fcx2q0710-q.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 June 30, 2007
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
(IRS 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 ÿ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer RAccelerated filer ÿNon-accelerated filer ÿ

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

On July 31, 2007, there were issued and outstanding 381,728,862 shares of the registrant’s Common Stock, par value $0.10 per share.


Table of Contents
 
FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS

   
 
Page
3
   
 
   
3
   
4
   
5
   
6
   
7
   
31
   
 
32
   
88
   
88
   
89
   
89
   
90
   
90
   
91
   
91
   
92
   
E-1
   

2

Table of Contents

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

Item 1. Financial Statements.

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

   
June 30,
   
December 31,
 
   
2007
   
2006
 
   
(In Millions)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
 
$
2,078
   
$
907
 
Accounts receivable
   
2,455
     
486
 
Inventories
   
2,387
     
724
 
Mill and leach stockpiles
   
320
     
-
 
Prepaid expenses, restricted cash and other
   
215
     
34
 
Total current assets
   
7,455
     
2,151
 
Property, plant, equipment and development costs, net
   
24,302
     
3,099
 
Other assets
   
743
     
140
 
Trust assets
   
612
     
-
 
Long-term mill and leach stockpiles
   
530
     
-
 
Goodwill
   
6,992
     
-
 
Total assets
 
$
40,634
   
$
5,390
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
2,647
   
$
789
 
Accrued income taxes
   
629
     
165
 
Copper price protection program
   
592
     
 
Current portion of long-term debt and short-term borrowings
   
152
     
19
 
Total current liabilities
   
4,020
     
973
 
Long-term debt, less current portion:
               
Senior notes
   
6,951
     
620
 
Term loan
   
2,450
     
-
 
Project financing, equipment loans and other
   
236
     
41
 
Total long-term debt, less current portion
   
9,637
     
661
 
Other liabilities and deferred credits
   
1,230
     
298
 
Deferred income taxes
   
6,856
     
800
 
Total liabilities
   
21,743
     
2,732
 
Minority interests
   
1,524
     
213
 
Stockholders’ equity:
               
5½% Convertible Perpetual Preferred Stock
   
1,100
     
1,100
 
6¾% Mandatory Convertible Preferred Stock
   
2,875
     
-
 
Common stock
   
50
     
31
 
Capital in excess of par value
   
13,331
     
2,668
 
Retained earnings
   
2,818
     
1,415
 
Accumulated other comprehensive income (loss)
   
16
     
(20
)
Common stock held in treasury
   
(2,823
)
   
(2,749
)
Total stockholders’ equity
   
17,367
     
2,445
 
Total liabilities and stockholders’ equity
 
$
40,634
   
$
5,390
 
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

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


 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2007
 
2006
 
2007
 
2006
 
 
(In Millions, Except Per Share Amounts)
 
Revenues
$
5,807
 
$
1,426
 
$
8,110
 
$
2,512
 
Cost of sales:
                       
Production and delivery
 
2,850
   
605
   
3,802
   
1,083
 
Depreciation, depletion and amortization
 
379
   
44
   
495
   
87
 
Total cost of sales
 
3,229
   
649
   
4,297
   
1,170
 
Exploration and research expenses
 
40
   
3
   
47
   
5
 
Selling, general and administrative expenses
 
139
   
35
   
188
   
66
 
Total costs and expenses
 
3,408
   
687
   
4,532
   
1,241
 
Operating income
 
2,399
   
739
   
3,578
   
1,271
 
Interest expense, net
 
(182
)
 
(21
)
 
(234
)
 
(44
)
Losses on early extinguishment and conversion of debt, net
 
(47
)
 
-
   
(135
)
 
(2
)
Gains on sales of assets
 
38
   
9
   
38
   
9
 
Other income, net
 
43
   
6
   
66
   
11
 
Equity in affiliated companies’ net earnings
 
7
   
1
   
12
   
5
 
Income before income taxes and minority interests
 
2,258
   
734
   
3,325
   
1,250
 
Provision for income taxes
 
(777
)
 
(310
)
 
(1,237
)
 
(532
)
Minority interests in net income of consolidated subsidiaries
 
(313
)
 
(42
)
 
(427
)
 
(69
)
Net income
 
1,168
   
382
   
1,661
   
649
 
Preferred dividends
 
(64
)
 
(15
)
 
(81
)
 
(30
)
Net income applicable to common stock
$
1,104
 
$
367
 
$
1,580
 
$
619
 
                         
Net income per share of common stock:
                       
Basic
 
$2.90
   
$1.95
   
$5.27
   
$3.29
 
Diluted
 
$2.62
   
$1.74
   
$4.80
   
$2.97
 
                         
Average common shares outstanding:
                       
Basic
 
381
   
188
   
300
   
188
 
Diluted
 
446
   
222
   
346
   
222
 
                         
Dividends paid per share of common stock
 
$0.3125
   
$1.0625
   
$0.625
   
$1.875
 
                         

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

4

Table of Contents
 
FREEPORT-McMoRan COPPER & GOLD INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
   
Six Months Ended
 
   
June 30,
 
   
2007
   
2006
 
   
(In Millions)
 
Cash flow from operating activities:
               
Net income
 
$
1,661
   
$
649
 
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Unrealized losses on copper price protection program
   
168
     
-
 
Depreciation, depletion and amortization
   
495
     
87
 
Minority interests in net income of consolidated subsidiaries
   
427
     
69
 
Noncash compensation and benefits
   
104
     
36
 
Losses on early extinguishment and conversion of debt, net
   
135
     
2
 
Gains on sales of assets
   
(38
)
   
(9
)
Deferred income taxes
   
(102
)
   
63
 
Elimination (recognition) of profit on PT Freeport Indonesia sales
               
to PT Smelting
   
36
     
(13
)
Increase in long-term mill and leach stockpiles
   
(101
)
   
-
 
Other
   
46
     
11
 
(Increases) decreases in working capital, excluding amounts
               
acquired from Phelps Dodge:
               
Accounts receivable
   
(557
)
   
(2
)
Inventories
   
298
     
(218
)
Prepaid expenses, restricted cash and other
   
16
     
(3
)
Accounts payable and accrued liabilities
   
182
     
(70
)
Accrued income taxes
   
(20
)
   
(226
)
Increase in working capital
   
(81
)
   
(519
)
Net cash provided by operating activities
   
2,750
     
376
 
Cash flow from investing activities:
               
Acquisition of Phelps Dodge, net of cash acquired
   
(13,906
)
   
-
 
Phelps Dodge capital expenditures
   
(476
)
   
-
 
PT Freeport Indonesia capital expenditures
   
(175
)
   
(104
)
Other capital expenditures
   
(21
)
   
(6
)
Sale of assets and other
   
90
     
1
 
Net cash used in investing activities
   
(14,488
)
   
(109
)
Cash flow from financing activities:
               
Proceeds from term loans under bank credit facility
   
10,000
     
-
 
Repayments of term loans under bank credit facility
   
(7,550
)
   
-
 
Net proceeds from sales of senior notes
   
5,880
     
-
 
Net proceeds from sale of 6¾% Mandatory Convertible Preferred Stock
   
2,803
     
-
 
Net proceeds from sale of common stock
   
2,816
     
-
 
Proceeds from other debt
   
227
     
53
 
Repayments of other debt
   
(481
)
   
(223
)
Purchases of FCX common shares
   
-
     
(100
)
Cash dividends paid:
               
Common stock
   
(182
)
   
(352
)
Preferred stock
   
(30
)
   
(30
)
Minority interests
   
(314
)
   
(57
)
Net (payments for) proceeds from exercised stock options
   
(24
)
   
14
 
Excess tax benefit from exercised stock options
   
7
     
22
 
Bank credit facilities fees and other
   
(243
)
   
-
 
Net cash provided by (used in) financing activities
   
12,909
     
(673
)
Net increase (decrease) in cash and cash equivalents
   
1,171
     
(406
)
Cash and cash equivalents at beginning of year
   
907
     
764
 
Cash and cash equivalents at end of period
 
$
2,078
   
$
358
 
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents
FREEPORT-McMoRan COPPER & GOLD INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

       
 Mandatory
             
Accumulated
 
 Common
       
   
Convertible Perpetual
 
 Convertible
             
Other
 
 Stock Held
       
   
Preferred Stock
 
Preferred Stock
 
Common Stock
         
Compre-
 
in Treasury
       
   
Number
     
Number
     
Number
     
Capital in
     
hensive
 
Number
           
   
of
 
At Par
 
of
 
At Par
 
of
 
At Par
 
Excess of
 
Retained
 
Income
 
of
 
At
 
Stockholders’
 
   
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
Par Value
 
Earnings
 
(Loss)
 
Shares
 
Cost
 
Equity
 
   
(In Millions)
 
Balance at December 31, 2006
 
1
 
$
1,100
   
-
 
$
-
   
310
 
$
31
 
$
2,668
 
$
1,415
 
$
(20
)
 
113
 
$
(2,749
)
$
2,445
 
Sale of 6¾% mandatory
                                                                       
convertible preferred stock
 
-
   
-
   
29
   
2,875
   
-
   
-
   
(72
)
 
-
   
-
   
-
   
-
   
2,803
 
Common stock issued to
                                                                       
acquire Phelps Dodge
 
-
   
-
   
-
   
-
   
137
   
14
   
7,767
   
-
   
-
   
-
   
-
   
7,781
 
Sale of common stock
 
-
   
-
   
-
   
-
   
47
   
5
   
2,811
   
-
   
-
   
-
   
-
   
2,816
 
Conversions of 7%
                                                                       
convertible senior notes
 
-
   
-
   
-
   
-
   
-
   
-
   
6
   
-
   
-
   
-
   
-
   
6
 
Exercised stock options, issued
                                                                       
restricted stock and other
 
-
   
-
   
-
   
-
   
2
   
-
   
74
   
-
   
-
   
-
   
-
   
74
 
Stock-based compensation costs
 
-
   
-
   
-
   
-
   
-
   
-
   
73
   
-
   
-
   
-
   
-
   
73
 
Tax benefit for stock option exercises
 
-
   
-
   
-
   
-
   
-
   
-
   
4
   
-
   
-
   
-
   
-
   
4
 
Tender of shares for exercised stock
                                                                       
options and restricted stock
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
1
   
(74
)
 
(74
)
Adjustment to initially apply FIN 48
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
4
   
-
   
-
   
-
   
4
 
Dividends on common stock
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(181
)
 
-
   
-
   
-
   
(181
)
Dividends on preferred stock
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(81
)
 
-
   
-
   
-
   
(81
)
Comprehensive income (loss):
                                                                       
Net income
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
1,661
   
-
   
-
   
-
   
1,661
 
Other comprehensive income
                                                                       
(loss), net of taxes:
                                                                       
Investment adjustment
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
26
   
-
   
-
   
26
 
Translation adjustment
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
6
   
-
   
-
   
6
 
Change in unrealized
                                                                       
derivatives fair value
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(2
)
 
-
   
-
   
(2
)
Reclass to earnings
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
3
   
-
   
-
   
3
 
Amortization of unrecognized
                                                                       
amounts (SFAS 158)
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
3
   
-
   
-
   
3
 
Other comprehensive income
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
36
   
-
   
-
   
36
 
Total comprehensive income
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
1,697
 
Balance at June 30, 2007
 
1
 
$
1,100
   
29
 
$
2,875
   
496
 
$
50
 
$
13,331
 
$
2,818
 
$
16
   
114
 
$
(2,823
)
$
17,367
 
                                                                         
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

6

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

1.  
GENERAL INFORMATION
The accompanying unaudited condensed 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) condensed consolidated financial statements and notes contained in its 2006 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. With the exception of certain adjustments associated with the acquisition of Phelps Dodge Corporation (Phelps Dodge), all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three and six-month periods ended June 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

For comparative purposes, certain amounts for the three and six-month periods ended June 30, 2006, have been reclassified to conform to current period presentation.

As further discussed in Note 2, on March 19, 2007, FCX completed its acquisition of Phelps Dodge. Financial results for the first six months of 2007 include Phelps Dodge’s results beginning March 20, 2007.

2.  
  ACQUISITION OF PHELPS DODGE
On March 19, 2007, FCX acquired Phelps Dodge. Phelps Dodge, now a wholly owned subsidiary of FCX, is a fully integrated producer of copper and molybdenum, with mines in North and South America and processing capabilities for other minerals as by-products, such as gold, silver and rhenium, and several development projects, including the Tenke Fungurume mine in the Democratic Republic of Congo (DRC). Additionally, Phelps Dodge has an international manufacturing division, Phelps Dodge International Corporation (PDIC), which manufactures engineered wire and cable products principally for the global energy sector. The initial estimates of the fair value of assets acquired and liabilities assumed and the results of Phelps Dodge’s operations are included in FCX’s condensed consolidated financial statements beginning March 20, 2007.

In the acquisition, each share of Phelps Dodge common stock was exchanged for 0.67 of a share of FCX common stock and $88.00 in cash. As a result, FCX issued 136.9 million shares and paid $18.0 billion in cash to Phelps Dodge shareholders. The acquisition has been accounted for under the purchase method as required by Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” with FCX as the accounting acquirer. Below is a summary of the $25.8 billion purchase price, which was funded through a combination of common shares issued, borrowings under a $11.5 billion senior credit facility, proceeds from the offering of $6.0 billion of senior notes (refer to Note 8 for further discussion) and available cash resources (in millions, except exchange ratio):

Phelps Dodge common stock outstanding
     
and issuable at March 19, 2007
 
204.3
 
Exchange offer ratio of FCX common stock for each
     
Phelps Dodge common share
 
0.67
 
Shares of FCX common stock issued
 
136.9
 
       
Cash consideration of $88.00 for each Phelps Dodge common share
$
17,979
a
Fair value of FCX common stock issued
 
7,781
b
Transaction and change of control costs and related employee benefits
 
136
 
Release of FCX deferred tax asset valuation allowances
 
(90
)c
Total purchase price
$
25,806
 

7

Table of Contents
 
a.  
Cash consideration includes cash paid in lieu of any fractional shares of FCX stock.
b.  
Measurement of the common stock component of the purchase price based on a weighted average closing price of FCX’s common stock of $56.85 for the two days prior to through two days after the public announcement of the merger on November 19, 2006.
c.  
During second-quarter 2007, FCX determined that, as a result of the acquisition of Phelps Dodge, it will be able to realize certain U.S. tax credits for which it had previously not recognized any benefit. Recognition of these tax credits resulted in a $90 million reduction to the purchase price.

In accordance with the purchase method of accounting, the purchase price paid was determined at the date of the public announcement of the transaction and has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the closing date of March 19, 2007. The estimated fair values were based on preliminary internal estimates and are subject to change as FCX completes its analysis. In valuing acquired assets and assumed liabilities, fair values were based on, but not limited to quoted market prices, where available; the intent of FCX with respect to whether the assets purchased are to be held, sold or abandoned; expected future cash flows; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; and appropriate discount rates and growth rates. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill. A significant decline in copper or molybdenum prices from those used to estimate the fair values of the acquired assets could result in impairment to the carrying amounts assigned to inventories; mill and leach stockpiles; property, plant, equipment and development costs; and goodwill.

A summary of the preliminary purchase price allocation as of June 30, 2007, follows (in billions):

         
Preliminary
 
         
Purchase
 
 
Historical
 
Fair Value
 
Price
 
 
Balances
 
Adjustments
 
Allocation
 
Cash and cash equivalents
$
4.2
 
$
 
$
4.2
 
Metal inventories and mill and leach stockpilesa
 
0.7
   
1.7
   
2.4
 
Property, plant, equipment and development costsb
 
6.0
   
15.0
   
21.0
 
Other assets
 
3.3
   
(0.4
)
 
2.9
 
Allocation to goodwillc
 
   
7.0
   
7.0
 
Total assets
 
14.2
   
23.3
   
37.5
 
Deferred income taxes (current and long-term)d
 
(0.7
)
 
(5.5
)
 
(6.2
)
Other liabilities
 
(4.1
)
 
(0.2
)
 
(4.3
)
Minority interests
 
(1.2
)
 
   
(1.2
)
Total
$
8.2
 
$
17.6
 
$
25.8
 

a.  
Inventories and stockpiles were valued using estimated discounted cash flows based on estimated selling prices less selling and completion costs and a reasonable profit allowance. Application of fair value principles to metal inventories and stockpiles resulted in a significantly higher value being applied to inventory compared with the historical cost recorded by Phelps Dodge. Consequently, when inventory on hand as of the date of acquisition is subsequently sold, FCX will recognize incremental noncash costs and realize a significantly smaller profit margin with respect to this inventory.
 
b.  
Includes amounts based on estimated discounted cash flows from future production of proven and probable reserves and for values of properties other than proven and probable reserves (VBPP). Carrying amounts assigned to proven and probable reserves are depleted using the unit of production method over the estimated lives of the reserves. Carrying amounts assigned to VBPP are not charged to income until the VBPP becomes associated with proven and probable reserves and are being produced or are determined to be impaired.
 
 
The concept of VBPP is described in Emerging Issue Task Force (EITF) Issue No. 04-3, “Mining Assets: Impairment and Business Combinations,” and has been interpreted differently by different mining companies. FCX’s preliminary adjustment to property, plant, equipment and development costs includes VBPP attributable to mineralized material that FCX believes could be brought into production with the establishment or modification of required permits and should market conditions and technical
 
8

Table of Contents
 
assessments warrant. Mineralized material is a mineralized body that has been delineated by appropriately spaced drilling and/or underground sampling to support reported tonnage and average grade of minerals. Such a deposit may not qualify as proven and probable reserves until legal and economic feasibility are confirmed based upon a comprehensive evaluation of development costs, unit costs, grades, recoveries and other material factors. The carrying amount of property, plant, equipment and development costs includes preliminary adjustments attributable to inferred mineral resources and exploration potential. FCX is continuing to analyze VBPP and the final values may vary significantly from preliminary estimates.
 
c.  
During the second quarter of 2007 adjustments to the preliminary fair values assigned to assets acquired and liabilities assumed from Phelps Dodge and adjustments to the purchase price resulted in a $0.4 billion reduction in goodwill. Additional adjustments, which could be significant, are expected in future periods until FCX finalizes its valuation of the assets acquired and liabilities assumed. None of the $7.0 billion allocation to goodwill is deductible for tax purposes.
 
d.  
Deferred income taxes have been recognized based on the estimated fair value adjustments to net assets.

As of June 30, 2007, FCX had not identified any material pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available that an asset existed, a liability had been incurred or an asset had been impaired as of the acquisition date, and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.

FCX paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets acquired for a number of potential strategic and financial benefits that are expected to be realized, including, but not limited to, the following:

·  
The combined company’s increased scale of operations, management depth and strengthened cash flow provide an improved platform to capitalize on growth opportunities in the global market.

·  
The combined company is well positioned to benefit from the positive copper market at a time when there is a scarcity of large-scale copper development projects combined with strong global demand for copper.

·  
The combined company has long-lived, geographically diverse reserves, totaling approximately 77 billion pounds of copper, 38 million ounces of gold and 2 billion pounds of molybdenum, net of minority interests as of December 31, 2006. Additionally, the combined company has rights to significant mineralized material that could add to reserves.

·  
The combined company has exploration rights with significant potential in copper regions around the world, including Phelps Dodge’s opportunities at its Tenke Fungurume concessions in the DRC.


9

Table of Contents
 
Pro Forma Financial Information.  The following pro forma financial information assumes that FCX acquired Phelps Dodge effective January 1, 2007, for the 2007 periods, and effective January 1, 2006, for the 2006 periods. The most significant adjustments relate to the purchase accounting impacts of increases in the carrying values of Phelps Dodge’s metal inventories (including mill and leach stockpiles) and property, plant and equipment (in millions, except per share data):
 
 
Historical
           
 
FCX
 
Phelps
Dodgea
 
Purchase
Adjustments
 
Pro forma
Consolidated
 
Three Months Ended June 30, 2007
                       
Revenues
$
5,807
   
N/A
 
$
 
$
5,807
b
Operating income
$
2,399
   
N/A
 
$
(28
)
$
2,371
b,c
Income before income taxes and minority
                       
interests
$
2,258
   
N/A
 
$
(28
)
$
2,230
b,c,e
Net income applicable to common stock
$
1,104
   
N/A
 
$
(18
)
$
1,086
b,c,e
Diluted net income per share of common stock
$
2.62
   
N/A
   
N/A
 
$
2.57
b,c,e
Diluted weighted average shares outstanding
 
446
   
N/A
   
N/A
   
447
g
                         
Six Months Ended June 30, 2007
                       
Revenues
$
8,110
 
$
2,537
 
$
 
$
10,647
b
Operating income
$
3,578
 
$
817
 
$
(445
)
$
3,950
b,c
Income before income taxes and minority
                       
interests
$
3,325
 
$
861
 
$
(512
)
$
3,674
b,c,d,e
Net income applicable to common stock
$
1,580
 
$
508
 
$
(384
)
$
1,704
b,c,d,e
Diluted net income per share of common stock
$
4.80
   
N/A
   
N/A
 
$
4.10
b,c,d,e
Diluted weighted average shares outstanding
 
346
   
N/A
   
N/A
   
446
g
 
Three Months Ended June 30, 2006
                       
Revenues
$
1,426
 
$
2,992
 
$
 
$
4,418
b
Operating income
$
739
 
$
963
 
$
(456
)
$
1,246
b,c
Income from continuing operations before income taxes and minority interests
$
734
 
$
986
 
$
(665
)
$
1,055
b,c,e
Income from continuing operations applicable to common stock
$
367
 
$
471
 
$
(524
)
$
314
b,c,e
Diluted income per share of common stock  from continuing operations
$
1.74
 
$
2.32
   
N/A
 
$
0.82
b,c,e
Diluted weighted average shares outstanding
 
222
   
204
   
N/A
   
406
g
 
Six Months Ended June 30, 2006
                       
Revenues
$
2,512
f
$
5,217
 
$
 
$
7,729
b
Operating income
$
1,271
f
$
1,538
 
$
(1,155
)
$
1,654
b,c
Income from continuing operations before income taxes and minority interests
$
1,250
f
$
1,590
 
$
(1,572
)
$
1,268
b,c,e
Income from continuing operations applicable to common stock
$
619
f
$
822
 
$
(1,200
)
$
241
b,c,e
Diluted income per share of common stock from continuing operations
$
2.97
 
$
4.04
   
N/A
 
$
0.64
b,c,e
Diluted weighted average shares outstanding
 
222
   
203
   
N/A
   
374
g

10

Table of Contents
 
a.  
For the six months ended June 30, 2007, represents the results of Phelps Dodge’s operations from January 1, 2007, through March 19, 2007. Beginning March 20, 2007, the results of Phelps Dodge’s operations are included in FCX’s consolidated financial information.
b.  
Includes charges to revenues for mark-to-market accounting adjustments on Phelps Dodge’s copper price protection programs totaling $130 million ($80 million to net income or $0.18 per share) for the three months ended June 30, 2007, $188 million ($116 million to net income or $0.26 per share) for the six months ended June 30, 2007, $677 million ($515 million to net income or $1.27 per share) for the three months ended June 30, 2006, and $1.1 billion ($813 million to net income or $2.17 per share) for the six months ended June 30, 2006.
c.  
Includes charges related to the impact of the increases in the carrying values of Phelps Dodge’s metal inventories (including mill and leach stockpiles) and property, plant and equipment totaling $483 million ($304 million to net income or $0.68 per share) for the three months ended June 30, 2007, $1.1 billion ($719 million to net income or $1.61 per share) for the six months ended June 30, 2007, $461 million ($290 million to net income or $0.71 per share) for the three months ended June 30, 2006, and $1.2 billion ($733 million to net income or $1.96 per share) for the six months ended June 30, 2006.
d.  
Excludes net losses on early extinguishment of debt totaling $88 million ($75 million to net income or $0.17 per share) for financing transactions related to the acquisition of Phelps Dodge.
e.  
Includes net interest expense associated with debt issued in connection with the acquisition of Phelps Dodge totaling $155 million ($132 million to net income or $0.29 per share) for the three months ended June 30, 2007, $344 million ($292 million to net income or $0.65 per share) for the six months ended June 30, 2007, $209 million ($178 million to net income or $0.44 per share) for the three months ended June 30, 2006, and $418 million ($356 million to net income or $0.95 per share) for the six months ended June 30, 2006.
f.  
Includes a charge to revenues for the redemption of FCX’s Gold-Denominated Preferred Stock, Series II totaling $69 million ($37 million to net income or $0.10 per share).
g.  
Estimated pro forma diluted weighted average shares outstanding for the three and six-month periods ended June 30, 2007 and 2006, follow (in millions):

   
Three Months Ended
 
Six Months Ended
 
   
June 30,
 
June 30,
 
   
2007
 
2006
 
2007
 
2006
 
Average number of basic shares of FCX common stock outstanding prior to the acquisition of Phelps Dodge
 
198
 
188
 
198
 
188
 
Shares of FCX common stock issued in the acquisition
 
137
 
137
 
137
 
137
 
Sale of FCX sharesa
 
47
 
47
 
47
 
47
 
Mandatory Convertible Preferred Stocka
 
39
 
b
39
 
b
Other dilutive securities
 
26
 
34
 
25
 
2
 
Pro forma average number of common shares outstanding
 
447
 
406
 
446
 
374
 

a.  
Refer to Notes 8 and 11 for additional information.
b.  
Not dilutive for the three and six-month periods ended June 30, 2006.

The above pro forma consolidated financial information has been prepared for illustrative purposes only and is not intended to be indicative of the results that would actually have occurred, or the results expected in future periods, had the events reflected herein occurred on the dates indicated.

3.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As a result of the acquisition of Phelps Dodge, the following summaries of significant accounting policies is in addition to those contained in FCX’s 2006 Annual Report on Form 10-K.

Basis of Presentation. Effective March 20, 2007, FCX began consolidating its wholly owned subsidiary, Phelps Dodge. Phelps Dodge’s financial information consolidates the results of operations and the assets and
 
11

Table of Contents
 
liabilities of majority-owned subsidiaries and reports the minority interest, and its investment in the Morenci copper mine, an unincorporated joint venture, is reflected using the proportionate consolidation method. All significant intercompany transactions and balances have been eliminated.

Investments in unconsolidated companies owned 20 percent or more are recorded on an equity basis. Investments in companies owned less than 20 percent, and for which FCX does not exercise significant influence, are carried at cost.

Foreign Currencies. Except as noted below, the assets and liabilities of foreign subsidiaries are translated at current exchange rates, while revenues and expenses are translated at average rates in effect for the period. The related translation gains and losses are included in accumulated other comprehensive income (loss) within stockholders’ equity. For the translation of the financial statements of certain foreign subsidiaries dealing predominantly in U.S. dollars, assets receivable and liabilities payable in cash are translated at current exchange rates, and inventories and other non-monetary assets and liabilities are translated at historical rates. Gains and losses resulting from translation of such financial statements are included in operating results, as are gains and losses from foreign currency transactions.

Mill and Leach Stockpiles. Mill and leach stockpiles acquired in connection with the Phelps Dodge acquisition are stated at the lower of cost or market. FCX uses the average cost method for recording its mill and leach stockpiles.

Both mill and leach stockpiles contain low-grade ore that has been extracted from the ore body and is available for copper recovery. For mill stockpiles, recovery is through milling, concentrating, smelting and refining or, alternatively, by concentrate leaching. For leach stockpiles, recovery is through exposure to acidic solutions that dissolve contained copper and deliver it in solution to extraction processing facilities. The recorded cost of mill and leach stockpiles includes mining and haulage costs incurred to deliver ore to stockpiles, depreciation, depletion, amortization and overhead costs.

Because it is generally impracticable to determine copper contained in mill and leach stockpiles by physical count, reasonable estimation methods are employed. The quantity of material delivered to mill and leach stockpiles is based on surveyed volumes of mined material and daily production records. Sampling and assaying of blasthole cuttings determine the estimated copper grades of material delivered to mill and leach stockpiles.

Expected copper recovery rates for mill stockpiles are determined by metallurgical testing. The recoverable copper in mill stockpiles can be extracted into copper concentrate almost immediately. Estimates of copper contained in mill stockpiles are adjusted as material is added or removed and fed to the mill.

Expected copper recovery rates for leach stockpiles are determined using small-scale laboratory tests, small- to large-scale column testing (which simulates the production-scale process), historical trends and other factors, including mineralogy of the ore and rock type. Ultimate recovery of copper contained in leach stockpiles can vary from a low percentage to more than 90 percent depending on several variables, including type of copper recovery, mineralogy and particle size of the rock. Although as much as 70 percent of the copper ultimately recoverable may be extracted during the first year, the remaining copper is recovered over several years.

Processes and recovery rates are monitored continuously, and recovery rate estimates are adjusted periodically as additional information becomes available and as related technology changes.

Goodwill. Goodwill has an indefinite useful life and is not amortized, but rather is tested for impairment at least annually, unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value of a related reporting unit below its carrying amount.

As of June 30, 2007, goodwill of approximately $7.0 billion was recorded as a result of the Phelps Dodge acquisition. This amount represents the excess of the purchase price over the fair value of assets acquired
12

Table of Contents
 
and liabilities assumed and is subject to adjustment as FCX completes its analysis of these fair values, which may take up to one year after the acquisition date. In accordance with accounting rules, goodwill resulting from a business combination is assigned to the acquiring entity's reporting units that are expected to benefit from the business combination, regardless of whether other assets or liabilities of the acquired entity have been assigned to those reporting units. FCX is in the process of determining the appropriate definition of reporting units for the allocation of goodwill, which could range from either an individual mine to an aggregation of several mines. The allocation of goodwill to reporting units will be completed at the conclusion of this analysis.

Intangible Assets. Intangible assets acquired as a result of the Phelps Dodge acquisition include water rights, land easements and trademarks primarily at the North American mining sites. The principal amortization method for such intangible assets is the computation of an overall unit rate applied to pounds of principal products sold from mine production. As of June 30, 2007, FCX has not completed the identification and valuation of intangible assets resulting from the acquisition of Phelps Dodge. FCX expects to record additional intangible assets, which could include such items as customer relationships and patents, as it identifies and values them, which will result in a reduction of the amount allocated to goodwill.

Environmental Expenditures. Environmental expenditures are expensed or capitalized, depending upon their future economic benefits. Liabilities for such expenditures are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. For closed facilities and closed portions of operating facilities with environmental obligations, an environmental liability is accrued when a decision to close a facility, or a portion of a facility, is made by management and the environmental liability is considered to be probable. Environmental liabilities attributed to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) or analogous state programs are considered probable when a claim is asserted, or is probable of assertion, and FCX, or any of its subsidiaries, have been associated with the site. Other environmental remediation liabilities are considered probable based on specific facts and circumstances. FCX’s estimates of these costs are based on an evaluation of various factors, including currently available facts, existing technology, presently enacted laws and regulations, remediation experience, whether or not FCX is a potentially responsible party (PRP) and the ability of other PRPs to pay their allocated portions. With the exception of those obligations assumed in the acquisition of Phelps Dodge (see Note 12), environmental obligations are recorded on an undiscounted basis. Where the available information is sufficient to estimate the amount of liability, that estimate has been used. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. Possible recoveries of some of these costs from other parties are not recognized in the condensed consolidated financial statements until they become probable. Legal costs associated with environmental remediation, as defined in Statement of Position 96-1, “Environmental Remediation Liabilities,” are included as part of the estimated liability.

At June 30, 2007, environmental reserves recorded in the condensed consolidated balance sheet totaled $360 million, which reflected the fair value of the estimated obligations. At June 30, 2007, the unescalated, undiscounted environmental reserve totaled approximately $384 million, leaving approximately $24 million to be accreted over time.

4.  
PENSION AND POSTRETIREMENT BENEFITS
With the acquisition of Phelps Dodge, FCX acquired trusteed, non-contributory pension plans covering substantially all of Phelps Dodge’s U.S. employees. The applicable plan design determines the manner in which benefits are calculated for any particular group of employees. With respect to certain of these plans, benefits are calculated based on final average monthly compensation and years of service. In the case of other plans, benefits are calculated based on a fixed amount for each year of service. Participants in the plans generally vest in their accrued benefits after five years of service. At the date of acquisition, Phelps Dodge had both overfunded and underfunded pension plans. The funded status of the overfunded plans was $129 million (representing the fair value of plans assets of approximately $1.36 billion less a projected benefit obligation of approximately $1.23 billion). The funded status of the underfunded plans was $(70) million (representing the fair value of plan assets of $11 million less a projected benefit obligation of $81 million). The majority of plan assets are invested in a diversified portfolio of stocks, bonds and cash and cash equivalents, which consist
 
13

Table of Contents
 
primarily of equity and fixed-income securities. At March 19, 2007, a discount rate of 5.78 percent and a wage increase assumption of 4.25 percent were used to estimate the projected benefit obligation, and the long-term expected rate of return on plan assets was 8.5 percent.

In addition to the pension benefits, Phelps Dodge provides postretirement medical and life insurance benefits for certain U.S. employees and, in some cases, employees of international subsidiaries. These postretirement benefits vary among plans, and many plans require contributions from retirees. The expected cost of providing such postretirement benefits is accrued during the years employees render the necessary service. At the date of acquisition, the funded status of the Phelps Dodge postretirement medical and life insurance benefits was $(80) million (representing the fair value of plan assets of $173 million less a benefit obligation of $253 million). The plan assets consist of two Voluntary Employees’ Beneficiary Association (VEBA) trusts, which FCX acquired through the acquisition of Phelps Dodge. One trust is dedicated to funding postretirement medical obligations and the other to funding postretirement life insurance obligations for eligible U.S. retirees. The majority of the assets of the VEBA trusts are invested in U.S. fixed-income securities. FCX’s funding policy provides that contributions to the VEBA trusts shall be at least sufficient to pay plan benefits as they come due. Additional contributions may be made from time to time. For participants not eligible to receive payments from the VEBA trusts, FCX’s funding policy provides that contributions shall be at least equal to the cash basis obligations. At March 19, 2007, a discount rate of 5.62 percent was used to estimate the accumulated postretirement benefit obligation for the medical plans and 5.66 percent for the retiree life insurance plan. The long-term expected rate of return on plan assets for the VEBA medical and life insurance trusts was 3.7 percent and 4.5 percent, respectively.

Net periodic benefit cost for pension and postretirement benefits for Phelps Dodge have been included in the condensed consolidated financial statements beginning March 20, 2007. The components of net periodic benefit cost for pension and postretirement benefits for all of FCX’s plans for the three-month periods ended June 30, 2007 and 2006, follow (in millions):
             
Phelps
 
 
FCX
 
PT Freeport Indonesia
 
Atlantic Copper
 
Dodge
 
 
2007
 
2006
 
2007
 
2006
 
2007
 
2006
 
2007
 
Service cost
$
 
$
 
$
1
 
$
1
 
$
 
$
 
$
7
 
Interest cost
 
1
   
1
   
2
   
1
   
1
   
1
   
22
 
Expected return on plan assets
 
   
   
(1
)
 
(1
)
 
   
   
(31
)
Amortization of prior service cost
 
1
   
1
   
   
1
   
   
   
 
Amortization of net actuarial loss
 
   
   
   
   
1
   
   
 
Net periodic benefit cost
$
2
 
$
2
 
$
2
 
$
2
 
$
2
 
$
1
 
$
(2
)

The components of net periodic benefit cost for pension and postretirement benefits for all of FCX’s plans for the six-month periods ended June 30, 2007 and 2006, follow (in millions):
             
Phelps
 
 
FCX
 
PT Freeport Indonesia
 
Atlantic Copper
 
Dodge
 
 
2007
 
2006
 
2007
 
2006
 
2007
 
2006
 
2007
 
Service cost
$
1
 
$
 
$
3
 
$
2
 
$
 
$
 
$
7
 
Interest cost
 
1
   
1
   
3
   
2
   
2
   
2
   
25
 
Expected return on plan assets
 
   
   
(2
)
 
(1
)
 
   
   
(34
)
Amortization of prior service cost
 
2
   
2
   
   
1
   
   
   
 
Amortization of net actuarial loss
 
   
   
   
   
1
   
1
   
 
Net periodic benefit cost
$
4
 
$
3
 
$
4
 
$
4
 
$
3
 
$
3
 
$
(2
)
 
14

Table of Contents
 
5.  
EARNINGS PER SHARE
FCX’s basic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the year. A reconciliation of net income and weighted-average common shares outstanding for purposes of calculating diluted net income per share for the three and six-month periods ended June 30, 2007 and 2006, follows (in millions, except per share amounts):

   
Three Months Ended
 
Six Months Ended
 
   
June 30,
 
June 30,
 
   
2007
 
2006
 
2007
 
2006
 
Net income before preferred dividends
 
$
1,168
 
$
382
 
$
1,661
 
$
649
 
Preferred dividends
   
(64
)
 
(15
)
 
(81
)
 
(30
)
Net income applicable to common stock
   
1,104
   
367
   
1,580
   
619
 
Plus income impact of assumed conversion of:
                         
5½% Convertible Perpetual Preferred Stock
   
15
   
15
   
30
   
30
 
   6¾% Mandatory Convertible Preferred Stock
   
49
   
   
51
   
 
7% Convertible Senior Notes
   
   
5
   
   
10
 
Diluted net income applicable to common stock
 
$
1,168
 
$
387
 
$
1,661
 
$
659
 
                           
Weighted average common shares outstanding
   
381
   
188
   
300
   
188
 
Add shares issuable upon conversion, exercise or vesting of:
                         
5½% Convertible Perpetual Preferred Stock
   
23
   
22
   
23
   
22
 
6¾% Mandatory Convertible Preferred Stock
   
39
   
   
21
   
 
7% Convertible Senior Notes
   
   
10
   
   
10
 
Dilutive stock options
   
2
   
1
   
1
   
1
 
Restricted stock
   
1
   
1
   
1
   
1
 
Weighted average common shares outstanding for purposes
                         
of calculating diluted net income per share
   
446
   
222
   
346
   
222
 
                           
Diluted net income per share of common stock
 
$
2.62
 
$
1.74
 
$
4.80
 
$
2.97
 
 
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. FCX’s convertible instruments are also excluded when including the conversion of these instruments increases reported diluted net income per share. A summary of the excluded amounts follows (in thousands, except exercise prices):
 
   
Three Months Ended
 
Six Months Ended
 
   
June 30,
 
June 30,
 
   
2007
 
2006
 
2007
 
2006
 
Weighted average outstanding options
   
169
   
1,006
   
568
   
842
 
Weighted average exercise price
 
$
78.92
 
$
63.77
 
$
67.71
 
$
63.77
 

15

Table of Contents
 
6.  
INVENTORIES
A summary of inventories, which were recorded using the weighted average cost method (except where otherwise indicated) and include the impact of purchase accounting adjustments (refer to Note 2), follows (in millions):

   
June 30,
 
December 31,
 
   
2007
 
2006
 
Mining Operations:
             
Raw materials
 
$
1
 
$
 
Work-in-process
   
117
   
11
 
Finished goodsa
   
970
   
4
 
Mill and leach stockpiles
   
850
   
 
Atlantic Copper:
 
 
         
Concentrates – First in, first out (FIFO)
 
 
81
 
 
189
 
Work-in-process – FIFO
   
254
 
 
168
 
Finished goods – FIFO
   
10
   
12
 
PDIC:
             
Raw materials
   
148
   
 
Work-in-process
   
13
   
 
Finished goods
   
81
   
 
Total product inventories
 
 
2,525
 
 
384
 
Total materials and supplies, netb
 
 
712
 
 
340
 
Total inventories
 
$
3,237
 
$
724
 
 
 
 
 
 
 
 
 
a.  
Finished goods inventory associated with mining operations primarily includes concentrates and cathodes.
b.  
Materials and supplies inventories are net of obsolescence reserves totaling $17 million at June 30, 2007, and $16 million at December 31, 2006.

7.  
TRUST ASSETS
A summary of FCX’s trust assets at June 30, 2007, which were acquired in connection with the acquisition of Phelps Dodge, follows (in millions):

Global reclamation and remediation
$
428
 
Financial assurance
 
99
a
Non-qualified retirement benefits
 
53
 
Change of control
 
32
 
Total trust assets
$
612
 

a.  
Represents legally restricted funds for the use of asset retirement obligation activities at Chino, Tyrone and Cobre (refer to Note 13 for further discussion of financial assurance requirements for these operations).

8.  
DEBT AND FINANCING TRANSACTIONS
At June 30, 2007, FCX had approximately $9.8 billion in debt, including $8.5 billion in acquisition debt, $0.9 billion in previously existing Phelps Dodge debt and $0.4 billion of previously existing FCX debt. In connection with financing its acquisition of Phelps Dodge, FCX used $2.5 billion of available cash (including cash acquired from Phelps Dodge) and funded the remainder with proceeds from borrowings under the $11.5 billion senior credit facility and proceeds from the offering of $6.0 billion in senior notes.

In accordance with its plan to reduce debt, following the close of the Phelps Dodge acquisition, FCX sold 47.15 million shares of common stock at $61.25 per share for net proceeds of approximately $2.8 billion and 28.75 million shares of 6¾% Mandatory Convertible Preferred Stock for net proceeds of approximately $2.8 billion (refer to Note 11 for further discussion of the 6¾% Mandatory Convertible Preferred Stock). The net
 
16

Table of Contents
 
proceeds from these transactions were used to reduce borrowings under the $11.5 billion senior credit facility, with $2.5 billion used to fully repay the senior term loan due March 2012 and the remaining $3.1 billion to partially repay the senior term loan due March 2014 (the Tranche B term loan). During the second quarter of 2007, FCX prepaid an additional $1.9 billion of debt under the Tranche B term loan.

A summary of financing activities for the first six months of 2007, and FCX’s outstanding debt balances at June 30, 2007, follows (in billions):

 
December 31,
 
Borrowings/
     
June 30,
 
 
2006
 
Additions
 
Repayments
 
2007
 
$11.5 billion senior credit facility:
                       
Senior term loan due 2012
$
 
$
2.5
a
$
(2.5
)
$
 
Senior term loan due 2014
 
   
7.5
a
 
(5.0
)
 
2.5
 
$1.5 billion revolving credit facilities
 
   
   
   
 
Senior Notes:
                       
10⅛% Notes due 2010
 
0.3
   
   
(0.3
)
 
 
6⅞% Notes due 2014
 
0.3
   
   
   
0.3
 
8¼% Notes due 2015
 
   
1.5
a
 
   
1.5
 
8⅜% Notes due 2017
 
   
3.5
a
 
   
3.5
 
   Senior floating rate notes due 2015
 
   
1.0
a
 
   
1.0
 
   Phelps Dodge Senior Notes
 
   
0.7
   
(0.1
)
 
0.6
 
Other
 
0.1
   
0.3
   
   
0.4
 
 
$
0.7
 
$
17.0
 
$
 (7.9
)
$
9.8
 
                         
a.  
Represents borrowings used to finance the acquisition of Phelps Dodge.

For the first six months of 2007, FCX recorded net charges totaling $135 million ($110 million to net income or $0.32 per share) for early extinguishment of debt. These net charges include $88 million ($75 million to net income) recorded in first-quarter 2007 and $30 million ($25 million to net income) recorded in second-quarter 2007 related to the accelerated recognition of deferred financing costs associated with the early repayment of amounts under the $11.5 billion senior credit facility. Also included is $17 million ($10 million to net income) recorded in second-quarter 2007 related to premiums paid and the accelerated recognition of deferred financing costs associated with the May 2007 redemption of FCX’s 10⅛% Senior Notes.

Additional information regarding the senior credit facility and senior notes used to finance the Phelps Dodge acquisition follows:

Senior Credit Facility. At the close of the Phelps Dodge acquisition, the senior credit facility consisted of a $2.5 billion term loan due March 2012, a $7.5 billion Tranche B term loan due March 2014 and $1.5 billion in revolving credit facilities due March 2012. The revolving credit facilities are composed of (i) a $1.0 billion revolving credit facility available to FCX and (ii) a $0.5 billion revolving credit facility available to both FCX and PT Freeport Indonesia, which represents an amendment to the FCX and PT Freeport Indonesia revolver that was scheduled to mature in 2009.

Interest on the revolving credit facilities currently accrues at the London Interbank Offered Rate (LIBOR) plus 1.00 percent, subject to an increase or decrease in the interest rate margin based on the credit rating assigned by Standard and Poor’s Rating Services (S&P) and Moody’s Investor Services (Moody’s). Prior to its refinancing, interest on the Tranche B term loan accrued at LIBOR plus 1.75 percent.

The senior credit facility also contains covenants, including limitations on indebtedness, liens, asset sales, prepayments of indebtedness and transactions with affiliates. Financial leverage ratios must be met in order to incur certain indebtedness and are required to be maintained when there are amounts drawn or letters of credits outstanding under the revolving credit facilities. The senior credit facility is guaranteed by certain wholly owned subsidiaries of FCX and is secured by the pledge of equity in substantially all of these subsidiary guarantors and certain other non-guarantor subsidiaries of FCX, and intercompany indebtedness owed to
 
17

Table of Contents
 
FCX. Borrowings by FCX and PT Freeport Indonesia under the $0.5 billion revolver are also secured with a pledge of 50.1 percent of the outstanding stock of PT Freeport Indonesia, over 90 percent of the assets of PT Freeport Indonesia and, with respect to borrowings by PT Freeport Indonesia, a pledge of the Contract of Work.

On July 10, 2007, FCX refinanced the remaining $2.5 billion balance outstanding under the Tranche B term loan with proceeds from a new senior term loan due March 2012 (the Tranche A term loan). Interest on the new Tranche A term loan accrues at LIBOR plus 1.00 percent, subject to an increase or decrease in the interest rate margin based on the credit rating assigned by S&P and Moody’s. The new Tranche A term loan requires minimum scheduled amortization payments of 10 percent per year, consisting of equal payments of $122.5 million on September 30 and March 31, with the first payment on September 30, 2007. In addition, certain terms and conditions of the senior credit facility were amended, including the elimination of certain collateral requirements. As a result of this transaction, FCX will record charges totaling approximately $36 million ($31 million to net income) in third-quarter 2007 related to the accelerated recognition of deferred financing costs associated with the extinguishment of the Tranche B term loan.

Senior Notes. Interest on the senior notes is payable semiannually on April 1 and October 1, with the first payment due October 1, 2007. Interest on the senior floating rate notes due April 2015 accrues at six-month LIBOR plus 3.25 percent. FCX may redeem some or all of the notes at its option at make-whole redemption prices, and afterwards at stated redemption prices. FCX may make these optional make-whole redemptions prior to April 1, 2009, for the senior floating rate notes; April 1, 2011, for the 8¼% Senior Notes; and April 1, 2012, for the 8⅜% Senior Notes. The indenture governing the notes contains restrictions, including restrictions on incurring debt, creating liens, selling assets, entering into certain transactions with affiliates, paying cash dividends on common stock, repurchasing or redeeming common or preferred equity, prepaying subordinated debt and making investments.

9.  
INCOME TAXES
FCX’s second-quarter 2007 income tax provision included taxes on international operations ($639 million) and U.S. taxes ($138 million). FCX’s income tax provision for the first six months of 2007 included taxes on international operations ($1.1 billion) and U.S. taxes ($92 million).

The difference between FCX’s consolidated effective income tax rate of approximately 37 percent for the first six months of 2007 and the U.S. federal statutory rate of 35 percent primarily was attributable to (i) withholding taxes incurred in connection with earnings from Indonesian and South American mining operations, (ii) income taxes incurred by PT Indocopper Investama, a wholly owned subsidiary of FCX whose only asset is its investment in PT Freeport Indonesia, and (iii) a U.S. foreign tax credit limitation, partly offset by a U.S. benefit for percentage depletion.

FCX’s income tax provision for second-quarter 2006 ($310 million) and for the first six months of 2006 ($532 million) primarily reflected taxes on PT Freeport Indonesia’s earnings. The difference between FCX’s effective income tax rate of approximately 43 percent for the first six months of 2006 and PT Freeport Indonesia’s Contract of Work rate of 35 percent primarily was attributable to withholding taxes incurred in connection with earnings from Indonesian mining operations and income taxes incurred by PT Indocopper Investama.

Effective January 1, 2007, FCX adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. With the adoption of FIN 48, FCX recognized a cumulative effect adjustment to increase beginning retained earnings of approximately $4 million. Following adoption of FIN 48, FCX no longer includes interest and penalties accrued on unrecognized tax benefits in its provision for income taxes; instead, interest and penalties are included in other income and expenses.

18

Table of Contents
A summary of the activities associated with the reserve for unrecognized tax benefits, interest and penalties for the period of adoption, follows (in millions):

   
Unrecognized
           
Three Months Ended March 31, 2007
 
Tax Benefit
 
Interest
 
Penalties
Balance at beginning of period
 
$
41
 
$
11
 
$
Additions:
                 
Acquisition of Phelps Dodge
   
220
   
6
   
2
Prior year tax positions
   
1
   
1
   
Balance, March 31, 2007
 
$
262
 
$
18
 
$
2

The reserve for unrecognized tax benefits of $262 million at March 31, 2007, includes $124 million ($116 million net of income tax benefits) that, if recognized, would reduce FCX’s provision for income taxes. There were no material changes to the reserves for unrecognized tax benefits during the second quarter of 2007.

For the first quarter of 2006, interest and penalties accrued on unrecognized tax benefits and recorded in the provision for income taxes totaled $3 million.

FCX or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The tax years of FCX and its significant subsidiaries that remain subject to examination are as follows:

Jurisdiction
Years Under Examination
Additional Open Years
U.S. Federal
1997-2005
2006
Indonesia
2002-2006
Peru
2003
1999-2002, 2004-2006
Chile
2003-2006
Arizona
2002-2006
New Mexico
2003-2006

FCX has not identified any uncertain tax position for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly increase or decrease within the 12-month period following the date of adoption of FIN 48.

10.  
INTEREST EXPENSE, NET
Interest expense, net, includes capitalized interest of approximately $50 million in the second quarter of 2007, approximately $2 million in the second quarter of 2006, approximately $57 million for the first six months of 2007 and approximately $4 million for the first six months of 2006. The majority of the capitalized interest in 2007 relates to development projects at Safford, Arizona, and Tenke Fungurume.

11.  
STOCKHOLDERS’ EQUITY AND STOCK AWARD PLANS
Preferred Stock. On March 28, 2007, FCX completed the sale of 28.75 million shares of 6¾% Mandatory Convertible Preferred Stock, with a liquidation preference of $100 per share. The 6¾% Mandatory Convertible Preferred Stock will automatically convert on May 10, 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. The conversion rate per $100 face amount of mandatory preferred will be 1.6327 when the FCX common stock price is at or below $61.25 and 1.3605 when the FCX common stock price is at or above $73.50. For FCX common stock prices between these levels, the conversion rate will be equal to $100 divided by FCX’s common stock price. Prior to May 1, 2010, holders may convert their 6¾% Mandatory Convertible Preferred Stock at a conversion rate of 1.3605. Dividends are payable quarterly on February 1, May 1, August 1 and November 1, with the first dividend paid on August 1, 2007.

Stock Award Plans.On July 10, 2007, FCX’s stockholders approved amendments to FCX's 2006 Stock Incentive Plan (the Plan). The purpose of the Plan is to motivate and reward key personnel with stock based-awards at an appropriate level. As a result of the acquisition of Phelps Dodge, the number of employees and consultants who are now eligible to receive awards under our incentive plans increased by over 200 people.
 
19

Table of Contents
 
Due in part to our increased employee population, the FCX Board of Directors believed that the number of shares available for grant under FCX's incentive plans was inadequate to address FCX's short-term needs. The amendments (i) increase the number of shares available for grant under the Plan from 12 million to 37 million shares, (ii) increase the sublimits under the Plan regarding the number of shares that may be granted as restricted stock, restricted stock units and other stock-based awards and (iii) extend the term of the amended and restated Plan to July 10, 2017.

During second-quarter 2007, FCX granted approx