10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
Commission File Number: 001-11307-01
Freeport-McMoRan Inc.
(Exact name of registrant as specified in its charter)
Delaware
74-2480931
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
333 North Central Avenue
 
Phoenix, AZ
85004-2189
(Address of principal executive offices)
(Zip Code)
(602) 366-8100
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes  o No

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

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

Large accelerated filer þ         Accelerated filer o          Non-accelerated filer o         Smaller reporting company o

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

On October 30, 2015, there were issued and outstanding 1,155,870,213 shares of the registrant’s common stock, par value $0.10 per share.



FREEPORT-McMoRan INC.

TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents                 


Part I.
FINANCIAL INFORMATION

Item 1.
Financial Statements.

FREEPORT-McMoRan INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 
September 30,
2015
 
December 31,
2014
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
338

 
$
464

Trade accounts receivable
626

 
953

Other accounts receivable
1,276

 
1,610

Inventories:
 
 
 
Materials and supplies, net
2,071

 
1,886

Mill and leach stockpiles
1,895

 
1,914

Product
1,379

 
1,561

Other current assets
570

 
657

Total current assets
8,155

 
9,045

Property, plant, equipment and mining development costs, net
27,355

 
26,220

Oil and gas properties, net - full cost method
 
 
 
Subject to amortization, less accumulated amortization
3,002

 
9,187

Not subject to amortization
7,568

 
10,087

Long-term mill and leach stockpiles
2,326

 
2,179

Other assets
1,977

 
1,956

Total assets
$
50,383

 
$
58,674

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
3,445

 
$
3,653

Current portion of debt
906

 
478

Current portion of environmental and asset retirement obligations
336

 
296

Accrued income taxes
75

 
410

Dividends payable
65

 
335

Total current liabilities
4,827

 
5,172

Long-term debt, less current portion
19,792

 
18,371

Deferred income taxes
4,363

 
6,398

Environmental and asset retirement obligations, less current portion
3,708

 
3,647

Other liabilities
1,727

 
1,861

Total liabilities
34,417

 
35,449

 
 
 
 
Redeemable noncontrolling interest
761

 
751

 
 
 
 
Equity:
 
 
 
Stockholders’ equity:
 
 
 
Common stock
127

 
117

Capital in excess of par value
23,335

 
22,281

(Accumulated deficit) retained earnings
(8,305
)
 
128

Accumulated other comprehensive loss
(509
)
 
(544
)
Common stock held in treasury
(3,702
)
 
(3,695
)
Total stockholders’ equity
10,946

 
18,287

Noncontrolling interests
4,259

 
4,187

Total equity
15,205

 
22,474

Total liabilities and equity
$
50,383

 
$
58,674


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

3

Table of Contents                 


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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
Revenues
$
3,681

 
$
5,696

 
$
12,082

 
$
16,203

Cost of sales:
 
 
 
 
 
 
 
Production and delivery
2,893

 
3,152

 
8,653

 
8,971

Depreciation, depletion and amortization
888

 
945

 
2,717

 
2,924

Impairment of oil and gas properties
3,652

 
308

 
9,442

 
308

Total cost of sales
7,433


4,405


20,812

 
12,203

Selling, general and administrative expenses
124

 
158

 
429

 
457

Mining exploration and research expenses
32

 
29

 
101

 
93

Environmental obligations and shutdown costs
37

 
18

 
61

 
100

Net gain on sales of assets

 
(46
)
 
(39
)
 
(46
)
Total costs and expenses
7,626

 
4,564

 
21,364

 
12,807

Operating (loss) income
(3,945
)
 
1,132

 
(9,282
)
 
3,396

Interest expense, net
(163
)
 
(158
)
 
(458
)
 
(483
)
Insurance and other third-party recoveries

 

 
92

 

Net gain on early extinguishment of debt

 
58

 

 
63

Other (expense) income, net
(40
)
 
23

 
(88
)
 
48

(Loss) income before income taxes and equity in affiliated companies' net losses
(4,148
)
 
1,055

 
(9,736
)
 
3,024

Benefit from (provision for) income taxes
360

 
(349
)
 
1,742

 
(1,034
)
Equity in affiliated companies’ net losses
(2
)
 
(2
)
 
(1
)
 

Net (loss) income
(3,790
)
 
704

 
(7,995
)
 
1,990

Net income attributable to noncontrolling interests
(29
)
 
(142
)
 
(129
)
 
(416
)
Preferred dividends attributable to redeemable noncontrolling interest
(11
)
 
(10
)
 
(31
)
 
(30
)
Net (loss) income attributable to common stockholders
$
(3,830
)
 
$
552

 
$
(8,155
)
 
$
1,544

 
 
 
 
 
 
 
 
Net (loss) income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(3.58
)
 
$
0.53

 
$
(7.77
)
 
$
1.48

Diluted
$
(3.58
)
 
$
0.53

 
$
(7.77
)
 
$
1.47

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
1,071

 
1,039

 
1,050

 
1,039

Diluted
1,071

 
1,046

 
1,050

 
1,045

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.0500

 
$
0.3125

 
$
0.2605

 
$
0.9375

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


4

Table of Contents                 


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

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In millions)
Net (loss) income
 
$
(3,790
)
 
$
704

 
$
(7,995
)
 
$
1,990

 
 
 
 
 
 
 
 
 
Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
 
Defined benefit plans:
 
 
 
 
 
 
 
 
Amortization of unrecognized amounts included in net periodic benefit costs
 
8

 
5

 
24

 
12

Foreign exchange gains (losses)
 
7

 
2

 
12

 
(1
)
Other comprehensive income
 
15

 
7

 
36

 
11

 
 
 
 
 
 
 
 
 
Total comprehensive (loss) income
 
(3,775
)
 
711

 
(7,959
)
 
2,001

Total comprehensive income attributable to noncontrolling interests
 
(30
)
 
(142
)
 
(130
)
 
(416
)
Preferred dividends attributable to redeemable noncontrolling interest
 
(11
)
 
(10
)
 
(31
)
 
(30
)
Total comprehensive (loss) income attributable to common stockholders
 
$
(3,816
)
 
$
559

 
$
(8,120
)
 
$
1,555


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




5

Table of Contents                 


FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
 
 
(In millions)
 
Cash flow from operating activities:
 
 
 
 
Net (loss) income
$
(7,995
)
 
$
1,990

 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
2,717

 
2,924

 
Impairment of oil and gas properties
9,442

 
308

 
Inventory adjustments
154

 

 
Net gain on sales of assets
(39
)
 
(46
)
 
Net (gains) losses on crude oil and natural gas derivative contracts
(87
)
 
56

 
Net charges for environmental and asset retirement obligations, including accretion
174

 
146

 
Payments for environmental and asset retirement obligations
(135
)
 
(134
)
 
Net gain on early extinguishment of debt

 
(63
)
 
Deferred income taxes
(1,926
)
 
107

 
Increase in long-term mill and leach stockpiles
(183
)
 
(182
)
 
Other, net
144

 
106

 
Changes in working capital and other tax payments, excluding amounts from acquisitions and dispositions:
 
 
 
 
Accounts receivable
990

 
200

 
Inventories
83

 
(267
)
 
Other current assets
(13
)
 
(26
)
 
Accounts payable and accrued liabilities
(150
)
 
(379
)
 
Accrued income taxes and changes in other tax payments
(568
)
 
(227
)
 
Net cash provided by operating activities
2,608

 
4,513

 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
Capital expenditures:
 
 
 
 
North America copper mines
(308
)
 
(815
)
 
South America
(1,339
)
 
(1,278
)
 
Indonesia
(660
)
 
(722
)
 
Africa
(166
)
 
(100
)
 
Molybdenum mines
(10
)
 
(45
)
 
United States oil and gas operations
(2,430
)
 
(2,392
)
 
Other
(142
)
 
(63
)
 
Acquisitions of Deepwater Gulf of Mexico interests

 
(1,421
)
 
Net proceeds from sale of Eagle Ford shale assets

 
2,971

 
Other, net
114

 
221

 
Net cash used in investing activities
(4,941
)
 
(3,644
)
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
Proceeds from debt
6,552

 
3,346

 
Repayments of debt
(4,693
)
 
(4,196
)
 
Net proceeds from sale of common stock
999

 

 
Cash dividends and distributions paid:
 
 
 
 
Common stock
(547
)
 
(979
)
 
Noncontrolling interests
(89
)
 
(365
)
 
Stock-based awards net (payments) proceeds, including excess tax benefit
(8
)
 
7

 
Debt financing costs and other, net
(7
)
 
(9
)
 
Net cash provided by (used in) financing activities
2,207

 
(2,196
)
 
 
 
 
 
 
Net decrease in cash and cash equivalents
(126
)
 
(1,327
)
 
Cash and cash equivalents at beginning of year
464

 
1,985

 
Cash and cash equivalents at end of period
$
338

 
$
658

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

6

Table of Contents                 


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

 
Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
Retained
Earnings(Accum-ulated Deficit)
 
Accumu-
lated
Other Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total
Stock-holders' Equity
 
 
 
 
 
Number
of
Shares
 
At Par
Value
 
Capital in
Excess of
Par Value
 
 
 
Number
of
Shares
 
At
Cost
 
 
Non-
controlling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Balance at December 31, 2014
1,167

 
$
117

 
$
22,281

 
$
128

 
$
(544
)
 
128

 
$
(3,695
)
 
$
18,287

 
$
4,187

 
$
22,474

Sale of common stock
98

 
10

 
989

 

 

 

 

 
999

 

 
999

Exercised and issued stock-based awards
1

 

 
3

 

 

 

 

 
3

 

 
3

Stock-based compensation

 

 
70

 

 

 

 

 
70

 
7

 
77

Reserve of tax benefit for stock-based awards

 

 
(4
)
 

 

 

 

 
(4
)
 

 
(4
)
Tender of shares for stock-based awards

 

 

 

 

 

 
(7
)
 
(7
)
 

 
(7
)
Dividends on common stock

 

 

 
(278
)
 

 

 

 
(278
)
 

 
(278
)
Dividends to noncontrolling interests

 

 

 

 

 

 

 

 
(68
)
 
(68
)
Noncontrolling interests' share of contributed capital in subsidiary

 

 
(4
)
 

 

 

 

 
(4
)
 
3

 
(1
)
Net loss attributable to common stockholders

 

 

 
(8,155
)
 

 

 

 
(8,155
)
 

 
(8,155
)
Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

 
129

 
129

Other comprehensive income

 

 

 

 
35

 

 

 
35

 
1

 
36

Balance at September 30, 2015
1,266

 
$
127

 
$
23,335

 
$
(8,305
)
 
$
(509
)
 
128

 
$
(3,702
)
 
$
10,946

 
$
4,259

 
$
15,205

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


7

Table of Contents                 


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

NOTE 1. GENERAL INFORMATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). Therefore, this information should be read in conjunction with Freeport-McMoRan Inc.'s (FCX) consolidated financial statements and notes contained in its annual report on Form 10-K for the year ended December 31, 2014. The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. With the exception of the oil and gas properties impairment discussed below and the related tax charges to establish a deferred tax valuation allowance (refer to Note 5), the Tyrone mine impairment and special retirement benefits and restructuring charges discussed below, and adjustments to inventories (refer to Note 4), all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the quarter and nine months ended September 30, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

Oil and Gas Properties. Under the U.S. Securities and Exchange Commission's (SEC) full cost accounting rules, FCX reviews the carrying value of its oil and gas properties each quarter on a country-by-country basis. Under these rules, capitalized costs of oil and gas properties (net of accumulated depreciation, depletion, amortization and impairment, and related deferred income taxes) for each cost center may not exceed a “ceiling” equal to:
the present value, discounted at 10 percent, of estimated future net cash flows from the related proved oil and natural gas reserves, net of estimated future income taxes; plus
the cost of the related unproved properties not being amortized; plus
the lower of cost or estimated fair value of the related unproved properties included in the costs being amortized (net of related tax effects).

These rules require that FCX price its future oil and gas production at the twelve-month average of the first-day-of-the-month historical reference prices as adjusted for location and quality differentials. FCX's reference prices are West Texas Intermediate (WTI) for oil and the Henry Hub spot price for natural gas. Such prices are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts. The reserve estimates exclude the effect of any crude oil derivatives FCX has in place. The estimated future net cash flows also exclude future cash outflows associated with settling asset retirement obligations included in the net book value of the oil and gas properties. The rules require an impairment if the capitalized costs exceed this “ceiling.”

At September 30, 2015, and for the previous two quarters of 2015, net capitalized costs with respect to FCX's proved oil and gas properties exceeded the related ceiling test limitation; therefore, impairment charges of $3.7 billion in third-quarter 2015 and $9.4 billion for the first nine months of 2015 were recorded, primarily because of the lower twelve-month average of the first-day-of-the-month historical reference oil price and additional capitalized costs. The SEC requires that the twelve-month average of the first-day-of-the-month historical reference oil price be used in determining the ceiling amount under its full cost accounting rules. The twelve-month average price (using WTI as the reference oil price) was $59.21 per barrel at September 30, 2015, compared with $71.68 per barrel at June 30, 2015.

FCX periodically (and at least annually) assesses the carrying value of its unevaluated properties to determine whether impairment has occurred. Following a review of the carrying values of unevaluated properties during third-quarter 2015, FCX determined that the carrying value of its unevaluated properties in the onshore California area was impaired, primarily resulting from declines in oil prices. As a result, $837 million of costs were transferred to the full cost pool, which was included in the September 30, 2015, ceiling test discussed above.


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Table of Contents                 


The fair value estimates for the unevaluated properties in the onshore California area were based on expected future cash flows based on estimated crude oil and natural gas forward prices as of September 30, 2015; risk adjusted probable and possible reserve quantities; costs to produce and develop reserves; and appropriate discount rates. Crude oil prices and FCX's estimates of oil reserves at September 30, 2015, represented the most significant assumptions used in the evaluation of the carrying value of these unevaluated properties.

Mining Operations. Because of the recent decline in commodity prices, FCX made adjustments to its operating plans for its mining operations in third-quarter 2015. Although FCX’s long-term strategy of developing its mining resources to their full potential remains in place, the decline in copper and molybdenum prices has limited FCX’s ability to invest in growth projects and caused FCX to make adjustments to its near-term plans. FCX responded to the decline in commodity prices 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 primarily to reflect: (a) suspension of mining operations at the Miami mine in Arizona; (b) a 50 percent reduction in mining rates at the Tyrone mine in New Mexico; (c) adjustments to mining rates at other North America copper mines; (d) an approximate 50 percent reduction in mining and stacking rates at the El Abra mine in Chile; (e) a 35 percent reduction in molybdenum production volumes at the Henderson primary molybdenum mine in Colorado; (f) capital cost reductions, including project deferrals associated with future development and expansion opportunities at the Tenke Fungurume minerals district in the Democratic Republic of Congo in Africa; and (g) reductions in operating, administrative and exploration costs, including workforce reductions.

During October 2015, FCX initiated a plan to reduce operating rates at its Sierrita mine in Arizona in response to low copper and molybdenum prices. Initially, the plan involves operating the Sierrita mine at 50 percent of its current operating rate. FCX is also evaluating the economics of a full shutdown.

In connection with the decline in copper and molybdenum prices and the revised operating plans discussed above, FCX evaluated its long-lived assets, other than indefinite-lived intangible assets, for impairment as of September 30, 2015. Indefinite-lived intangible assets are evaluated annually as of December 31. FCX’s long-lived asset impairment evaluations required FCX to make several assumptions in determining estimates of future cash flows of its individual mining operations, including: near- and long-term metal price assumptions; estimates of commodity-based and other input costs; proven and probable mineral reserves estimates, including the timing and costs to develop and produce the reserves; and the use of appropriate current escalation and discount rates. Projected long-term average metal prices represented the most significant assumption used in the cash flow estimates.

FCX’s evaluation of long-lived assets (other than indefinite-lived intangible assets) resulted in the recognition of a charge to production costs for the impairment of the Tyrone mine totaling $59 million in third-quarter 2015. As a result of the third-quarter 2015 revisions to its operating plans, FCX also recorded charges to production costs of $36 million in third-quarter 2015 related to special retirement benefits and restructuring charges, primarily for employee severance and benefit costs. Refer to Note 10 for long-lived asset impairments and restructuring charges by business segment.

NOTE 2. ACQUISITIONS AND DISPOSITIONS
Eagle Ford Disposition. On June 20, 2014, FCX completed the sale of its Eagle Ford shale assets to a subsidiary of Encana Corporation for cash consideration of $3.1 billion, before closing adjustments from the April 1, 2014, effective date. Under full cost accounting rules, the proceeds were recorded as a reduction of capitalized oil and gas properties, with no gain or loss recognition, except for $62 million of deferred tax expense recorded through September 30, 2014, in connection with the allocation of $221 million of goodwill (for which deferred taxes were not previously provided) to the Eagle Ford shale assets. Approximately $1.3 billion of proceeds from this transaction was placed in a like-kind exchange escrow and was used to reinvest in additional Deepwater Gulf of Mexico (GOM) oil and gas interests, as discussed below and in Note 2 of FCX's annual report on Form 10-K for the year ended December 31, 2014. The remaining proceeds were used to repay debt.


9

Table of Contents                 


Deepwater GOM Acquisitions. On June 30, 2014, FCX completed the acquisition of interests in the Deepwater GOM from a subsidiary of Apache Corporation, including interests in the Lucius and Heidelberg oil fields and several exploration leases, for $918 million ($451 million for oil and gas properties subject to amortization and $477 million for costs not subject to amortization, including transaction costs and $10 million of asset retirement costs). The Deepwater GOM acquisition was funded by the like-kind exchange escrow.

On September 8, 2014, FCX completed the acquisition of additional Deepwater GOM interests for $496 million ($509 million for oil and gas properties not subject to amortization, including purchase price adjustments and transaction costs), including an interest in the Vito oil discovery in the Mississippi Canyon area and a significant lease position in the Vito basin area. This acquisition was funded in part with the remaining $414 million of funds from the like-kind exchange escrow.

NOTE 3. EARNINGS PER SHARE
FCX’s basic net (loss) income per share of common stock was computed by dividing net (loss) income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. Diluted net income per share of common stock was computed using the most dilutive of (a) the two-class method or (b) the treasury stock method. Under the two-class method, net income is allocated to each class of common stock and participating securities as if all of the earnings for the period had been distributed. FCX’s participating securities consist of vested restricted stock units (RSUs) for which the underlying common shares are not yet issued and entitle holders to non-forfeitable dividends.

A reconciliation of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating basic and diluted net (loss) income per share follows (in millions, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
Net (loss) income
$
(3,790
)
 
$
704

 
$
(7,995
)
 
$
1,990

 
Net income attributable to noncontrolling interests
(29
)
 
(142
)
 
(129
)
 
(416
)
 
Preferred dividends on redeemable noncontrolling interest
(11
)
 
(10
)
 
(31
)
 
(30
)
 
Undistributed earnings allocable to participating securities
(3
)
 
(2
)
 
(3
)
 
(4
)
 
Net (loss) income allocable to common stockholders
$
(3,833
)
 
$
550

 
$
(8,158
)
 
$
1,540

 
 
 
 
 
 
 
 
 
 
Basic weighted-average shares of common stock outstanding
1,071

 
1,039

 
1,050

 
1,039

 
Add shares issuable upon exercise or vesting of dilutive stock options and RSUs

a 
7

a 

a 
6

a 
Diluted weighted-average shares of common stock outstanding
1,071

 
1,046

 
1,050

 
1,045

 
 
 
 
 
 
 
 
 
 
Basic net (loss) income per share attributable to common stockholders
$
(3.58
)
 
$
0.53

 
$
(7.77
)
 
$
1.48

 
Diluted net (loss) income per share attributable to common stockholders
$
(3.58
)
 
$
0.53

 
$
(7.77
)
 
$
1.47

 
a.
Excludes approximately 7 million shares of common stock for third-quarter 2015, 5 million for third-quarter 2014, 10 million for the nine months ended September 30, 2015, and 3 million for the nine months ended September 30, 2014, associated with outstanding stock options with exercise prices less than the average market price of FCX's common stock and RSUs that were anti-dilutive.

Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period are excluded from the computation of diluted net income per share of common stock. Excluded stock options totaled 48 million for third-quarter 2015, 25 million for third-quarter 2014, 45 million for the nine months ended September 30, 2015, and 28 million for the nine months ended September 30, 2014.


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NOTE 4. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES
The components of inventories follow (in millions):
 
September 30,
2015
 
December 31, 2014
 
Current inventories:
 
 
 
 
Total materials and supplies, neta
$
2,071

 
$
1,886

 
 
 
 
 
 
Mill stockpiles
$
118

 
$
86

 
Leach stockpiles
1,777

 
1,828

 
Total current mill and leach stockpiles
$
1,895

 
$
1,914

 
 
 
 
 
 
Raw materials (primarily concentrates)
$
281

 
$
288

 
Work-in-process
102

 
174

 
Finished goods
996

 
1,099

 
Total product inventories
$
1,379

 
$
1,561

 
 
 
 
 
 
Long-term inventories:
 
 
 
 
Mill stockpiles
$
444

 
$
360

 
Leach stockpiles
1,882

 
1,819

 
Total long-term mill and leach stockpilesb
$
2,326

 
$
2,179

 
a.
Materials and supplies inventory was net of obsolescence reserves totaling $26 million at September 30, 2015, and $20 million at December 31, 2014.
b.
Estimated metals in stockpiles not expected to be recovered within the next 12 months.

Beginning in third-quarter 2015, FCX adopted new accounting guidance for the subsequent measurement of inventories (refer to Note 12), which resulted in a change in accounting principle, whereby inventories are stated at the lower of weighted-average cost or net realizable value. Prior to third-quarter 2015, FCX's inventories were stated at the lower of weighted-average cost or market.

FCX recorded charges to production costs for adjustments to inventory carrying values of $91 million ($37 million for molybdenum inventories and $54 million for copper inventories) for third-quarter 2015 and $154 million ($89 million for molybdenum inventories and $65 million for copper inventories) for the first nine months of 2015, primarily because of lower molybdenum and copper prices (refer to Note 10 for inventory adjustments by business segment).

NOTE 5. INCOME TAXES
Variations in the relative proportions of jurisdictional income result in fluctuations to FCX's consolidated effective income tax rate. FCX’s consolidated effective income tax rate was 18 percent for the first nine months of 2015 and 34 percent for the first nine months of 2014. Geographic sources of FCX's benefit from (provision for) income taxes follow (in millions):
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
U.S. operations
$
309

a 
$
(38
)
 
$
2,020

a 
$
(323
)
b 
International operations
51

 
(311
)
c 
(278
)
 
(711
)
c 
Total
$
360

 
$
(349
)
 
$
1,742

 
$
(1,034
)
 
a.
As a result of the impairment to U.S. oil and gas properties, FCX recorded tax charges of $1.2 billion for third-quarter 2015 and $2.0 billion for the first nine months of 2015 to establish a valuation allowance primarily against U.S. federal alternative minimum tax credits and foreign tax credits, partly offset by a tax benefit of $56 million related to the impairment of the Morocco oil and gas properties. Excluding these charges, FCX's consolidated effective income tax rate was 38 percent for the first nine months of 2015.
b.
FCX recognized a $62 million charge for deferred taxes recorded in connection with the allocation of goodwill to the sale of Eagle Ford shale assets.
c.
Included a $54 million charge related to changes in Chilean tax rules.

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During third-quarter 2015, PT Freeport Indonesia's (PT-FI) Delaware domestication was terminated. As a result, PT-FI will no longer be a U.S. income tax filer, and tax attributes related to PT-FI, which currently are fully reserved with a related valuation allowance, will no longer be available for use within FCX's U.S. federal consolidated income tax return. PT-FI remains a limited liability company organized under Indonesian law.

NOTE 6. DEBT AND EQUITY TRANSACTIONS
Debt Transactions. At September 30, 2015, FCX had $20.7 billion in debt, which included additions for unamortized fair value adjustments of $218 million (primarily from the oil and gas acquisitions in 2013), and is net of reductions attributable to unamortized net discounts of $20 million and unamortized debt issuance costs of $111 million. Refer to Note 12 for discussion of a change in the presentation of debt issuance costs.

In February 2015, FCX's unsecured revolving credit facility and $4.0 billion bank term loan (Term Loan) were modified to amend the maximum total leverage ratio. In addition, the Term Loan amortization schedule was extended such that, as amended, the Term Loan’s scheduled payments total $205 million in 2016, $272 million in 2017, $1.0 billion in 2018, $313 million in 2019 and $1.3 billion in 2020, compared with the previous amortization schedule of $650 million in 2016, $200 million in 2017 and $2.2 billion in 2018.

At September 30, 2015, $458 million was outstanding and $42 million of letters of credit were issued under FCX's revolving credit facility, resulting in availability of approximately $3.5 billion, of which approximately $1.5 billion could be used for additional letters of credit.

At September 30, 2015, $1.5 billion was outstanding and no letters of credit were issued under Sociedad Minera Cerro Verde S.A.A.'s (Cerro Verde, FCX's mining subsidiary in Peru) credit facility, resulting in availability of $301 million. Cerro Verde's five-year, $1.8 billion senior unsecured credit facility is nonrecourse to FCX and the other shareholders of Cerro Verde.

In December 2014, Cerro Verde entered into a loan agreement with its shareholders for borrowings up to $800 million. Cerro Verde can designate all or a portion of the shareholder loans as subordinated. If the loans are not designated as subordinated, they bear interest at the London Interbank Offered Rate plus the current spread on Cerro Verde’s senior unsecured committed credit facility. If they are designated as subordinated, they bear interest at the same rate plus 0.5 percent. The loans mature on December 22, 2019, unless at that time there is senior financing associated with the Cerro Verde expansion project that is senior to the shareholder loans, in which case the shareholder loans mature two years following the maturity of the senior financing. During third-quarter 2015, Cerro Verde borrowed $100 million under these shareholder loans (which included $57 million from Freeport Minerals Corporation, a wholly owned subsidiary of FCX), and this amount remained outstanding as of September 30, 2015.

In July 2014, FCX redeemed $1.7 billion of the aggregate principal amount of FCX Oil & Gas Inc.'s (FM O&G, FCX's oil and gas subsidiary) outstanding senior notes, which included $263 million for the 6.125% Senior Notes due 2019, $525 million for the 6½% Senior Notes due 2020, $350 million for the 6.75% Senior Notes due 2022 and $525 million for the 6⅞% Senior Notes due 2023. At the redemption date, these senior notes had an aggregate book value of $1.8 billion, which included purchase accounting fair value adjustments of $167 million. Holders of these senior notes received the principal amount together with the redemption premium and accrued and unpaid interest to the redemption date. As a result of these redemptions, FCX recorded a gain on early extinguishment of debt of $58 million in third-quarter 2014.

In April 2014, FCX redeemed $210 million of the aggregate principal amount of FM O&G's outstanding 6.625% Senior Notes due 2021. Holders of these senior notes received the principal amount together with the redemption premium and accrued and unpaid interest to the redemption date. As a result of the redemption, FCX recorded a gain on early extinguishment of debt of $6 million in second-quarter 2014.

In accordance with the terms of the senior notes, the April 2014 and July 2014 redemptions were funded with cash contributions to FM O&G by FCX in exchange for additional equity, which is eliminated in the consolidated financial statements.

Consolidated interest expense (excluding capitalized interest) totaled $217 million in third-quarter 2015, $212 million in third-quarter 2014, $642 million for the first nine months of 2015 and $661 million for the first nine months of 2014. Capitalized interest added to property, plant, equipment and mining development costs, net, totaled $42 million in third-quarter 2015, $34 million in third-quarter 2014, $134 million for the first nine months of 2015 and

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$113 million for the first nine months of 2014. Capitalized interest added to oil and gas properties not subject to amortization totaled $12 million in third-quarter 2015, $20 million in third-quarter 2014, $50 million for the first nine months of 2015 and $65 million for the first nine months of 2014.

Equity Transactions. In September 2015, FCX completed a $1.0 billion at-the-market equity program and announced an additional $1.0 billion at-the-market equity program. Through September 30, 2015, FCX sold 97.5 million shares of its common stock at an average price of $10.35 per share under these programs, which generated gross proceeds of $1.01 billion (net proceeds of $1.00 billion after commissions of $10 million and expenses). From October 1, 2015, through November 5, 2015, FCX sold 34.1 million shares of its common stock at an average price of $12.15 per share, which generated gross proceeds of $414 million (net proceeds of $410 million after commissions of $4 million and expenses). FCX used the net proceeds for general corporate purposes, including the repayment of amounts outstanding under its revolving credit facility and other borrowings, and the financing of working capital and capital expenditures. At October 30, 2015, FCX had 1.2 billion shares of common stock outstanding.

On September 30, 2015, FCX's Board of Directors (the Board) declared a dividend of $0.05 per share, which was paid on November 2, 2015, to common shareholders of record at the close of business on October 15, 2015.

NOTE 7. FINANCIAL INSTRUMENTS
FCX does not purchase, hold or sell derivative financial instruments unless there is an existing asset or obligation, or it anticipates a future activity that is likely to occur and will result in exposure to market risks, which FCX intends to offset or mitigate. FCX does not enter into any derivative financial instruments for speculative purposes, but has entered into derivative financial instruments in limited instances to achieve specific objectives. These objectives principally relate to managing risks associated with commodity price changes, foreign currency exchange rates and interest rates.

Commodity Contracts.  From time to time, FCX has entered into derivative contracts to hedge the market risk associated with fluctuations in the prices of commodities it purchases and sells. As a result of the acquisition of the oil and gas business in 2013, FCX assumed a variety of crude oil and natural gas commodity derivatives to hedge the exposure to the volatility of crude oil and natural gas commodity prices. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As of September 30, 2015, and December 31, 2014, FCX had no price protection contracts relating to its mine production. A discussion of FCX’s derivative contracts and programs follows.

Derivatives Designated as Hedging Instruments – Fair Value Hedges
Copper Futures and Swap Contracts. Some of FCX’s U.S. copper rod customers request a fixed market price instead of the Commodity Exchange Inc. (COMEX), a division of the New York Mercantile Exchange, average copper price in the month of shipment. FCX hedges this price exposure in a manner that allows it to receive the COMEX average price in the month of shipment while the customers pay the fixed price they requested. FCX accomplishes this by entering into copper futures or swap contracts. Hedging gains or losses from these copper futures and swap contracts are recorded in revenues. FCX did not have any significant gains or losses during the quarters or nine months ended September 30, 2015 and 2014, resulting from hedge ineffectiveness. At September 30, 2015, FCX held copper futures and swap contracts that qualified for hedge accounting for 59 million pounds at an average contract price of $2.46 per pound, with maturities through September 2017.

A summary of gains (losses) recognized in revenues for derivative financial instruments related to commodity contracts that are designated and qualify as fair value hedge transactions, along with the unrealized gains (losses) on the related hedged item follows (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Copper futures and swap contracts:
 
 
 
 
 
 
 
Unrealized gains (losses):
 
 
 
 
 
 
 
Derivative financial instruments
$
(2
)
 
$
(10
)
 
$

 
$
(10
)
Hedged item – firm sales commitments
2

 
10

 

 
10

 
 
 
 
 
 
 
 
Realized (losses) gains:
 
 
 
 
 
 
 
Matured derivative financial instruments
(12
)
 
1

 
(23
)
 
(3
)

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Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. As described in Note 1 to FCX's annual report on Form 10-K for the year ended December 31, 2014, under “Revenue Recognition,” certain FCX copper concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on the London Metal Exchange (LME) copper price or the COMEX copper price and the London Bullion Market Association (London) gold price at the time of shipment as specified in the contract. Similarly, FCX purchases copper under contracts that provide for provisional pricing. FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host sales agreements since the contracts do not allow for net settlement and always result in physical delivery. Sales and purchases with a provisional sales price contain an embedded derivative (i.e., the price settlement mechanism is settled after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale or purchase of the metals contained in the concentrates or cathodes at the then-current LME or COMEX copper price or the London gold price as defined in the contract. Mark-to-market price fluctuations from these embedded derivatives are recorded through the settlement date and are reflected in revenues for sales contracts and in cost of sales as production and delivery costs for purchase contracts.

A summary of FCX’s embedded commodity derivatives at September 30, 2015, follows:
 
Open Positions
 
Average Price
Per Unit
 
Maturities Through
 
 
Contract
 
Market
 
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
536

 
$
2.45

 
$
2.34

 
March 2016
Gold (thousands of ounces)
149

 
1,125

 
1,118

 
December 2015
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
87

 
2.45

 
2.35

 
January 2016

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

The crude oil options were entered into by the oil and gas business to protect the realized price of a portion of expected future sales in order to limit the effects of crude oil price decreases. At September 30, 2015, these contracts are composed of crude oil put spreads consisting of put options with a floor limit. The premiums associated with put options are deferred until the settlement period. At September 30, 2015, the deferred option premiums and accrued interest associated with the crude oil option contracts totaled $53 million, which was included as a component of the fair value of the crude oil options contracts. At September 30, 2015, the outstanding 2015 crude oil option contracts, which settle monthly and cover approximately 7.7 million barrels over the remainder of 2015, follow:
 
 
 
 
Daily Volumes (thousand barrels)
 
Average Strike Price (per barrel)a
 
Weighted-Average Deferred Premium
 (per barrel)
 
 
2015 Period
 
Instrument Type
 
 
Floor
 
Floor Limit
 
 
Index
 
 
 
 
 
 
 
 
 
 
 
 
 
October - December
 
Put optionsb
 
84

 
$
90

 
$
70

 
$
6.89

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

Copper Forward Contracts. Atlantic Copper, FCX's wholly owned smelting and refining unit in Spain, enters into copper forward contracts designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match. These economic hedge transactions are intended to hedge against changes in copper prices, with the mark-to-market hedging gains or losses recorded in cost of sales. At September 30, 2015, Atlantic Copper held net copper forward sales contracts for 4 million pounds at an average contract price of $2.31 per pound, with maturities through November 2015.


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Summary of (Losses) Gains. A summary of the realized and unrealized (losses) gains recognized in (loss) income before income taxes and equity in affiliated companies’ net earnings for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, follows (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Embedded derivatives in provisional copper and gold
 
 
 
 
 
 
 
sales contractsa
$
(170
)
 
$
(99
)
 
$
(320
)
 
$
(184
)
Crude oil optionsa
29

 
57

 
87

 
(47
)
Natural gas swapsa

 
7

 

 
(9
)
Copper forward contractsb
(8
)
 
(4
)
 
(15
)
 
1

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

Unsettled Derivative Financial Instruments
A summary of the fair values of unsettled commodity derivative financial instruments follows (in millions):
 
 
September 30,
2015
 
December 31, 2014
Commodity Derivative Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contractsa
 
$
1

 
$

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
17

 
15

Crude oil optionsb
 
101

 
316

Total derivative assets
 
$
119

 
$
331

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

 
$
7

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
69

 
93

Total derivative liabilities
 
$
77

 
$
100

a.
FCX paid $16 million to brokers at September 30, 2015, and $10 million at December 31, 2014, for margin requirements (recorded in other current assets).
b.
Amounts are net of $53 million at September 30, 2015, and $210 million at December 31, 2014, for deferred premiums and accrued interest.


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FCX's commodity contracts have netting arrangements with counterparties with which the right of offset exists, and it is FCX's policy to offset balances by counterparty on its balance sheet. FCX's embedded derivatives on provisional sales/purchases are netted with the corresponding outstanding receivable/payable balances. A summary of these unsettled commodity contracts that are offset in the balance sheet follows (in millions):
 
 
Assets
 
Liabilities
 
 
September 30, 2015
 
December 31, 2014
 
September 30,
 2015
 
December 31, 2014
 
 
 
 
 
 
 
 
 
Gross amounts recognized:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
$
17

 
$
15

 
$
69

 
$
93

Crude oil derivatives
 
101

 
316

 

 

Copper derivatives
 
1

 

 
8

 
7

 
 
119

 
331

 
77

 
100

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

 
1

 
2

 
1

Crude oil derivatives
 

 

 

 

Copper derivatives
 
1

 

 
1

 

 
 
3

 
1

 
3

 
1

 
 
 
 
 
 
 
 
 
Net amounts presented in balance sheet:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
15

 
14

 
67

 
92

Crude oil derivatives
 
101

 
316

 

 

Copper derivatives
 

 

 
7

 
7

 
 
$
116

 
$
330

 
$
74

 
$
99

 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
 
 
 
Trade accounts receivable
 
$
6

 
$
5

 
$
50

 
$
56

Other current assets
 
101

 
316

 

 

Accounts payable and accrued liabilities
 
9

 
9

 
24

 
43

 
 
$
116

 
$
330

 
$
74

 
$
99


Credit Risk.  FCX is exposed to credit loss when financial institutions with which FCX has entered into derivative transactions (commodity, foreign exchange and interest rate swaps) are unable to pay. To minimize the risk of such losses, FCX uses counterparties that meet certain credit requirements and periodically reviews the creditworthiness of these counterparties. FCX does not anticipate that any of the counterparties it deals with will default on their obligations. As of September 30, 2015, the maximum amount of credit exposure associated with derivative transactions was $146 million.

Other Financial Instruments.  Other financial instruments include cash and cash equivalents, accounts receivable, restricted cash, investment securities, legally restricted funds, accounts payable and accrued liabilities, dividends payable and long-term debt. The carrying value for cash and cash equivalents (which included time deposits of $44 million at September 30, 2015, and $48 million at December 31, 2014), accounts receivable, restricted cash, accounts payable and accrued liabilities, and dividends payable approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 8 for the fair values of investment securities, legally restricted funds and long-term debt).



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Table of Contents                 


NOTE 8. FAIR VALUE MEASUREMENT
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

FCX recognizes transfers between levels at the end of the reporting period. FCX did not have any significant transfers in or out of Level 1, 2 or 3 for third-quarter 2015. A summary of the carrying amount and fair value of FCX’s financial instruments, other than cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, and dividends payable (refer to Note 7), follows (in millions):
 
At September 30, 2015
 
Carrying
 
Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
23

 
$
23

 
$

 
$
23

 
$

Money market funds
22

 
22

 
22

 

 

Equity securities
3

 
3

 
3

 

 

Total
48

 
48

 
25

 
23

 

 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a,b,c,d
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
52

 
52

 

 
52

 

Government bonds and notes
41

 
41

 

 
41

 

Government mortgage-backed securities
28

 
28

 

 
28

 

Corporate bonds
26

 
26

 

 
26

 

Asset-backed securities
12

 
12

 

 
12

 

Collateralized mortgage-backed securities
8

 
8

 

 
8

 

Money market funds
4

 
4

 
4

 

 

Municipal bonds
1

 
1

 

 
1

 

Total
172

 
172

 
4

 
168

 

 
 
 
 
 
 
 
 
 
 
Derivatives:a,e
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross asset position
17

 
17

 

 
17

 

Crude oil options
101

 
101

 

 

 
101

Copper futures and swap contracts
1

 
1

 
1

 

 

Total
119

 
119

 
1

 
17

 
101

 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
339

 
$
30

 
$
208

 
$
101

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivatives:a,e
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross liability position
$
69

 
$
69

 
$

 
$
69

 
$

Copper futures and swap contracts
8

 
8

 
7

 
1

 

Total
77

 
77

 
7

 
70

 

 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portionf
20,698

 
17,291

 

 
17,291

 

 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
$
17,368

 
$
7

 
$
17,361

 
$




17

Table of Contents                 


 
At December 31, 2014
 
Carrying
 
Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
23

 
$
23

 
$

 
$
23

 
$

Money market funds
20

 
20

 
20

 

 

Equity securities
3

 
3

 
3

 

 

Total
46

 
46

 
23

 
23

 

 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a,b,c,d
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
52

 
52

 

 
52

 

Government bonds and notes
39

 
39

 

 
39

 

Corporate bonds
27

 
27

 

 
27

 

Government mortgage-backed securities
19

 
19

 

 
19

 

Asset-backed securities
17

 
17

 

 
17

 

Money market funds
11

 
11

 
11

 

 

Collateralized mortgage-backed securities
6

 
6

 

 
6

 

Municipal bonds
1

 
1

 

 
1

 

Total
172

 
172

 
11

 
161

 

 
 
 
 
 
 
 
 
 
 
Derivatives:a,e
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross asset position
15

 
15

 

 
15

 

Crude oil options
316

 
316

 

 

 
316

Total
331

 
331

 

 
15

 
316

 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
549

 
$
34

 
$
199

 
$
316

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivatives:a,e
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross liability position
$
93

 
$
93

 
$

 
$
93

 
$

Copper futures and swap contracts
7

 
7

 
6

 
1

 

Total
100

 
100

 
6

 
94

 

 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portionf
18,849

 
18,735

 

 
18,735

 

 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
$
18,835

 
$
6

 
$
18,829

 
$

a.
Recorded at fair value. 
b.
Current portion included in other current assets and long-term portion included in other assets.
c.
Excludes time deposits (which approximated fair value) included in other assets of $117 million at September 30, 2015, and $115 million at December 31, 2014, associated with an assurance bond to support PT-FI's commitment for smelter development in Indonesia.
d.
Excludes time deposits (which approximated fair value) included in other current assets of $30 million at September 30, 2015, associated with PT-FI's commitment for smelter development in Indonesia of $20 million and a reclamation guarantee at PT-FI of $10 million. Excludes time deposits of $17 million at December 31, 2014, associated with a customs audit assessment at PT-FI of $9 million and a reclamation guarantee at PT-FI of $8 million.
e.
Refer to Note 7 for further discussion and balance sheet classifications. Crude oil options are net of $53 million at September 30, 2015, and $210 million at December 31, 2014, for deferred premiums and accrued interest.
f.
Recorded at cost except for debt assumed in acquisitions, which were recorded at fair value at the respective acquisition dates.




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

The U.S. core fixed income fund is valued at net asset value. The fund strategy seeks total return consisting of income and capital appreciation primarily by investing in a broad range of investment-grade debt securities, including U.S. government obligations, corporate bonds, mortgage-backed securities, asset-backed securities and money market instruments. There are no restrictions on redemptions (usually within one business day of notice) and, as such, this fund is classified within Level 2 of the fair value hierarchy.

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

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

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using quoted monthly LME or COMEX copper forward prices and the London gold forward price at each reporting date based on the month of maturity (refer to Note 7 for further discussion); however, FCX's contracts themselves are not traded on an exchange. As a result, these derivatives are classified within Level 2 of the fair value hierarchy.

FCX's derivative financial instruments for crude oil options are valued using an option pricing model, which uses various inputs including Intercontinental Exchange Holdings, Inc. crude oil prices, volatilities, interest rates and contract terms. Valuations are adjusted for credit quality, using the counterparties' credit quality for asset balances and FCX's credit quality for liability balances (which considers the impact of netting agreements on counterparty credit risk, including whether the position with the counterparty is a net asset or net liability). For asset balances, FCX uses the credit default swap value for counterparties when available or the spread between the risk-free interest rate and the yield rate on the counterparties' publicly traded debt for similar instruments. The crude oil options are classified within Level 3 of the fair value hierarchy because the inputs used in the valuation models are not observable for the full term of the instruments. The significant unobservable inputs used in the fair value measurement of the crude oil options are implied volatilities and deferred premiums. Significant increases (decreases) in implied volatilities in isolation would result in a significantly higher (lower) fair value measurement. The implied volatilities ranged from 38 percent to 66 percent, with a weighted average of 49 percent. The weighted-average cost of deferred premiums totals $6.89 per barrel at September 30, 2015. Refer to Note 7 for further discussion of these derivative financial instruments.

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

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

The techniques described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while FCX believes its valuation techniques are appropriate and consistent with other market participants, the use of different techniques or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the techniques used at September 30, 2015.


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A summary of the changes in the fair value of FCX's most significant Level 3 instruments, crude oil options, follows (in millions):
 
Crude Oil
 
 
Options
 
Fair value at December 31, 2014
$
316

 
Net realized gains
50

a 
Net unrealized gains included in earnings related to assets and liabilities
  still held at the end of the period
36

 
Net settlement receipts
(301
)
b 
Fair value at September 30, 2015
$
</