fcx3q09_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
To
Commission File Number: 1-9916
 
 
Freeport-McMoRan Copper & Gold Inc.
(Exact name of registrant as specified in its charter)

Delaware
74-2480931
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
   
One North Central Avenue
 
Phoenix, AZ
85004-4414
(Address of principal executive offices)
(Zip Code)
 
(602) 366-8100
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
R Yes    o No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer R                                                              Accelerated filer oÿ                                  Non-accelerated filer oÿ                                            Smaller reporting company oÿ

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

On October 30, 2009, there were issued and outstanding 429,877,602 shares of the registrant’s common stock, par value $0.10 per share.

 
 

 

FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS

   
 
Page
   
3
   
 
   
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4
   
5
   
6
   
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21
   
 
22
   
62
   
62
   
62
   
62
   
63
   
63
   
63
   
64
   
E-1
   

2


FREEPORT-McMoRan COPPER & GOLD INC.
PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements.

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

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(In Millions)
 
                 
ASSETS
               
Current assets:
               
Cash and cash equivalents
 
$
2,269
   
$
872
 
Trade accounts receivable
   
1,292
     
374
 
Income tax receivables
   
390
     
611
 
Other accounts receivable
   
174
     
227
 
Product inventories and materials and supplies, net
   
2,314
     
2,192
 
Mill and leach stockpiles
   
602
     
571
 
Other current assets
   
365
     
386
 
Total current assets
   
7,406
     
5,233
 
Property, plant, equipment and development costs, net
   
16,075
     
16,002
 
Long-term mill and leach stockpiles
   
1,294
     
1,145
 
Intangible assets, net
   
342
     
364
 
Trust assets
   
140
     
142
 
Other assets
   
448
     
467
 
Total assets
 
$
25,705
   
$
23,353
 
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
1,986
   
$
2,766
 
Accrued income taxes
   
940
     
163
 
Current portion of reclamation and environmental liabilities
   
187
     
162
 
Current portion of long-term debt and short-term borrowings
   
44
     
67
 
Total current liabilities
   
3,157
     
3,158
 
Long-term debt, less current portion:
               
Senior notes
   
6,350
     
6,884
 
Project financing, equipment loans and other
   
228
     
250
 
Revolving credit facility
   
     
150
 
Total long-term debt, less current portion
   
6,578
     
7,284
 
Deferred income taxes
   
2,660
     
2,339
 
Reclamation and environmental liabilities, less current portion
   
2,006
     
1,951
 
Other liabilities
   
1,370
     
1,520
 
Total liabilities
   
15,771
     
16,252
 
Equity:
               
FCX stockholders’ equity:
               
5½% Convertible Perpetual Preferred Stock
   
     
832
 
6¾% Mandatory Convertible Preferred Stock
   
2,875
     
2,875
 
Common stock
   
55
     
51
 
Capital in excess of par value
   
15,627
     
13,989
 
Accumulated deficit
   
(6,711
)
   
(8,267
)
Accumulated other comprehensive loss
   
(224
)
   
(305
)
Common stock held in treasury
   
(3,413
)
   
(3,402
)
Total FCX stockholders’ equity
   
8,209
     
5,773
 
Noncontrolling interests
   
1,725
     
1,328
 
Total equity
   
9,934
     
7,101
 
Total liabilities and equity
 
$
25,705
   
$
23,353
 
                 
The accompanying notes are an integral part of these consolidated financial statements.

3


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

                         
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2009
 
2008
 
2009
 
2008
 
                 
 
(In Millions, Except Per Share Amounts)
 
                         
Revenues
$
4,144
 
$
4,616
 
$
10,430
 
$
15,729
 
Cost of sales:
                       
Production and delivery
 
1,715
   
2,857
   
5,086
   
8,294
 
Depreciation, depletion and amortization
 
252
   
442
   
740
   
1,322
 
Lower of cost or market inventory adjustments
 
   
17
   
19
   
22
 
Total cost of sales
 
1,967
   
3,316
   
5,845
   
9,638
 
Selling, general and administrative expenses
 
74
   
90
   
225
   
300
 
Exploration and research expenses
 
19
   
77
   
73
   
209
 
Restructuring and other charges
 
   
   
23
   
 
Total costs and expenses
 
2,060
   
3,483
   
6,166
   
10,147
 
Operating income
 
2,084
   
1,133
   
4,264
   
5,582
 
Interest expense, net
 
(162
)
 
(139
)
 
(451
)
 
(444
)
Losses on early extinguishment of debt
 
(31
)
 
   
(31
)
 
(6
)
Other income and expense, net
 
(7
)
 
(14
)
 
(24
)
 
10
 
Income before income taxes and equity in
                       
affiliated companies’ net earnings
 
1,884
   
980
   
3,758
   
5,142
 
Provision for income taxes
 
(684
)
 
(240
)
 
(1,557
)
 
(1,627
)
Equity in affiliated companies’ net earnings
 
3
   
2
   
21
   
16
 
Net income
 
1,203
   
742
   
2,222
   
3,531
 
Net income attributable to noncontrolling
                       
interests
 
(224
)
 
(155
)
 
(492
)
 
(748
)
Preferred dividends
 
(54
)
 
(64
)
 
(174
)
 
(191
)
Net income attributable to FCX common
                       
stockholders
$
925
 
$
523
 
$
1,556
 
$
2,592
 
                         
Net income per share attributable to
                       
FCX common stockholders:
                       
Basic
$
2.23
 
$
1.37
 
$
3.80
 
$
6.78
 
Diluted
$
2.07
 
$
1.31
 
$
3.70
 
$
6.20
 
                         
Weighted-average common shares outstanding:
                       
Basic
 
416
   
382
   
409
   
383
 
Diluted
 
472
   
447
   
428
   
449
 
                         
Dividends declared per share of common stock
$
 
$
0.50
 
$
 
$
1.375
 
 
The accompanying notes are an integral part of these consolidated financial statements.

4


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

   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
   
(In Millions)
 
                 
Cash flow from operating activities:
               
Net income
 
$
2,222
   
$
3,531
 
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation, depletion and amortization
   
740
     
1,322
 
Lower of cost or market inventory adjustments
   
19
     
22
 
Stock-based compensation
   
75
     
113
 
Charges for reclamation and environmental liabilities, including accretion
   
150
     
141
 
Losses on early extinguishment of debt
   
31
     
6
 
Deferred income taxes
   
(32
)
   
(347
)
Intercompany profit on PT Freeport Indonesia sales to PT Smelting
   
47
     
(5
)
Increase in long-term mill and leach stockpiles
   
(68
)
   
(167
)
Changes in other assets and liabilities
   
136
     
35
 
Amortization of intangible assets/liabilities and other, net
   
53
     
59
 
(Increases) decreases in working capital:
               
Accounts receivable
   
(754
)
   
(198
)
Inventories
   
(176
)
   
(567
)
Other current assets
   
88
     
(58
)
Accounts payable and accrued liabilities
   
(518
)
   
(152
)
Accrued income and other taxes
   
913
     
(424
)
Settlement of reclamation and environmental liabilities
   
(76
)
   
(142
)
Net cash provided by operating activities
   
2,850
     
3,169
 
                 
Cash flow from investing activities:
               
Capital expenditures:
               
North America copper mines
   
(121
)
   
(498
)
South America copper mines
   
(129
)
   
(229
)
Indonesia
   
(186
)
   
(332
)
Africa
   
(577
)
   
(698
)
Other
   
(125
)
   
(172
)
Proceeds from the sale of assets and other, net
   
(8
)
   
58
 
Net cash used in investing activities
   
(1,146
)
   
(1,871
)
                 
Cash flow from financing activities:
               
Net proceeds from sale of common stock
   
740
     
 
Proceeds from revolving credit facility and other debt
   
307
     
183
 
Repayments of revolving credit facility and other debt
   
(1,066
)
   
(198
)
Purchases of FCX common stock
   
     
(500
)
Cash dividends paid:
               
Common stock
   
     
(504
)
Preferred stock
   
(181
)
   
(191
)
Noncontrolling interests
   
(149
)
   
(714
)
Net (payments for) proceeds from stock-based awards
   
(9
)
   
22
 
Excess tax benefit from stock-based awards
   
2
     
25
 
Contributions from noncontrolling interests
   
54
     
155
 
Bank fees and other
   
(5
)
   
 
Net cash used in financing activities
   
(307
)
   
(1,722
)
                 
Net increase (decrease) in cash and cash equivalents
   
1,397
     
(424
)
Cash and cash equivalents at beginning of year
   
872
     
1,626
 
Cash and cash equivalents at end of period
 
$
2,269
   
$
1,202
 
 
The accompanying notes are an integral part of these consolidated financial statements.

5


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

   
FCX Stockholders’ Equity
           
   
Convertible Perpetual
 
Mandatory Convertible
             
Accumu-lated
 
Common Stock
               
   
Preferred Stock
 
Preferred Stock
 
Common Stock
         
Other
 
Held in Treasury
 
Total FCX
           
   
Number
     
Number
     
Number
     
Capital in
 
Accumu-
 
Compre-
 
Number
     
Stock-
 
Non-
       
   
of
 
At Par
 
of
 
At Par
 
of
 
At Par
 
Excess of
 
lated
 
hensive
 
of
 
At
 
holders’
 
controlling
 
Total
 
   
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
Par Value
 
Deficit
 
Loss
 
Shares
 
Cost
 
Equity
 
Interests
 
Equity
 
   
(In Millions)
 
                                                                                     
Balance at December 31, 2008
 
1
 
$
832
   
29
 
$
2,875
   
505
 
$
51
 
$
13,989
 
$
(8,267
)
$
(305
)
 
121
 
$
(3,402
)
$
5,773
 
$
1,328
 
$
7,101
 
Sale of common stock
 
   
   
   
   
27
   
2
   
738
   
   
   
   
   
740
   
   
740
 
Conversions and redemptions of 5½%
                                                                                   
Convertible Perpetual Preferred Stock
 
(1
)
 
(832
)
 
   
   
18
   
2
   
829
   
   
   
   
   
(1
)
 
   
(1
)
Exercised and issued stock-based awards
 
   
   
   
   
1
   
   
2
   
   
   
   
   
2
   
   
2
 
Stock-based compensation
 
   
   
   
   
   
   
69
   
   
   
   
   
69
   
   
69
 
Tender of shares for stock-based awards
 
   
   
   
   
   
   
   
   
   
   
(11
)
 
(11
)
 
   
(11
)
Dividends on preferred stock
 
   
   
   
   
   
   
   
(174
)
 
   
   
   
(174
)
 
   
(174
)
Distributions to noncontrolling interests
 
   
   
   
   
   
   
   
   
   
   
   
   
(149
)
 
(149
)
Contributions from noncontrolling interests
 
   
   
   
   
   
   
   
   
   
   
   
   
54
   
54
 
Comprehensive income:
                                                                                   
Net income
 
   
   
   
   
   
   
   
1,730
   
   
   
   
1,730
   
492
   
2,222
 
Other comprehensive income,
                                                                                   
net of taxes:
                                                                                   
Unrealized gains on securities
 
   
   
   
   
   
   
   
   
3
   
   
   
3
   
   
3
 
Translation adjustment
 
   
   
   
   
   
   
   
   
3
   
   
   
3
   
   
3
 
Defined benefit plans:
                                                                                   
Net gain during period, net of
                                                                                   
taxes of $38 million
 
   
   
   
   
   
   
   
   
61
   
   
   
61
   
   
61
 
Amortization of unrecognized amounts
 
   
   
   
   
   
   
   
   
14
   
   
   
14
   
   
14
 
Other comprehensive income
 
   
   
   
   
   
   
   
   
81
   
   
   
81
   
   
81
 
Total comprehensive income
 
   
   
   
   
   
   
   
   
   
   
   
1,811
   
492
   
2,303
 
Balance at September 30, 2009
 
 
$
   
29
 
$
2,875
   
551
 
$
55
 
$
15,627
 
$
(6,711
)
$
(224
)
 
121
 
$
(3,413
)
$
8,209
 
$
1,725
 
$
9,934
 
                                                                                     
The accompanying notes are an integral part of these consolidated financial statements.

6


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

1.  
GENERAL INFORMATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). Therefore, this information should be read in conjunction with Freeport-McMoRan Copper & Gold Inc.’s (FCX) consolidated financial statements and notes contained in its 2008 Annual Report on Form 10-K. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. All such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three-month and nine-month periods ended September 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. FCX changed Phelps Dodge Corporation’s (Phelps Dodge) legal name to Freeport-McMoRan Corporation (FMC) in 2008.

2.  
RESTRUCTURING AND OTHER CHARGES
During the fourth quarter of 2008, there was a dramatic decline in copper and molybdenum prices. After averaging $3.05 per pound in 2006, $3.23 per pound in 2007 and $3.61 per pound for the first nine months of 2008, London Metal Exchange (LME) spot copper prices declined to a four-year low of $1.26 per pound in December 2008 and closed at $1.32 per pound on December 31, 2008. Additionally, molybdenum prices, which averaged approximately $25 per pound in 2006, $30 per pound in 2007 and $33 per pound for the first nine months of 2008, declined to $8.75 per pound in November 2008 and closed at $9.50 per pound on December 31, 2008.

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

Charges recognized in the first nine months of 2009 in connection with FCX’s revised operating plans in the fourth quarter of 2008 and January 2009 include restructuring charges of $32 million ($25 million to net income attributable to FCX common stockholders or $0.06 per diluted share) for contract termination costs, other project cancellation costs, and employee severance and benefit costs, partially offset by pension and postretirement gains of $9 million ($7 million to net income attributable to FCX common stockholders or $0.02 per diluted share) for special retirement benefits and curtailments. The restructuring charges reflect workforce reductions (approximately 3,000 employees related to fourth-quarter 2008 revised operating plans and approximately 1,500 employees related to January 2009 revised operating plans) and other charges that reflect an approximate 50 percent total reduction in mining and crushed-leach rates at the Morenci mine in Arizona, an approximate 50 percent reduction in mining and stacking rates at the Safford mine in Arizona, an approximate 50 percent reduction in the mining rate at the Tyrone mine in New Mexico, suspension of mining and milling activities at the Chino mine in New Mexico (with limited residual copper production from leach operations), and an approximate 40 percent reduction in annual production (an approximate 25 percent reduction began in the fourth quarter of 2008) at the Henderson molybdenum mine in Colorado. In addition, the revised operating plans included decisions at that time to defer certain capital projects, including the (i) incremental expansion projects at the Sierrita and Bagdad mines in Arizona, the Cerro Verde mine in Peru and the sulfide project at the El Abra mine in Chile, (ii) the restart of the Miami mine in Arizona and (iii) the restart of the Climax molybdenum mine in Colorado.

At December 31, 2008, FCX had a balance of $38 million in current liabilities related to the fourth-quarter 2008 restructuring activities for contract termination costs, other project cancellation costs, and employee severance and benefit costs. During 2009, additions and adjustments totaled $12 million in current liabilities (excludes $3 million for the write off of other current assets in connection with a lease cancellation that was not recorded to current liabilities), which were primarily recorded in the first quarter of 2009, and payments were $50 million. There
 
7

 
was less than $1 million of liabilities remaining at September 30, 2009, related to the fourth-quarter 2008 restructuring activities.

In connection with the January 2009 restructuring activities for contract termination costs, other project cancellation costs, and employee severance and benefit costs, additions and adjustments totaled $17 million, which were primarily recorded in the first quarter of 2009, and payments were $16 million. There was $1 million of liabilities remaining at September 30, 2009, related to the January 2009 restructuring activities.
 
3.  
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 for the three-month and nine-month periods ended September 30, 2009 and 2008 (in millions, except per share amounts):
                           
   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2009
 
2008
 
2009
 
2008
 
Net income
 
$
1,203
 
$
742
 
$
2,222
 
$
3,531
 
Net income attributable to noncontrolling interests
   
(224
)
 
(155
)
 
(492
)
 
(748
)
Preferred dividends
   
(54
)
 
(64
)
 
(174
)
 
(191
)
Net income attributable to FCX common stockholders
   
925
   
523
   
1,556
   
2,592
 
Plus income impact of assumed conversion of:
                         
6¾% Mandatory Convertible Preferred Stock
   
48
   
49
   
a
 
146
 
5½% Convertible Perpetual Preferred Stock
   
5
   
15
   
28
   
45
 
Diluted net income attributable to FCX common
                         
stockholders
 
$
978
 
$
587
 
$
1,584
 
$
2,783
 
                           
Weighted-average shares of common stock outstanding
   
416
   
382
   
409
   
383
 
Add stock issuable upon conversion, exercise or
                         
vesting of:
                         
6¾% Mandatory Convertible Preferred Stockb
   
39
   
39
   
a
 
39
 
5½% Convertible Perpetual Preferred Stock
   
14
   
24
   
17
   
24
 
Dilutive stock options
   
2
   
1
c
 
1
   
2
 
Restricted stock
   
1
   
1
   
1
   
1
 
Weighted-average shares of common stock outstanding
                         
for purposes of calculating diluted net income per share
   
472
   
447
   
428
   
449
 
                           
Diluted net income per share attributable to
                         
FCX common stockholders
 
$
2.07
 
$
1.31
 
$
3.70
 
$
6.20
 
                           
 
a.  
Potential income impact of $146 million and additional shares of common stock of approximately 39 million shares for the 6¾% Mandatory Convertible Preferred Stock were excluded for the nine months ended September 30, 2009, because they were anti-dilutive.
 
b.  
Preferred stock will automatically convert on May 1, 2010, into between approximately 39 million and 47 million shares of FCX common stock at a conversion rate that will be determined based on FCX’s common stock price. Prior to May 1, 2010, holders may convert at a conversion rate of 1.3716 into approximately 39 million shares of common stock.
 
c.  
Potential additional shares of common stock of approximately 1 million were excluded for the three months ended September 30, 2008, because they were anti-dilutive.

FCX’s convertible instruments are excluded from the computation of diluted net income per share of common stock when including the conversion of these instruments results in an anti-dilutive effect on earnings per share (see footnote a above). The dilution threshold for the nine-month period of 2009 for the 6¾% Mandatory Convertible Preferred Stock is $3.72 per share.

Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period also are excluded from the computation of diluted net income per share of common stock.

8


Excluded amounts were approximately 7 million stock options with a weighted-average exercise price of $75.58 for third-quarter 2009 and approximately 8 million stock options with a weighted-average exercise price of $71.37 for the nine months ended September 30, 2009. Stock options totaling less than 0.3 million shares were excluded for third-quarter 2008 and the nine months ended September 30, 2008.

4.  
PENSION AND POSTRETIREMENT BENEFITS
During the first quarter of 2009, FCX remeasured its plan assets and benefit obligations for the FMC Retirement Plan and the FMC Retiree Medical Plan as a result of employee reductions caused by FCX’s revised operating plans.

The components of net periodic benefit cost for pension and postretirement benefits for the three-month and nine-month periods ended September 30, 2009 and 2008, follow (in millions):

   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2009
 
2008
 
2009
 
2008
 
Service cost
 
$
8
 
$
9
 
$
25
 
$
27
 
Interest cost
   
28
   
27
   
83
   
81
 
Expected return on plan assets
   
(19
)
 
(31
)
 
(59
)
 
(95
)
Amortization of prior service cost
   
   
1
   
   
4
 
Amortization of net actuarial loss
   
7
   
   
22
   
1
 
Curtailments
   
   
   
(4
)
 
 
Special retirement benefits
   
3
   
   
(2
)
 
 
Net periodic benefit costs
 
$
27
 
$
6
 
$
65
 
$
18
 
                           
Net periodic benefit costs increased by $21 million in third-quarter 2009 mainly as a result of a decrease in the expected return on plan assets ($12 million) and amortization of actuarial losses ($7 million) primarily in connection with the losses on plan assets.

Net periodic benefit costs increased by $47 million in the first nine months of 2009 mainly as a result of a decrease in the expected return on plan assets ($36 million) and amortization of actuarial losses ($21 million) primarily in connection with the losses on plan assets, partially offset by gains on special retirement benefits and curtailments ($9 million) resulting from workforce reductions caused by the revised operating plans.

5.  
INVENTORIES, AND MILL AND LEACH STOCKPILES
The components of inventories follow (in millions):

   
September 30,
 
December 31,
 
   
2009
 
2008
 
Mining Operations:
             
Raw materials
 
$
1
 
$
1
 
Work-in-process
   
148
   
128
 
Finished goodsa
   
618
   
703
 
Atlantic Copper, S.A. (Atlantic Copper):
             
Raw materials (concentrates)
   
178
   
164
 
Work-in-process
   
238
   
71
 
Finished goods
   
12
   
1
 
Total product inventories
   
1,195
   
1,068
 
Total materials and supplies, netb
   
1,119
   
1,124
 
Total inventories
 
$
2,314
 
$
2,192
 
               
 
a.  
Primarily includes copper concentrates, anodes, cathodes and rod, and molybdenum.
 
b.  
Materials and supplies inventory is net of obsolescence reserves totaling $21 million at September 30, 2009, and $22 million at December 31, 2008.
 
9


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

   
September 30,
 
December 31,
 
   
2009
 
2008
 
Current:
             
Mill stockpiles
 
$
9
 
$
10
 
Leach stockpiles
   
593
   
561
 
Total current mill and leach stockpiles
 
$
602
 
$
571
 
               
Long-terma:
             
Mill stockpiles
 
$
435
 
$
340
 
Leach stockpiles
   
859
   
805
 
Total long-term mill and leach stockpiles
 
$
1,294
 
$
1,145
 
               
 
a.  
Metals in stockpiles not expected to be recovered within the next 12 months.

FCX recorded charges for lower of cost or market (LCM) molybdenum inventory adjustments of $19 million ($15 million to net income attributable to FCX common stockholders or $0.04 per diluted share) for the nine months ended September 30, 2009, resulting from lower molybdenum prices. There were no adjustments in third-quarter 2009.

FCX recorded charges for LCM inventory adjustments at certain of its North America copper mines of $17 million ($10 million to net income attributable to FCX common stockholders or $0.02 per diluted share) in third-quarter 2008 and $22 million ($13 million to net income attributable to FCX common stockholders or $0.03 per diluted share) for the nine months ended September 30, 2008.

6.  
INCOME TAXES
FCX’s third-quarter 2009 income tax provision resulted from taxes on international operations ($660 million) and U.S. operations ($24 million). FCX’s income tax provision for the first nine months of 2009 resulted from taxes on international operations ($1.5 billion) and U.S. operations ($29 million). FCX’s effective tax rate for 2009 has been highly sensitive to changes in commodity prices and the mix of income between U.S. and international operations. The difference between FCX’s consolidated effective income tax rate of 41 percent for the first nine months of 2009 and the U.S. federal statutory rate of 35 percent was primarily attributable to the high proportion of income earned in Indonesia, which was taxed at an effective tax rate of 43 percent.

FCX’s third-quarter 2008 income tax provision resulted from taxes on international operations ($230 million) and U.S. operations ($10 million). FCX’s income tax provision for the first nine months of 2008 resulted from taxes on international operations ($1.3 billion) and U.S. operations ($308 million).The difference between FCX’s consolidated effective income tax rate of approximately 32 percent for the first nine months of 2008 and the U.S. federal statutory rate of 35 percent was primarily attributable to a U.S. benefit for percentage depletion, partly offset by withholding taxes and incremental U.S. income tax accrued on foreign earnings.

7.  
DEBT AND EQUITY TRANSACTIONS
In February 2009, FCX completed a public offering of 26.8 million shares of FCX common stock at an average price of $28.00 per share, which generated gross proceeds of $750 million (net proceeds of approximately $740 million).

For third-quarter 2009 and the first nine months of 2009, FCX recorded losses on early extinguishment of debt totaling $31 million ($28 million to net income attributable to FCX common stockholders or $0.06 per diluted share for third-quarter 2009 and $0.07 per diluted share for the first nine months of 2009). These losses resulted from the following transactions. On August 20, 2009, FCX redeemed $340 million of its 6⅞% Senior Notes due 2014 for $352 million or a redemption price of 103.438 percent of the principal amount (plus accrued and unpaid interest). FCX recorded losses on early extinguishment of debt of $14 million ($13 million to net income attributable to FCX common stockholders or $0.03 per diluted share) in third-quarter 2009 in connection with this redemption. In addition, during September 2009, FCX purchased in the open market $99 million of its 8.25% Senior Notes for $107 million and $92 million of its 8.375% Senior Notes for $99 million. These open-market purchases resulted in losses on early extinguishment of debt totaling $17 million ($15 million to net income attributable to FCX common
 
10

 
stockholders or $0.03 per diluted share for third-quarter 2009 and $0.04 per diluted share for the first nine months of 2009).

In September 2009, FCX called for redemption its remaining outstanding shares of 5½% Convertible Perpetual Preferred Stock. Of the 831,554 shares outstanding at the time of the call, 830,529 shares converted into 17.9 million shares of FCX common stock, and the remaining 1,025 shares were redeemed for approximately $1 million in cash.

For the first nine months of 2008, FCX recorded net losses on early extinguishment of debt totaling $6 million ($5 million to net income or $0.01 per diluted share) associated with an open-market purchase of $33 million of its 9½% Senior Notes for $46 million in first-quarter 2008.

8.  
FINANCIAL INSTRUMENTS
FCX does not purchase, hold or sell derivative financial instruments unless there is an existing asset or obligation or if it anticipates a future activity that is likely to occur and will result in exposure to market risks and FCX intends to offset or mitigate such risks. FCX does not enter into any derivative financial instruments for speculative purposes, but has entered into derivative financial instruments in limited instances to achieve specific objectives. These objectives principally relate to managing risks associated with commodity price, foreign currency and interest rate risks.

Summarized below are unrealized gains (losses) recognized in income before income taxes and equity in affiliated companies’ net earnings for derivative financial instruments that are designated and qualify as fair value hedge transactions, along with the unrealized gains (losses) on the related hedged item (firm sales commitments) (in millions):

 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2009
 
September 30, 2009
 
     
Hedged
     
Hedged
 
 
Derivative
 
Item
 
Derivative
 
Item
 
Commodity contracts:
                       
FMC’s copper futures and swap contractsa
$
1
 
$
(1
)
$
8
 
$
(8
)
                         
 
a.  
Amounts are recorded in revenues.

FCX realized gains, which are recorded in revenues, of $18 million during third-quarter 2009 and $36 million during the first nine months of 2009 from matured derivative financial instruments that qualified for hedge accounting.

Summarized below are the realized and unrealized gains (losses) recognized in income before income taxes and equity in affiliated companies’ net earnings for derivative financial instruments, including embedded derivatives, which do not qualify as hedge transactions (in millions):

 
Three Months
 
Nine Months
 
 
Ended
 
Ended
 
 
September 30,
 
September 30,
 
 
2009
 
2009
 
Commodity contracts:
           
Embedded derivatives in provisional sales contractsa
$
421
 
$
1,017
 
Embedded derivatives in provisional purchase contractsb
 
(4
)
 
(5
)
PT Freeport Indonesia’s copper forward contractsa
 
(7
)
 
(104
)
Atlantic Copper’s copper forward contractsb
 
   
4
 
FMC’s copper futures and swap contractsa
 
12
   
61
 
             
 
a.  
Amounts recorded in revenues.
 
b.  
Amounts recorded in cost of sales as production and delivery costs.
 
11


Summarized below are the fair values of unsettled derivative financial instruments recorded on the consolidated balance sheet at September 30, 2009 (in millions):

Derivatives designated as hedging instruments
             
Commodity contracts:
             
FMC’s copper futures and swap contracts:
             
Asset positiona
       
$
9
 
Liability positionb
         
(1
)
               
Derivatives not designated as hedging instruments
             
Commodity contracts:
             
Embedded derivatives in provisional sales/purchases contracts:c
             
Asset position
       
$
153
 
Liability position
         
(36
)
Atlantic Copper’s copper forward contracts:
             
Liability positionb
         
*
FMC’s copper futures and swap contracts:d
             
Asset positiona
         
7
 
Liability positionb
         
(2
)
               
 
*
Less than $1 million.
 
a.  
Amounts recorded in other current assets.
 
b.  
Amounts recorded in accounts payable and accrued liabilities.
 
c.  
Amounts recorded either as a net accounts receivable or a net accounts payable.
 
d.  
At September 30, 2009, FCX had paid $2 million to a broker for margin requirements (recorded in other current assets) and FCX had received $2 million from a broker associated with margin requirements (recorded in accounts payable and accrued liabilities).

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. 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 FMC’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 nine-month periods ended September 30, 2009, resulting from hedge ineffectiveness. At September 30, 2009, FCX held copper futures and swap contracts that qualified for hedge accounting for 34 million pounds at an average price of $2.58 per pound, with maturities through July 2010.

Derivatives Not Designated as Hedging Instruments
Embedded derivatives and derivative financial instruments that do not meet the criteria to qualify for hedge accounting are discussed below.

Embedded Derivatives. As described in Note 1 to FCX’s 2008 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 LME or COMEX prices at the time of shipment as specified in the contract. Similarly, FCX purchases copper and molybdenum under contracts that provide for provisional pricing. 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
 
12

 
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. The embedded derivatives are marked to market at the period-end forward prices, with price fluctuations recorded through the settlement date reflected in revenues for sales contracts and in cost of sales as production and delivery costs for purchase contracts. At September 30, 2009, FCX had embedded derivatives on 592 million pounds of copper sales at an average price of $2.79 per pound, with maturities through February 2010, 205 thousand ounces of gold sales at an average price of $999 per ounce, with maturities through November 2009, 261 million pounds of copper purchases at an average price of $2.79 per pound, with maturities through December 2009 and less than 1 million pounds of molybdenum purchases at an average price of $12.74 per pound, with maturities through October 2009.

Copper Forward Contracts. In April 2009, FCX entered into copper forward sales contracts to lock in prices at an average of $1.86 per pound on 355 million pounds of PT Freeport Indonesia’s provisionally priced copper sales at March 31, 2009, which final priced from April 2009 through July 2009. These economic hedge transactions were intended to reduce short-term price volatility in earnings and cash flows. Gains and losses for these economic hedge transactions were recorded in revenues. FCX has not entered into additional forward sales contracts since April 2009 for its provisionally priced copper sales, but may enter into future transactions to lock in pricing on provisionally priced sales from time to time. However, FCX does not intend to change its long-standing policy of not hedging future copper production.

Atlantic Copper 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 September 30, 2009, Atlantic Copper held net forward copper purchase contracts for 15 million pounds at an average price of $2.80 per pound, with maturities through November 2009.

Copper Futures and Swap Contracts. In addition to the contracts discussed above that qualify for fair value hedge accounting, FCX also has similar contracts with FMC’s U.S. copper rod customers that do not qualify for hedge accounting because of certain terms in the sales contracts. Gains and losses for these economic hedge transactions are recorded in revenues. At September 30, 2009, FCX held copper futures and swap contracts for 12 million pounds at an average price of $2.41 per pound, with maturities through December 2010.

Foreign Currency Exchange Contracts.  As a global company, FCX transacts business in many countries and in many currencies. Foreign currency transactions at FCX’s international subsidiaries increase its risks because exchange rates can change between the time agreements are made and the time foreign currency transactions are settled. FCX may hedge or protect its international subsidiaries’ foreign currency transactions from time to time by entering into forward exchange contracts to lock in or minimize the effects of fluctuations in exchange rates. FCX had no outstanding foreign currency exchange contracts at September 30, 2009.

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 interest rate swap contracts to lock in an interest rate considered to be favorable in order to protect against its exposure to variability in future interest payments attributable to increases in interest rates of the designated floating-rate debt. In some situations, FCX may enter into fixed-to-floating interest rate swap contracts to protect against changes in the fair value of the underlying fixed-rate debt that result from market interest rate changes and to take advantage of lower interest rates. FCX had no outstanding interest rate swap contracts at September 30, 2009.

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 highly rated financial institutions that meet certain requirements. FCX also periodically reviews the creditworthiness of these institutions to ensure that they are maintaining their credit ratings. FCX does not anticipate that any of the financial institutions it deals with will default on their obligations. As of September 30, 2009, 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, accounts payable and accrued liabilities, and long-term debt. Refer to Note 9 for the fair values of these financial instruments.
 
13

 
Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable and Accrued Liabilities. 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. The financial statement amount represents the fair value of trust assets, which is based on quoted market prices.

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

Capitalized interest totaled $10 million in third-quarter 2009, $35 million in third-quarter 2008, $69 million for the first nine months of 2009 and $90 million for the first nine months of 2008. Lower capitalized interest in the 2009 periods primarily reflects the substantial completion of development activities at FCX’s Tenke Fungurume mine.

9.  
FAIR VALUE MEASUREMENT
In September 2006, the Financial Accounting Standards Board (FASB) issued enhanced accounting guidance for using fair value to measure assets and liabilities. This guidance does not require any new fair value measurements under U.S. GAAP; rather this guidance establishes a common definition of fair value, provides a framework for measuring fair value under U.S. GAAP and expands disclosure requirements about fair value measurements. In February 2008, FASB delayed the effective date for nonfinancial assets or liabilities that are not required or permitted to be measured at fair value on a recurring basis to fiscal years beginning after November 15, 2008, and interim periods within those years. FCX adopted the guidance for financial assets and liabilities recognized at fair value on a recurring basis effective January 1, 2008, and it did not have a material impact on FCX’s financial reporting and disclosures. FCX adopted the guidance for nonfinancial assets or liabilities not valued on a recurring basis (at least annually) effective January 1, 2009, with no material impact on its financial reporting and disclosures.

Fair value accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The three levels of the fair value hierarchy are described below:
 
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
Level 2
Quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
 
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

The following table sets forth FCX’s financial assets and liabilities measured at fair value on a recurring basis (in millions):

   
Fair Value at September 30, 2009
 
   
Total
 
Level 1
 
Level 2
 
Level 3
 
Cash equivalents
 
$
2,242
 
$
2,242
 
$
 
$
 
Trust assets (current and long-term)
   
164
   
164
   
   
 
Available-for-sale securities
   
77
   
77
   
   
 
Embedded derivatives in provisional sales/purchases
                         
contracts, net
   
117
   
117
   
   
 
Other derivative financial instruments, net
   
13
   
13
   
   
 
   
$
2,613
 
$
2,613
 
$
 
$
 
                           

Valuation Techniques

Cash Equivalents. The fair value of FCX’s cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. FCX’s cash equivalents are primarily money market securities, time deposits and U.S. treasury securities.
 
14

 
Trust Assets. The fair value of FCX’s trust assets are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. FCX’s trust assets are primarily money market securities and fixed income funds.

Available-for-sale securities. FCX’s available-for-sale securities are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy. The fair value of the available-for-sale securities is calculated as the quoted market price of the security multiplied by the quantity of shares held by FCX.

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

Other derivative financial instruments. FCX’s other derivative financial instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets (refer to Note 8 for further discussion).

Summarized below are the carrying amount and fair value of FCX’s financial instruments (in millions):
         
 
At September 30, 2009
 
At December 31, 2008
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Cash and cash equivalentsa
$
2,269
 
$
2,269
 
$
872
 
$
872
 
Accounts receivableb
 
1,856
   
1,856
   
1,212
   
1,212
 
Trust assetsa (current and long-term)
 
164
   
164
   
260
   
260
 
Available-for-sale securitiesa
 
77
   
77
   
84
   
84
 
Derivative assetsa
 
169
   
169
   
89
   
89
 
Accounts payable and accrued liabilitiesb
 
1,986
   
1,986
   
2,688
   
2,688
 
Long-term debt (including amounts due
                       
within one year)c
 
(6,622
)
 
(6,892
)
 
(7,351
)
 
(5,889
)
Derivative liabilitiesa
 
(39
)
 
(39
)
 
(578
)
 
(578
)
                         
 
a.  
Recorded at fair value. Quoted market prices are used to determine fair value.
 
b.  
Fair value approximates the carrying amounts because of the short maturity of these instruments.
 
c.  
Generally recorded at cost. Fair value of substantially all of FCX’s long-term debt is estimated based on quoted market prices.

10.  
NEW ACCOUNTING STANDARDS
Noncontrolling Interests in Consolidated Financial Statements. In December 2007, FASB issued accounting guidance associated with noncontrolling interests in consolidated financial statements, which clarifies that noncontrolling interests (minority interests) are to be treated as a separate component of equity and any changes in the ownership interest (in which control is retained) are to be accounted for as capital transactions. However, a change in ownership of a consolidated subsidiary that results in a loss of control is considered a significant event that triggers gain or loss recognition, with the establishment of a new fair value basis in any remaining ownership interests. This guidance also provides additional disclosure requirements for each reporting period. This guidance applies to fiscal years beginning on or after December 15, 2008, with early adoption prohibited. This guidance is required to be adopted prospectively, except for the following provisions, which are to be applied retrospectively: (i) the reclassification of noncontrolling interests to equity in the consolidated balance sheets and (ii) the adjustment to consolidated net income to include net income attributable to both the controlling and noncontrolling interests. FCX adopted this guidance effective January 1, 2009, and adjusted its December 31, 2008, condensed consolidated balance sheet to reflect noncontrolling interests in the amount of $1,328 million as a component of equity. In addition, FCX revised its consolidated statements of income for the three and nine months ended September 30, 2008, to include net income attributable to both the controlling and noncontrolling interests.
 
15

 
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion. In May 2008, FASB issued accounting guidance that changed the accounting treatment for convertible debt securities that the issuer may settle fully or partially in cash. This guidance requires bifurcation of convertible debt instruments into a debt component that is initially recorded at fair value and an equity component that represents the difference between the initial proceeds from issuance of the instrument and the fair value allocated to the debt component. The debt component is subsequently accreted (as a component of interest expense) to par value over its expected life. This guidance is effective for fiscal years and interim periods beginning after December 15, 2008, and must be retrospectively applied to all prior periods presented, even if an instrument has matured, converted, or otherwise been extinguished as of the effective date. This guidance did not have an impact on FCX’s financial reporting.

Employers’ Disclosures about Postretirement Benefit Plan Assets. In December 2008, FASB issued enhanced accounting guidance for an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This guidance revises disclosure requirements on pension and postretirement plan assets. The disclosures about plan assets required by this guidance are effective for fiscal years ending after December 15, 2009, with early application permitted. Upon initial application, disclosures are not required for earlier periods that are presented for comparative purposes. FCX is currently evaluating the impact that the adoption of this guidance will have on its financial disclosures.

Interim Disclosures about Fair Value. In April 2009, FASB issued accounting guidance that requires disclosures by publicly traded companies about the fair value of financial instruments for interim periods as well as in annual financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009, and was adopted by FCX beginning in second-quarter 2009.

Subsequent Events. In May 2009, FASB issued accounting guidance that requires disclosure of the date through which an entity has evaluated subsequent events and whether that represents the date the financial statements were issued or were available to be issued. This guidance sets forth: (i) the period after the balance sheet during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. This guidance is effective for interim and fiscal years ending after June 15, 2009, and shall be applied prospectively. FCX adopted this guidance effective second-quarter 2009.

Variable Interests. In June 2009, FASB issued accounting guidance that will improve financial reporting by enterprises involved with variable interest entities by providing more relevant and reliable information to users of financial statements. This guidance is effective for fiscal years beginning after November 15, 2009, and interim periods within those years. Early adoption is prohibited. FCX is currently evaluating the impact, if any, the adoption of this guidance will have on its financial reporting and disclosures.

Accounting Standards Codification. In June 2009, FASB established the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification is effective for interim and annual reporting periods ending after September 15, 2009, except for certain nonpublic nongovernmental entities. The Codification did not have an impact on FCX’s financial statements.

Fair Value Measurement of Liabilities. In August 2009, FASB issued guidance providing clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:
 
1.  
A valuation technique that uses:
 
a.  
The quoted price of the identical liability when traded as an asset.
 
b.  
Quoted prices for similar liabilities or similar liabilities when traded as assets.
 
2.  
Another valuation technique that is consistent with the principles in the FASB’s guidance (two examples would be an income approach or a market approach).

This guidance also clarifies that (i) when estimating fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the
 
16

 
transfer of the liability and (ii) both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This guidance is effective for the first reporting period (including interim periods) beginning after issuance. FCX does not expect this guidance to have a material impact on its financial statements and disclosures.

11.  
SUBSEQUENT EVENTS
During October 2009, FCX made open-market purchases of $42 million of its 8.25% Senior Notes for $45 million and $65 million of its 8.375% Senior Notes for $69 million, which are in addition to the purchases discussed in Note 7. FCX expects to record an approximate $10 million loss on early extinguishment of debt in fourth-quarter 2009 in connection with these open-market purchases. Refer to Note 7 for further discussion.

In October 2009, FCX’s Board of Directors reinstated an annual cash dividend on its common stock of $0.60 per share. The Board of Directors would declare a quarterly dividend of $0.15 per share, with the initial dividend expected to be paid on February 1, 2010.

FCX evaluated events after September 30, 2009, and through November 6, 2009, which is the date the 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 financial statements.

12.  
BUSINESS SEGMENTS
FCX has organized its operations into five primary divisions – North America copper mines, South America copper mines, Indonesia mining, Africa mining and Molybdenum operations. Notwithstanding this structure, FCX internally reports information on a mine-by-mine basis. Therefore, FCX concluded that its operating segments include individual mines. Operating segments that meet certain thresholds are reportable segments. In accordance with accounting guidance for segment reporting, beginning in first-quarter 2009, the Sierrita mine is no longer a reportable segment.

During 2008, Africa mining became a reportable segment. Accordingly, FCX has revised its segment disclosures for the three and nine months ended September 30, 2008, to conform with the current period presentation. Further discussion of the reportable segments included in FCX’s primary operating divisions, as well as FCX’s other reportable segments – Rod & Refining and Atlantic Copper Smelting & Refining – follows.

North America Copper Mines.  FCX has five operating copper mines in North America – Morenci, Sierrita, Bagdad and Safford in Arizona, and Tyrone in New Mexico. The North America copper mines include open-pit mining, sulfide ore concentrating, leaching, and solution extraction and electrowinning (SX/EW) operations. A majority of the copper produced at the North America copper mines is cast into copper rod by FCX’s Rod & Refining operations. The North America mines division includes the Morenci copper mine as a reportable segment.

Morenci. The Morenci open-pit mine, located in southeastern Arizona, primarily produces copper cathodes. FCX owns an 85 percent undivided interest in Morenci through an unincorporated joint venture. The Morenci mine produced approximately 40 percent of FCX’s North America copper during the first nine months of 2009.

Other Mines. Other mines include FCX’s other operating southwestern U.S. copper mines – Sierrita, Bagdad, Safford and Tyrone – and its southwestern U.S. copper mines that are currently on care-and-maintenance status. In addition to copper, the Sierrita and Bagdad mines produce molybdenum concentrates as a by-product.

South America Copper Mines.  FCX has four operating copper mines in South America – Cerro Verde in Peru, and Candelaria, Ojos del Salado and El Abra in Chile. These operations include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations. The South America mines division includes the Cerro Verde copper mine as a reportable segment.

Cerro Verde. The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces copper cathodes and copper concentrates. In addition to copper, the Cerro Verde mine produces molybdenum concentrates as a by-product. FCX owns a 53.56 percent interest in Cerro Verde. The Cerro Verde mine produced approximately 50 percent of FCX’s South America copper during the first nine months of 2009.
 
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Other Mines. Other mines include FCX’s Chilean copper mines – Candelaria, Ojos del Salado and El Abra. In addition to copper, the Candelaria and Ojos del Salado mines produce gold and silver as by-products. FCX owns an 80 percent interest in both the Candelaria and Ojos del Salado mines, and owns a 51 percent interest in the El Abra mine.

Indonesia.  Indonesia mining includes PT Freeport Indonesia’s Grasberg minerals district. PT Freeport Indonesia produces copper concentrates, which contain significant quantities of gold and silver. FCX owns 90.64 percent of PT Freeport Indonesia, including 9.36 percent owned through PT Indocopper Investama. In 1996, FCX established an unincorporated joint venture with Rio Tinto, which covers PT Freeport Indonesia’s mining operations in Block A and gives Rio Tinto, through 2021, a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver. After 2021, Rio Tinto will have a 40 percent interest in all production from Block A.

Africa.  Africa mining includes the Tenke Fungurume copper and cobalt mining concessions in the Katanga province of the Democratic Republic of Congo. The Tenke Fungurume mine includes open-pit mining, leaching and SX/EW operations. In addition to copper, the Tenke Fungurume mine produces cobalt hydroxide. Copper cathode production commenced in March 2009, and the first copper cathode was sold in second-quarter 2009. The cobalt plant and sulphuric acid plant were commissioned in third-quarter 2009, and start-up issues are being addressed. FCX owns an effective 57.75 percent interest in Tenke Fungurume.

Molybdenum.  The Molybdenum segment is an integrated producer of molybdenum, with mining, sulfide ore concentrating, roasting and processing facilities that produce high-purity, molybdenum-based chemicals, molybdenum metal powder and metallurgical products, which are sold to customers around the world, and includes the wholly owned Henderson molybdenum mine in Colorado and related conversion facilities. The Henderson underground mine produces high-purity, chemical-grade molybdenum concentrates, which are typically further processed into value-added molybdenum chemical products. This segment also includes a sales company that purchases and sells molybdenum from the Henderson mine as well as from FCX’s North and South America copper mines that produce molybdenum as a by-product. In addition, at times this segment roasts and/or processes material on a toll basis. Toll arrangements require the tolling customer to deliver appropriate molybdenum-bearing material to FCX’s facilities for processing into a product that is returned to the customer, who pays FCX for processing its material into the specified products. The Molybdenum segment also includes FCX’s wholly owned Climax molybdenum mine in Colorado, which has been on care-and-maintenance status since 1995.

Rod & Refining.  The Rod & Refining segment consists of copper conversion facilities located in North America, and includes a refinery, three rod mills and a specialty copper products facility. These operations process copper produced at the North America mines and purchased copper into copper cathode, rod and custom copper shapes. At times these operations refine copper and produce copper rod and shapes for customers on a toll basis. Toll arrangements require the tolling customer to deliver appropriate copper-bearing material to FCX’s facilities for processing into a product that is returned to the customer, who pays FCX for processing its material into the specified products.

Atlantic Copper Smelting & Refining.  Atlantic Copper, FCX’s wholly owned smelting unit in Spain, smelts and refines copper concentrates and markets refined copper and precious metals in slimes. PT Freeport Indonesia and the South America copper mines generally sell a portion of their concentrate and cathode (South America) production to Atlantic Copper.

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 the operating divisions and individual segments. However, not all costs and expenses applicable to a mine or operation are allocated. All 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 mine or operation. 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.

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Business Segments

(In Millions)
North America Copper Mines
 
South America Copper Mines
 
Indonesia
 
Africa
                     
                                         
Atlantic
 
Corporate,
     
                                         
Copper
 
Other &
     
     
Other
     
Cerro
 
Other
             
Molyb-
 
Rod &
 
Smelting
 
Elimi-
 
FCX
 
 
Morenci
 
Mines
 
Total
 
Verde
 
Mines
 
Total
 
Grasberg
 
Tenke
 
denum
 
Refining
 
& Refining
 
nations
 
Total
 
Three Months Ended September 30, 2009
                                                                             
Revenues:
                                                                             
Unaffiliated customers
$
18
 
$
25
 
$
43
 
$
386
 
$
546
 
$
932
 
$
1,348
a
$
113
 
$
258
 
$
955
 
$
495
 
$
 
$
4,144
 
Intersegment
 
299
   
578
   
877
   
83
   
3
   
86
   
308
   
   
   
8
   
   
(1,279
)
 
 
Production and delivery
 
148
   
303
   
451
   
154
   
225
   
379
   
369
   
89
   
177
   
957
   
493
   
(1,200
)
 
1,715
 
Depreciation, depletion and amortization
 
36
   
34
   
70
   
37
   
30
   
67
   
64
   
20
   
13
   
2
   
9
   
7
   
252
 
Selling, general and administrative expenses
 
   
   
   
   
   
   
24
   
   
2
   
   
4
   
44
   
74
 
Exploration and research expenses
 
   
   
   
   
   
   
   
   
1
   
   
   
18
   
19
 
Operating income (loss)
 
133
   
266
   
399
   
278
   
294
   
572
   
1,199
   
4
   
65
   
4
   
(11
)
 
(148
)
 
2,084
 
                                                                               
Interest expense, net
 
1
   
3