perpetual Preferred Stock, which is recorded at cost.

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

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 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). FCX did not have any significant transfers in or out of Levels 1, 2 or 3 for the second quarter of 2012.


13

Table of Contents                 

The carrying value for certain FCX financial instruments (i.e., cash, accounts receivable, accounts payable and accrued liabilities, and dividends payable) approximate fair value because of their short-term nature and generally negligible credit losses. A summary of the carrying amount and fair value of FCX’s other financial instruments follows (in millions):
 
At June 30, 2012
 
Carrying
 
Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Cash equivalents:a
 
 
 
 
 
 
 
 
 
Money market funds
$
4,185

 
$
4,185

 
$
4,185

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Investment securities (current and long-term):
 
 
 
 
 
 
 
 
 
MMR investmentb
461

 
475

 

 
475

 

Money market fundsa, c
24

 
24

 
24

 

 

Equity securitiesa, c
7

 
7

 
7

 

 

Total investment securities
492

 
506

 
31

 
475

 

 
 
 
 
 
 
 
 
 
 
Trust assets (long-term):a, c
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
48

 
48

 

 
48

 

Government mortgage-backed securities
43

 
43

 

 
43

 

Corporate bonds
24

 
24

 

 
24

 

Government bonds and notes
24

 
24

 

 
24

 

Asset-backed securities
10

 
10

 

 
10

 

Money market funds
7

 
7

 
7

 

 

Municipal bonds
1

 
1

 

 
1

 

Total trust assets
157

 
157

 
7

 
150

 

 
 
 
 
 
 
 
 
 
 
Derivatives:a
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in an asset positiond
53

 
53

 

 
53

 

Copper futures and swap contractse
4

 
4

 
3

 
1

 

Copper forward contractse
3

 
3

 
1

 
2

 

Total derivative assets
60

 
60

 
4

 
56

 

 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
4,908

 
$
4,227

 
$
681

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivatives:a
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a liability positiond
$
95

 
$
95

 
$

 
$
95

 
$

Copper futures and swap contractsf
8

 
8

 
6

 
2

 

Total derivative liabilities
103

 
103

 
6

 
97

 

 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portiong
3,523

 
3,564

 

 
3,564

 

 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
$
3,667

 
$
6

 
$
3,661

 
$



14

Table of Contents                 

 
At December 31, 2011
 
Carrying
 
Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Cash equivalents:a
 
 
 
 
 
 
 
 
 
Money market funds
$
4,007

 
$
4,007

 
$
4,007

 
$

 
$

 
Investment securities (current and long-term):
 
 
 
 
 
 
 
 
 
MMR investmentb
475

 
507

 

 
507

 

Equity securitiesa, c
9

 
9

 
9

 

 

Money market fundsa, c
2

 
2

 
2

 

 

Total investment securities
486

 
518

 
11

 
507

 

 
 
 
 
 
 
 
 
 
 
Trust assets (long-term):a, c
 
 
 
 
 
 
 
 
 
Government mortgage-backed securities
47

 
47

 

 
47

 

U.S. core fixed income fund
46

 
46

 

 
46

 

Government bonds and notes
21

 
21

 

 
21

 

Corporate bonds
19

 
19

 

 
19

 

Money market funds
9

 
9

 
9

 

 

Asset-backed securities
9

 
9

 

 
9

 

Municipal bonds
1

 
1

 

 
1

 

Total trust assets
152

 
152

 
9

 
143

 

 
 
 
 
 
 
 
 
 
 
Derivatives:a
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in an asset positiond
72

 
72

 

 
72

 

Copper futures and swaps contractse
3

 
3

 
3

 

 

Copper forward contractse
2

 
2

 
1

 
1

 

Total derivative assets
77

 
77

 
4

 
73

 

 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
4,754

 
$
4,031

 
$
723

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivatives:a
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a liability positiond
$
82

 
$
82

 
$

 
$
82

 
$

Copper futures and swap contractsf
13

 
13

 
11

 
2

 

Total derivative liabilities
95

 
95

 
11

 
84

 

 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portiong
3,537

 
3,797

 

 
3,797

 

 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
$
3,892

 
$
11

 
$
3,881

 
$

a.
Recorded at fair value. 
b.
Recorded at cost and included in other assets.
c.
Current portion included in other current assets and long-term portion included in other assets. 
d.
Embedded derivatives are recorded in accounts receivable and/or accounts payable and accrued liabilities.
e.
Included in other current assets.
f.
Included in accounts payable and accrued liabilities.
g.
Recorded at cost except for long-term debt acquired in the FMC acquisition, which was recorded at fair value at the acquisition date.


15

Table of Contents                 

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.

MMR's 5¾% Convertible Perpetual Preferred Stock is not actively traded; therefore, FCX's investment in the MMR 5¾% Convertible Perpetual Preferred Stock is valued based on a pricing simulation model that uses MMR's publicly traded common stock as the most significant observable input. Therefore, this investment is classified within Level 2 of the fair value hierarchy.

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

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

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales have critical inputs of quoted monthly LME or COMEX copper forward prices and the London PM gold forward price at each reporting date based on the month of maturity; however, FCX's contracts themselves are not traded on an exchange. Likewise, FCX’s embedded derivatives on provisional molybdenum purchases have critical inputs based on the latest average weekly Metals Week Molybdenum Dealer Oxide prices; 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 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 forward 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.

Long-term debt, including 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.

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 June 30, 2012.
 
8.
CONTINGENCIES AND COMMITMENTS
Litigation. The following information includes a discussion of updates to previously reported legal proceedings included in Note 13 and incorporated by reference into Part I, Item 3. “Legal Proceedings” of FCX's annual report on Form 10-K for the year ended December 31, 2011.

Kay County, Oklahoma.  Board of Commissioners of the County of Kay, Oklahoma, v. Freeport-McMoRan Copper & Gold Inc., et al., United States District Court, Western District of Oklahoma, Case No. 5:12-cv-00601-C. On May 23, 2012, the Board of Commissioners of Kay County, Oklahoma, filed suit in Oklahoma District Court against FCX and several affiliates, including Blackwell Zinc Company, Inc. (BZC), an indirect subsidiary of FCX that owned and operated a zinc smelter in Blackwell, Oklahoma, from 1916 to 1974. On May 25, 2012, the case was removed to the United States District Court for the Western District of Oklahoma. The suit alleges that BZC permitted large quantities of smelter waste to be used as road building and fill material throughout Kay County over a period of decades and seeks unspecified financial assistance for removing or covering much of the material and unspecified damages for the alleged public nuisance created by the presence of the material. Because of the early stage of the proceeding, an estimate of any possible loss or range of loss cannot be made. FCX intends to vigorously defend against this litigation.

16

Table of Contents                 

Columbian Chemicals Company (Columbian) Claims.  Columbian Chemicals Company and Columbian Chemicals Acquisition LLC v. Freeport-McMoRan Corporation f/k/a Phelps Dodge Corporation, County of New York, Supreme Court of the State of New York, Index No. 600999/2010. In July 2012, FCX and Columbian reached a settlement pursuant to which the litigation will be dismissed with prejudice and all outstanding disputes regarding the extent of FCX's indemnity obligations to Columbian will be fully resolved. Under the terms of the settlement, FCX's remaining possible exposure will be to indemnify Columbian for incurred losses related only to the Clean Air Act matter and the Carbon Black claims, and the original indemnity cap of approximately $110 million will be increased by an amount that is not material to FCX.
Other Contingencies. The Indonesian tax authorities issued assessments for various audit exceptions on
PT Freeport Indonesia's income tax returns as follows (in millions):
Date of assessment
 
Tax return year
 
Tax assessment
 
Interest assessment
 
Total
October 2010
 
2005
 
$
106

 
$
52

 
$
158

November 2011
 
2006
 
22

 
10

 
32

March 2012
 
2007
 
91

 
44

 
135

Total
 
 
 
$
219

 
$
106

 
$
325

 
PT Freeport Indonesia has filed objections to the 2005, 2006 and 2007 assessments. During first-quarter 2012,
PT Freeport Indonesia's objections to the assessments related to 2005 were substantially all rejected by the Indonesian tax authorities and, in May 2012, appeals were filed with the Indonesian Tax Court. As of June 30, 2012, PT Freeport Indonesia has paid $158 million (of which $124 million is included in long-term receivables) for the disputed tax assessments related to 2005, 2006 and 2007.

Mining Contracts. Effective March 26, 2012, the Democratic Republic of Congo (DRC) government issued a Presidential Decree approving the modifications to TFM's bylaws. As a result, FCX's effective ownership interest in the Tenke Fungurume minerals district was reduced from 57.75 percent to 56.0 percent and $50 million of TFM's intercompany loans payable to FMC were converted to equity.

9.
NEW ACCOUNTING STANDARDS
In May 2011, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) in connection with guidance for fair value measurements and disclosures. This ASU clarifies the FASB's intent on current guidance, modifies and changes certain guidance and principles, and expands disclosures concerning Level 3 fair value measurements in the fair value hierarchy (including quantitative information about significant unobservable inputs within Level 3 of the fair value hierarchy). In addition, this ASU requires disclosure of the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position, but whose fair value is required to be disclosed. This ASU is effective for interim and annual reporting periods beginning after December 15, 2011, and early application is not permitted. FCX adopted this guidance effective January 1, 2012.

In June 2011, FASB issued an ASU in connection with guidance on the presentation of comprehensive income. The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This ASU requires an entity to present the components of net income and other comprehensive income and total comprehensive income (includes net income) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of equity, but does not change the items that must be reported in other comprehensive income. This ASU is effective for interim and annual reporting periods beginning after December 15, 2011, and early adoption is permitted. Effective January 1, 2012, FCX adopted this ASU and presented total comprehensive income in a separate statement. Additionally, in December 2011, FASB deferred the effective date in this ASU for presenting reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements.
 

17

Table of Contents                 


10.
SUBSEQUENT EVENTS
In July 2012, Sociedad Minera Cerro Verde S.A.A. (Cerro Verde) signed a new 15-year mining stability agreement with the Peruvian government, which is expected to become effective January 1, 2014, when the current mining stability agreement expires on December 31, 2013. In connection with the new mining stability agreement, Cerro Verde's income tax rate will increase from 30 percent to 32 percent. As a result of the change in the income tax rate, FCX expects to recognize additional deferred tax expense of approximately $50 million in third-quarter 2012, which relates primarily to the increase in asset values recorded in connection with the 2007 acquisition of FMC.

FCX evaluated events after June 30, 2012, and through the date the consolidated financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these consolidated financial statements.

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

Intersegment Sales. Intersegment sales between FCX’s operations are based on similar arms-length transactions with third parties at the time of the sale. Intersegment sales may not be reflective of the actual prices ultimately realized because of a variety of factors, including additional processing, timing of sales to unaffiliated customers and transportation premiums.

Allocations. FCX allocates certain operating costs, expenses and capital expenditures to its operating divisions and individual segments. However, not all costs and expenses applicable to a mine or operation are allocated. U.S. federal and state income taxes are recorded and managed at the corporate level, whereas foreign income taxes are recorded and managed at the applicable country. In addition, most exploration and research activities are managed at the corporate level, and those costs along with some selling, general and administrative costs are not allocated to the operating divisions or segments. Accordingly, the following segment information reflects management determinations that may not be indicative of what the actual financial performance of each operating division or segment would be if it was an independent entity.





18

Table of Contents                 

Business Segments
(In millions)
North America Copper Mines
 
South America
 
Indonesia
 
Africa
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Atlantic
 
Corporate,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Copper
 
Other &
 
 
 
 
 
Other
 
 
 
Cerro
 
Other
 
 
 
 
 
 
 
Molyb-
 
Rod &
 
Smelting
 
Elimi-
 
FCX
 
Morenci
 
Mines
 
Total
 
Verde
 
Mines
 
Total
 
Grasberg
 
Tenke
 
denum
 
Refining
 
& Refining
 
nations
 
Total
Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
105

 
$
(5
)
 
$
100

 
$
332

 
$
546

 
$
878

 
$
875

a 
$
317

 
$
334

 
$
1,283

 
$
686

 
$
2

 
$
4,475

Intersegment
405

 
922

 
1,327

 
151

 
(13
)
 
138

 
81

 
5

 

 
7

 
9

 
(1,567
)
 

Production and delivery
279

 
503

 
782

 
185

 
305

 
490

 
594

 
152

 
277

 
1,281

 
669

 
(1,623
)
 
2,622

Depreciation, depletion and amortization
33

 
61

 
94

 
33

 
39

 
72

 
53

 
40

 
14

 
3

 
10

 
5

 
291

Selling, general and administrative expenses
1

 

 
1

 

 
1

 
1

 
27

 
1

 
3

 

 
5

 
59

 
97

Exploration and research expenses

 

 

 

 

 

 

 

 
1

 

 

 
72

 
73

Environmental obligations and shutdown costs

 
42

 
42

 

 

 

 

 

 

 

 

 
39

 
81

Operating income (loss)
197

 
311

 
508

 
265

 
188

 
453

 
282

 
129

 
39

 
6

 
11

 
(117
)
 
1,311